-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mm+JQC8UyegSAqd/r+S07OA/Nij1skckjmpCIcFQZ4e7OTwGhP00OCbE1qlKEJnf O1y+bgZp3dMBGrjuGXATbQ== 0000916641-00-000428.txt : 20000331 0000916641-00-000428.hdr.sgml : 20000331 ACCESSION NUMBER: 0000916641-00-000428 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERSHA HOSPITALITY TRUST CENTRAL INDEX KEY: 0001063344 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 251811499 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14765 FILM NUMBER: 589168 BUSINESS ADDRESS: STREET 1: 148 SHERATON DRIVE, BOX A CITY: NEW CUMBERLAND STATE: PA ZIP: 17070 BUSINESS PHONE: 2157702405 10-K 1 HERSHA HOSPITALITY 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 005-55249 HERSHA HOSPITALITY TRUST (Exact Name of Registrant as Specified in Its Charter) MARYLAND 251811499 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 148 SHERATON DRIVE, BOX A, NEW CUMBERLAND, PENNSYLVANIA 17070 (Address of Registrant's Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (717) 770-2405 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered PRIORITY CLASS A COMMON SHARES AMERICAN STOCK EXCHANGE OF BENEFICIAL INTEREST, PAR VALUE $.01 PER SHARE Securities registered pursuant to Section 12(g) of the Act: NONE (Title of class) Indicate by check mark whether the registrant (i) 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 that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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 this Form 10-K. [X] The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant, as of March 27, 2000, was approximately $11.7 million. As of March 27, 2000, the number of outstanding Priority Class A Common Shares of Beneficial Interest outstanding was 2,275,000. Documents Incorporated By Reference: Portions of the 1999 Hersha Hospitality Trust Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to the Annual Meeting of Shareholders to be held on May 26, 2000 are incorporated by reference into Part III hereof. HERSHA HOSPITALITY TRUST INDEX
FORM 10-K REPORT ITEM NO. PAGE PART I 1. BUSINESS........................................................................................................3 2. PROPERTIES......................................................................................................8 3. LEGAL PROCEEDINGS..............................................................................................15 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................................15 PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................................15 6. SELECTED FINANCIAL AND OPERATING DATA..........................................................................16 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................20 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................................22 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................................23 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES..........................73 PART III 10. TRUSTEES AND EXECUTIVE OFFICERS OF OUR COMPANY................................................................73 11. EXECUTIVE COMPENSATION........................................................................................73 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................................73 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................................73 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...............................................74
2 ITEM 1. BUSINESS OVERVIEW Hersha Hospitality Trust [the "Company"] was formed in May 1998 to own initially ten hotels in Pennsylvania and to continue the hotel acquisition and development strategies of Hasu P. Shah, Chairman of the board of trustees and Chief Executive Officer of the Company. We are a self-advised Maryland real estate investment trust for federal income tax purposes. As of March 27, 2000, we owned four Holiday Inn Express(R) hotels, four Hampton Inn(R) hotels, two Holiday Inn(R) hotels, four Comfort Inn(R) hotels, one Best Western(R) hotel and one Clarion Suites(R) hotel, which contain an aggregate of 1,598 rooms. We completed an initial public offering of two million of our Class A Priority Common Shares on January 26, 1999 at $6.00 per share. In addition, on February 5, 1999, we sold an additional 275,000 Class A Priority Common Shares pursuant to an over allotment option granted to the underwriter in our initial public offering. Our Priority Class A Common Shares are traded on the American Stock Exchange under the symbol "HT." We contributed substantially all of the net proceeds from our initial public offering to our operating partnership subsidiary, Hersha Hospitality Limited Partnership ["HHLP" or the "Partnership"], of which we are the sole general partner. We currently own a 35.1% partnership interest in the Partnership. Interests in the hotel properties are owned by subsidiary partnerships of HHLP. HHLP owns a 99% limited partnership interest and Hersha Hospitality, LLC ["HHLLC"], a Virginia limited liability company, owns a 1% general partnership interest in these subsidiary partnerships. With the proceeds of our initial public offering, we caused the Partnership to acquire ten hotels [the "Initial Hotels"] in exchange for (1) 4,032,431 subordinated units of limited partnership interest in the partnership that are redeemable for the same number of Class B Common Shares with a value of approximately $24.2 million based on the initial public offering price, and (2) the assumption of approximately $23.3 million of indebtedness of which approximately $6.1 million was repaid immediately after the acquisition of the hotels. Since the completion of the initial public offering we have issued an additional 173,539 units in connection with the acquisition of the Hampton Inn, Danville, PA. We have acquired seven of the Initial Hotels and three other hotels, acquired subsequent to the commencement of operations, for prices that will be adjusted at either December 31, 1999, 2000 or 2001. The purchase price adjustments are performed by applying a pricing methodology consistent with the pricing of the hotels at the commencement of operations. Utilizing this pricing methodology, the hotels' cash flows are adjusted for the year ended on the adjustment dates in order to calculate a value for the respective hotel based upon a 12% return criteria. All such adjustments must be approved by a majority of our independent trustees. If the repricing produces a higher aggregate price for the hotels, sellers (who are affiliated with the officers of our Company) will receive an additional number of subordinated units that equals the increase in value plus the value of any distributions that would have been made with respect to such subordinated units if such units had been issued at the time of the acquisition of such hotels. If, however, the repricing produces a lower aggregate value for such hotels, the sellers will forfeit to the Partnership that number of subordinated units that equals the decrease in value plus the value of any distributions made with respect to such subordinated units. Any adjustments arising from the issuance or forfeiture of shares will adjust the cost of the property acquired based on the fair value of the shares on the date of adjustment. Based upon unaudited results for the period ending December 31, 1999, the Partnership anticipates issuing additional units for the Holiday Inn, Milesburg, the Holiday Inn Express, Harrisburg and the Comfort Inn, Denver, PA. In order for us to qualify as a REIT, we cannot operate hotels. Therefore, the majority of our hotels are leased to Hersha Hospitality Management, L.P. [the "Lessee"]. The Lessee is owned by Mr. Hasu P. Shah, Mr. Bharat C. Mehta, Mr. Kanti D. Patel, Mr. Rajendra O. Gandhi, Mr. Kiran P. Patel and certain other affiliates [the "Hersha Affiliates"] some of whom have ownership interests in the Partnership. The hotels are leased to the Lessee pursuant to percentage leases [the "Percentage Leases"] based in part on the revenues at such hotels. We structured each percentage lease to provide us with anticipated rents at least equal to 12% of the purchase price paid for the hotel, net of (1) property and casualty insurance premiums, (2) real estate and personal property taxes, and (3) a reserve for furniture, fixtures and equipment 3 equal to 4% (6% for the Holiday Inn Hotel and Conference Center, Harrisburg, PA, and Holiday Inn, Milesburg, PA) of gross revenues per quarter at the hotel. This pro forma return is based on certain assumptions and historical revenues for the hotels (including projected revenues for the newly-developed and newly-renovated hotels) and no assurance can be given that future revenues for the hotels will be consistent with prior performance or the estimates. Until the purchase price adjustment dates, the rent on the newly-developed and newly-renovated hotels will be fixed. See Item 2. Properties. After the adjustment dates, rent will be computed based on a percentage of revenues of those hotels. The Percentage Leases will have initial terms of five years and may be extended for two additional five-year terms at the option of the Lessee. On August 11, 1999 we purchased, from the Hersha Affiliates, all the partnership interests in 3744 Associates, a Pennsylvania limited partnership and through the ownership of 3744 Associates, a 60 room Comfort Inn hotel located near the John F. Kennedy International Airport in Jamaica, New York. The Comfort Inn was newly constructed and commenced operations on August 12, 1999. On September 1, 1999 we purchased, from the Hersha Affiliates, all the partnership interests in 2844 Associates, a Pennsylvania limited partnership and, through the ownership of 2844 Associates, a 77-room Clarion Inn & Suites hotel located in Harrisburg, Pennsylvania. We also purchased the 72-room Hampton Inn hotel located in Danville, Pennsylvania from 3544 Associates. The purchase prices for the Comfort Inn, Hampton Inn and Clarion Inn & Suites are $5.5million, $3.6 million and $2.7 million, respectively. The purchase price valuations for the properties acquired were based upon the rent to be paid by the Lessee under Percentage Leases. The purchase prices of these hotels will be adjusted on December 31, 2001 by applying the initial pricing methodology to such hotels' cash flows in a manner similar to that of the other hotels purchased by HHLP from the Hersha Affiliates. The adjustments must be approved by a majority of the Company's independent trustees. On February 25, 2000, our Board of Trustees approved the purchase of three hotel properties from the Hersha Affiliates. The acquisitions will be effective as of January 1, 2000. The hotels acquired include a 110 room Hampton Inn & Suites located in Hershey, Pennsylvania, a 107 room full service Best Western located in Indiana, Pennsylvania and a 76 room Comfort Inn located in McHenry, Maryland. The aggregate purchase price of the three hotels was $11.5 million and was funded through our Line of Credit, the assumption of loans of $7.0 million and an additional loan of $2.0 million. The prices paid for these hotels will be adjusted on December 31, 2001 based upon the initial pricing methodology discussed previously. The adjustments must be approved by a majority of the Company's independent trustees. GROWTH STRATEGY We seek to enhance shareholder value by increasing amounts available for distribution to our shareholders by (1) acquiring additional hotels that meet our investment criteria and (2) participating in any increased revenue from our hotels through our Percentage Leases. ACQUISITION STRATEGY We focus on limited service and full service hotels with strong, national franchise affiliations in the upper-economy and mid-scale market segments, or hotels with the potential to obtain such franchises. In particular, we consider acquiring limited service hotels such as Comfort Inn(R), Best Western(R), Days Inn(R), Fairfield Inn(R), Hilton Garden Inn(R), Hampton Inn(R), Holiday Inn(R) and Holiday Inn Express(R) hotels, and Limited service extended-stay hotels such as Comfort Suites(R), Homewood Suites(R), Main Stay Suites(R) and Residence Inn by Marriott(R) hotels. In addition to the direct acquisition of hotels, we may make investments in hotels through joint ventures with strategic partners or through equity contributions, sales and leasebacks, or secured loans. We identify acquisition candidates located in markets with economic, demographic and supply dynamics favorable to hotel owners and operators. Through our extensive due diligence process, we select those acquisition targets where we believe selective capital improvements and intensive management will increase the hotel's ability to attract key demand segments, enhance hotel operations and increase long-term value. 4 INVESTMENT CRITERIA We focus predominantly on potential acquisitions in the eastern United States. Such investments may include hotels newly developed by certain of our affiliates. Pursuant to an option agreement, we have an option to acquire any hotels owned or developed in the future by certain of our affiliates within 15 miles of any hotels that we own for two years after acquisition or development. Our acquisition policy is to acquire hotels for which we expect to receive rents at least equal to 12% of the purchase price paid for each hotel, net of (1) property and casualty insurance premiums, (2) real estate and personal property taxes, and (3) a reserve for furniture, fixtures and equipment equal to 4% (6% in the case of full-service hotels) of annual gross revenues at each hotel. Our board of trustees, however, may change our acquisition policy at any time without the approval of our shareholders. We intend to acquire hotels that meet one or more of the following criteria: o nationally-franchised hotels in locations with a relatively high demand for rooms, with a relatively low supply of competing hotels and with significant barriers to entry in major metropolitan and suburban areas; o poorly managed hotels, which could benefit from new management, new marketing strategy and association with a national franchisor; o hotels in a deteriorated physical condition that could benefit significantly from renovations; and o hotels in attractive locations that we believe could benefit significantly by changing franchises to a superior brand. We intend to lease hotels that we acquire to operators, including the current Lessee of all our hotels, Hersha Hospitality Management, L.P., as well as operators unaffiliated with the Lessee. Future leases with our current Lessee generally will be similar to the Percentage Leases. We will negotiate the terms and provisions of each future lease, depending on the purchase price paid, economic conditions and other factors deemed relevant at the time. FINANCING We may finance additional investments in hotels, in whole or in part, with undistributed cash, subsequent issuances of Priority Class A Common Shares or other securities, or borrowings. Our debt policy is to limit consolidated indebtedness to less than 67% of the aggregate purchase prices paid for the hotels in which we invest. Our board of trustees, however, may change the debt policy without the approval of our shareholders. The aggregate purchase prices for our thirteen hotels, owned as of December 31, 1999, was approximately $59.5 million, and our indebtedness at December 31, 1999 was $24.8 million, which represents approximately 41.7% of the aggregate purchase price for our hotels. In February 2000, we entered into a portfolio refinancing of seven of our hotel properties for $22.05 million. Outstanding borrowings under the refinancing bear interest at a rate of 8.94% and have a total loan amortization period of 23.5 years. The first eighteen months of the loan is structured to be interest only financing with no principal payoff during the period. The loan proceeds will be utilized to payoff existing loans, to payoff limited partnership accruals and will also be utilized for acquisitions of hotel properties. INTERNAL GROWTH STRATEGY Our Percentage Leases are designed to allow us to participate in growth in revenues at our hotels. Our Percentage Leases generally provide that the Lessee will pay in each calendar quarter the greater of base rent or percentage rent. The percentage rent for each hotel is comprised of (1) a percentage of room revenues up to a threshold, (2) a higher percentage of room revenues in excess of that threshold but not more than a incentive threshold, (3) a lower percentage of room revenues in excess of that incentive threshold and (4) a percentage of revenues other than room revenues. The threshold is designed to provide incentive to the Lessee to generate higher revenues at each hotel by lowering the percentage of revenue paid as percentage rent once room revenues reach certain levels. In the case of the newly-developed and newly-renovated hotels, the Lessee will pay fixed rent until the adjustment date, after which the Lessee will pay the greater of base rent or percentage rent. 5 PROPERTY MANAGEMENT In order for the Company to qualify as a REIT, neither the Company, the Partnership nor the subsidiary partnerships can operate hotels. Therefore, each of the hotels is leased to the Lessee under Percentage Leases. The Lessee also manages certain other properties owned by the Hersha Affiliates that are not owned by the Partnership. The Lessee commenced operations on January 1, 1999 and as of December 31, 1999 leases 13 hotel properties from the Partnership and also manages other properties for the Hersha Affiliates. OPERATING PRACTICES The Lessee utilizes a centralized accounting and data processing system, which facilitates financial statement and budget preparation, payroll management, internal auditing and other support functions for the on-site hotel management team. The Lessee provides centralized control over purchasing and project management (which can create economies of scale in purchasing) while emphasizing local discretion within specific guidelines. The Company has an agreement between it and the Lessee [the "Administrative Services Agreement"] to provide accounting and securities reporting services for the Company. The Administrative Services Agreement provides that the Lessee shall perform such services for an annual fee of $55,000 per year plus $10,000 per property for each hotel owned by the Company. The Lessee employs approximately 500 people in operating the hotels. The Lessee has advised the Company that its relationship with its employees is good. BUSINESS RISKS The hotels are subject to all operating risks common to the hotel industry. These risks include, among other things, competition from other hotels; recent over-building in the hotel industry, which has adversely affected occupancy and room rates; increases in operating costs due to inflation and other factors, which increases have not in recent years been, and may not necessarily in the future be, offset by increased room rates; significant dependence on business and commercial travelers and tourism; increases in energy costs and other expenses of travel; and adverse effects of general and local economic conditions. These factors could adversely affect the Lessee's ability to make lease payments and, therefore, the Company's ability to make expected distributions to shareholders. Further, decreases in room revenue at the hotels will result in decreased revenue to the Partnership and the subsidiary partnership, as applicable, under the Percentage Leases. ENVIRONMENTAL RISKS Under various federal, state, and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances, on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect the owner's ability to borrow using such real 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 such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Certain environmental laws and common law principles could be used to impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs. In connection with the ownership of the hotels, the Company, the Partnership or the subsidiary partnerships may be potentially liable for any such costs. Phase I environmental site assessments were obtained on all of the hotels prior to their acquisition by the Company. Phase I environmental assessments were intended to identify potential environmental contamination for which the hotels may be responsible. The Phase I environmental assessments included historical reviews of the hotels, reviews of certain public records, preliminary investigations of the sites and surrounding properties, screening for the presence of hazardous substances, toxic substances and underground storage tanks, and the preparation and issuance of a written report. The Phase I environmental assessments did not include invasive procedures, such as soil sampling or ground water analysis. The Phase I site assessments have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets, results of operations or liquidity, nor is the 6 Company aware of any such liability. Nevertheless, it is possible that the Phase I site assessments do not reveal environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Moreover, no assurance can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability, or (ii) the current environmental condition of the hotels will not be affected by the condition of other properties in the vicinity of the hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to the Company, the Partnership, the subsidiary partnerships or the Lessee. The Company believes that the hotels are in compliance in all material respects with all federal, state and local ordinances and regulations regarding hazardous or toxic substances or other environmental matters. Neither the Company nor, to the knowledge of the Company, or any of the former owners of the Hotels have been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of the hotels. FRANCHISE AGREEMENTS We have paid certain expenses in connection with the transfer of the franchise licenses to the Lessee. The Lessee, which is owned by the Hersha Affiliates, holds all of the franchise licenses for each of the hotels currently owned by the Partnership. The Lessee is expected to hold all of the franchise licenses for any subsequently acquired hotel properties that it leases. We do not anticipate maintaining the franchise licenses for hotel properties managed by third party management companies. It is anticipated that franchise licenses for hotel properties managed by other lessees will be maintained by that lessee. During 1999, the Lessee paid franchise fees in the aggregate amount of approximately $1,600,000. TAX STATUS The Company intends to make an election to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code ("Code"), commencing with its taxable year ending December 31, 1999. As long as the Company qualifies for taxation as a REIT, it generally will not be subject to Federal income tax on the portion of its income that is distributed to shareholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to Federal income and excise taxes on its undistributed income. Earnings and profits, which will determine the taxability of dividends to shareholders, will differ from net income reported for financial reporting purposes due to the differences for federal tax purposes in the estimated useful lives and methods used to compute depreciation. Of the total 1999 distributions to the Company's shareholders, 100.0% are considered ordinary income. 7 ITEM 2. PROPERTIES The following table sets forth certain information with respect to the hotels we owned as of December 31, 1999.
Twelve Months Ended December 31, 1999 Average Year Number of Room Other Daily Opened Rooms Revenue Revenue(1) Occupancy Rate REVPAR(2) HOTELS CLARION SUITES: Philadelphia, PA........... 1995 96 $2,242,322 $233,597 64.1% $99.82 $63.99 Harrisburg, PA............. 1998 77 $944,071 $29.460 54.4% $61.83 $33.66 COMFORT INNS: Denver, PA (3)............. 1990 45 $730,351 $14,626 61.9% $71.84 $44.47 JFK, NY(4)................. 1999 60 $670,922 $9,945 77.3% $120.65 $93.21 Harrisburg, PA ............ 1998 81 $1,203,944 $24,036 60.3% $68.38 $41.23 HAMPTON INN Carlisle, PA............... 1997 95 $1,708,748 $30,221 68.8% $70.10 $48.26 Selinsgrove, PA (5) ....... 1996 75 $1,520,944 $54,739 80.7% $69.80 $56.31 Danville, PA............... 1998 72 $1,143,249 $34,837 68.5% $63.62 $43.60 HOLIDAY INNS: Milesburg, PA............. 1986 118 $1,510,420 $255,548 54.9% $63.87 $35.07 Harrisburg, PA............ 1970 196 $3,110,524 $2,017,766 62.3% $69.76 $43.48 HOLIDAY INN EXPRESS: Harrisburg, PA (6)........ 1968 117 $1,509,220 $94,300 56.9% $62.07 $35.34 Hershey, PA............... 1997 85 $1,834,550 $49,228 59.2% $101.91 $60.36 New Columbia, PA........... 1997 81 $995.116 $30,378 55.2% $61.34 $33.83 Total/weighted average.................. 1,198 $19,124,381 $2,878,681 62.1% $73.00 $ 45.35 ----------- ---------- Total Revenue........................... $22,003,062 - -------------------------
(1) Represents restaurant revenue, telephone revenue and other revenue. (2) REVPAR is determined by dividing room revenue by available rooms for the applicable period. (3) The land underlying this hotel is leased to our operating Partnership by certain affiliates for rent of $6,000 per year for 99 years. (4) This hotel opened on August 12 and, thus, the data shown represents operations from the date of opening through December 31, 1999. (5) A portion of the land adjacent to this hotel, which is not currently used for hotel operations, is leased to an affiliate for $1 per year for 99 years. (6) The land underlying this hotel is leased to our operating Partnership by certain affiliates for rent of $15,000 per year for 99 years. HOLIDAY INN EXPRESS (RIVERFRONT), HARRISBURG, PENNSYLVANIA DESCRIPTION. The Holiday Inn Express Riverfront, Harrisburg, Pennsylvania, is located at 525 South Front Street. The hotel was opened in 1968, was purchased in 1984 and was fully renovated in 1996. It is a 117-room, limited service hotel with non-smoking units available with an adjacent restaurant and lounge. Amenities include a fitness center and adjacent banquet and meeting facilities with a 200-person capacity. GUEST PROFILE AND LOCAL COMPETITION. Approximately 25% of the hotel's business is related to business from the Commonwealth of Pennsylvania. The remainder of the hotel's business consists of tourists, overnight travelers and people visiting local residents. We consider this hotel's primary competition to be the Ramada Hotel on Second Street in Harrisburg, Pennsylvania. HOLIDAY INN EXPRESS, HERSHEY, PENNSYLVANIA DESCRIPTION. The Holiday Inn Express, Hershey, Pennsylvania is located on Walton Avenue, one and one half miles from Hershey Park. The hotel, which opened in October 1997, is an 85-room limited service hotel. Amenities include an indoor pool, hot tub, fitness center, business service center, meeting facility, complimentary continental breakfast and 24-hour coffee. All rooms have one king bed or two queen beds and some rooms have refrigerators, coffee makers and microwaves. GUEST PROFILE AND LOCAL COMPETITION. Approximately 30% of the hotel's business is related to commercial activity from local business. The hotel's group business, which accounts for approximately 5% of its business, is generated from area institutions, local weddings and local social and sporting events. The remainder of the hotel's business consists of transient guests, 8 visitors to area residents and demand generated by the hotel's proximity to Hershey Park. We consider this hotel's primary competition to be the Comfort Inn in Hershey, Pennsylvania. HOLIDAY INN EXPRESS, NEW COLUMBIA, PENNSYLVANIA DESCRIPTION. The Holiday Inn Express, New Columbia, Pennsylvania is located at the intersection of Interstate 80 and Route 15. The hotel, which opened in December 1997, is an 81-room limited service hotel. Amenities include an indoor pool, hot tub, fitness center, meeting facility, complimentary continental breakfast and 24-hour coffee. All rooms have one king bed or two queen beds, some Jacuzzi suites are available and some rooms have refrigerators, coffee makers and microwaves. The Holiday Inn Express in New Columbia, Pennsylvania was ranked number one in its region for GSTS (Guest Satisfaction Tracking System), for February and March of 1998. This award recognizes the Holiday Inn Express in New Columbia as the leader in guest satisfaction and product service out of 32 other Holiday Inns and Holiday Inns Express in the Eastern region. GUEST PROFILE AND LOCAL COMPETITION. Approximately 80% of the hotel's business is related to commercial activity from local business. As a result of its proximity to ski resorts and nearby tourist attractions, recreational travelers generate approximately 10% of the hotel's business. The remainder of the hotel's business consists of overnight travelers and visitors to area residents. We consider this hotel's primary competition to be the Comfort Inn in New Columbia, Pennsylvania. HAMPTON INN, CARLISLE, PENNSYLVANIA DESCRIPTION. The Hampton Inn, Carlisle, Pennsylvania is located at the intersection of Route 11 and exit 16 off the Pennsylvania Turnpike. The hotel, which opened in June 1997, is a 95-room limited service hotel. Amenities include an indoor pool, hot tub, fitness center, meeting facilities, complimentary continental breakfast and 24-hour coffee. All rooms have one king bed or two queen beds, some Jacuzzi suites are available and some rooms have refrigerators, coffee makers and microwaves. GUEST PROFILE AND LOCAL COMPETITION. Approximately 50% of the hotel's business is related to commercial activity from local businesses. The remainder of the hotel's business consists of overnight travelers and general demand generated by the hotel's proximity to the Carlisle Fairgrounds and the Army War College. We consider this hotel's primary competition to be the Holiday Inn in Carlisle, Pennsylvania. HAMPTON INN, SELINSGROVE, PENNSYLVANIA DESCRIPTION. The Hampton Inn, Selinsgrove, Pennsylvania is located on Pennsylvania Routes 11 and 15. The hotel, which opened in September 1996, is a 75-room, three story, limited service hotel. Amenities include an indoor pool, hot tub, fitness center, meeting facilities, complimentary continental breakfast and 24-hour coffee. All rooms have one king bed or two queen beds, some Jacuzzi suites are available and some rooms have refrigerators, coffee makers and microwaves. The Hampton Inn in Selinsgrove was recently named one of the top hotels in the entire Hampton Inn system, receiving the hotel chain's Circle of Excellence Award. The award recognizes superior quality and guest satisfaction and is the highest distinction a Hampton Inn hotel can receive. GUEST PROFILE AND LOCAL COMPETITION. Approximately 80% of the hotel's business is related to commercial activity from local businesses. The remainder of the hotel's business consists of pleasure travelers, transient guests and demand generated by the hotel's proximity to area universities and Knoebels Amusement Park. We consider this hotel's primary competition to be the Best Western near Selinsgrove, Pennsylvania. HAMPTON INN, DANVILLE, PENNSYLVANIA DESCRIPTION. The Hampton Inn, Danville, Pennsylvania, is located at Exit 33 off Interstate 80. The hotel, which opened in September 1998, has 72 guest rooms. Amenities include an indoor pool, hot tub, meeting facilities, complimentary continental breakfast, and 24-hour coffee service. All rooms offer queen beds or king beds, and coffee makers. GUEST PROFILE AND LOCAL COMPETITION. The majority of the hotel guests consist of tourists or overnight travelers. The Company considers its primary competition to be the Pine Barn Inn in Danville, PA. 9 HOLIDAY INN HOTEL AND CONFERENCE CENTER, HARRISBURG, PENNSYLVANIA DESCRIPTION. The Holiday Inn Hotel and Conference Center, Harrisburg, Pennsylvania is located at the intersection of the Pennsylvania Turnpike exit 18 and Interstate 83, ten minutes from downtown, Harrisburg International Airport and Hershey Park. The hotel opened in 1970 as a Sheraton Inn and was converted to a Ramada Inn in 1984. It was completely renovated and converted to a Holiday Inn in September 1995. This hotel has 196 deluxe guest units and is a full service hotel, including a full service restaurant as well as a nightclub. Amenities include an indoor tropical courtyard with a pool and Jacuzzi as well as a banquet and conference facility for up to 700 people. GUEST PROFILE AND LOCAL COMPETITION. Approximately 40% of the hotel's business is related to commercial activity from local businesses. The remainder of the hotel's business consists of overnight travelers visiting Hershey and Harrisburg. We consider this hotel's primary competition to be the Radisson Penn Harris in Camp Hill, Pennsylvania. HOLIDAY INN, MILESBURG, PENNSYLVANIA DESCRIPTION. The Holiday Inn, Milesburg/State College, Pennsylvania is located at Exit 23, I-80 and US 50 North. The hotel opened in 1977 as a Sheraton and was completely renovated in 1992. In 1996, the hotel was converted into a Holiday Inn. It is a 118-room, full service hotel with a full service restaurant and cocktail lounge. Amenities include an outdoor pool as well as banquet and meeting facilities for 220 people. GUEST PROFILE AND LOCAL COMPETITION. Approximately 20% of the hotel's business is related to commercial activity from local businesses and demand generated by local businesses. Approximately 80% of the hotel's business consists of leisure travelers visiting the many tourist attractions around State College and I-80. We consider this hotel's primary competition to be the Best Western in Milesburg, Pennsylvania. COMFORT INN, DENVER, PENNSYLVANIA DESCRIPTION. The Comfort Inn, Denver, Pennsylvania is located at 2015 North Reading Road. This 45-room limited service hotel was constructed in 1990 and renovated in 1995. All rooms have one king bed or two queen beds and non-smoking units are available. Amenities include hairdryers in all rooms, a fitness center and a complimentary continental breakfast. GUEST PROFILE AND LOCAL COMPETITION. Approximately 75% of the hotel's business is comprised of leisure travelers and transient guests related to its location at the crossroads of two major interstate highways. The remainder of the hotel's business is due to commercial activity from local businesses and people visiting area residents. We consider this hotel's primary competition to be the Holiday Inn in Denver, Pennsylvania. COMFORT INN, HARRISBURG, PENNSYLVANIA DESCRIPTION. The Comfort Inn, Harrisburg, Pennsylvania is located 8 miles north of Hershey, Pennsylvania at 7744 Linglestown Road off exit 27 of Interstate 81. The hotel opened in May 1998. It is an 81-room limited service hotel. Amenities include an indoor pool, hot tub, fitness center, meeting facilities, complimentary continental breakfast and 24-hour coffee. All rooms have one king bed or two queen beds and some Jacuzzi suites are available. GUEST PROFILE AND LOCAL COMPETITION. Approximately 25% of the hotel's business is related to commercial activity from local businesses. The hotel's group business, which accounts for approximately 5% of its business, is generated from area institutions, local weddings and local social and sporting events. The remainder of the hotel's business consists of transient and recreational travelers generated by its proximity to Hershey, Pennsylvania. We consider this hotel's primary competition to be the Holiday Inn in Grantville, Pennsylvania. COMFORT INN JFK, JAMAICA NEW YORK DESCRIPTION. The Comfort Inn JFK, Jamaica, NY is located at 144-36 153rd Lane. The hotel was newly constructed and opened in 1999. It is a 60-room, limited service hotel with non-smoking units available and a complimentary breakfast buffet. 10 GUEST PROFILE AND LOCAL COMPETITION. Approximately 75% of the hotel's business is related to business from the John F. Kennedy International Airport. The hotel's primary competition is the Ramada JFK, Holiday Inn JFK, Hilton JFK, and the Sheraton Hotel JFK. CLARION SUITES, PHILADELPHIA, PENNSYLVANIA DESCRIPTION. The Clarion Suites, Philadelphia, Pennsylvania is located at 1010 Race Street, one half block from the newly-built Philadelphia convention center and six blocks from the Independence Hall historic district and the Liberty Bell. The hotel is located in the historic Bentwood Rocking Chair Company building, which was constructed in 1896 and converted to a Quality Suites hotel in the 1980s. The hotel was purchased by an affiliate as a Ramada Suites in 1995 and substantially rehabilitated. The affiliate later converted the hotel to a Clarion Suites. The hotel has 96 executive suites with fully-equipped kitchens and an eight-story interior corridor with Victorian style architecture. The hotel has a lounge featuring light fare and a comedy cabaret. Amenities include two large meeting rooms, boardrooms, a fitness room and a complimentary continental breakfast. GUEST PROFILE AND LOCAL COMPETITION. Approximately 20% of the hotel's business is comprised of leisure travelers and transient guests related to its close proximity to the historic district. The remainder of the hotel's business is due to commercial activity from local businesses and people visiting area residents. We consider this hotel's primary competition to be all Center City, Philadelphia hotels. CLARION INN & SUITES, HARRISBURG, PENNSYLVANIA DESCRIPTION. The Clarion Inn & Suites, Harrisburg, Pennsylvania, is located at 5680 Allentown Boulevard and is easily accessible from Interstates 81 & 83. The hotel, which opened in August 1998, is a 77-room limited service hotel. Amenities include an outdoor pool, meeting facilities, complimentary continental breakfast, and 24-hour coffee. All rooms have one king bed or two queen beds. Jacuzzi suites are available and some rooms also have refrigerators and microwaves. GUEST PROFILE AND LOCAL COMPETITION. Approximately 40% of the hotel's business is comprised of business travelers, 30% is related to group business, 20% is leisure travelers, and 10% is government business. The Company considers its primary competition the Best Western and the Baymont Inn both located in Harrisburg, Pennsylvania. 11 The following table sets forth certain information with respect to each of our hotels:
Year Ended December 31, 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- HOLIDAY INN EXPRESS - HARRISBURG, PA Occupancy 56.9% 59.2% 56.4% 40.7% 43.2% 44.9% ADR $62.07 $53.87 $56.33 $52.77 $48.05 $48.34 REVPAR $35.34 $31.87 $31.78 $21.50 $20.74 $21.70 HOLIDAY INN EXPRESS - HERSHEY, PA (1) Occupancy 59.22% 64.4% 38.8% ADR $101.91 $81.25 $75.62 REVPAR $60.36 $52.33 $29.35 HOLIDAY INN EXPRESS - NEW COLUMBIA, PA (2) Occupancy 55.2% 49.3% 9.0% ADR $61.34 $58.96 $59.68 REVPAR $33.83 $29.08 $5.39 HAMPTON INN - CARLISLE, PA (3) Occupancy 68.8% 66.8% 53.5% ADR $70.10 $63.63 $65.33 REVPAR $48.26 $42.48 $34.93 HAMPTON INN - SELINSGROVE, PA (4) Occupancy 80.7% 78.6% 71.9% 50.1% ADR $69.80 $65.58 $65.29 $60.76 REVPAR $56.31 $51.57 $46.96 $30.43 HAMPTON INN, DANVILLE, PA (5) Occupancy 68.5% 46.6% ADR $63.62 $61.97 REVPAR $43.60 $28.85 HOLIDAY INN HOTEL AND CONFERENCE CENTER - - HARRISBURG, PA (6) Occupancy 62.3% 63.5% 63.3% 58.9% 46.2% ADR $69.76 $68.34 $68.22 $61.36 $56.97 REVPAR $43.48 $43.37 $43.17 $36.13 $26.31 HOLIDAY INN - MILESBURG, PA Occupancy 54.9% 53.6% 52.0% 48.4% 51.0% 55.3% ADR $63.87 $62.69 $56.07 $52.31 $51.59 $48.64 REVPAR $35.07 $33.76 $29.13 $25.31 $26.29 $26.88 COMFORT INN - DENVER, PA Occupancy 61.9% 63.2% 54.7% 53.5% 60.4% 60.4% ADR $71.84 $74.99 $73.26 $61.04 $50.68 $49.72 REVPAR $44.47 $47.37 $40.08 $32.63 $30.60 $30.01 COMFORT INN - HARRISBURG, PA (7) Occupancy 60.3% 54.4% ADR $68.38 $65.88 REVPAR $41.23 $35.85 COMFORT INN JFK, JAMAICA, NY (8) Occupancy 77.3% ADR $120.65 REVPAR $93.21 CLARION SUITES, PHILADELPHIA, PA (9) Occupancy 64.1% 70.2% 73.7% 60.2% ADR $99.82 $99.11 $91.02 $86.10 REVPAR $63.99 $69.56 $67.09 $51.83 CLARION INN & SUITES - HARRISBURG, PA Occupancy 54.4% 24.5% ADR $61.83 $63.77 REVPAR $33.66 $15.61 - ---------------
(1) This hotel opened in October 1997 and, thus, the data shown for 1997 represent approximately three months of operations. (2) This hotel opened in December 1997 and, thus, the data shown for 1997 represent approximately one month of operations. 12 (3) This hotel opened in June 1997 and, thus, the data shown for 1997 represent approximately seven months of operations. (4) This hotel opened in September 1996 and, thus, the data shown for 1996 represent approximately four months of operations. (5) This hotel opened in September 1998 and, thus, the data shown for 1998 represents approximately four months of operations. (6) This hotel was converted to a Holiday Inn in September 1995 and, thus, the data shown for 1995 represent approximately four months of operations. (7) This hotel opened in May 1998 and, thus, the data shown for 1998 represent approximately eight months of operations. (8) This hotel opened in August 1999, and, thus, the data shown for 1999 represent approximately five months of operations. (9) This hotel opened in August 1998 and, thus, the data shown for 1998 represent approximately five months of operations. THE PERCENTAGE LEASES The following summary is qualified in its entirety by the actual Percentage Leases, the form of which has been filed as an exhibit to this Form 10-K. Our hotels are operated by the Lessee pursuant to Percentage Leases. We intend to lease future acquired hotels to operators, including both our current Lessee and operators unaffiliated with the Lessee. Future leases with our current Lessee generally will be similar to the Percentage Leases. Future leases with operators unaffiliated with our current Lessee may or may not be similar to the Percentage Leases. Our board of trustees will negotiate the terms and provisions of each future lease, depending on the purchase price paid, economic conditions and other factors deemed relevant at the time. Each percentage lease has an initial non-cancelable term of five years. All, but not less than all, of our current Percentage Leases may be extended for an additional five-year term at the Lessee's option. At the end of the first extended term, the Lessee, at its option, may extend some or all of the Percentage Leases for an additional five-year term. The Percentage Leases are subject to earlier termination upon the occurrence of defaults thereunder and certain other events described therein. The Percentage Leases generally provide for the Lessee to pay in each calendar quarter the greater of the base rent or percentage rent. The percentage rent for each hotel is comprised of (i) a percentage of room revenues up to a threshold, (ii) a percentage of room revenues in excess of the first threshold but less than a second incentive threshold, (iii) a percentage of room revenues in excess of the second incentive threshold and (iv) a percentage of revenues other than room revenues. The second threshold is designed to provide an incentive to the Lessee to generate higher revenues at each hotel. Until the applicable adjustment date, the rent on the newly-renovated hotels and the newly-developed hotels will be the initial fixed rents applicable to those hotels. After the adjustment date, rent will be computed with respect to the newly-renovated hotels and the newly-developed hotels based on the percentage rent formulas described herein. The Lessee also will be obligated to pay certain other amounts, including interest accrued on any late payments or charges. Rent is payable quarterly in arrears. 13 The following table sets forth the initial fixed rent, if applicable, the annual base rent and the percentage rent formulas:
Initial Annual Percentage Hotel Property Fixed Rent(1) Base Rent(1) Rent Formula HOLIDAY INN EXPRESS: Harrisburg, PA 504,406 195,000 31.0% of room revenue up to $1,153,655, plus 65.0% of room revenue in excess of $1,153,655 but less than $1,357,241, plus 29.0% of room revenue in excess of $1,357,241, plus 8.0% of all non-room revenue. HOLIDAY INN, EXPRESS: $794,686 $364,000 42.1% of room revenue up to $1,479,523, plus Hershey, PA 65.0% of room revenue in excess of $1,479,523 but less than $1,740,615, plus 29.0% of room revenue in excess of $1,740,615, plus 8.0% of all non-room revenue. HOLIDAY INN EXPRESS: 498,198 227,500 46.7% of room revenue up to $850,986, plus New Columbia, PA 65.0% of room revenue in excess of $850,986 but less than $1,001,160, plus 29.0% of room revenue in excess of $1,001,160, plus 8.0% of all non-room revenue. HAMPTON INN: Carlisle, PA 699,062 325,000 42.3% of room revenue up to $1,293,906, plus 65.0% of room revenue in excess of $1,293,906 but less than $1,522,242, plus 29.0% of room revenue in excess of $1,522,242, plus 8.0% of all non-room revenue. HAMPTON INN: Selinsgrove, PA n/a 308,469 49.0% of room revenue up to $1,081,152, plus 65.0% of room revenue in excess of $1,081,152 but less than $1,271,943, plus 29.0% of room revenue in excess of $1,271,943, plus 8.0% of all non-room revenue. HAMPTON INN: $504,116 $234,000 43.2% of room revenue up to $916,749, plus 65% Danville, PA of room revenue in excess of $916,749 but less than $1,078,528, plus 29.0% of room revenue in excess of $1,078,528, plus 8.0% of all non-room revenue. HOLIDAY INN HOTEL AND n/a 675,921 44.3% of room revenue up to $2,638,247, plus CONFERENCE CENTER: 65.0% of room revenue in excess of $2,638,247 Harrisburg, PA but less than $3,103,820, plus 31.0% of room revenue in excess of $3,103,820, plus 8.0% of all non-room revenue. HOLIDAY INN: Milesburg, PA 524,750 214,500 36.1% of room revenue up to $1,065,960, plus 65.0% of room revenue in excess of $1,065,960 but less than $1,254,070, plus 31.0% of room revenue in excess of $1,254,070, plus 8.0% of all non-room revenue. COMFORT INN: Denver, PA 262,234 112,288 35.4% of room revenue up to $559,542, plus 65.0% of room revenue in excess of $559,542 but less than $658,285, plus 29.0% of room revenue in excess of $658,285, plus 8.0% of all non-room revenue. COMFORT INN: Harrisburg, PA 514,171 234,000 40.7% of room revenue up to $980,050, plus 65.0% of room revenue in excess of $980,050 but less than $1,153,000, plus 29.0% of room revenue in excess of $1,153,000, plus 8.0% of all non-room revenue. COMFORT INN JFK,: $758,300 $357,500 43.7% of room revenue up to $1,370,430, plus Jamaica, NY 65.0% of room revenue in excess of $1,370,430 but less than $1,612,271, plus 29.0% of room revenue in excess of $1,612,271, plus 8.0% of all non-room revenue. CLARION SUITES: Philadelphia, PA n/a 418,593 36.1% of room revenue up to $1,998,097, plus 65.0% of room revenue in excess of $1,998,097 but less than $2,350,702, plus 29.0% of room revenue in excess of $2,350,702, plus 8.0% of all non-room revenue. 14 CLARION INN & SUITES: $404,031 $175,500 35.3% of room revenue up to $855,611, plus 65% Harrisburg, PA of room revenue in excess of $855,611 but less than $1,006,601, plus 29.0% of room revenue in excess of $1,006,601, plus 8.0% of all non-room revenue. - -----------------
(1) The initial fixed rent or base rent, as applicable, will accrue pro rata during each quarter of each lease year. The Lessee, however, will pay the initial fixed rent or the base rent, as applicable, for each calendar quarter in each lease year based on the ratio of budgeted gross revenues for such calendar quarter to budgeted gross revenues for such lease year. ITEM 3. LEGAL PROCEEDINGS We are not presently subject to any material litigation. To our knowledge, no litigation has been threatened against us or our affiliates other than routine actions and administrative proceedings substantially all of which are expected to be covered by liability insurance and which, in the aggregate, are not expected to have a material adverse effect on our business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our security holders during 1999, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our Priority Class A Common Shares began trading on the American Stock Exchange on January 20, 1999 under the symbol "HT." As of March 27, 2000, the last reported closing price per Priority Class A Common Share on the American Stock Exchange was $5.125. The following table sets forth the high and low sales price per Priority Class A Common Share reported on the American Stock Exchange as traded for the period indicated.
PERIOD HIGH LOW 1999 First Quarter (January 21, 1999 through March 31, 1999) $6.313 $5.750 Second Quarter (April 1, 1999 through June 30, 1999) $6.125 $5.125 Third Quarter (July 1, 1999 through September 30, 1999) $5.875 $5.000 Fourth Quarter (October 1, 1999 through December 31, 1999) $5.500 $4.813
SHAREHOLDER INFORMATION At March 27, 2000, we had approximately 550 holders of record of our Priority Class A Common Shares. The subordinated units of limited partnership interest in our operating Partnership subsidiary (which are redeemable for Class B Common Shares subject to certain limitations) were held by twelve entities and or persons, including us. Our organizational documents limit the number of equity securities of any series that may be owned by any single person or affiliated group to 9.9% of the outstanding shares. 15 DISTRIBUTION INFORMATION On March 15, 1999, we declared a cash distribution for the holders of the Priority Class A Common Shares for the period from January 1, 2000 to March 31, 2000 in the amount of $0.18 per share, payable on April 28, 2000, to holders of record on March 29, 2000. We currently anticipate maintaining at least the current distribution rate for the immediate future, unless actual results of operations, economic conditions or other factors differ from our current expectations. Future distributions, if any, will be at the discretion of our board of trustees and will depend on our actual cash flow, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as we may deem relevant. Our operating partnership subsidiary has not yet paid a distribution to the holders of its subordinated units of limited partnership interest. ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The following sets forth selected financial and operating data on a pro forma and historical consolidated basis. The following data should be read in conjunction with the financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K. The statement of operations and other data for the year ended December 31, 1999 include the historical results of the combined hotels prior to our acquisition of them. Historical operating results of the combined hotels prior to our acquisition, including net income, may not be comparable to future operating results. 16 HERSHA HOSPITALITY TRUST SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1999 (1) 1999 (1) --------------- -------------- OPERATING DATA Percentage Lease Revenue (2) $7,264 $8,299 Other Revenue 106 125 --------------- -------------- Total Revenue 7,370 8,424 Interest expense 1,428 1,768 Land lease 20 20 Real estate and personal property taxes and property insurance 450 546 General and administrative 363 424 Depreciation and amortization 2,064 2,433 --------------- -------------- Total expenses 4,325 5,191 Income before allocation to minority interest 3,045 3,233 Minority interest 1,707 1,985 --------------- -------------- Net income $1,338 $1,248 =============== ============== Basic earnings per common share (3) $0.59 $0.55 Diluted earnings per common share (3) $0.48 $0.50 Dividends declared per common share $0.67 $0.72 BALANCE SHEET DATA Net investment in hotel properties $51,908 Minority interest in Partnership $18,980 Shareholder's equity $11,805 Total assets $56,382 Total debt $24,754 OTHER DATA Funds from operations (4) $5,109 Net cash provided by operating activities $1,737 Net cash (used in) investing activities $(9,149) Net cash provided by financing activities $6,198 Weighted average shares outstanding Basic 2,275,000 Diluted 6,369,700 - ------------------------- (1) Hersha Hospitality Trust commenced operations on January 26, 1999. The unaudited pro forma information for Hersha Hospitality Trust is presented for information purposes as if the acquisition of all hotels by the Partnership, and the commencement of the Percentage Leases had occurred on January 1, 1999. The unaudited results are not necessarily indicative of what actual results of our operations would have been if we commenced operations on January 1, 1999. (2) Represents initial fixed rent plus aggregate Percentage Rent paid by the Lessee to the Partnership pursuant to the Percentage Leases, which payments are calculated by applying the rent provisions in the Percentage Leases to the historical room revenues. (3) Represents basic and diluted earnings per share computed in accordance with FAS No. 128. (4) We note that industry analysts and investors use Funds From Operations (FFO) as a tool to compare equity real estate investment trust performance. In accordance with the resolution adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (NAREIT), FFO represents net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructing or sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies due to the fact that not all real estate companies use the same definition. 17 The following table computes FFO: YEAR ENDED DECEMBER 31, 1999 (1) ---------------- Net income applicable to common shares $1,338 Add: Minority interest 1,707 Depreciation and amortization 2,064 ----------- Funds From Operations $5,109 =========== - ------------------------- (1) Commenced operations on January 26, 1999. HERSHA HOSPITALITY MANAGEMENT, L.P. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1999 --------------- OPERATING DATA Room revenue $21,871 Other revenue 3,428 --------------- Total Revenue 25,299 Hotel operating expenses 9,944 Restaurant operating expenses 1,822 Advertising and Marketing 1,228 Bad Debts 247 Depreciation and amortization 102 General and Administrative 3,717 Lease Expense - Related Party HHLP 7,264 Lease Expense - Other Related Parties 1,361 --------------- Total Expenses 25,685 --------------- Net income $(386) =============== 18 COMBINED ENTITIES - INITIAL HOTELS SELECTED HISTORICAL FINANCIAL DATA (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 OPERATING DATA Room revenue $ 15,185 $ 10,880 $ 7,273 $ 5,262 Restaurant revenue 2,111 1,744 2,106 1,515 Other revenue 790 821 610 442 --------- --------- -------- -------- TOTAL REVENUE 18,086 13,445 9,989 7,219 Hotel operating expenses 7,449 5,628 4,887 3,789 Restaurant operating expenses 1,469 996 1,406 961 Advertising and Marketing 918 571 418 185 Depreciation and amortization 1,543 1,189 924 711 Interest expense 1,605 821 605 434 Interest expense - Related parties 386 533 316 200 General and Administrative 2,065 1,644 1,085 779 General and Administrative - Related Parties 608 320 364 102 Loss on Abandonments and Asset Disposals 95 - 12 284 Liquidation Damages - 14 - 150 --------- --------- -------- -------- TOTAL EXPENSES 16,138 11,716 10,017 7,595 --------- --------- -------- -------- NET INCOME $ 1,948 $ 1,729 $ (28) $ (376) ========= ========= ======== ========
19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements contained in this section that are not historical facts are based on current expectations. This includes statements regarding our 2000 anticipated revenues, expenses and returns, and future capital requirements. Words such as "believes", "expects", "anticipate", "intends", "plans" and "estimates" and variations of such words and similar words also identify forward-looking statements. Our actual results may differ materially. We caution you not to place undue reliance on any such forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. GENERAL The Company's principal source of revenue is from payments by the Lessee under the Percentage Leases. The principal determinants of Percentage Rent are the hotels' room revenue, and to a lesser extent, other revenue. The Lessee's ability to make payments to the Partnership under the Percentage Leases is dependent on the operations of the hotels. OVERVIEW Please refer to the information under Item 1, entitled "Overview." PRO FORMA RESULTS OF OPERATIONS OF OUR HOTELS COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998 Room revenue for our hotels increased $4,487,852 or 27.8% to $20,649,276 in 1999 from $16,161,424 in 1998. The increase resulted from the addition of 80,890 available room nights with an overall increase of 54,776 room nights sold. The increase in room nights available was a result of opening three new hotels in 1998, which were open the full year in 1999, and one hotel that opened in 1999. In addition, a 2% increase in occupancy to 58% in 1999 as well as a 3.5% increase in our average daily rate to $71.64 compared to $69.23 augmented the available room-nights. Revenue per available room (REVPAR) increased 7.0% to $41.34 from $38.61. Total expenses less depreciation, amortization and interest increased by $2,277,434 or 18.2% to $14,806,884. Operating income before interest expense, depreciation and amortization increased by 56.4% to $8,702,136 from $5,563,648. RESULTS OF OPERATIONS OF OUR HOTELS PRIOR TO THE COMMENCEMENT OF OPERATIONS FOR HERSHA HOSPITALITY TRUST COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997 Room revenue for our hotels increased $4,305,000 or 40% to $15,185,000 in 1998 from $10,880,000 in 1997. The increase resulted from the addition of 86,114 available room nights with an overall increase of 58,986 room nights sold. The increase in room nights available was a result of opening three new hotels in 1997, which were open the full year in 1998, and one hotel that opened in 1998. In addition, a 3% increase in occupancy to 62% from 60% in 1997 as well as a 2% increase in our average daily rate to $69.54 compared to $68.27 in 1997 augmented the available room nights. REVPAR increased 5% to $43.30 from $41.09. Total expenses less depreciation, amortization and interest increased by $3,431,000 or 37% to $12,604,000. Operating income before interest expense, depreciation and amortization increased by 28% to $5,482,000 from $4,272,000. COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996 Room revenue increased by $3,607,000 or 50% to $10,880,000 in 1997 from $7,273,000 in 1996. The increase resulted from the addition of four new hotels opening in 1997 and one hotel which was only open during half of 1996 being open for the entire 1997 period. These new properties added additional available room-nights of 43,171. In addition, a 13% increase in occupancy to 60% from 53% in 1996 as well as a 7% increase in our average daily rate to $68.27 compared to 20 $63.51 in 1996 augmented the available room-nights. Revenue per available room increased 25% to $41.09 from $33.48. Total expenses less depreciation, amortization and interest increased by $1,001,000 or 12% to $9,173,000 but decreased as a percentage of total revenue to 68% from 82%. Operating income before interest expense, depreciation and amortization increased by 135% to $4,272,000 from $1,817,000. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 Room revenue increased $2,011,000 or 38% to $7,273,000 in 1996 from $5,262,000 in 1995. The increase in revenue came through the opening of two hotels in 1996 adding additional room-nights available of 41,168. In addition, an overall increase in occupancy of 10% to 53% from 48% in 1995 as well as a 2% increase in our average daily rate to $63.51 compared to $62.40 in 1995 augmented the available room-nights. Revenue per available room increased 12% to $33.48 from $29.89. Total expenses less depreciation, amortization and interest increased by $1,922,000 or 31% to $8,172,000 but decreased as a percentage of total revenue to 82% from 87%. Operating income before interest expense, depreciation and amortization increased by 87% to $1,817,000 from $969,000. LIQUIDITY AND CAPITAL RESOURCES We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our line of credit. We believe that our net cash provided by operations will be adequate to fund both operating requirements and our payment of dividends in accordance with REIT requirements of the federal income tax laws. We expect to meet our long-term liquidity requirements, such as scheduled debt maturities and property acquisitions, through long-term secured and unsecured borrowings, the issuance of additional equity securities or, in connection with acquisitions of hotel properties, the issuance of units of limited partnership interest in our operating partnership subsidiary. We currently maintain a $7.0 million line of credit with Sovereign Bank. We may use the line of credit to fund future acquisitions and for working capital. Outstanding borrowings under the Line of Credit bear interest at the bank's prime rate and are collateralized by the Holiday Inn, Milesburg, PA., and the Clarion Suites, Philadelphia, PA. In the future, we may seek to increase the amount of the line of credit, negotiate additional credit facilities or issue corporate debt instruments. Any debt incurred or issued by us may be secured or unsecured, long-term or short-term, fixed or variable interest rate and may be subject to such other terms as we deem prudent. The outstanding principal balance on the line of credit was approximately $6.1 million at December 31, 1999 with approximately $900,000 available on a collateralized basis. The weighted average interest rate on short term borrowings was 8.37%. We have a debt policy that limits our consolidated indebtedness to less than 67% of the aggregate purchase prices for the hotels in which we have invested. However, our organizational documents do not limit the amount of indebtedness that we may incur and our board of trustees may modify our debt policy at any time without shareholder approval. We intend to repay indebtedness incurred under the line of credit from time to time, for acquisitions or otherwise, out of cash flow and from the proceeds of issuances of additional Priority Class A Common Shares and other securities. We will invest in additional hotels only as suitable opportunities arise. We will not undertake investments in hotels unless adequate sources of financing are available. Our bylaws require the approval of a majority of our board of trustees, including a majority of the independent trustees, to acquire any additional hotel in which one of our trustees or officers, or any of their affiliates, has an interest (other than solely as a result of his status as a trustee, officer or shareholder of our company). We expect that future investments in hotels will depend on and will be financed by, in whole or in part, the proceeds from additional issuances of Priority Class A Common Shares or other securities or borrowings. Because of the level of our indebtedness, the success of our acquisition strategy will depend primarily on our ability to access additional capital through issuances of equity securities. We currently have no agreement or understanding to invest in any hotel and there can be no assurance that we will make any investments in any other hotels that meet our investment criteria. 21 Pursuant to our Percentage Leases, we will be required to make available to the Lessee of our hotels 4% (6% for the Holiday Inn Hotel and Conference Center, Harrisburg, PA and the Holiday Inn, Milesburg, PA) of gross revenues per quarter, on a cumulative basis, for periodic replacement or refurbishment of furniture, fixtures and equipment at each of our hotels. We believe that a 4% (6% for the Holiday Inn Hotel and Conference Center, Harrisburg, PA and the Holiday Inn, Milesburg, PA) percentage set-aside is a prudent estimate for future capital expenditure requirements. We intend to spend amounts in excess of the obligated amounts if necessary to comply with the reasonable requirements of any franchise license under which any of our hotels operate and otherwise to the extent we deem such expenditures to be in our best interests. We will also be obligated to fund the cost of certain capital improvements to our hotels. We believe that amounts required to be set aside in our Percentage Leases will be sufficient to meet required expenditures for furniture, fixtures and equipment during the term of the Percentage Leases. We will use undistributed cash or borrowings under credit facilities to pay for the cost of capital improvements and any furniture, fixture and equipment requirements in excess of the set aside referenced above. INFLATION Operators of hotels in general possess the ability to adjust room rates quickly. However, competitive pressures may limit the Lessee's ability to raise room rates in the face of inflation, and annual increases in average daily rates have failed to keep pace with inflation. SEASONALITY Our hotels' operations historically have been seasonal in nature, reflecting higher occupancy rates during the second and third quarters. This seasonality can be expected to cause fluctuations in our quarterly lease revenue to the extent that we receive percentage rent. RECENTLY ISSUED ACCOUNTING STANDARDS None. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is to changes in interest rates on its variable rate Line of Credit. At December 31, 1999, the Company had total outstanding indebtedness under the Line of Credit of approximately $6.1 million at an interest rate of 8.5%. At March 27, 1999, the Company had total outstanding indebtedness under the Line of Credit of approximately $4.5 million at an interest rate of 9.0%. The entire amount outstanding under the Line of Credit becomes due and payable as of August 8, 2001. The Company has not entered into, but in the future may enter into, derivative financial instruments such as interest rate swaps to mitigate its interest rate risk. In the event that the Company does not have sufficient cash reserves to pay off the Line of Credit when due, it will have to borrow an amount sufficient to pay off the Line of Credit at the prevailing interest rate at the time the amount outstanding becomes due and payable. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's financing requirements. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES Independent Auditors' Report.........................................................24 Consolidated Balance Sheets as of December 31, 1999 and 1998.........................25 Consolidated Statement of Operations for the year ended December 31, 1999....................................................................26 Consolidated Statements of Shareholders' Equity for the year ended December 31, 1999 and the period May 27, 1998 (date of inception) to December 31, 1998.................................................................27 Consolidated Statement of Cash Flows for the year ended December 31, 1999....................................................................28 Notes to Consolidated Financial Statements...........................................30 Schedule III - Real Estate and Accumulated Depreciation for the year ended December 31, 1999.........................................................45 HERSHA HOSPITALITY MANAGEMENT, L.P. Independent Auditors' Report.........................................................47 Balance Sheets as of December 31, 1999 and 1998......................................48 Statement of Operations for the year ended December 31, 1999.........................49 Statement of Partners Capital for the year ended December 31, 1999...................50 Statement of Cash Flows for the year ended December 31, 1999.........................51 Notes to Financial Statements........................................................53 COMBINED ENTITIES - INITIAL HOTELS Independent Auditors' Report.........................................................59 Combined Balance Sheets as of December 31, 1998 and 1997.............................60 Combined Statements of Operations for the years ended December 31, 1998, 1997, and 1996 ...................................................61 Combined Statements of Owners' Equity for the years ended December 31, 1998, 1997, and 1996 ...................................................62 Combined Statements of Cash Flows for the year ended December 31, 1998, 1997, and 1996....................................................63 Notes to Combined Financial Statements...............................................64
23 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Trustees of Hersha Hospitality Trust New Cumberland, Pennsylvania We have audited the accompanying consolidated balance sheet of Hersha Hospitality Trust and subsidiaries as of December 31, 1999, and the related consolidated statement of operations, shareholders' equity, and cash flows for the year then ended. We have also audited the accompanying consolidated balance sheet as of December 31, 1998 and the related consolidated statement of shareholders' equity for the period May 27, 1998 [date of inception] to December 31, 1998. Our audits also included the consolidated financial statement schedule included on Pages 45 and 46. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company'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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of Hersha Hospitality Trust and subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for the year ended December 31, 1999, and the statement of shareholders' equity for the period May 27, 1998 [date of inception] to December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the consolidated financial statement schedule referred to above, when considered in relationship to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein as of December 31, 1999. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey February 16, 2000 [Except as to Note 13[B] as to which the date is February 25, 2000] 24 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (1) [IN THOUSANDS EXCEPT SHARE AMOUNTS]
DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------ ----------------- ASSETS: Investment in Hotel Properties, Net of Accumulated Depreciation $ 51,908 $ -- Cash and cash equivalents 124 -- Lease Payments Receivable - Related Party 2,116 -- Intangibles, Net of Accumulated Amortization 855 -- Due from Related Party 1,028 -- Other Assets 351 -- -------------------- ------------------ TOTAL ASSETS $ 56,382 $ -- ==================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY: Cash Overdraft $ 84 $ -- Line of Credit 6,096 -- Mortgages Payable 18,658 -- Dividends Payable 410 -- Due to Related Party 188 -- Accounts Payable and Accrued Expenses 161 -- -------------------- ------------------ TOTAL LIABILITIES $ 25,597 $ -- -------------------- ------------------ MINORITY INTEREST 18,980 -- -------------------- ------------------ COMMITMENTS AND CONTINGENCIES -- -- -------------------- ------------------ SHAREHOLDERS' EQUITY: Preferred Shares, $.01 par value, 10,000,000 Shares authorized, None Issued and Outstanding -- -- Common Shares - Priority Class A, $.01 Par Value, 50,000,000 Shares Authorized, 2,275,000 and -0- Shares Issued and Outstanding at December 31, 1999 and 1998, Respectively (Aggregate Liquidation Preference $13,650) 23 -- Common Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized, -0- and 100 Shares Issued and Outstanding at December 31, 1999 and 1998, Respectively -- -- Additional Paid-in Capital 11,968 -- Distributions in Excess of Net Earnings (186) -- -------------------- ------------------ TOTAL SHAREHOLDERS' EQUITY 11,805 -- -------------------- ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 56,382 $ -- ==================== ==================
(1) Operations commenced on January 26, 1999 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. 25 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (1) [IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS]
YEAR ENDED DECEMBER 31, 1999 REVENUE: Percentage Lease Revenue - Related Party $ 7,264 Interest 78 Interest - Related Party 28 ------------------------ TOTAL REVENUE $ 7,370 ------------------------ EXPENSES: Interest 1,428 Land Lease - Related Party 20 Real Estate and Personal Property Taxes and Insurance 450 General and Administrative 363 Depreciation and Amortization 2,064 ------------------------ TOTAL EXPENSES $ 4,325 INCOME BEFORE MINORITY INTEREST 3,045 ------------------------ INCOME ALLOCATED TO MINORITY INTEREST 1,707 ------------------------ NET INCOME $ 1,338 ======================== BASIC EARNINGS PER COMMON SHARE $ 0.59 ======================== DILUTED EARNINGS PER COMMON SHARE $ 0.48 ======================== WEIGHTED AVERAGE SHARES: Basic 2,275,000 ======================== Diluted (2) 6,369,700 ========================
(1) Operations commenced on January 26, 1999 (2) Includes 4,205,970 units of limited partnership interest that are redeemable on a one-for-one basis for Class B Common Shares. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. 26 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1999 (1) AND THE PERIOD MAY 27, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998 [IN THOUSANDS, EXCEPT SHARES]
PRIORITY CLASS A CLASS B ADDITIONAL DISTRIBUTIONS ------------------------ ------------------------ COMMON STOCK COMMON STOCK PAID-IN IN EXCESS OF DESCRIPTION SHARES DOLLARS SHARES DOLLARS CAPITAL NET EARNINGS TOTAL ----------- ------ ------- ------ ------- ------- ------------ ----- Balance at May 27, 1998 - $ - - $ - $ - $ - $ - Issuance of Initial Shares - - 100 - - - - ---------- --------- ---------- ----------- ------------ ------------ ---------- Balance at December 31, 1998 - - 100 - - - - Cancellation of Initial Shares - - (100) - - - - Issuance of shares, 2,275,000 23 - - 11,968 - 11,991 net of offering expenses Dividends declared - - - - - (1,524) (1,524) ($0.67 per share) Net Income 1,338 1,338 ---------- --------- ---------- ----------- ------------ ------------ ---------- Balance at December 31, 1999 2,275,000 $23 - $ - $ 11,968 $ (186) $ 11,805 ========== ========= ========== =========== ============ ============ ==========
(1) Operations commenced on January 26, 1999 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. 27 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 (1) [IN THOUSANDS] OPERATING ACTIVITIES: Net Income $ 1,338 ---------------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating activities: Depreciation and Amortization 2,064 Income Allocated to Minority Interest 1,707 Change in Assets and Liabilities: (Increase) Decrease in: Cash Overdraft 84 Lease Payments Receivable (2,116) Other Assets (351) Increase (Decrease): Due to Related Party 188 Accounts Payable and Accrued Expenses 161 ---------------- Total Adjustments 1,737 ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,075 INVESTING ACTIVITIES Purchase of Hotel Property Assets (7,209) Purchase of Intangible Assets (940) Advances to Related Party (1,000) ------- NET CASH USED IN INVESTING ACTIVITIES (9,149) FINANCING ACTIVITIES Draw on Line of Credit 6,096 Net Proceeds from Issuance of Stock 11,991 Repayment of Mortgages Payable (5,460) Dividends Paid (1,114) Limited Partnership Unit Distributions Paid (1,580) Repayment of Related Party Loans (3,735) ---------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 6,198 NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 124 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD - ---------------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 124 ================ (1) Operations commenced on January 26, 1999 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. 28 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 (1) [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid During the Period: Interest $ 1,393 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: We have acquired an Investment in Hotel Properties with an approximate value, at the commencement of operations, of $40,307 in exchange for (i) 4,032,321 subordinated units of limited partnership interest in the Partnership that are redeemable for the same number of Class B Common Shares with a value of approximately $24.2 million based on the initial offering price and (ii) the assumption of approximately $23.3 million of indebtedness of which approximately $6.1 million was repaid immediately after the acquisition of the hotels and approximately $2.8 million was repaid prior to June 30, 1999. On September 1, 1999, we have acquired an Investment in the Hampton Inn, Danville, PA in exchange for (i) 173,359 subordinated units of limited partnership interest in the partnership that are redeemable for the same number of Class B Common Shares with a value of approximately $1.0 million based on the initial offering price and (ii) the assumption of approximately $2.6 million of indebtedness. We assumed mortgages payable of $2.0 million in connection with the acquisition of the Clarion Inn & Suites, Harrisburg. On December 29, 1999 we declared a $0.18 per Class A Common Share dividend of $410 that was paid on January 31, 2000 and a distribution of $460 to the holders of limited partnership units. (1) Operations commenced on January 26, 1999 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. 29 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [1] ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION Hersha Hospitality Trust was formed in May 1998 to acquire equity interests in ten existing hotel properties. We are a self-administered, Maryland real estate investment trust for federal income tax purposes. On January 26, 1999, we completed an initial public offering of 2,275,000 shares of $.01 par value Priority Class A Common Shares. The offering price per share was $6 resulting in gross proceeds of $13,650. Net of underwriters discount and offering expenses, we received net proceeds of $11,991. Upon completion of the initial public offering, we contributed substantially all of the net proceeds to Hersha Hospitality Limited Partnership [the "Partnership"] in exchange for a 36.1% general partnership interest in the Partnership. The Partnership used these proceeds to acquire an equity interest in ten hotels [the "Initial Hotels"] through subsidiary partnerships, and to retire certain indebtedness relating to these hotels. The Partnership acquired these hotels in exchange for (i) units of limited partnership interest in the Partnership which are redeemable, subject to certain limitations, for an aggregate of 4,032,431 Priority Class B Common Shares, with a value of approximately $24.2 million based on the initial public offering, and (ii) the assumption of approximately $23.3 million of indebtedness of which approximately $6.1 million was repaid immediately after the acquisition of the hotels. Hasu P. Shah and certain affiliates the ["Hersha Affiliates"] received units of limited partnership interests in the Partnership aggregating a 63.9% equity interest in the Partnership. The Partnership owns a 99% limited partnership interest and Hersha Hospitality, LLC ["HHLLC"], a Virginia limited liability company, owns a 1% general partnership interest in the subsidiary partnerships. The Partnership is the sole member of HHLLC. We began operations on January 26, 1999, therefore, the historical financial statements include activity from January 26, 1999 to December 31, 1999. Since inception, we have leased all of our hotel facilities to Hersha Hospitality Management, LP, [the "Lessee" or "HHMLP"], a limited partnership owned by the Hersha Affiliates. The Lessee operates and leases the hotel properties pursuant to separate percentage lease agreements [the "Percentage Leases"] which provide for initial fixed rents or percentage rents based on the revenues of the hotels. The hotels are located principally in the eastern Pennsylvania area. [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and includes all of our accounts as well as accounts of the Partnership and the subsidiary partnerships and all intercompany amounts have been eliminated. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT IN HOTEL PROPERTIES - Investment in hotel properties are stated at cost. Depreciation for financial reporting purposes is principally based upon the straight-line method. 30 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] The estimated lives used to depreciate the Hotel properties are as follows: Building and Improvements 15 to 40 Years Furniture and Fixtures 5 to 7 Years IMPAIRMENT OF LONG-LIVED ASSETS - We review the carrying value of each hotel property in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121 to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel property or that depreciation periods should be modified. Long-Lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We perform undiscounted cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. We do not believe that there are any current facts or circumstances indicating impairment of any of our investment in hotel properties. CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of cash and certain highly liquid investments with maturities of three months or less when acquired, carried at cost, which approximates fair value. We had no cash equivalents at December 31, 1999. INTANGIBLE ASSETS - Intangible assets are carried at cost and consist of loan acquisition fees and goodwill. Amortization of loan acquisition fees is computed using the straight-line method over the two year term of the related debt and over a 15 year period for goodwill. REVENUE RECOGNITION - Percentage lease income is recognized when earned from the Lessee under the agreements from the date of acquisition of each hotel property. Lease income is recognized under fixed rent agreements ratably over the lease term. All leases between us and the Lessee are operating leases. INCOME TAXES - We qualify as a real estate investment trust under Section 856 and 860 of the Internal Revenue Code. Accordingly, no provision for federal income taxes has been reflected in the financial statements. Earnings and profits that determine the taxability of dividends to shareholders differ from net income reported for financial reporting purposes due to the differences for Federal tax purposes in the estimated useful lives and methods used to compute depreciation. During 1999, none of the distributions were considered to be return of capital for Federal income tax purposes. MINORITY INTEREST - Minority interest in the Partnership represents the limited partners proportionate share of the equity of the Partnership. The limited partnership interests are owned by numerous individuals and companies as of December 31, 1999. Income is allocated to minority interest based on weighted average percentage ownership throughout the year. 31 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] EARNINGS PER COMMON SHARE - We compute earnings per share in accordance with Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per Share." SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share," and replaces its primary earnings per share with new basic earnings per share representing the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share reflects the amount of earnings for the period available to each share of common stock outstanding during the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period, such as common shares that could result from the potential exercise or conversion of securities into common stock. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an antidilutive effect on earnings per share. The dilutive effect of outstanding options and warrants and their equivalents is reflected in diluted earnings per share by the application of the treasury stock method which recognizes the use of proceeds that could be obtained upon exercise of options and warrants in computing diluted earning per share. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. Options and warrants will have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the option or warrants. Potential future dilutive securities include 4,205,970 shares issuable under limited partnership units and 534,000 shares issuable under outstanding options. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject us to concentrations of credit risk include cash and cash equivalents and rent receivable arising from our normal business activities. We place our cash and cash equivalents with high credit quality financial institutions. We do not require collateral to support our financial instruments. At December 31, 1999, we had approximately $35 in financial institutions that exceeded federally insured amounts. Rental income is earned from a single related party lessee. Therefore, the collection of rent receivable and rent income is reliant on the continued financial health of the Lessee. STOCK BASED COMPENSATION - We account for employee stock-based compensation under the intrinsic value based method as prescribed by Accounting Principles Board ["APB"] Opinion No. 25. We apply the provisions of SFAS No. 123, "Accounting for Stock Based Compensation," to non-employee stock-based compensation and the pro forma disclosure provisions of that statement to employee stock-based compensation. DISTRIBUTIONS - We intend to pay regular quarterly dividends which are initially dependent upon receipt of distributions from the Partnership. On December 29, 1999, we declared a $.18 per Class A Common Share dividend which was paid on January 31, 2000. As of December 31, 1999, the cumulative distributions declared since the commencement of operations on January 26, 1999 was $0.67 per Class A Common Share. 32 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [3] INTANGIBLE ASSETS At December 31, 1999, intangibles consisted of the following: ACCUMULATED DESCRIPTION COST AMORTIZATION NET December 31, 1999: Goodwill $ 868 $ 72 $ 796 Loan Acquisition Fees 72 13 59 -------------- ------------------ ------------- Totals $ 940 $ 85 $ 855 ============== ================== ============= Amortization expense was $85 for the year ending December 31, 1999 [4] INVESTMENT IN HOTEL PROPERTIES Hotel properties consist of the following at December 31, 1999: 1999 Land $ 4,597 Buildings and Improvements 42,915 Furniture, Fixtures and Equipment 6,375 ------------- 53,887 Less Accumulated Depreciation 1,979 ------------- $51,908 ============= Depreciation expense was $1,979 for the year ending December 31, 1999. The thirteen hotels owned at December 31, 1999 consist of eleven premium limited service hotels and two full service hotel properties. 33 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [4] INVESTMENT IN HOTEL PROPERTIES [CONTINUED] In 1999, we acquired the following premium limited service hotels for the approximate amounts indicated: NO. OF PURCHASE ROOMS PRICE Comfort Inn - JFK, NY 60 $5,500 Clarion Inn & Suites, Harrisburg, PA 77 2,700 Hampton Inn, Danville, PA 72 3,600 ------------- --------------- 209 $11,800 On August 11, 1999 we purchased, from the Hersha Affiliates, all the partnership interests in 3744 Associates, a Pennsylvania limited partnership and through the ownership of 3744 Associates, a 60-room Comfort Inn hotel located near the John F. Kennedy International Airport in Jamaica, New York. The Comfort Inn was newly constructed and commenced operations on August 12, 1999. On September 1, 1999 we purchased, from the Hersha Affiliates, all the partnership interests in 2844 Associates, a Pennsylvania limited partnership and, through the ownership of 2844 Associates, a 77-room Clarion Inn & Suites hotel located in Harrisburg, Pennsylvania. We also purchased the 72-room Hampton Inn hotel located in Danville, Pennsylvania from 3544 Associates. The purchase prices for the Comfort Inn, Hampton Inn and Clarion Inn & Suites are $5.5million, $3.6 million and $2.7 million, respectively. The purchase price valuations for the properties acquired were based upon the rent to be paid by the Lessee under Percentage Leases. The purchase prices of these hotels will be adjusted on December 31, 2001 by applying a pricing methodology to such hotels' cash flows in a manner similar to that of the other hotels purchased by HHLP from the Hersha Affiliates. The adjustments must be approved by a majority of the Company's independent trustees. The above acquisitions were accounted for as purchases, and the results of such acquisitions are included in the Company's consolidated statements of operations from the dates of acquisition. No goodwill arose in the transactions. [5] DEBT Debt is comprised of the following at December 31, 1999: 1999 Mortgages Payable $18,658 Revolving Credit Facility 6,096 ------- 24,754 34 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [5] DEBT [CONTINUED] Substantially all of our mortgage indebtedness is collateralized by property and equipment and in certain situations is personally guaranteed by the Hersha Affiliates. The total mortgages payable balance at December 31, 1999, was $18,658 and consisted of mortgages with fixed interest rates ranging from 7.75% to 8.45%. The maturities for the outstanding mortgages ranged from October 3, 2011 to October 18, 2013. On August 9, 1999, the Company obtained a $7.0 million credit facility from Sovereign Bank (the "Line of Credit"). Outstanding borrowings under the Line of Credit bear interest at the bank's prime rate and the Line of Credit is collateralized by the Holiday Inn, Milesburg, PA and the Clarion Suites, Philadelphia, PA. The interest rate on borrowings under the Line of Credit at December 31, 1999 was 8.50%. The Line of Credit expires on August 8, 2001. We have the option to extend the Line of Credit for an additional twelve months upon expiration. The outstanding principal balance on the Line of Credit was approximately $6.1 million at December 31, 1999 with approximately $900,000 available on a collateralized basis. The weighted average interest rate on short term borrowings was 8.37 %. Aggregate annual principal payments for the Company's mortgages payable at December 31, 1999 are due as follows: 2000 $ 853 2001 925 2002 1,003 2003 1,088 2004 1,201 Thereafter 13,588 ------------------- TOTAL $ 18,658 =================== [6] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS In conjunction with the initial public offering, we acquired the Initial Hotels and entered into percentage lease agreements with Hersha Hospitality Management, L.P. We have acquired three properties subsequent to our public offering. Under the Percentage Leases, the Partnership is obligated to pay the costs of certain capital improvements, real estate and personal property taxes and property insurance, and to make available to the lessee an amount equal to 4% [6% for some hotels] of room revenues per quarter, on a cumulative basis, for the periodic replacement or refurbishment of furniture, fixtures and equipment at these hotels. For the year ending December 31, 1999 the limited partners were paid cumulative distributions of $2,039. We have a commitment outstanding to the limited partners of $704 as of December 31, 1999. The Priority Class A Common shareholders will be entitled to receive dividends in excess of the priority distribution [See Note 9] after the limited partners have received an amount equal to the priority distribution. The holders of the Priority Class A Common Shares will be entitled to receive further distributions on a pro rata basis with the holders of the limited partnership units. 35 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [6] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED] We are the sole general partner in the Partnership, which is the sole general partner in the subsidiary partnerships and, as such, are liable for all recourse debt of the Partnership to the extent not paid by the partnerships. In the opinion of management, we do not anticipate any losses as a result of our obligations as general partner. We have entered into percentage leases relating to each of the hotels with the Lessee. Each percentage lease will have an initial non-cancelable term of five years. All of the Percentage Leases for these hotels may be extended for an additional five-year term at the Lessee's option. At the end of the first extended term, the Lessee, at its option, may extend some or all of the Percentage Leases for these hotels for an additional five-year term. Pursuant to the terms of the Percentage Leases, the Lessee is required to pay initial fixed rent, base rent or percentage rent and certain other additional charges and is entitled to all profits from the operations of the hotels after the payment of certain specified operating expenses. We have future lease commitments from the Lessee through January 2004. Minimum future rental income under these noncancellable operating leases at December 31, 1999, is as follows: 2000 $ 7,775 2001 6,420 2002 4,604 2003 4,604 2004 1,280 Thereafter 0 ------------- TOTAL $ 24,683 ============= For the period January 26, 1999 through December 31, 1999, we earned initial fixed rents of $4,152 and earned percentage rents of $3,112. We have acquired seven of the Initial Hotels and three other hotels, since the commencement of operations, for prices that will be adjusted at either December 31, 1999, 2000 or 2001. The purchase price adjustments are calculated by applying the initial pricing methodology to such hotels' cash flows as shown on our and the Lessee's audited financial statements. The adjustments must be approved by a majority of our independent trustees. If the repricing produces a higher aggregate value for such hotels, the Hersha Affiliates receive an additional number of units of limited partnership interest that, when multiplied by the offering price, equals the increase in value plus the value of any distributions that would have been made with respect to such units if such units had been issued at the time of the acquisition of such hotels. If, however, the repricing produces a lower aggregate value for such hotels, the Hersha Affiliates forfeit to the Partnership that number of units of limited partnership interest that, when multiplied by the offering price, equals the decrease in value plus the value of any distributions made with respect to such units. Any adjustments arising from the issuance or forfeiture of shares will adjust the cost of the property acquired based on the fair value of the shares on the date of the adjustment. 36 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] On January 26, 1999, we executed an administrative services agreement with the Lessee to provide accounting and securities reporting services for the Company. The terms of the agreement provided for a fixed fee of $55 with an additional $10 per property (prorated from the time of acquisition) for each hotel added to the Company's portfolio. As of December 31, 1999 $155 has been charged to operations. We owe the Lessee, a related party, $144 for replacement reserve reimbursements and $44 under the administrative services agreement as of December 31, 1999. We leased a parcel of real estate to Mr. Hasu P. Shah for a nominal amount per year. We leased a two parcels of real estate from the Hersha Affiliates for an aggregate annual rental of $21. We paid to Mr. Jay H. Shah, son of Mr. Hasu P. Shah, certain legal fees aggregating $153. Of this amount $144 was capitalized as Settlement costs. We have approved the lending of up to $3.0 million to the Hersha Affiliates to construct hotels and related improvements on specific hotel projects. As of December 31, 1999, the Hersha Affiliates owe us $1.0 million related to this borrowing. The Hersha Affiliates have borrowed this money from us at an interest rate of 12.0% per annum. Interest income from these advances was $28 for the year ended December 31, 1999. [7] STOCK OPTION PLANS [A] Prior to the initial public offering, we adopted the Option Plan. The Option Plan is administered by the Compensation Committee of the Board of Trustees, or its delegate. Our officers and other employees generally are eligible to participate in the Option Plan. The administrator of the plan selects the individuals who participate in the Option Plan. The Option Plan authorizes the issuance of options to purchase up to 650,000 Class B Common Shares and subordinated units. The Option Plan provides for the grant of (i) options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, and (ii) options not intended to so qualify. Options under the option plan may be awarded by the administrator of the Option Plan, and the administrator will determine the option exercise period and any vesting requirements. The options granted under the Option Plan will be exercisable only if (i) we obtain a per share closing price on the Common Shares of $9.00 or higher for 20 consecutive trading days and (ii) the closing price per Common Share for the prior trading day was $9.00 or higher. In addition, no option granted under the option plan may be exercised more than five years after the date of grant. The exercise price for options granted under the option plan will be determined by the Compensation Committee at the time of grant. No option award may be granted under the Option Plan more than ten years after the date the Board of Trustees approved such Plan. The Board may amend or terminate the Option Plan at any time, but an amendment will not become effective without shareholder approval if the amendment (i) increases the number of shares that may be issued under the Option Plan, (ii) materially changes the eligibility requirements or (iii) extends the length of the Option Plan. No amendment will affect a participant's outstanding award without the participant's consent. 37 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [7] STOCK OPTION PLANS [CONTINUED] We issued options to purchase 500,000 Class B common shares and units under the Option Plan with a exercise price of $6.00, subject to the price restrictions mentioned above. Utilizing the Black Scholes option pricing model no compensation is required to be recorded. [B] Prior to the initial public offering, the Board of Trustees also adopted, and our sole shareholder approved, the Trustees' Plan to provide incentives to attract and retain Independent Trustees. The Trustees' Plan authorizes the issuance of up to 200,000 Class B Common Shares. The Trustees' Plan provides for, in the event the Class B Common Shares are converted into another or our securities, the issuance of equivalent amounts of such security and options to purchase such security into which the Class B Common Shares are converted. Under the Trustees' Plan, we granted a nonqualified option for Class B Common Shares to our independent Trustees who were members of the Board on the effective date of the initial public offering. The exercise price of each such option is equal to the offering price. Each such option shall become exercisable over the particular Trustee's initial term, provided that the Trustee is a member of the Board on the applicable date. An option granted under the Trustees' Plan will be exercisable only if (i) we obtain a per share closing price on the Priority Common Shares of $9.00 for 20 consecutive trading days and (ii) the per share closing price on the Priority Common Shares for the prior trading day was $9.00 or higher. Options issued under the Trustees' Plan are exercisable for five years from the date of grant. A Trustee's outstanding options will become fully exercisable if the Trustee ceases to serve on the Board due to death or disability. All awards granted under the Trustees' Plan shall be subject to Board or other approval sufficient to provide exempt status for such grants under Section 16 of the Securities Exchange Act of 1934, as amended, as that section and the rules thereunder are in effect from time to time. No option may be granted under the Trustees' Plan more than 10 years after the date that the Board of Trustees approved the Plan. The Board may amend or terminate the Trustees' Plan at any time but an amendment will not become effective without shareholder approval if the amendment increases the number of shares that may be issued under the Trustees' Plan (other than equitable adjustments upon certain corporate transactions). We issued options to purchase 34,000 Class B Common Shares under the Trustees' Plan with an exercise price of $6.00, subject to the price restrictions mentioned above. Utilizing the Black Scholes option pricing model no compensation is required to be recorded. The fair value of each option grant is estimated on the date of the grant with the following weighted average assumptions: Dividend Yield 12.00% Expected Volatility 30.63% Risk-Free Interest Rate 5.20% Expected Lives 3 Years 38 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [7] STOCK OPTION PLANS [CONTINUED] A summary of stock option activity under all plans is as follows: WEIGHTED AVERAGE SHARES EXERCISE PRICE Outstanding December 31, 1998 - $ - Granted 1,033,975 $ 6.00 Exercised - - Forfeited/Expired - - Cancelled (499,975) $ 6.00 ----------- ------------ Outstanding December 31, 1999 534,000 $ 6.00 =========== ============ Exercisable December 31, 1999 - =========== The following table summarizes information about stock options at December 31, 1999:
OUTSTANDING EXERCISABLE ----------------------------------------------------- --------------------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE REMAINING EXERCISE EXERCISE PRICE SHARES CONTRACTUAL LIFE PRICE SHARES PRICE $6.00 534,000 4.42 $6.00 - -
The number of shares available at December 31, 1999 and 1998 for granting of options was 316,000 and 0, respectively. 39 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [8] EARNINGS PER SHARE YEAR ENDED DECEMBER 31, 1999 ------------------ Net Income for Basic Earnings Per Share $ 1,338 Add: Income Attributable to Minority Interest 1,707 ------------------ NET INCOME FOR DILUTED EARNINGS PER SHARE $ 3,045 - ----------------------------------------- ================== Weighted Average Shares for Basic Earnings Per Share 2,275,000 Dilutive Effect of Limited Partnership Units 4,094,700 ------------------ WEIGHTED AVERAGE SHARES FOR DILUTED EARNINGS PER SHARE 6,369,700 - ------------------------------------------------------ ================== [9] CAPITAL STOCK The Priority Class A Common Shares have priority as to the payment of dividends until dividends equal $.18 per share on a quarterly basis and shares equally in additional dividends after the Class B Common Shares have received $.18 per share in each quarterly period. The Priority Class A Common Shares carry a liquidation preference of $6.00 per share plus unpaid dividends and votes with the Class B Common Shares on a one vote per share basis. The priority period of the Class A Shares commenced on the date of the closing of the initial public offering and end on the earlier of (i) five years after the initial public offering of the Priority Common Shares, or (ii) the date that is 15 trading days after closing bid price of the Priority Common Shares is at least $7 on each trading day during such 15-day period. Pursuant to the Hersha Hospitality Limited Partnership Agreement, the limited partners have certain redemption rights that enable them to cause the Partnership to redeem their units of limited partnership interest in exchange for Class B Common Shares or for cash at our election. In the event the Class B Common Shares are converted into Priority Class A Common Shares prior to redemption of the units, the units will be redeemable for Priority Class A Common Shares. If we do not exercise our option to redeem the units for Class B Common Shares, then the limited partner may make a written demand that we redeem the units for Class B Common Shares. These redemption rights may be exercised by the limited partners over time periods ranging from one to two years from January 26, 1999. At December 31, 1999, the aggregate number of Class B Common Shares issuable to the limited partners upon exercise of the redemption rights is 4,205,970. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidation or similar pro rata share transactions, that otherwise would have the effect of diluting the ownership interest of the limited partners or our shareholders. 40 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [9] CAPITAL STOCK [CONTINUED] The Company's common stock is duly authorized, fully paid and nonassessable. Common shareholders are entitled to receive dividends if and when authorized and declared by the Board of Trustees of the Company out of assets legally available and to share ratably in the assets of the Company legally available for distribution to its shareholders in the event of its liquidation, application of SFAS No. 133 should be as of the beginning of a fiscal quarter; on that date, hedging dissolution or winding up after payment of, or adequate provision for, all known debts and liabilities of the Company. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of shareholders. See Note 4 for a discussion of the units issued and the redemption rights of minority interest shareholders with respect to 4,205,970 units that are redeemable on a one-for-one basis for shares of Class B common stock. None of the units discussed in Note 4 have been redeemed. We intend to make regular quarterly distributions to holders of the Priority Common Shares initially equal to $0.18 per share, which on an annualized basis would be equal to $0.72 per share or 12.0% of the Offering Price of $6.00. The holders of the Priority Common Shares will be entitled to a priority with respect to distributions and amounts payable upon liquidation [the "Priority Rights"] for a period [the "Priority Period"] beginning on January 26, 1999 and ending on the earlier of: (i) the date that is 15 trading days after the Company sends notice to the record holders of the Priority Common Shares that their Priority Rights will terminate in 15 trading days, provided that the closing bid price of the Priority Common Shares is at least $7.00 on each trading day during such 15-day period, or (ii) the fifth anniversary of the closing of the Offering. Upon liquidation of the Partnership during the Priority Period, after payment of, or adequate provision for, debts and obligations of the Partnership, including any partner loans, any remaining assets of the Partnership will be distributed in the following order of priority: (i) first, to us until we have received any unpaid Preferred Return plus an amount equal to $6.00 per Unit held us, (ii) second, to the Limited Partners in accordance with their respective percentage interests in the Partnership until each Limited Partner has received an amount equal to any unpaid Preferred Return plus $6.00 per Unit held by the such Limited Partner, and (iii) finally, to us and the Limited Partners with positive capital accounts. Upon liquidation of the Partnership after the Priority Period, after payment of, or adequate provision for, debts and obligations of the Partnership, including any partner loans, any remaining assets of the Partnership will be distributed to us and the Limited Partners with positive capital accounts in accordance with their respective positive capital account balances. Pursuant to the Partnership Agreement, the Limited Partners will receive the Redemption Rights, which will enable them to cause the Partnership to redeem their interests in the Partnership in exchange for cash or, at the option of the Company, Class B Common Shares on a one-for-one basis. In the event that the Class B Common Shares are converted into Priority Common Shares prior to redemption of the Subordinated Units, such outstanding Subordinated Units will be redeemable for Priority Common Shares. The holders of the Priority Common Shares and the Class B Common Shares have identical voting rights and will vote together as a single class. [10] NEW AUTHORITATIVE PRONOUNCEMENTS The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting 41 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [10] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED] for changes in the fair value of a derivative depends on the intended use of the derivative and how it its designated, for example, gain or losses related to changes in the fair value of a derivative not designated as a hedging instrument is recognized in earnings in the period of the change, while certain types of hedges may be initially reported as a component of other comprehensive income until the consummation of the underlying transaction. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial relationships must be designated anew and documented pursuant to the provisions of SFAS No. 133. Earlier application of all of the provisions of SFAS No. 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is not to be applied retroactively to financial statements of prior periods. We do not currently have any derivative instruments and are not currently engaged in any hedging activities. In June 1999 the FASB issued SFAS No. 137 which deferred the effective date of SFAS No. 133 to fiscal quarters beginning after June 30, 2000. [11] FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 1999, financial instruments include cash and cash equivalents, lease payments receivable, accounts payable, accrued expenses, loans to and from related parties, a line of credit and mortgages payable. The fair values of cash and cash equivalents, lease payments receivable and accounts payable and accrued expenses approximate carrying value because of the short-term nature of these instruments. Loans to and from related parties carry interest at rates that approximate our borrowing cost. The fair value of mortgages payable and the line of credit approximates carrying value since the interest rates approximate the interest rates currently offered for similar debt with similar maturities. 42 HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [12] PRO FORMA INFORMATION[UNAUDITED] Due to the impact of the acquisitions, historical operations may not be indicative of future results of operations and net income per common share. The following pro forma information is presented for information purposes as if the acquisition of all hotels by the Partnership, including the acquisitions discussed in NOTE [1] - ORGANIZATION AND BASIS OF PRESENTATION, and the commencement of the Percentage Leases had occurred on January 1, 1999 and 1998, respectively. The unaudited pro forma condensed statement of operations is not necessarily indicative of what actual results of our operations would have been assuming such operations had commenced as of January 1, 1999 and 1998, respectively, nor does it purport to represent the results of operations for future periods. PRO FORMA CONDENSED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
YEARS ENDED DECEMBER 31, ----------------------------------- 1999 1998 ---------------- -------------- REVENUE: Percentage Lease Revenue - Related Party $8,299 $7,346 Other Revenue 125 95 ---------------- -------------- Total Revenue $8,424 $7,441 ---------------- -------------- EXPENSES: Interest 1,768 1,442 Land Lease - Related Party 20 20 Taxes and Insurance 546 527 General and Administrative 424 442 Depreciation and Amortization 2,433 2,280 ---------------- -------------- TOTAL EXPENSES $5,191 $4,711 ---------------- -------------- Income Before Minority Interest 3,233 2,730 Income Allocated to Minority Interest 1,985 1,723 Net Income $1,248 $1,007 ================ ============== Basic Earning Per Common Share 0.55 0.44 ================ ============== Diluted Earnings Per Common Share 0.50 0.42 ================ ============== Weighted Average Shares for Basic Earnings Per Share 2,275,000 2,275,000 Weighted Average Shares for Diluted Earnings Per Share 6,480,970 6,480,970
43 HERSHA HOSPITALITY TRUST SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] [13] SUBSEQUENT EVENTS [A] On February 3, 2000 we entered into an agreement with Lehman Brothers Bank for the refinancing of eight properties currently owned by the Company. The total amount of the loan is $22.05 million for 10 years with a fixed interest rate of 8.94%. The loan is interest only for the first eighteen months with the principal amortizing over a period of 22 years after the completion of the interest only period. [B] On February 25, 2000, our Board of Trustees approved the purchase of three hotel properties from the Hersha Affiliates. The acquisitions will be effective as of January 1, 2000. The hotels acquired include a 110 room Hampton Inn & Suites located in Hershey, Pennsylvania, a 107 room full service Best Western located in Indiana, Pennsylvania and a 76 room Comfort Inn located in McHenry, Maryland. The aggregate purchase price of the three hotels was $11.5 million and was funded through our Line of Credit, the assumption of loans of $7.0 million and an additional loan of $2.0 million. The prices paid for these hotels will be adjusted on December 31, 2001 based upon the initial pricing methodology discussed in our financial statements. . . . . . . . . 44 HERSHA HOSPITALITY TRUST SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1999 [IN THOUSANDS] SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1999 [IN THOUSANDS]
GROSS AMOUNTS AT WHICH COSTS CAPITALIZED CARRIED AT INITIAL COSTS SUBSEQUENT TO ACQUISITION CLOSE OF PERIOD BUILDINGS AND BUILDINGS AND BUILDINGS AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL ----------- ------------ ---- ------------ ---- ------------ ---- ------------ ----- Holiday Inn, Harrisburg, PA $3,247 $412 $ 1,234 $ - $ 1,442 $412 $ 2,676 $ 3,088 Holiday Inn, Milesburg, - 1,158 45 2,235 87 3,393 3,480 PA 42 Holiday Inn Express, New Columbia, 2,499 2,510 54 374 148 2,884 3,032 PA 94 Holiday Inn Express, Harrisburg, PA 1,024 - 850 - 2,070 - 2,920 2,920 Holiday Inn Express, Hershey, PA 2,564 426 2,645 249 1,861 675 4,506 5,181 Clarion Suites, Philadelphia, - 262 1,049 828 3,512 1,090 4,561 5,651 PA Clarion Inn & Suites, Harrisburg, PA 2,075 213 1,934 - - 213 1,934 2,147 Comfort Inn, Harrisburg, PA - - 2,720 175 352 175 3,072 3,247 Comfort Inn, Denver, PA - - 782 - 976 - 1,758 1,758 Comfort Inn - JFK, Jamaica, NY - 850 4,093 - - 850 4,093 4,943 Hampton Inn, Selinsgrove, 2,169 157 2,511 93 1,837 250 4,348 4,598 PA Hampton Inn, Carlisle, PA 2,621 300 3,109 97 874 397 3,983 4,380 Hampton Inn, Danville, PA 2,459 300 2,787 - - 300 2,787 3,087 ------------ ------- ------------ -------- ------------ -------- ------------ --------- $18,658 $ 3,056 $ 27,382 $ 1,541 $ 15,533 $ 4,597 $ 42,915 $ 47,512 ============ ======= ============ ======== ============ ======== ============ ========= LIFE ACCUMULATED NET UPON WHICH DEPRECIATION BOOK VALUE LATEST INCOME BUILDINGS AND BUILDINGS AND DATE OF STATEMENT IS IMPROVEMENTS IMPROVEMENTS ACQUISITION COMPUTED - ------------ ------------ ----------- -------- $ 102 $ 2,986 12/15/94 15 to 40 124 3,356 08/15/85 15 to 40 71 2,961 12/01/97 15 to 40 109 2,811 06/15/84 15 to 40 111 5,070 10/01/97 15 to 40 133 5,518 06/30/95 15 to 40 16 2,131 03/06/98 15 to 40 72 3,175 05/15/98 15 to 40 89 1,669 01/01/88 15 to 40 38 4,905 08/11/99 15 to 40 112 4,486 09/12/96 15 to 40 97 4,283 06/01/97 15 to 40 25 3,062 08/28/97 15 to 40 - ------------ ------------- $ 1,099 $ 46,413 ============ =============
45 HERSHA HOSPITALITY TRUST SUBSIDIARIES NOTES TO SCHEDULE III [IN THOUSANDS] 1999 RECONCILIATION OF REAL ESTATE: Balance at Beginning of Year $ - Additions During Year 42,915 Deletions During Year - ---------- Balance at End of Year $ 42,915 RECONCILIATION OF ACCUMULATED DEPRECIATION: Balance at Beginning of Year $ - Depreciation for the Year 1,099 Accumulated Depreciation on Deletions - ---------- Balance at End of Year $ 1,099 The aggregate cost of land, buildings and improvements for federal income tax purposes is approximately $39,177 Depreciation is computed based upon the following useful lives: Buildings and Improvements 15 to 40 years 46 INDEPENDENT AUDITOR'S REPORT To the Partners of Hersha Hospitality Management L.P. New Cumberland, Pennsylvania We have audited the accompanying balance sheets of Hersha Hospitality Management L.P. as of December 31, 1999 and 1998, and the related consolidated statements of operations, partners' capital, and cash flows for the year ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hersha Hospitality Management L.P. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the year ended December 31, 1999, in conformity with generally accepted accounting principles. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey March 9, 2000 47 HERSHA HOSPITALITY MANAGEMENT, L.P. BALANCE SHEETS(1) [IN THOUSANDS]
DECEMBER 31, DECEMBER 31, CURRENT ASSETS: 1999 1998 ---- ---- Cash and Cash Equivalents $ 778 $ - Accounts Receivable, less allowance for doubtful accounts of $135 and $0 at December 31, 1999 and 1998, respectively 817 Prepaid Expenses 60 Due from Related Party - HHLP 188 Due from Related Parties 796 - Other Assets 184 - -------------------- ------------------ TOTAL CURRENT ASSETS 2,823 - FRANCHISE LICENSES [NET OF ACCUMULATED AMORTIZATION OF $28 AND $0 AT DECEMBER 31, 1999 AND 1998, RESPECTIVELY] 287 PROPERTY AND EQUIPMENT 894 - -------------------- ------------------ TOTAL ASSETS $ 4,004 $ - -------------------- ------------------ LIABILITIES AND PARTNERS' CAPITAL: CURRENT LIABILITIES: Cash Overdraft $ 694 $ - Accounts Payable 660 Accounts Payable Related Party 30 Accrued Expenses 432 Lease Payments Payable Related Party - HHLP 2,116 - -------------------- ------------------ TOTAL CURRENT LIABILITIES 3,932 - COMMITMENTS - - PARTNERS' CAPITAL 72 - -------------------- ------------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 4,004 $ - ==================== ==================
(1) Operations commenced on January 1, 1999. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. 48 HERSHA HOSPITALITY MANAGEMENT, L.P. STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 (1) [IN THOUSANDS] YEAR ENDED DECEMBER 31, 1999 REVENUES FROM HOTEL OPERATIONS Room Revenue $ 21,871 Restaurant Revenue 2,074 Other revenue 1,354 ------------------- TOTAL REVENUES FROM HOTEL OPERATIONS $ 25,299 EXPENSES: Hotel Operating Expenses 9,944 Restaurant Operating Expenses 1,822 Advertising and Marketing 1,228 Bad Debts 247 Depreciation and Amortization 102 General and Administrative 3,717 Lease Expense Related Party - HHLP 7,264 Lease Expense - Other Related Parties 1,361 ------------------- TOTAL EXPENSES $ 25,685 ------------------- NET LOSS $ (386) =================== (1) Operations commenced on January 1, 1999 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. 49 HERSHA HOSPITALITY MANAGEMENT, L.P. STATEMENTS OF PARTNERS' CAPITAL FOR THE YEAR ENDED DECEMBER 31, 1999 (1) [IN THOUSANDS]
GENERAL LIMITED PARTNER PARTNERS TOTAL Partners Capital - December 31, 1998 $ - $ - $ - Contribution by Partners - 458 458 Net loss (4) (382) (386) --------------- ------------- ------------- Partners Capital - December 31, 1999 $ (4) $ 76 $ 72 =============== ============= =============
(1) Operations commenced on January 1, 1999 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. 50 HERSHA HOSPITALITY MANAGEMENT, L.P. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 (1) [IN THOUSANDS] OPERATING ACTIVITIES: Net Loss $ (386) ---------------- Adjustments to Reconcile Net Loss to Net Cash Provided by Operations Depreciation and Amortization 102 Allowance for Doubtful Accounts 247 Changes in Assets and Liabilities: (Increase) in: Accounts receivable (1,064) Prepaid Expenses (60) Other Assets (52) Due from Related Parties (1,714) Increase in: Cash Overdraft 694 Accounts Payable 660 Accounts Payable - Related Party 30 Lease Payments Payable Related Party - HHLP 2,116 Accrued Expenses 432 ---------------- Total Adjustments 1,391 ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,005 INVESTING ACTIVITIES: Property and Equipment (217) Franchise Licenses (10) ---------------- NET CASH USED IN INVESTING ACTIVITIES (227) ---------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 778 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD - ---------------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 778 ================ (1) Operations commenced on January 1, 1999 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. 51 HERSHA HOSPITALITY MANAGEMENT, L.P. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 [IN THOUSANDS] SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: On January 26, 1999 we received franchise agreements, property and certain other assets with book values of $305, $21 and $132, respectively, from our partners. These amounts were recorded as a contribution to capital. On January 26, 1999 we recorded property and a liability to a related party of $730. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT. 52 HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] [1] ORGANIZATION Hersha Hospitality Management, L.P., [the "Lessee"], was organized under the laws of the State of Pennsylvania in May, 1998 to lease and operate ten existing hotel properties, principally in the Harrisburg and Central Pennsylvania area, from Hersha Hospitality Limited Partnership ["HHLP" or the "Partnership"]. The Lessee is owned by Mr. Hasu P. Shah and certain affiliates, [the "Hersha Affiliates"], some of whom have ownership interests in the Partnership. We also manage certain other properties owned by the Hersha Affiliates which are not owned by the Partnership. We commenced operations on January 1, 1999 and as of December 31, 1999 leased 13 hotel properties from the Partnership. [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of cash and certain highly liquid investments with a maturity of three months or less when purchased, carried at cost, which approximates fair value. We have no cash equivalents at December 31, 1999. INVENTORIES - Inventories of $26, consisting primarily of food and beverages and which are included in other assets, are stated at the lower of cost [generally, first-in, first-out] or market. ACCOUNTS RECEIVABLE - We are required to make certain estimates related to the allowances for uncollectible accounts. These estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary. PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation for financial reporting purposes is principally based upon the straight-line method. The estimated lives used to depreciate the property improvements are as follows: Building and Improvements 15 to 40 years Furniture and Equipment 5 to 7 years FRANCHISE LICENSES - The franchise agreements have lives ranging from 10 to 20 years but may be terminated by either party on certain anniversary dates specified in the agreements. The franchise fees are amortized over their respective franchise lives utilizing the straight-line method. Amortization expense was $28 for the year ended December 31, 1999. REVENUE RECOGNITION - Revenue is recognized as earned which is when services are rendered. INCOME TAXES - As a partnership, we are not subject to federal and state income taxes, however, we must file informational income tax returns and the partners must take their respective portion of the items of income or loss into consideration when filing their respective returns. 53 HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject us to concentration of credit risk include cash and cash equivalents and accounts receivable arising from our normal business activities. We place our cash with high credit quality financial institutions. We do not require collateral to support our financial instruments. At December 31, 1999 we had approximately $20 in financial institutions that exceeded federally insured amounts. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires us 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 during the reporting period. Actual results could differ from those estimates. ADVERTISING AND MARKETING - Advertising and marketing costs are expensed as incurred and totaled $1,228 for the year ended December 31, 1999. In connection with our franchise agreements, a portion of the franchise fees paid is for marketing services. Payments under these agreements related to marketing services amounted to $415. [3] COMMITMENTS AND RELATED PARTY TRANSACTIONS We have assumed the rights and obligations under the terms of existing franchise licenses relating to the hotels upon acquisition of the hotels by the Partnership. The franchise licenses generally specify certain management, operational, accounting, reporting and marketing standards and procedures with which the franchisee must comply and provide for annual franchise fees based upon percentages of gross room revenue. During the year ended December 31, 1999 franchise fees totaling $1,182 were charged to general and administrative expenses. We have entered into Percentage Leases with HHLP. Each Percentage Lease will have an initial non-cancelable term of five years and may be extended for an additional five-year term at our. Pursuant to the terms of the Percentage Leases, we are required to pay the greater of the base rent or the percentage rent for hotels with established operating histories. The base rent is 6.5 percent of the purchase price assigned to each hotel. The percentage rent for each hotel is comprised of (i) a percentage of room revenues up to a certain threshold amount for each hotel up to which we receive a certain percentage of room revenues as a component of percentage rent, (ii) a percentage of room revenues in excess of the threshold amount, but not more than a certain incentive threshold amount for each hotel in excess of the threshold amount up to which we receive a certain percentage of the room revenues in excess of the threshold amount as a component of percentage rent (iii) a percentage for room revenues in excess of the incentive threshold amount and (iv) a percentage of revenues other than room revenues. For hotels with limited operating histories, the leases provide for the payment of an initial fixed rent for certain periods as specified in the leases and the greater of base rent or percentage rent thereafter. The leases commenced on January 26, 1999. 54 HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] [3] COMMITMENTS AND RELATED PARTY TRANSACTIONS [CONTINUED] Minimum future lease payments due during the noncancellable portion of the leases as of December 31, 1999 are as follows: 2000 $ 7,775 2001 6,420 2002 4,604 2003 4,604 2004 1,280 Thereafter 0 ------------------------ TOTAL $ 24,683 ======================== For the year ended December 31, 1999 we incurred initial fixed rents of $4,152 and percentage rents of $3,112 on Partnership hotels and fixed rents of $1,361 on other related party hotels. As of December 31, 1999, the amount due to the Partnership for lease payments was $2,116. During 1999, we provided for and were reimbursed for capital improvements totaling $794 to the hotels which are the responsibility of HHLP. As of December 31, 1999, $144 remains receivable and is recorded as Due from HHLP. On January 26, 1999, we executed an agreement with HHLP to provide accounting and securities reporting services. The terms of the agreement provided for a fixed fee of $55,000 with an additional $10,000 per property (prorated from the time of acquisition) for each hotel added to the Company's portfolio. As of December 31, 1999, we have earned $155 for the services provided in accordance with the Agreement which is included in Other Revenues. At December 31, 1999, $44 remains receivable and is recorded as Due from HHLP. We paid to Mr. Jay H. Shah, son of Mr. Hasu P. Shah, certain nominal legal fees for consultation. We paid to Hersha Construction Company $1,101 for construction work related to the renovation of hotel properties. We had paid $27 for Construction in Progress of which an additional $30 is committed to complete the project. We paid to Hersha Hotel Supply $761 for hotel supplies of which $30 was in accounts payable at December 31, 1999. These expenses are included in Hotel Operating Expenses and Restaurant Operating Expenses. We provide office space to various related entities on a rent free basis. During the year ended December 31, 1999, we had advances to related parties of $1,196, inclusive of accrued interest of $29, and repayments from related parties of $400. Interest income of $102 was recorded on these loans. 55 HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] [4] PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1999: 1999 Building and Improvements $ 680 Furniture, Fixtures and Equipment 246 Automobiles 15 ------------- Subtotal 941 Less: Accumulated Depreciation 74 ------------- 867 Construction in Progress 27 ------------- Total Property and Equipment $ 894 ============= Depreciation expense was $74 for the year ending December 31, 1999. [5] SHARE APPRECIATION RIGHTS PLAN ["SAR"] We have established a share appreciation rights plan ["SAR"] to incentivize our employees to improve the operations of our Lessor, HHLP, and to associate our employees interest with those of our Lessor. Officers and employees of our company are eligible to participate in the SAR. The SAR entitles the holder to receive, with respect to each Class B Common Share encompassed by the exercise of such SAR, the amount determined by the Administrator and specified in an Agreement. A SAR granted under this Plan will be exercisable only if (i) the General Partner of the Lessor, Hersha Hospitality Trust [HT], obtains a per share closing price on the Class A Common Shares of $9.00 or higher for 20 consecutive trading days; and (ii) the closing price on the Class A Common Shares for the prior trading day was $9.00 or higher. The maximum period in which a SAR may be exercised shall be determined by the Administrator on the date of grant, except that no SAR shall be exercisable after the expiration of five years from the date such SAR is granted. The administrator of the plan, Hersha Hospitality Management, Co. [HHMCO], selects the individuals who participate in the Option Plan and the maximum aggregate number of Class B Common Shares with respect to which SARs may be granted under this Plan is 300,000. HT has issued 300,000 restricted hedge options for the express purpose of exercising SARs on their respective exercise dates. As of December 31, 1999, we have not issued any SARs to our employees. 56 HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] [6] NEW AUTHORITATIVE PRONOUNCEMENTS The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and how it its designated, for example, gain or losses related to changes in the fair value of a derivative not designated as a hedging instrument is recognized in earnings in the period of the change, while certain types of hedges may be initially reported as a component of other comprehensive income until the consummation of the underlying transaction. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of SFAS No. 133 should be as of the beginning of a fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of SFAS No. 133. Earlier application of all of the provisions of SFAS No. 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is not to be applied retroactively to financial statements of prior periods. The lessee does not currently have any derivative instruments and is not currently engaged in any hedging activities. In June 1999 the FASB issued SFAS No. 137 which deferred the effective date of SFAS No. 133 to fiscal quarters beginning after June 30, 2000. [7] FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 1999, financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and loans to related parties. The fair values of these instruments approximate carrying value because of their short-term nature. 57 HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] [8] PRO FORMA FINANCIAL INFORMATION [UNAUDITED] The following pro forma information is presented for information purposes as if the acquisition of all hotels by the Partnership and the commencement of the Percentage Leases had occurred on January 1, 1999 and 1998, respectively. The unaudited pro forma condensed statements of operations is not necessarily indicative of what our actual results of operations would have been assuming such operations had commenced as of January 1, 1999 and 1998, respectively, nor does it purport to represent the results of operations for future periods. PRO FORMA CONDENSED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998 [IN THOUSANDS] [UNAUDITED]
1999 1998 --------------------- ------------------------ Revenue from Hotel Operations: Room Revenue $ 21,888 $ 16,835 Food & Beverage 2,074 2,242 Telephone and Other 1,415 1,041 --------------------- ------------------------ Total Revenue from Hotel Operations $ 25,360 $ 20,118 Expenses: Hotel Operating Expenses 9,944 8,494 Restaurant Operating Expenses 1,822 1,621 Advertising and Marketing 1,228 1,014 Bad Debt 247 - Depreciation and Amortization 102 - General and Administrative 3,717 2,415 Lease Expense Related Party - HHLP 8,300 7,345 Lease Expense - Other Related Parties 618 - --------------------- ------------------------ Total Expenses $ 25,978 $ 20,889 --------------------- ------------------------ Net Income (Loss) $ (618) $ (771) ===================== ========================
[9] ECONOMIC DEPENDENCY We receive the majority of our income from related hotel entities. The related hotels are primarily located in the Harrisburg and Central Pennsylvania regions of the United States. [10] SUBSEQUENT EVENTS On February 25, 2000, the Board of Trustees of the Partnership approved the purchase of three hotel properties from the Hersha Affiliates. The acquisitions will be effective as of January 1, 2000. The hotels acquired include a 110 room Hampton Inn & Suites located in Hershey, Pennsylvania, a 107 room full service Best Western located in Indiana, Pennsylvania and a 76 room Comfort Inn located in McHenry, Maryland. We are the Lessee for these three hotel properties. . . . . . . . . 58 INDEPENDENT AUDITORS' REPORT To the Partners and Shareholders of The Combined Entities - Initial Hotels We have audited the accompanying combined balance sheets of the Combined Entities - Initial Hotels as of December 31, 1998 and 1997, and the related combined statements of operations, owners' equity, and cash flows for each of the three years in the period ended December 31, 1998. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Combined Entities - Initial Hotels as of December 31, 1998 and 1997, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey February 19, 1999 59 COMBINED ENTITIES - INITIAL HOTELS COMBINED BALANCE SHEETS [IN THOUSANDS]
DECEMBER 31, ------------ 1 9 9 8 1 9 9 7 ------- ------- ASSETS: INVESTMENT IN HOTEL PROPERTIES: Land $ 2,099 $ 2,099 Buildings and Improvements 22,489 19,276 Furniture, Equipment and Other 7,176 6,056 -------------- --------------- Totals 31,764 27,431 Less: Accumulated Depreciation 4,835 3,356 -------------- --------------- Totals 26,929 24,075 Construction in Progress 235 1,412 -------------- --------------- NET INVESTMENT IN HOTEL PROPERTIES 27,164 25,487 Cash and Cash Equivalents 373 694 Accounts Receivable 460 394 Prepaid Expenses and Other Assets 431 182 Due from Related Parties 103 268 Intangible Assets 1,348 1,427 -------------- --------------- TOTAL ASSETS $ 29,879 $ 28,452 ============== =============== LIABILITIES AND OWNERS' EQUITY: Mortgages Payable $ 19,578 $ 14,713 Accounts Payable and Accrued Expenses 525 1,092 Accrued Expenses - Related Parties 54 153 Due to Related Parties 4,459 9,169 Other Liabilities 149 172 -------------- --------------- TOTAL LIABILITIES 24,765 25,299 COMMITMENTS -- -- OWNERS' EQUITY: Net Combined Equity 5,114 3,153 -------------- --------------- TOTAL LIABILITIES AND OWNERS' EQUITY $ 29,879 $ 28,452 ============== ===============
The Accompanying Notes Are an Integral Part of These Combined Financial Statements. 60 COMBINED ENTITIES - INITIAL HOTELS COMBINED STATEMENTS OF OPERATIONS [IN THOUSANDS]
Y E A R S E N D E D D E C E M B E R 31, 1 9 9 8 1 9 9 7 1 9 9 6 ------- ------- ------- REVENUES FROM HOTEL OPERATIONS: Room Revenue $ 15,185 $ 10,880 $ 7,273 Restaurant Revenue 2,111 1,744 2,106 Other Revenue 790 821 610 ------------- ------------- -------------- TOTAL REVENUE 18,086 13,445 9,989 ------------- ------------- -------------- EXPENSES: Hotel Operating Expenses 7,449 5,628 4,538 Restaurant Operating Expenses 1,469 996 1,304 Advertising and Marketing 918 571 532 Depreciation and Amortization 1,543 1,189 924 Interest Expense 1,605 821 605 Interest Expense - Related Parties 386 533 316 General and Administrative 2,065 1,644 1,422 General and Administrative - Related Parties 608 320 364 Loss on Abandonments and Asset Disposals 95 -- 12 Liquidation Damages -- 14 -- ------------- ------------- -------------- TOTAL EXPENSES 16,138 11,716 10,017 ------------- ------------- -------------- NET INCOME [LOSS] $ 1,948 $ 1,729 $ (28) ============= ============= ==============
The Accompanying Notes Are an Integral Part of These Combined Financial Statements. 61 COMBINED ENTITIES - INITIAL HOTELS COMBINED STATEMENTS OF OWNERS' EQUITY [IN THOUSANDS] Balance - December 31, 1995 $ 2,217 Net [Loss] (28) Capital Contributions 470 Cash Distributions (470) ---------- Balance - December 31, 1996 2,189 Net Income 1,729 Capital Contributions 59 Cash Distributions (824) ---------- Balance - December 31, 1997 3,153 Net Income 1,948 Capital Contributions 1,159 Cash Distributions (1,146) ---------- Balance - December 31, 1998 $ 5,114 ========= The Accompanying Notes Are an Integral Part of These Combined Financial Statements. 62 COMBINED ENTITIES - INITIAL HOTELS COMBINED STATEMENTS OF CASH FLOWS [IN THOUSANDS]
Y E A R S E N D E D D e c e m b e r 31, 1 9 9 8 1 9 9 7 1 9 9 6 ------- ------- ------- OPERATING ACTIVITIES: Net Income [Loss] $1,948 $1,729 $ (28) Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization Expense 1,604 1,246 966 Loss on Abandonments and Disposal of Assets 95 -- 12 Writeoff of Financing Fees -- 44 -- Changes in Assets and Liabilities: Accounts Receivable (66) (203) 105 Prepaid Expenses and Other Assets (249) (28) (28) Accounts Payable and Accrued Expenses (666) 584 241 Other Liabilities (23) (78) 79 ------ ----- ----- NET CASH - OPERATING ACTIVITIES 2,643 3,294 1,347 ------ ------ ----- INVESTING ACTIVITIES: Improvements and Additions to Hotel Properties (3,251) (12,821) (5,601) Payment for Intangibles (46) (166) (117) Advances to Related Parties (501) (268) (99) Repayment of Advances to Related Parties 666 107 584 Proceeds from Sale of Assets -- -- 129 ------ ------- ------- NET CASH - INVESTING ACTIVITIES (3,132) (13,148) (5,104) ------ ------- ------- FINANCING ACTIVITIES: Proceeds from Mortgages Payable 5,639 9,526 3,631 Principal Payments on Mortgages Payable (774) (3,383) (612) Advances from Related Parties 3,411 6,555 2,756 Repayments of Advances from Related Parties (8,121) (1,622) (1,915) Capital Contributions 1,159 59 470 Distributions Paid (1,146) (824) (470) ------ ------ ----- NET CASH - FINANCING ACTIVITIES 168 10,311 3,860 ------ ------ ----- Net [Decrease] Increase in Cash and Cash Equivalents (321) 457 103 Cash and Cash Equivalents at Beginning of Years 694 237 134 -------- ---- ------- Cash and Cash Equivalents at End of Years $ 373 $ 694 $ 237 ======== ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the years for: Interest [Net of Amounts Capitalized] $2,087 $1,133 $ 903
The Accompanying Notes Are an Integral Part of These Combined Financial Statements. 63 COMBINED ENTITIES - INITIAL HOTELS NOTES TO FINANCIAL STATEMENTS [AMOUNTS IN THOUSANDS] [1] ORGANIZATION, PROPOSED INITIAL PUBLIC OFFERING AND BASIS OF PRESENTATION ORGANIZATION - Hersha Hospitality Trust [the "Company"] has been established to own initially ten existing hotels [collectively the "Initial Hotels"] and to continue the hotel acquisition and operating strategies of Mr. Hasu P. Shah, Chairman of the Board of Trustees and President of the Company. The Company intends to qualify as a real estate investment trust [REIT] under the Internal Revenue Code of 1986, as amended, [the "Code"]. The Initial Hotels include three hotels operated as Holiday Inn Express(R) hotels, two Hampton Inn(R) hotels, two Holiday Inn(R) hotels, two Comfort Inn(R) hotels, and one Clarion Suites(R) hotel with an aggregate of 989 rooms and are located in Pennsylvania. Upon completion of the proposed initial public offering [see below], the Company will own an approximate 32% general partnership interest in Hersha Hospitality Limited Partnership, a Pennsylvania limited partnership [the "Partnership"]. The Company will be the sole general partner of the Partnership. The Partnership will own the Initial Hotels and lease them to Hersha Hospitality Management, L.P. ["Lessee"] under Percentage Leases, each having a 5 year term with two 5 year renewals, which shall provide for rent equal to the greater of (i) fixed base rent, or (ii) percentage rents based upon specific percentages of room and other revenue of each of the Initial Hotels. The Company will enter into management agreements with the Lessee whereby the Lessee will be required to perform all management functions necessary to operate the Initial Hotels. Under the administrative services agreement, the Lessee will be paid a fee equal to $10 per hotel or $100 per year based on the ten initial hotels [See Note 10]. BASIS OF PRESENTATION - The combined financial statements include the accounts of various partnerships, individuals, certain other corporations and Subchapter S corporations which perform property management services and own property improvements and furniture and fixtures [collectively the "Combined Entities"] [See Note 5] using their historical cost basis. No adjustments have been reflected in these combined financial statements to give effect to the purchase of the Initial Hotels by the Partnership. The Combined Entities are owned by Mr. Hasu P. Shah and certain affiliates of Mr. Hasu P. Shah [the "Hersha Affiliates"] for all periods presented. Due to common ownership and management of the Combined Entities, the historical combined financial statements have been accounted for as a group of entities under common control. All significant intercompany transactions and balances have been eliminated in the combined presentation. PROPOSED INITIAL PUBLIC OFFERING - The Company has filed a registration statement with the Securities and Exchange Commission pursuant to which the Company expects to offer 1,833,334 common shares to the public and 166,666 common shares to Mr. Hasu P. Shah and certain affiliates of Mr. Hasu P. Shah [the "Offering"]. The Company expects to qualify as a real estate investment trust under Sections 856-860 of the Code. Under the proposed structure, the Company will become the sole general partner in the Partnership and the Hersha Affiliates will be the limited partners. 64 COMBINED ENTITIES - INITIAL HOTELS NOTES TO FINANCIAL STATEMENTS, SHEET #2 [AMOUNTS IN THOUSANDS] [1] ORGANIZATION, PROPOSED INITIAL PUBLIC OFFERING AND BASIS OF PRESENTATION [CONTINUED] Upon completion of the Offering, the Company will contribute substantially all of the net proceeds of the offering to the Partnership in exchange for an approximate 32% general partnership interest in the Partnership. The Partnership will use the proceeds from the Company to acquire the Initial Hotels from the Combined Entities and to repay certain outstanding indebtedness. Rather than receiving cash for their interests in the Combined Entities upon the sale of the Initial Hotels, the Hersha Affiliates have elected to receive limited partnership interests in the Partnership aggregating an approximate 68% ownership interest in the Partnership. PROPOSED INITIAL PUBLIC OFFERING [CONTINUED] - After consummation of the Offering, the Company's acquisition of an interest in the Partnership and the Partnership's acquisition of the Initial Hotels, (a) the Company will own approximately 32% of the Partnership, (b) the Hersha Affiliates will own an aggregate of approximately 68% of the Partnership, and (c) the Partnership will own 100% of the equity interest in the Initial Hotels [See Note 10]. [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS - Operations consist of hotel room rental, conferences room rental and the associated sales of food and beverages principally in the Harrisburg and central Pennsylvania area. INVESTMENT IN HOTEL PROPERTIES - Investment in hotel properties are stated at cost. Depreciation for financial reporting purposes is principally based upon the straight-line method for buildings and improvements and accelerated methods for furniture and equipment acquired prior to the year ended December 31, 1998 and the straight-line method thereafter. The estimated lives used to depreciate the Initial Hotel properties are as follows: Years Building and Improvements 15 to 40 Furniture and Equipment 5 to 7 Maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts, and the gain or loss is included in income from operations. Depreciation expense was $1,432, $1,076 and $819 for the years ended December 31, 1998, 1997 and 1996, respectively. Room linens and restaurant supplies are capitalized and amortized utilizing the straight-line method over periods of three and two years, respectively, and are charged to Hotel Operating Expenses. Amortization expense was $61, $57 and $42 for the years ended December 31, 1998, 1997 and 1996, respectively. 65 COMBINED ENTITIES - INITIAL HOTELS NOTES TO FINANCIAL STATEMENTS, SHEET #3 [AMOUNTS IN THOUSANDS] [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased. INVENTORIES - Inventories, consisting primarily of food and beverages and which are included in prepaid expenses and other assets, are stated at the lower of cost [generally, first-in, first-out] or market. INTANGIBLE ASSETS - Intangible assets are carried at cost and consist of initial franchise fees, loan acquisition costs and goodwill. Amortization is computed using the straight-line method based upon the terms of the franchise and loan agreements which range from 5 to 30 years, and over a 15 year period for goodwill. INCOME TAXES - The Combined Entities are not a legal entity subject to income taxes. Hersha Enterprises, Ltd., an entity included in these combined financial statements, is a taxable corporate entity [See Note 6]. Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized. The Combined Partnerships and S corporations are not subject to federal or state income taxes; however, they must file informational income tax returns and the partners must take income or loss of the Combined Entities into consideration when filing their respective tax returns. The cumulative difference between the book basis and tax basis of the Combined Entities' assets and liabilities is approximately $4,620 due primarily to depreciation and amortization expense on the tax basis in excess of the book basis. REVENUE RECOGNITION - Revenue is recognized as earned which is generally when a guest occupies a room and utilizes the hotel's services. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject the Company to concentrations of credit risk include cash and cash equivalents and accounts receivable arising from its normal business activities. The Company places its cash with high credit quality financial 66 COMBINED ENTITIES - INITIAL HOTELS NOTES TO FINANCIAL STATEMENTS, SHEET #4 [AMOUNTS IN THOUSANDS] [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] institutions. The Company does not require collateral to support its financial instruments. The Company periodically has money in financial institutions that is subject to normal credit risk beyond insured amounts. This credit risk, representing the excess of the bank's deposit liabilities reported by the bank over the amounts that would have been covered by federal insurance, amounted to approximately $355 and $71 at December 31, 1998 and 1997, respectively. The Company's extension of credit to its customers results in accounts receivable arising from its normal business activities. The Company does not require collateral from its customers, but routinely assesses the financial strength of its customers. Based upon factors surrounding the credit risk of its customers and the Company's historical collection experience, no allowance for uncollectible accounts has been established at December 31, 1998 and 1997, respectively. The Company believes that its accounts receivable credit risk exposure is limited. Such assessment may be subject to change in the near term. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DEFERRED OFFERING COSTS - Costs of $267 associated with the Company's anticipated public offering are deferred and will be charged against the proceeds of the offering. If the offering is not consummated, the cost will be charged to operations [See Note 10]. ADVERTISING AND MARKETING - Advertising costs are expensed as incurred and totaled $596, $370 and $418 for the years ended December 31, 1998, 1997 and 1996, respectively. In connection with its franchise agreements, a portion of the franchise fees paid is for marketing services. Payments under these agreements related to marketing services amounted to $323, $201 and $114 for the years ended December 31, 1998, 1997 and 1996, respectively, and are included in Advertising and Marketing. RECLASSIFICATION - Certain prior year's figures have been reclassified to conform with the current year's presentation. 67 COMBINED ENTITIES - INITIAL HOTELS NOTES TO FINANCIAL STATEMENTS, SHEET #5 [AMOUNTS IN THOUSANDS] [3] INTANGIBLE ASSETS At December 31, 1998 and 1997, intangibles consisted of the following: Accumulated December 31, 1998: Cost Amortization Net Goodwill $ 1,168 $ 294 $ 874 Franchise Fees 374 66 308 Loan Acquisition Fees 196 30 166 ------------ ------------ ------------ TOTALS $ 1,738 $ 390 $ 1,348 ------ ============ ============ ============ Accumulated December 31, 1997: Cost Amortization Net Goodwill $ 1,168 $ 216 $ 952 Franchise Fees 342 46 296 Loan Acquisition Fees 196 17 179 ------------ ------------ ------------ TOTALS $ 1,706 $ 279 $ 1,427 ------ ============ ============ ============ Amortization expense was $111, $113 and $105 for the years ended December 31, 1998, 1997 and 1996, respectively. [4] MORTGAGES PAYABLE
December 31, 1 9 9 8 1 9 9 7 Holiday Inn, Harrisburg, Pennsylvania: Note payable to bank dated August 19, 1997 with monthly payments of $34 including interest at 8.45% until November 1, 2002. Thereafter the rate is negotiated or the bank's prime rate plus 1/4%. Final payment is due November 1, 2012. The property previously was financed by a bank with a note payable with monthly payments of $27 including interest at the prime rate plus 1-1/2% maturing March 2, 2010 and another note payable with monthly payments of $7 plus interest at 8-1/2% maturing January 5, 2001. $3,379 $3,500 Holiday Inn, Milesburg, Pennsylvania: Note payable to bank dated June 2, 1977 with monthly payments of $11 including interest at 8% until June 6, 1999 835 914 ---- ---- Totals - Forward $4,214 $4,414
68 COMBINED ENTITIES - INITIAL HOTELS NOTES TO FINANCIAL STATEMENTS, SHEET #5 [AMOUNTS IN THOUSANDS] [4] MORTGAGES PAYABLE [CONTINUED]
December 31, 1 9 9 8 1 9 9 7 Totals - Forwarded $4,214 $ 414 Clarion Suites, Philadelphia, Pennsylvania: Note payable to a bank dated June 21, 1995 with monthly payments of $16 as adjusted for interest at the prime rate plus 1.25% until July 1, 2010. Guaranteed by PIDC Local Development Corporation and the Small Business Administration. 1,139 1,195 Note payable to a bank dated June 21, 1995 with monthly payments of $3 plus interest at the prime rate plus .5%. Principal balance is due July 1, 2002. 383 419 Hampton Inn, Selinsgrove, Pennsylvania: Note payable to a bank dated April 3, 1996 with monthly payments of $24 including interest at 7-3/4% until October 3, 2011. 2,287 2,385 Hampton Inn, Carlisle, Pennsylvania: Note payable to a bank dated September 6, 1996 with monthly payments of $28 including interest at 8% until March 6, 2001. Thereafter, the rate is negotiated or prime rate plus 1%. Final payment is due June 6, 2012. 2,739 2,848 Holiday Inn Express, New Columbia, Pennsylvania: Note payable to a bank dated September 9, 1997 with monthly payments of $27 including interest at 8-1/2% until February 1, 2003. Thereafter interest will be at the prime rate plus 1/4% as of January 1, 2003 and January 1, 2008. Final payment is due January 1, 2013. 2,613 1,000 Comfort Inn, West Hanover, Pennsylvania: Note payable to a bank dated August 28, 1997, drawn May 8, 1998, with monthly payments of $23 including interest at 8.0% until May 28, 2003. Thereafter, the rate shall be annually adjusted at the prime rate. Final payment is due May 28, 2008. 2,450 -- Holiday Inn Express, Harrisburg, Pennsylvania: Note payable to a bank dated September 26, 1997 with monthly payments of $11 including interest at 8.35% until October 1, 2000. Thereafter, the rate is as negotiated or at prime plus 1%. Final payment is due October 1, 2012. 1,071 1,110 Holiday Inn Express, Hershey, Pennsylvania: Note payable to a bank dated December 30, 1996 with monthly payments of $27 including interest at 8.15% until December 31, 2001. Thereafter, the rate is as negotiated or prime plus 3/4%. Final payment is due January 1, 2013. 2,682 1,342 ----- ----- TOTALS $19,578 $14,713 - ------ ======= =======
69 COMBINED ENTITIES - INITIAL HOTELS NOTES TO FINANCIAL STATEMENTS, SHEET #6 [AMOUNTS IN THOUSANDS] [4] MORTGAGES PAYABLE [CONTINUED] Substantially all the Combined Entities' mortgage indebtedness is collateralized by property and equipment and is personally guaranteed by the partners and stockholders of the Combined Entities. Certain of the hotel properties also collateralize lines of credit of a related party aggregating $7,500 and $500 at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, the prime rate was 7.75% and 8.5%, respectively. As of December 31, 1998, aggregate annual principal payments for the five years following December 31, 1998, and thereafter are as follows: Year ending December 31, 1999 $ 1,636 2000 878 2001 955 2002 1,260 2003 1,078 Thereafter 13,771 ---------------- TOTAL $ 19,578 ----- ================ [5] OWNERS' EQUITY The owners' equity of the Combined Entities by entity is as follows: December 31, 1 9 9 8 1 9 9 7 244 Associates $ 527 $ 542 844 Associates 488 285 944 Associates 133 29 1244 Associates 228 373 1444 Associates 1,099 829 1644 Associates 321 (72) 2144 Associates 801 833 2244 Associates 472 (54) 2544 Associates 478 (60) Hersha Enterprises 394 267 MEPS Associates 204 170 Shree Associates (31) 11 ----------- ----------- TOTALS $ 5,114 $ 3,153 ------ =========== =========== 70 COMBINED ENTITIES - INITIAL HOTELS NOTES TO FINANCIAL STATEMENTS, SHEET #7 [AMOUNTS IN THOUSANDS] [6] INCOME TAXES Included in the Combined Entities for the years ended December 31, 1998, 1997 and 1996 is a corporation which computed its income taxes pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes at December 31, 1998 and 1997 was comprised of deferred tax assets of $10 and $20, respectively, representing net operating loss carryforwards, offset by full valuation allowances of $10 and $20, respectively. Under the transaction contemplated in connection with the proposed initial public offering, the net operating loss carryforwards will not be available to the Company. The Combined Entities neither incurred nor paid any income taxes during the periods presented. [7] RELATED PARTY TRANSACTIONS At December 31, 1998 and 1997, the Combined Entities are indebted to various related entities, partners, and stockholders in the amount of $4,459 and $9,169, respectively. The loans carry interest ranging from 8.5% on short-term loans to 10.5% on longer term loans. Accrued interest payable was $54 and $153 at December 31, 1998 and 1997, respectively, and interest expense was $386, $533 and $316 for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, various related entities, partners and stockholders are indebted to the Combined Entities in the amount of $103 and $268, respectively. The loans carry interest ranging from 0% on short-term loans to 9% on longer term loans. Accrued interest receivable was $1 and $1 at December 31, 1998 and 1997, respectively, and interest income was $6, $9 and $1 for the years ended December 31, 1998, 1997 and 1996, respectively. The Combined Entities have paid or accrued $2,359, $9,433 and $856 during the years ended December 31, 1998, 1997 and 1996 to related entities for various hotel construction projects and interest costs during construction. Capitalized interest amounted to $63, $183 and $10 for the years ended December 31, 1998, 1997 and 1996, respectively. Certain properties are managed by individual partners or related entities. Management fees paid to these individuals or related entities were $608, $272 and $97 during the years ended December 31, 1998, 1997 and 1996, respectively. A related entity rents office space in a hotel owned by the Combined Entities on a month to month basis. The Combined Entities received rent of $-0- and $30 for the years ended December 31, 1998 and 1997, respectively. The rent amount includes an allocation of certain related expenses. During the year ended December 31, 1996, the Combined Entities sold for $129, the book value of the assets, certain leasehold improvements to Mr. Hasu P. Shah. On September 26, 1997, the Combined Entities acquired from Mr. Hasu P. Shah, the Holiday Inn Express in Harrisburg, Pennsylvania by paying off the $1,106 indebtedness on the property. Prior to the sale, the Combined Entities had rented the property from Mr. Hasu P. Shah under an informal 71 COMBINED ENTITIES - INITIAL HOTELS NOTES TO FINANCIAL STATEMENTS, SHEET #8 [AMOUNTS IN THOUSANDS] [7] RELATED PARTY TRANSACTIONS [CONTINUED] rent arrangement. Rent paid to Mr. Hasu P. Shah was $48 and $267 for the years ended December 31, 1997 and 1996, respectively. Mr. Hasu P. Shah owns a parcel of land on which a hotel is situated for which no land rent is charged. [8] COMMITMENTS FRANCHISE AGREEMENTS - The Initial Hotels have executed franchise agreements that have initial lives ranging from 10 to 20 years but may be terminated by either party on certain anniversary dates specified in the agreements. In addition to initial fees totaling $374, which are being amortized over the franchise lives, the agreements require annual payments for franchise royalties, reservation, and advertising services which are based upon percentages of gross room revenue. Such fees were approximately $1,135, $779 and $524 for the years ended December 31, 1998, 1997, 1996, respectively. The Initial Hotels will continue to be operated under the franchise agreements. CONSTRUCTION IN PROGRESS - At December 31, 1998, the Combined Entities had commenced improvements of a hotel property in Harrisburg, Pennsylvania. These improvements involve the construction of offices and the installation of a sprinkler system for the entire property. Through December 31, 1998, the Combined Entities had incurred expenses of $235. The improvements are being contracted and funded through a related party and the total construction cost is expected to be approximately $425. At December 31, 1998, $235 was outstanding to a related party in relation to the construction project. Interest is payable on this amount at 9.5% per annum payable quarterly. There is no security provided against this loan. At December 31, 1997, the Combined Entities had future obligations under various hotel construction project in the amount of $255. Through December 31, 1997, the Combined Entities had incurred expenses of $1,412 in connection with the construction of a hotel property in Harrisburg, Pennsylvania. The construction is being contracted and funded through a related party and the total construction cost is expected to be approximately $3,100. The Combined Entities have obtained a construction/term loan in the amount of $2,500 under which no borrowings are outstanding at December 31, 1997. The loan bears interest at 8% for 5 years and 9 months and the Wall Street Journal prime rate thereafter through maturity 10 years and 9 months from inception. The loan is collateralized by the property and is guaranteed by certain partners, stockholders, Combined Entities and related parties. Construction of the property was completed and the property opened for business May 15, 1998. [9] FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 1998 and 1997, financial instruments include cash and cash equivalents, accounts receivable, accounts payable, loans to and from related parties and mortgage payables. The fair values of cash, accounts receivable and accounts payable approximate carrying value because of the short-term nature of these instruments. Loans to and from related parties carry interest at rates that approximate the Combined Entities' borrowing cost. The fair value of mortgages payable 72 COMBINED ENTITIES - INITIAL HOTELS NOTES TO FINANCIAL STATEMENTS, SHEET #8 [AMOUNTS IN THOUSANDS] [9] FAIR VALUE OF FINANCIAL INSTRUMENTS [CONTINUED] approximates carrying value since the interest rates approximate the interest rates currently offered for similar debt with similar maturities. [10] SUBSEQUENT EVENTS On January 1, 1999, the Combined Entities transferred all management operations to the Lessee. In January 1999, the Company completed its offering of common stock whereby a total of 2.275 million common shares, including the underwriters over allotment, were issued. Concurrent with the offering, certain assets and partnership interests of the Combined Entities were exchanged for 4,032,431 units representing a 63.93% limited partnership interest in the Partnership. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF OUR COMPANY Incorporated herein by reference from the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to its Annual Meeting of Shareholders to be held on May 26, 2000. ITEM 11. EXECUTIVE COMPENSATION Documents Incorporated By Reference: Portions of the Hersha Hospitality Trust Proxy Statements are to be filed approximately 120 days following the year covered by this Form 10-K with respect to the Annual Meeting of Shareholders to be held on May 26, 2000 which are incorporated by reference in Part III hereof. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Documents Incorporated By Reference: Portions of the Hersha Hospitality Trust Proxy Statements are to be filed approximately 120 days following the year covered by this Form 10-K with respect to the Annual Meeting of Shareholders to be held on May 26, 2000 which are incorporated by reference in Part III hereof. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Documents Incorporated By Reference: Portions of the Hersha Hospitality Trust Proxy Statements are to be filed approximately 120 days following the year covered by this Form 10-K with respect to the Annual Meeting of Shareholders to be held on May 26, 2000 which are incorporated by reference in Part III hereof. 73 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedule and Exhibits INDEX TO FINANCIAL STATEMENTS
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES Independent Auditors' Report.........................................................24 Consolidated Balance Sheets as of December 31, 1999 and 1998.........................25 Consolidated Statement of Operations for the year ended December 31, 1999....................................................................26 Consolidated Statements of Shareholders' Equity for the year ended December 31, 1999 and the period May 27, 1998 (date of inception) to December 31, 1998.................................................................27 Consolidated Statement of Cash Flows for the year ended December 31, 1999....................................................................28 Notes to Consolidated Financial Statements...........................................30 Schedule III - Real Estate and Accumulated Depreciation for the year ended December 31, 1999.........................................................45 HERSHA HOSPITALITY MANAGEMENT, L.P. Independent Auditors' Report.........................................................47 Balance Sheets as of December 31, 1999 and 1998......................................48 Statement of Operations for the year ended December 31, 1999.........................49 Statement of Partners Capital for the year ended December 31, 1999...................50 Statement of Cash Flows for the year ended December 31, 1999.........................51 Notes to Financial Statements........................................................53 COMBINED ENTITIES - INITIAL HOTELS Independent Auditors' Report.........................................................59 Combined Balance Sheets as of December 31, 1998 and 1997.............................60 Combined Statements of Operations for the years ended December 31, 1998, 1997, and 1996 ...................................................61 Combined Statements of Owners' Equity for the years ended December 31, 1998, 1997, and 1996 ...................................................62 Combined Statements of Cash Flows for the year ended December 31, 1998, 1997, and 1996....................................................63 Notes to Combined Financial Statements...............................................64
(b) Reports on Form 8-K A Current Report on Form 8-K/A, amending a Current Report on Form 8-K filed on September 15, 1999, was filed by the Company on November 15, 1999. (c) Exhibits Unless otherwise indicated, the exhibits listed below are incorporated by reference to our Registration Statement on Form S-11, File No. 333-56087.
Exhibit Document 3.1 Amended and Restated Declaration of Trust of the Registrant 3.2 Bylaws of the Registrant 4.1 Form of Common Share Certificate 10.1 Form of First Amended and Restated Agreement of Limited Partnership of Hersha Hospitality Limited Partnership
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10.2 Contribution Agreement, dated as of June 3, 1998, between Hasu P. Shah and Bharat C. Mehta, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.3 Contribution Agreement, dated as of June 3, 1998, between Shree Associates, JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Devi Associates, Neil H. Shah, David L. Desfor, Madhusudan I. Patni, Manhar Gandhi and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.4 Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Devi Associates, Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd. as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.5 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.6 Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, David L. Desfor, Madhusudan I. Patni, Manhar Gandhi and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.7 Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, Madhusudan I. Patni and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.8 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.9 Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.10 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.11 Contribution Agreement, dated as of June 3, 1998, between 144 Associates, 344 Associates, 544 Associates and 644 Associates, Joint Tenants Doing Business as 2544 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.12 Contribution Agreement dated June 3, 1998, between Shree Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.13 Contribution Agreement dated June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.14 Contribution Agreement dated June 3, 1998, between 144 Associates, 344 Associates, 544 Associates and 644 Associates, Joint Tenants Doing Business as 2544 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.15 Contribution Agreement, dated June 3, 1998, between Shree Associates, Devi Associates, Shreeji Associates, Madhusudan I. Patni and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.16 Contribution Agreement, dated June 3, 1998, between Shree Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.17 Form of Ground Lease 10.18 Form of Percentage Lease 10.19 Option Agreement, dated June 3, 1998, between Hasu P. Shah, Jay H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and Hersha Hospitality Limited Partnership. 10.19(a) Amendment to Option Agreement, dated December 4, 1998, between Hasu P. Shah, Jay H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and Hersha Hospitality Limited Partnership.
75
10.20 Administrative Services Agreement, dated January 26, 1999, between Hersha Hospitality Trust and Hersha Hospitality Management, L.P. 10.21 Warrant Agreement, dated January 26, 1999, between Anderson & Strudwick, Inc. and Hersha Hospitality Trust. 10.22 Warrant Agreement, dated June 3, 1998, between 2744 Associates, L.P. and Hersha Hospitality Limited Partnership. 10.23 Hersha Hospitality Trust Option Plan 10.24 Hersha Hospitality Trust Non-Employee Trustees' Option Plan 10.25* Loan and Security Agreement between 1444 Associates and MEPS Associates and Sovereign Bank 10.26* Note executed by 1444 Associates and MEPS Associates in connection with the Loan and Security Agreement 21.1* Subsidiaries of the Registrant 27.1* Financial Data Schedule
- --------------------- * Filed herewith (d) Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1999. 76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HERSHA HOSPITALITY TRUST March 30, 2000 /s/ Hasu P. Shah -------------------------------------------- Hasu P. Shah Chairman of the Board and Chief Executive Officer Pusuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ Hasu P. Shah Chairman of the Board and Chief March 30, 2000 - ---------------------- Executive Officer (Principal Hasu P. Shah Executive Officer) /s/ Bharat C. Mehta Trustee March 30, 2000 - ---------------------- Bharat C. Mehta /s/ K. D. Patel Trustee March 30, 2000 - ---------------------- K. D. Patel /s/ L. McCarthy Downs, III Trustee March 30, 2000 - -------------------------- L. McCarthy Downs, III Trustee March 30, 2000 - ---------------------------- Everette G. Allen, Jr. /s/ Thomas S. Capello Trustee March 30, 2000 - -------------------------- Thomas S. Capello /s/ Mark R. Parthemer Trustee March 30, 2000 - -------------------------- Mark R. Parthemer /s/ Ashish R. Parikh Chief Financial Officer (Principal March 30, 2000 - ---------------------- Financial Officer) Ashish R. Parikh /s/ David Desfor Controller (Principal Accounting March 30, 2000 - --------------------- Officer) David Desfor
77 List of Exhibits Unless otherwise indicated, the exhibits listed below are incorporated by reference to our Registration Statement on Form S-11, File No. 333-56087.
Exhibit Document 3.1 Amended and Restated Declaration of Trust of the Registrant 3.2 Bylaws of the Registrant 4.1 Form of Common Share Certificate 10.1 Form of First Amended and Restated Agreement of Limited Partnership of Hersha Hospitality Limited Partnership 10.2 Contribution Agreement, dated as of June 3, 1998, between Hasu P. Shah and Bharat C. Mehta, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.3 Contribution Agreement, dated as of June 3, 1998, between Shree Associates, JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Devi Associates, Neil H. Shah, David L. Desfor, Madhusudan I. Patni, Manhar Gandhi and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.4 Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Devi Associates, Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd. as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.5 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.6 Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, David L. Desfor, Madhusudan I. Patni, Manhar Gandhi and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.7 Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, Madhusudan I. Patni and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.8 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.9 Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.10 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.11 Contribution Agreement, dated as of June 3, 1998, between 144 Associates, 344 Associates, 544 Associates and 644 Associates, Joint Tenants Doing Business as 2544 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.12 Contribution Agreement dated June 3, 1998, between Shree Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.13 Contribution Agreement dated June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.14 Contribution Agreement dated June 3, 1998, between 144 Associates, 344 Associates, 544 Associates and 644 Associates, Joint Tenants Doing Business as 2544 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.15 Contribution Agreement, dated June 3, 1998, between Shree Associates, Devi Associates, Shreeji Associates, Madhusudan I. Patni and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror. 10.16 Contribution Agreement, dated June 3, 1998, between Shree Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.17 Form of Ground Lease 10.18 Form of Percentage Lease 10.19 Option Agreement, dated June 3, 1998, between Hasu P. Shah, Jay H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and Hersha Hospitality Limited Partnership. 10.19(a) Amendment to Option Agreement, dated December 4, 1998, between Hasu P. Shah, Jay H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and Hersha Hospitality Limited Partnership. 10.20 Administrative Services Agreement, dated January 26, 1999, between Hersha Hospitality Trust and Hersha Hospitality Management, L.P. 10.21 Warrant Agreement, dated January 26, 1999, between Anderson & Strudwick, Inc. and Hersha Hospitality Trust. 10.22 Warrant Agreement, dated June 3, 1998, between 2744 Associates, L.P. and Hersha Hospitality Limited Partnership. 10.23 Hersha Hospitality Trust Option Plan 10.24 Hersha Hospitality Trust Non-Employee Trustees' Option Plan 10.25* Loan and Security Agreement between 1444 Associates and MEPS Associates and Sovereign Bank 10.26* Note executed by 1444 Associates and MEPS Associates in connection with the Loan and Security Agreement 21.1* Subsidiaries of the Registrant 27.1* Financial Data Schedule
- ------------------- *Filed herewith. EX-10 2 EXHIBIT 10.25 Exhibit 10.25 LOAN AND SECURITY AGREEMENT BETWEEN 1444 ASSOCIATES AND MEPS ASSOCIATES AND SOVEREIGN BANK DATED AS OF AUGUST 9,1999 INDEX Section Page 1. The Loan.............................................................1 2. Loan Term/Interest Rate..............................................1 3. The Properties.......................................................1 4. Use of Funds/Revolving Facility......................................2 5. Collateral; General Assignment.......................................2 6. Conditions Precedent.................................................3 7. Disbursement and Application of Loan Proceeds........................4 8. Representations and Warranties.......................................4 9. Advances.............................................................6 10. Extension of Maturity Date...........................................6 11. Other Obligations and Covenants of Borrower..........................7 12. Substitution of Collateral...........................................9 13. Compliance With Contracts............................................9 14. Compliance With All Laws.............................................9 15. Proof of Title.......................................................9 16. Warrant of Attorney.................................................10 17. Indemnity...........................................................10 18. Defaults............................................................10 19. Notices.............................................................10 20. Severability........................................................10 21. Third Parties.......................................................10 i 22. Complete Agreement..................................................10 23. Governing Law.......................................................11 24. Waiver of Jury Trial................................................11 25. Counterparts........................................................11 26. Miscellaneous.......................................................11 LIST OF EXHIBITS EXHIBIT A -.......LEGAL DESCRIPTION OF PROPERTY EXHIBIT B -.......LOAN ADVANCE REQUISITION FORM ii LOAN AND SECURITY AGREEMENT THIS AGREEMENT is made as of this 9th day of August, 1999 between 1444 ASSOCIATES ("1444"), a Pennsylvania limited partnership with an address at 148 Sheraton Drive, Box A, New Cumberland, Pennsylvania 17070 and MEPS ASSOCIATES, a Pennsylvania limited partnership with an address at 148 Sheraton Drive, New Cumberland, Pennsylvania 17070 ("MEPS") (individually, the "Borrower" and collectively, the "Borrowers") and SOVEREIGN BANK, (the "Bank"), with an address at Two Aldwyn Center, Lancaster Avenue and Route 320, Villanova, Pennsylvania 19085. Intending to be legally bound, Borrower and Bank hereby agree as follows: 1. The Loan. Subject to the terms and conditions of this Agreement, Bank agrees to lend to the Borrowers up to Seven Million Dollars ($7,000,000) (the "Funds" or the "Loan" and as used in Section 12 herein, the "Loan Commitment"). All capitalized terms used in this Agreement and not otherwise defined shall have the meanings given to them in the Loan Documents (as herein defined). Such documents include but are not limited to a Note in the face amount of the Loan (the "Note"), two Mortgage and Security Agreements (individually, the "Mortgage" and collectively, the "Mortgages"), two Assignments of Rents and Leases (individually, the "Assignment of Leases" and collectively, the "Assignments of Leases"), an Environmental Indemnity Agreement (the "Environmental Indemnity"), a Guaranty and Surety Agreement (the "Guaranty") from Hersha Hospitality Trust (the "Guarantor"), a Pledge and Security Agreement (the "Pledge") and UCC- I Financing Statements (the "UCCs"). This Agreement, the Note, the Mortgage, the Assignment of Leases, the Environmental Indemnity, the Guaranty, the Pledge and the UCCs and any other documents executed and delivered in connection with closing of the Loan or otherwise evidencing or securing the Loan are herein collectively referred to as the "Loan Documents". 2. Loan Term/Interest Rate. Subject to the terms and conditions contained in the Note, the term of the Loan shall be for a period of twenty-four months from the date hereof, with a Maturity Date of August 8th, 2001. So long as no Event of Default (as defined herein) has occurred, interest shall be charged on the outstanding principal balance at a rate of the Wall Street Journal published Prime Rate. 3. The Properties. 1444 owns certain real property and the improvements thereon situated at 1010 Race Street, Philadelphia, Pennsylvania (the "1444 Property") and MEPS owns certain real property and the improvements thereon situated at Interstate 80 and U.S. Highway 220, Milesburg, Centre County, Pennsylvania (the "MEPS Property"). The 1444 Property and the MEPS Property are sometimes collectively herein referred to as the "Properties". The Properties are more fully described in Exhibit A attached hereto. 4. Use of Funds/Revolving Facility. A Borrower shall use the Funds as a revolving working capital facility. A Borrower shall notify Bank three (3) regular business days in advance of an anticipated draw of a Borrower's request to incur a revolving advance under the Note. Borrower's request to draw shall include a description of the proposed use of the Funds. Further, either Borrower, or a representative of either Borrower, shall have the 4 power and right to act on behalf of and bind both Borrowers, including the right to notify Bank of a requested draw, and Bank may rely on such notice or other communication. During the term of the Loan, Borrower may use the Funds by borrowing, prepaying and reborrowing, all in accordance with the terms and conditions herein. The Funds be made available to the applicable Borrower on the day so requested by way of credit to such Borrower's operating account at Bank in immediately available federal funds or other immediately available funds. 5. Collateral, General Assignment. Each Borrower hereby grants to Bank, as security for the performance of this Agreement and payment of the principal of and interest on the Note and all advances now or hereafter made by Bank to or for the benefit of Borrower under this Agreement, the Mortgage or any instrument delivered to Bank pursuant to this Agreement or any other evidence of indebtedness, a security interest in (a) all materials delivered to the site of the Property but not yet incorporated therein, now owned or hereafter acquired, (b) all machinery, equipment, fixtures, furnishings, furniture, appliances, general intangibles, accounts, accounts receivable and other personalty of Borrower, now owned or hereafter acquired, and intended to be incorporated into or used in connection with the Improvements, (c) all insurance on all the foregoing and the proceeds of any sale or exchange of the foregoing in whole or in part, and (d) all property of Borrower which at any time Bank shall have or have the right to have in its possession, or which is in transit to it, including without limitation, any balance or share of any deposit, trust, agency, escrow or other account with Bank and any amounts which may be owing from time to time by Bank to Borrower. Borrower hereby also assigns and grants to Bank a security interest in, and agrees Bank shall have and be able to exercise, until all amounts payable to Bank under the Note, the Mortgage or this Agreement have been paid in full, all of Borrower's right, title and interest in, to and under all contracts, instruments, documents, licenses, permits, surveys, approvals and agreements of any kind relating to the Property or the Improvements or marketing, sale, leasing, financing or operation of all or any part of the Property, now owned or hereafter acquired, and the proceeds of any of the foregoing provided that so long as no Event of Default shall have occurred and be continuing hereunder, Borrower shall have the benefits of such right, title and interest, except Borrower shall not terminate, cancel or amend or suffer or permit the termination, cancellation or amendment or default or expiration of any assigned instrument without Bank's prior approval, except for any amendment (i) for which Bank's consent is not otherwise expressly required by the terms of the Loan Documents, (ii) which does not increase the cost of the Property or otherwise jeopardize or adversely affect the completion or operation of the Property or Bank's security for the Loan and (iii) of which Bank is given a copy. Borrower shall continue to be solely liable for all obligations of Borrower under any assigned instrument and neither Borrower nor any other party thereto shall look to Bank to pay or perform any of such obligations unless and until Bank shall have notified such party in writing that Bank has elected to assume such obligations, and then only to the extent set forth in such assumption. In the event of foreclosure of a Mortgage, the purchaser at such foreclosure shall also acquire all of the right, title and interest of Borrower in, to and under said contracts, instruments, documents, licenses, permits, surveys, approvals and agreements, but such purchaser shall be liable only for the obligations expressly assumed by such purchaser. The foregoing constitutes a security agreement under the Uniform Commercial Code. Further, in the event of foreclosure of a Mortgage, Bank shall have the absolute right to collect and enforce any and all remedies available to 5 it and may, by means of illustration, foreclose on either or both Mortgages and may do so in any order it chooses. Bank shall have the right, in its sole discretion, to release either of the Borrowers or Guarantor from its obligations under this Agreement or the Loan Documents and to proceed against the remaining Borrower or Guarantor, as applicable. For purposes of this Agreement, the term "Collateral" shall mean the right, title and interest of Bank in the property described in the Mortgage and the property described in this Section. Borrower will execute or join with Bank in executing such financing statements and continuation statements under the Uniform Commercial Code or other applicable law as Bank may specify in order to perfect and maintain perfection of Bank's security interest in any of the Collateral and will pay the costs of filing the same in such public offices as Bank may designate. 6. Conditions Precedent. The obligation of Bank to advance the Funds hereunder is subject to the following conditions precedent: (a) The Bank shall have satisfactorily reviewed Phase I and Phase II (if the latter is applicable) environmental studies; (b) Borrower shall have received and satisfactorily reviewed an MAI appraisal of the 1444 Property and the MEPS Property, which appraisals shall evidence, in the aggregate a 60% loan-to-value for each Property (the "Loan-to-Value"); (c) Bank shall have received and satisfactorily reviewed Guarantor's financial statements and tax returns; (d) Borrowers shall establish all Property-related operating and deposit accounts with the Bank, which accounts shall be pledged to the Bank as security for the Loan. Further, Borrower shall; (e) Borrowers shall have delivered to Bank a commitment for title insurance in form and substance satisfactory to Bank, insuring each Mortgage as a first lien, subject only to such exceptions as may be approved in writing by Bank and containing any endorsements required by Bank; (f) Bank shall have received and satisfactorily reviewed evidence of insurance as stipulated by Section 1.4 of the Mortgage; (g) Borrower shall have delivered to Bank a commitment fee in the amount of one-half percent (1/2%) of the Loan amount, or $35,000; (h) Bank shall have received and satisfactorily reviewed an ALTA/ASCM metes and bounds survey for the Property; 6 (i) Borrower shall deliver to Bank a written opinion of Borrower's counsel, dated the date of Closing and addressed to Bank, in form and substance satisfactory to Bank; (j) Borrower shall have delivered to Bank the Loan Documents and any other documents reasonably required by Bank in connection with the closing or funding of the Loan. 7. Disbursement and Application of Loan Proceeds. So long as there has occurred no Event of Default or any event or condition which, with the passage of time or giving of notice or both could become an Event of Default, Bank shall be obligated to advance the Funds against the Note. Each request for an advance shall be made by a loan advance requisition in the form attached hereto as Exhibit B. All conditions to the obligation of Bank to make advances hereunder are imposed solely and exclusively for the benefit of Bank and its assigns, and no other person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Bank will make or not make advances in the absence of strict compliance with any or all thereof, and no other person shall, under any circumstances, be deemed to be a beneficiary of such conditions, any or all of which may be freely waived in whole or in part by the Bank at any time if, in its sole discretion, it deems it advisable to do so. In no event shall any other party be deemed to be a beneficiary of the Funds that may be advanced to Borrower pursuant to the terms hereof or have any right to an accounting therefor. Bank shall not in any way or for any purpose be deemed to be or to become a partner of or a joint venturer or a member of a joint enterprise with Borrower in connection with the ownership or operation of the Property or the Loan contemplated herein. 8. Representations and Warranties. Borrowers represent and warrant that: (a) Each Borrower is a limited partnership duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania, is duly qualified and in good standing to conduct business in those jurisdictions in which its ownership of property or the conduct of its business requires such qualification, and has the requisite power and authority to make and perform its obligations under this Agreement, the Note and the Loan Documents and under all other documents delivered to Bank pursuant hereto and to carry out the transactions contemplated hereby and thereby. (b) The execution, delivery and performance of this Agreement and the execution and delivery of the Note and the Loan Documents have been duly authorized by all requisite partnership action of each Borrower and will not violate any provision of law or any judgment, order or regulation of any court or of any public or governmental agency or authority applicable to each Borrower or the partnership agreement of each Borrower or conflict with or result in a breach of any of the terms, conditions or provisions of or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the properties or assets of each Borrower pursuant to the terms of any agreement, indenture or instrument to which each Borrower or 7 any of either Borrower's constituent general partners is a party or by which each Borrower or any of such partners or any of their properties are bound. (c) This Agreement, the Note and the Loan Documents when executed and delivered by each Borrower will be the legal, valid and binding obligations of the parties thereto in accordance with their respective terms. (d) There is no claim, litigation or governmental proceeding against either Borrower or any of either Borrower's constituent general partners now pending or, to the knowledge of either Borrower, threatened, which is substantial in amount or which, if adversely determined would have a material adverse effect on the financial condition or business of either Borrower or any of such partners, or would adversely affect the Property or the ability of either Borrower to perform its respective obligations under this Agreement, the Note or the Loan Documents, except such as are adequately covered by insurance and have been disclosed in the financial statements hereinafter referred to or except such as have been disclosed to Bank in writing. (e) The balance sheet and profit, loss and surplus statement of each Borrower as of 12/31/97 are complete and correct, were prepared in accordance with generally accepted accounting principles consistently applied and fairly set forth the financial condition of each Borrower as of the date thereof and the result of its operations for the period covered thereby, and said balance sheet reflects all liabilities of each Borrower direct or contingent as of the date thereof. (f) Each Borrower has filed all federal, state and local tax returns required to be filed and has paid all taxes as shown on said returns to be due. (g) There has been no material adverse change which has not been disclosed to Bank in the condition of either Borrower, financial or otherwise, from that shown on its balance sheet and profit, loss and surplus statement referred to in paragraph (e) above. (h) Neither Borrower has knowledge of any violation, nor is there any notice or other record of any violation, of any zoning, subdivision, environmental, building or other statute, ordinance, regulation, restrictive covenant or other restriction applicable to the Property or the Property. (i) The use of the Property and the Improvements for the purpose contemplated hereby and the operation of the Property do and shall, in all respects, comply with, and are lawful, permitted and conforming uses under, all applicable building, fire, safety, subdivision, zoning, sewer, environmental, securities, health, insurance and other laws, ordinances, rules, regulations and plan approval conditions of any governmental or public body or authority and each Borrower has obtained all permits, licenses or approvals from such governmental or public bodies or authorities. (j) No approval, consent or authorization of, or registration, declaration or filing with, any governmental or public body or authority is required in connection with the valid execution, delivery and performance of 8 this Agreement or the Loan Documents, the issuance of the Note or the carrying out by each Borrower of the transactions contemplated hereby, except such as have been or will, prior to the first advance hereunder, be obtained. (k) There exist no liens, encumbrances or other charges against the Property, the Improvements or any property relating thereto other than the Mortgage and the security interests created hereby or pursuant hereto, including statutory and other liens of mechanics, workmen, contractors, subcontractors, suppliers, taxing authorities and others, except those disclosed to and approved by Bank. (1) All utility services necessary for the operation of the Property, including water supply, storm and sanitary sewer facilities, gas, electricity and telephone facilities are available within the boundaries of the Property. (m) All roads necessary for the full utilization of the Property and the Improvements for their intended purposes have either been completed or the necessary rights-of-way therefor have been acquired by the appropriate governmental authority. All of the above representations and warranties shall be continuing and survive the making of this Agreement and the issuance of the Note. 9. Advances. Notwithstanding anything herein to the contrary, Bank shall not advance more than the amount of the Designated Loan-to-Value for each Property on an individual basis. 10. Extension of Maturity Date. Borrower shall have the option of extending the Maturity Date of the Loan for up to twelve additional months (the "Extension Period") upon satisfaction of the following terms and conditions: (a) Borrower shall give not less than sixty (60) days' prior written notice to Bank of Borrower's request to extend the Maturity Date. (b) At and as of the time any such extension is to take effect, there shall have occurred no Event of Default, or any event or condition which, with the passage of time or giving of notice or both could become an Event of Default, provided that if Borrower cures any such event or condition existing at such time, within the applicable grace period set forth herein, if any, this condition shall be deemed satisfied as of the date of such cure. (c) On or before the commencement date of the Extension Period, Borrower shall pay to the Bank an extension fee of twenty thousand dollars ($20,000). (d) On or before the commencement date of the Extension Period, Borrower shall execute any other documents reasonably requested by Bank, including but not limited to a reaffirmation of the Guaranty. 11. Other Obligations and Covenants of Borrower. 9 (a) Borrower will forward to Bank promptly after receipt, copies of all notices, permits or other documents (excepting only notices for non-delinquent taxes due) received by Borrower from any governmental authority relating to the Property or the Improvements or from any person claiming a mechanic's or materialmen's lien against the Property or the Property. (b) Beginning on October 1, 1999, and on a quarterly basis thereafter during the term of the Loan, Borrower shall deliver to Bank operating statements for the Property; (c) Beginning on May 1, 2000, and on an annual basis thereafter, Borrower and Guarantor shall deliver to Bank a copy of Borrower's and Guarantor's federal and state tax returns and accountant-prepared financial statements; (d) Borrower will forward to Bank promptly after receipt, copies of all notices, permits or other documents (excepting only notices for non-delinquent taxes due) received by Borrower from any governmental authority relating to the Property or the Improvements or from any person claiming a mechanic's or materialmen's lien against the Property or the Property; (e) Borrower shall ensure the maintenance of a minimum Property Cash Flow (as herein defined) of $950,000, measured annually on a combined basis, as follows: (i) "Property Cash Flow" shall mean the sum of Property Operating Income, and unearned income of Borrower (such as dividends and interest) projected to be received by Borrower, less Property Operating Expenses. (ii) "Property Operating Expenses" means all expenses incurred by Borrower for such period in the normal course of operating the Property (excluding Debt Service and other charges payable on the Loan), including but not limited to maintenance fees, real estate taxes and insurance premiums, expenses and the expensed portion of capitalized expenditures related to the repair and maintenance of the Property, expenses related to the management and marketing of the Property and all legal and accounting expenses. Property Operating Expenses shall be determined on a cash basis method, except that any expense otherwise defined as a Property Operating Expense which is regularly incurred on a yearly, quarterly, bimonthly, semiannually or biannual basis, or at any other regular interval spanning more than one month, shall be amortized over the number of months included within that interval for the purpose of calculating Property Operating Expenses. Legal, accounting and other professional fees which are directly incurred on account of a capital expenditure may be amortized over time in accordance with, and not to exceed the period prescribed by, GAAP. The Property Operating Expenses shall not include non-cash items and prepaid expenses that are not prepaid in the ordinary course of business. Property Operating Expenses shall include a 5% management fee. (iii) "Property Operating Income" shall mean the gross income or revenues for such period (determined on a cash basis method) derived in any manner whatsoever for the operation of the Property, including but not limited to room rentals (fixed, minimum, guaranteed, additional, 10 overage, percentage, participation or any other type or kind, including premiums paid for short term or month-to-month leases), food and beverage income, laundry, concession and gift shop income, fees, charges, late charges, business interruption insurance, or otherwise for the use or occupancy of all or any part of the Property, or for any services, equipment or furnishings provided in connection with such use or occupancy, including without limitation vending, washer and dryer machine income, forfeited deposits, fees from amenities offered at the Property, utility income and reimbursement for Property Operating Expenses. Property Operating Income shall specifically exclude any unearned income (such as dividends and interest), proceeds from hazard insurance or condemnation awards, security deposits, prepaid rent, and any payment received by Borrower representing proceeds of borrowed money. (f) Borrower shall be prohibited from placing obtaining additional financing secured by a Property or Properties, or to otherwise encumbers a Property or the Properties without Bank's prior written consent. (g) In the event of any lien being filed against the Property or final judgment for the payment of money involving more than $50,000 against Borrower or any Guarantor, Borrower or Guarantor shall cause the same to be discharged or bonded off to the satisfaction of Lender within sixty (60) days from the filing of the lien or the entry of the order, decree or process; (h) From time to time upon the request of the Bank, borrower shall promptly and duly execute, acknowledge and deliver any and all such further instruments and documents as Bank may reasonably deem necessary or desirable to confirm this Agreement and the Note, to carry out the purpose in it and intent hereof and thereof or to enable Bank to enforce any of its rights hereunder or thereunder. 12. Substitution of Collateral. Bank, in its sole discretion, shall review requests from Borrower to substitute new collateral (the "New Collateral") for the existing Collateral, upon satisfaction of the following terms and conditions: (a) Borrower shall deliver to Bank a written request for the collateral substitution not less than sixty (60) days prior to such substitution taking effect; (b) the proposed New Collateral shall be of equal or greater value, as determined by Bank in its sole discretion, provided, however, that if the New Collateral shall be of lesser value, Bank shall review Borrower's request for substitution in exchange for a corresponding reduction in the Loan Commitment; (c) Borrower shall deliver to Bank any and all documents requested by Bank to evidence the taking of the New Collateral, including but not limited to an M.A.I. appraisal in form and substance satisfactory to Bank, a Phase I environmental report and property operating statements, an Assignment of Rents and Leases related to the substituted property and Open-End Mortgage and Security Agreement related to the substituted property; and (d) if Borrower requests Bank to allow the substitution of a new borrowing entity, such substitution shall be subject to all of Bank's 11 underwriting requirements and documentation procedures and any decision to accept a new borrowing entity shall be at Bank's sole discretion. 13. Compliance With Contracts. Borrower will comply with all requirements and satisfy all conditions of all contracts, bonds or insurance which insure or relate to all or any part of this Agreement, the Property, the Improvements or Borrower. The foregoing includes without limitation compliance with all the terms and satisfaction of all the conditions of the General Contract. In the event of a failure by Borrower to comply with any of such terms or satisfy any of such conditions, Bank may undertake such compliance or satisfaction on Borrower's behalf and any sums expended by Bank in connection therewith shall be deemed advances hereunder against the Note and secured by the Loan Documents. 14. Compliance With All Laws. Borrower will comply with all laws applicable to Borrower or the Property or the Improvements, including without limitation zoning and use laws and building restrictions and regulations. 15. Proof of Title. Borrower will deliver to Bank, upon demand, any contracts, bills of sale, statements, receipted vouchers or agreements under which Borrower claims title to any materials, fixtures, equipment, machinery, appliances, furniture, furnishings or other personal property incorporated in the Improvements or subject to the lien of the Mortgage or included in the Collateral. 16. Warrant of Attorney. Borrower hereby irrevocably appoints Bank as attorney-in-fact to do in Borrower's stead all things believed by Bank reasonably necessary to effect performance of this Agreement, including without limitation filing notices in public records and endorsing checks or drafts payable to Borrower and Bank jointly. The foregoing appointment is coupled with an interest and is solely for protection of Bank's security and, therefore, is not intended to confer any right of action on any third party. 17. Indemnity. Borrower hereby indemnifies Bank and agrees to hold Bank harmless from any loss, expense or damage on account of anything arising out of or in connection with this Agreement, the Note, the Collateral Documents, the Property, the Improvements or any of the documents and instruments delivered to Bank in compliance with this Agreement unless caused solely by the Bank's gross negligence or willful misconduct. This indemnity shall survive the completion of the Improvements and payment of the Note. 18. Defaults. The occurrence of an "Event of Default" as defined in the Mortgage shall constitute an event of default hereunder and under the Note and the Loan Documents. 19. Notices. Any notice, demand or request under this Agreement shall be made in accordance with Section 6.03 of the Mortgage. 20. Severability. If any provision hereof or of the Note is found by a court of competent jurisdiction to be prohibited or unenforceable, it shall be ineffective only to the extent of such prohibition or unenforceability, and such prohibition or unenforceability shall not invalidate the balance of such 12 provision to the extent it is not prohibited or unenforceable, nor invalidate the other provisions hereof. 21. Third Parties. This Agreement shall be binding upon and inure to the benefit of Bank and Borrower and their respective successors and assigns. Borrower may not, without the prior written consent of Bank, assign any of its rights or obligations under this Agreement. The parties intend that no other person or entity is to have any claim or any interest under this Agreement, and no other person or entity is to have any right of action hereon or hereunder. 22. Complete Agreement. Taken together with the Note, the Loan Documents and the other instruments, contracts and documents delivered in compliance herewith, this Agreement is a complete memorandum of the agreement of Borrower and Bank. Waivers or modifications of any provision hereof must be in writing signed by the party to be charged with the effect thereof. 23. Governing Law. Except to the extent applicable law may require otherwise, this Agreement shall be construed in accordance with and governed by the substantive laws of the Commonwealth of Pennsylvania. 24. Waiver of Jury Trial. Borrower and Bank hereby waive the right to trial by jury in any action arising hereunder. 25. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 26. Miscellaneous. (a) The captions preceding the text of the Sections of this Agreement are for convenience of reference and shall not constitute a part of this Agreement, nor shall they in any way affect its meaning, construction or effect. Unless the context clearly indicates a contrary intent. (b) The terms "Borrower" and "Borrowers" shall mean the person or persons specifically named herein as "Borrower" or "Borrowers" and their respective heirs, executors, administrators, successors and assigns. (c) The term "Bank" shall mean the person specifically named herein as "Bank" or any successor to or assignee of its rights hereunder and under the Note. (d) The word "person" shall mean individual, corporation, partnership, Joint venture or unincorporated association. (e) The use of any gender shall include all genders. (f) The singular number shall include the plural and the plural the singular as the context may require. 13 (g) If Borrower is more than one person, all agreements, conditions, covenants, provisions, stipulations, warrants of attorney, authorizations, waivers, releases, options, undertakings, indemnities, rights and benefits made or given by Borrower shall be joint and several and shall legally bind and affect all persons who are defined as "Borrower" as fully as though all of them were specifically named herein wherever the term "Borrower" is used, and each of them shall be deemed to have made the representations and warranties of herein set forth. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BORROWERS: 1444 Associates, a Pennsylvania limited partnership By: Hersha Hospitality Limited Liability Company ("HHLLC"), a Virginia limited liability company, as sole general partner of 1444 Associates By: Hersha Hospitality Limited Partnership, a Virginia limited partnership, as sole member of HHLLC (signatures continued on next page) 14 (signatures continued from previous page) By: Hersha Hospitality Trust, a Maryland Business Trust, as sole general partner of HHLP By: /s/ Hasu P. Shah ------------------------------------ Name: Hasu P. Shah Title: President MEPS Associates, a Pennsylvania limited partnership By: Hersha Hospitality Limited Liability Company ("HHLLC"), a Virginia limited liability company, as sole general partner of 1444 Associates By: Hersha Hospitality Limited Partnership, a Virginia limited partnership, as sole member of HHLLC By: Hersha Hospitality Trust, a Maryland Business Trust, as sole general partner of HHLP By: /s/ Hasu P. Shah ------------------------------------ Name: Hasu P. Shah Title: President BANK: SOVEREIGN BANK By: /s/ Richard J. Narkiewicz ------------------------------------ Name: Richard J. Narkiewicz Title: Vice President 15 EX-10 3 EXHIBIT 10.26 Exhibit 10.26 NOTE $7,000,000 Philadelphia, Pennsylvania Dated: August 9, 1999 FOR VALUE RECEIVED, 1444 ASSOCIATES, a Pennsylvania limited partnership whose place of business and mailing address is 148 Sheraton Drive, Box A, New Cumberland, Pennsylvania 17070 and MEPS ASSOCIATES, a Pennsylvania limited partnership (separately "Maker" or collectively, the "Makers") whose place of business and mailing address is 148 Sheraton Drive, New Cumberland, Pennsylvania 17070 promises to pay, with joint and several liability, to the order of SOVEREIGN BANK ("Payee"), having its place of business at Two Aldwyn Center, Lancaster Avenue & Route 320, Villanova, Pennsylvania 19085, the principal sum of Seven Million Dollars ($7,000,000) (the "Principal Sum") lawful money of the United States of America, or so much thereof as may be advanced by Payee to Maker, together with interest on the outstanding balance thereof. 1. There shall be paid to Payee on or before the 15th day of September, 1999, interest at the rate of the Wall Street Journal reported Prime on the outstanding principal balance of this Note from and including the date hereof to the Maturity Date. As used herein, the Maturity Date shall mean the date which is twenty-four (24) months from the date hereof, or August 8, 2001. 2. Interest shall be on the basis of a year of three hundred sixty (360) days. 3. Payment shall be payable to Payee at the address set forth in the heading of this Note, or at such other place as Payee may designate from time to time in writing. 4. Maker shall have the right to prepay the entire Principal Sum, together with all interest accrued thereon and all other sums payable hereunder, with 5 business days' written notice to Bank. 5. Maker shall have the right to extend the Maturity Date of this Note, subject to the terms of the Loan and Security Agreement (the "Loan Agreement") of even date herewith between Maker and Bank. 6. Payment and performance of the obligations set forth in this Note are governed and secured by: (a) two Open-End Mortgage and Security Agreements of even date herewith (collectively, the "Mortgages"), intended to be recorded forthwith, executed and delivered by Makers, creating a first mortgage lien upon the fee and beneficial interest of Maker in those certain premises situated in (i) Milesburg, Pennsylvania and (ii) Philadelphia, Pennsylvania, and together with the buildings and other improvements constructed thereon, all as more particularly described in the Mortgages (the "Premises"), and creating a first security interest in all furniture, fixtures, machinery, appliances and equipment used or usable in the operation or maintenance of the Premises and the 16 other personal property described in the Mortgage, which security interest will be perfected by the filing of certain financing statements executed by Maker (the "Financing Statements"); (b) two Assignments of Rents and Leases (the "Assignment") of even date herewith executed and delivered by Makers; (c) Guaranty and Surety Agreement (the "Guaranty") executed and delivered by the Hersha Hospitality Trust, as Guarantor; (d) an Environmental Indemnity Agreement (the "Environmental Indemnity") of even date herewith executed and delivered by Makers and Guarantor; (e) a Pledge and Security Agreement (the "Pledge") of even date herewith, executed and delivered by Maker; and (f) the Loan Agreement. The Mortgages, the Financing Statements, the Assignments of Rents and Leases, the Guaranty, the Environmental Indemnity, the Pledge, the Loan Agreement and any other instruments evidencing or securing this Note are herein referred to collectively as the "Loan Documents". 7. All of the agreements, conditions, covenants, provisions and stipulations contained in the Loan Documents are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully set forth herein, and Makers covenant and agree to keep and perform them, or cause them to be kept and performed, strictly in accordance with their terms. 8. The terms and provisions of this Note and the other Loan Documents shall be binding upon and inure to the benefit of Borrowers and Bank and their respective heirs, executors, legal representatives, successors, successors and permitted assigns, whether by voluntary action of the parties or by operation of law. The foregoing shall not be construed, however, to alter any limitations or restrictions applicable to Borrowers under the other Loan Documents. Each Borrower shall be jointly and severally liable to perform the obligations of Borrower under this Note and the other Loan Documents. 9. If any installment of principal and/or interest or any other payment is not paid when due under the terms of this Note or of the Mortgage, then there also shall be immediately due and payable a late charge at the rate of ten cents ($.10) for each dollar of such delinquent payment to cover the additional costs incurred in handling such delinquent payment. 10. It is further understood, however, that if either Maker fails to pay within five (5) days after notice from Payee that such is due and payable any installment of principal and/or interest (other than sums falling due on the Maturity Date, for which no such notice shall be required) or any other sum due hereunder or fails to perform any of the other agreements, conditions, 17 covenants, provisions or stipulations contained in this Note, or in the Mortgage or in any of the other Loan Documents subject to the periods for performance (including the provisions regarding notice and opportunity to cure) set forth therein or is otherwise in default under any of the Loan Documents, then interest shall accrue thereafter at a rate (the "Default Rate") which shall be (i) five percent (5%) higher than the rate specified in the first unnumbered paragraph of this Note, or (ii) the maximum rate of interest permitted by law in the Commonwealth of Pennsylvania from time to time, whichever shall be less, and Payee at its option and without further notice to either Maker may declare immediately due and payable the entire unpaid balance of principal with interest accrued thereon to the date of default; and payment thereof, together with interest on the unpaid principal balance at the Default Rate, may be enforced and recovered in whole or in part at any time by one or more of the remedies provided to Payee in this Note or in the Mortgage or the other Loan Documents. Upon the acceleration of the maturity of this Note, a tender of payment by Maker of the amount necessary to satisfy the entire indebtedness evidenced hereby made at any time prior to foreclosure sale (including sale under the power of sale) under the Mortgage shall constitute an evasion of the prepayment terms of this Note and be deemed to be a voluntary prepayment hereunder, and any such payment, to the extent permitted by law, will therefore include the additional payment, if any, required under the prepayment privilege contained herein. In such case Payee also may recover all costs of suit and other expenses in connection therewith, together with attorneys' commissions for collection equal to the lesser of five percent (5%) of all sums due by Maker to Payee or Ten Thousand Dollars ($10,000) together with interest on any judgment obtained by Payee at the Default Rate, and interest shall continue to accrue at the Default Rate from and after the date of such judgment until payment is made of the full amount due Payee. 11. MAKER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF PENNSYLVANIA, OR ELSEWHERE, TO APPEAR AT ANY TIME, AFTER DEFAULT BY MAKER UNDER THIS NOTE, THE MORTGAGE OR ANY OTHER LOAN DOCUMENT, FOR MAKER IN ANY ACTION BROUGHT AGAINST MAKER ON THIS NOTE AT THE SUIT OF PAYEE, WITH OR WITHOUT DECLARATION FILED, AS OF ANY TERM, AND THEREIN TO CONFESS OR ENTER JUDGMENT AGAINST MAKER FOR THE ENTIRE UNPAID PRINCIPAL BALANCE OF THIS NOTE AND ALL OTHER SUMS PAID BY PAYEE TO OR ON BEHALF OF MAKER PURSUANT TO THE TERMS OF THIS NOTE AND THE MORTGAGE, AND ALL ARREARAGES OF INTEREST THEREON, TOGETHER WITH COSTS OF SUIT AND AN ATTORNEY'S COMMISSION IN THE AMOUNT SPECIFIED IN THE PRECEDING PARAGRAPH OF THIS NOTE, AND FOR SO DOING THIS NOTE OR A COPY HEREOF VERIFIED BY AFFIDAVIT SHALL BE SUFFICIENT WARRANT. THE AUTHORITY GRANTED HEREIN TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF BUT SHALL CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL PAYMENT IN FULL OF ALL THE AMOUNTS DUE HEREUNDER OR UNDER THE MORTGAGE. MAKER KNOWINGLY, AND AFTER CONSULTATION WITH INDEPENDENT COUNSEL, WAIVES ITS RIGHTS TO BE HEARD PRIOR TO THE ENTRY OF SUCH JUDGMENT AND 18 UNDERSTANDS THAT UPON ENTRY SUCH JUDGMENT SHALL BECOME A LIEN ON ALL REAL PROPERTY OF MAKER IN THE COUNTY IN WHICH SUCH JUDGMENT IS ENTERED. 12. The remedies of Payee as provided herein, or in the Mortgage or other Loan Documents, and the warrants contained herein or in the Mortgage or other Loan Documents shall be cumulative and concurrent, and may be pursued singly, successively, or together at the sole discretion of Payee, and may be exercised as often as occasion therefor shall occur; and the failure to exercise any such right or remedy shall in no event be construed as a waiver or release thereof. 13. MAKER HEREBY WAIVES ITS RIGHT TO A TRIAL BY JURY IN CONNECTION WITH THE ENFORCEMENT OF THIS NOTE OR ANY OTHER LOAN DOCUMENT. 14. Maker (a) hereby irrevocably submits to the nonexclusive jurisdiction of the Court of Common Pleas of Delaware County, Commonwealth of Pennsylvania, or any successor to said court, and to the nonexclusive jurisdiction of the United States District Court for the Eastern District of Pennsylvania, or any successor to said court (hereinafter referred to as the "Pennsylvania Courts") for purposes of any suit, action or other proceeding which relates to this Note, (b) to the extent permitted by applicable law, hereby waives and agrees not to assert by way of motion, as a defense or otherwise in any such suit, action or proceeding, any claim that either Maker is not personally subject to the jurisdiction of the Pennsylvania Courts; that such suit, action or proceeding is brought in an inconvenient forum; that the venue of such suit, action or proceeding is improper; or that this Note may not be enforced in or by the Pennsylvania Courts, (c) hereby agrees not to seek, and hereby waives, any collateral review by any other court, which may be called upon to enforce the judgment of any of the Pennsylvania Courts, of the merits of any such suit, action or proceeding or the jurisdiction of the Pennsylvania Courts, and (d) waives personal service of any and all process upon each Maker and consents that all such service of process be made by certified or registered mail, and service so made shall be deemed to be completed upon actual receipt thereof. Nothing herein shall limit Payee's right to bring any suit, action or other proceeding against any of Maker's assets or to serve process on Maker by any means authorized by law for any claim arising hereunder. 15. Maker hereby waives and releases all errors, defects and imperfections in any proceedings instituted by Payee under the terms of this Note, or of the Mortgage or other Loan Documents, as well as all benefit that might accrue to Maker by virtue of any present or future laws exempting the Premises, or any other property, real or personal, pledged or mortgaged as security for the payment of this Note, or any part of the proceeds arising from any sale of any such property, from attachment, levy, or sale under execution, or providing for any stay of execution, exemption from civil process, or extension of time for payment; and Maker agrees that any real estate that may be levied upon pursuant to a judgment obtained by virtue hereof, on any writ of execution issued thereon, may be sold upon any such writ in whole or in part in any order desired by Payee. 16. Maker and all endorsers sureties and guarantors, hereby jointly and severally waive presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Note, 19 and all other notices in connection with the delivery, acceptance, performance, default, or enforcement of the payment of this Note, and they agree that the liability of each of them shall be unconditional, without regard to the liability of any other party, and shall not be affected in any manner by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Payee. Maker and all endorsers, sureties and guarantors or sureties consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by Payee with respect to the payment or other provisions of this Note and to the release of the collateral or any part thereof, with or with/out substitution, and agree that additional makers, endorsers, guarantors, or sureties may become parties hereto without notice to them or affecting their liability hereunder. 17. Bank or Guarantor shall have the right, in whole or in part, (i) to release one of the Makers from its or their obligations hereunder and under the Loan Documents and (ii) to enforce remedies against either or both Makers and the Guarantor or any of them or (iii) to release any of them from liability, in its sole discretion, with no liability, in whole or in part, therefor to the parties not released or against whom remedies are not sought. 18. Payee shall not be deemed, by any act of omission or commission to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by Payee, and then only to the extent specifically set forth in the writing. A waiver as to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event. 19. This instrument shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania. 20. Whenever used the singular number shall include the plural, the plural the singular, the use of any gender shall be applicable to all genders, and the words "Payee" and "Maker" shall be deemed to include their respective heirs, personal representatives, successors and assigns. IN WITNESS WHEREOF, Maker, intending to be legally bound, has caused this Note to be duly executed on the day and year first above written. 1444 Associates, a Pennsylvania limited partnership By: Hersha Hospitality Limited Liability Company ("HHLLC"), a Virginia limited liability company, as sole general partner of 1444 Associates By: Hersha Hospitality Limited Partnership, a Virginia limited partnership, as sole member of HHLLC By: Hersha Hospitality Trust, a Maryland Business Trust, as sole general partner of HHLP 20 By: /s/ Hasu P. Shah ------------------------------------ Name: Hasu P. Shah Title: President (signatures continued on next page) 21 (signatures continued from previous page) MEPS Associates, a Pennsylvania limited partnership By: Hersha Hospitality Limited Liability Company ("HHLLC"), a Virginia limited liability company, as sole general partner of 1444 Associates By: Hersha Hospitality Limited Partnership, a Virginia limited partnership, as sole member of HHLLC By: Hersha Hospitality Trust, a Maryland Business Trust, as sole general partner of HHLP By: /s/ Hasu P. Shah ------------------------------------ Name: Hasu P. Shah Title: President 22 EX-21 4 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT: 1. 844 Associates, a Pennsylvania limited partnership 2. 944 Associates, a Pennsylvania limited partnership 3. 1244 Associates, a Pennsylvania limited partnership 4. 1444 Associates, a Pennsylvania limited partnership 5. MEPS Associates, a Pennsylvania limited partnership 6. 1644 Associates, a Pennsylvania limited partnership 7. 2244 Associates, a Pennsylvania limited partnership 8. 3444 Associates, a Pennsylvania limited partnership 9. 1544 Associate, a Pennsylvania limited partnership 10. 1844 Associates, a Pennsylvania limited partnership 11. 3144 Associates, a Pennsylvania limited partnership 12. 2844 Associates, a Pennsylvania limited partnership 13. Hersha Hospitality Limited Partnership, a Virginia limited partnership 23 EX-27 5 EXHIBIT 27.1
5 This schedule contains summary financial information extracted from the Financial Statements of Hersha Hospitality Trust for the year ended December 31, 1999 and is qualified in its entirety by reference to such Financial Statements. YEAR DEC-31-1999 DEC-31-1999 124 0 2,116 0 0 0 51,908 1,979 56,382 0 24,754 0 0 23 11,782 56,382 7,264 7,370 0 2,897 0 0 1,428 1,338 0 1,338 0 0 0 1,338 0.59 0.48
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