SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 (Zip Code)
Principal Executive Offices)
Registrant's telephone number, including area code: (717) 770-2405
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of June 30, 1999, the number of outstanding Priority Class A Common
Shares of Beneficial Interest outstanding was 2,275,000.
<PAGE>
HERSHA HOSPITALITY TRUST
INDEX
ITEM NO. FORM 10-Q
- -------- REPORT
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...........................................1
HERSHA HOSPITALITY TRUST
Consolidated Balance Sheets as of June 30,
1999 [Unaudited] and December 31, 1998.........................1
Consolidated Statement of Operations for the six
and three months ended June 30, 1999 [Unaudited]...............2
Consolidated Statement of Cash Flows for
the six months ended June 30, 1999 [Unaudited].................3
Notes to Consolidated Financial Statements.....................5
HERSHA HOSPITALITY MANAGEMENT, L.P.
Balance Sheets as of June 30, 1999
[Unaudited] and December 31, 1998.............................14
Statement of Operations for the six and
three months ended June 30, 1999 [Unaudited]..................15
Statement of Cash Flows for the six
months ended June 30, 1999 [Unaudited]........................16
Notes to Financial Statements.................................17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................22
Six and Three Months Ended June 30, 1999, Results
of Operations.................................................22
Liquidity and Capital Resources...............................23
Inflation.....................................................24
Seasonality...................................................25
Year 2000 Compliance..........................................25
Subsequent Events.............................................27
Item 3. Quantitative and Qualitative Disclosures About Market Risk....27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................28
Item 2. Changes in Securities and Use of Proceeds.....................28
Item 3. Defaults Upon Senior Securities...............................28
Item 4. Submission of Matters to a Vote of Security Holders...........28
Item 5. Other Information.............................................28
Item 6. Exhibits and Reports on Form 8-K..............................28
(a) Exhibits............................................28
(b) Reports on Form 8-K.................................28
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
================================================================================
HERSHA HOSPITALITY TRUST
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX AND THREE MONTHS
ENDED JUNE 30, 1999 [UNAUDITED](1)
================================================================================
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31,
ASSETS: [UNAUDITED] 1998
<S> <C>
Investment in Hotel Properties, Net of $ 39,903 $ --
Accumulated Depreciation
Cash and Cash Equivalents 1,593 --
Lease Payments Receivable 1,966 --
Intangibles, Net of Accumulated Amortization 1,565 --
Other Assets 523 --
------------------- ----------------
TOTAL ASSETS $ 45,550 $ --
=================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Mortgages Payable $ 14,429 $ --
Dividends Payable 410 --
Accounts Payable and Accrued Expenses 468 --
------------------- ----------------
TOTAL LIABILITIES $ 15,307 $ --
------------------- ----------------
MINORITY INTEREST 18,300 --
------------------- ----------------
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 23 --
Shares Authorized, 2,275,000 and -0- Shares Issued and
Outstanding at June 30, 1999 and December 31, 1998, Respectively
Common Shares - Class B, $.01 Par Value, 50,000,000 Shares -- --
Authorized, -0- and 100 Shares Issued and Outstanding at June
30, 1999 and December 31, 1998, Respectively
Additional Paid-in Capital 11,968 --
Distributions in Excess of Net Earnings (48) --
------------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,550 $ --
=================== ================
</TABLE>
(1) Operations commenced on January 26, 1999
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
<PAGE>
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HERSHA HOSPITALITY TRUST
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX AND THREE
MONTHS ENDED JUNE 30, 1999 [UNAUDITED](1)
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS
---------------- ------------
JUNE 30, 1999 ENDED, JUNE 30,
------------- ---------------
1999
----
<S> <C>
REVENUE:
Percentage Lease Revenue $ 3,034 $ 1,888
Other Revenue 63 24
------------------------ ------------------------
TOTAL REVENUE $ 3,097 $ 1,912
------------------------ ------------------------
EXPENSES:
Interest 554 288
Land Lease 9 5
Real Estate and Personal Property Taxes and 204 112
Insurance
General and Administrative 173 95
Depreciation and Amortization 838 502
------------------------ ------------------------
TOTAL EXPENSES $ 1,778 $ 1,002
INCOME BEFORE MINORITY INTEREST 1,319 910
------------------------ ------------------------
INCOME ALLOCATED TO MINORITY INTEREST 661 529
------------------------ ------------------------
NET INCOME $ 658 $ 381
======================== ========================
BASIC EARNINGS PER COMMON SHARE $ 0.29 $ 0.17
======================== ========================
DILUTED EARNINGS PER COMMON SHARE $ 0.21 $ 0.14
======================== ========================
WEIGHTED AVERAGE SHARES:
Basic 2,275,000 2,275,000
Diluted (2) 6,307,431 6,307,431
======================== ========================
</TABLE>
(1) Operations commenced on January 26, 1999
(2) Includes 4,032,431 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.
2
<PAGE>
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HERSHA HOSPITALITY TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 [UNAUDITED] (1)
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
<TABLE>
<CAPTION>
OPERATING ACTIVITIES:
<S> <C>
Net Income $ 658
----------------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating activities:
Depreciation and Amortization 838
Income Allocated to Minority Interest 661
Change in Assets and Liabilities:
(Increase) Decrease in:
Lease Payments Receivable (1,966)
Other Assets (523)
Increase (Decrease):
Accounts Payable and Accrued Expenses 468
----------------
Total Adjustments (522)
----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 136
INVESTING ACTIVITIES
Purchase of Hotel Property Assets (631)
Purchase of Intangible Assets (582)
----------------
NET CASH USED IN INVESTING ACTIVITIES (1,213)
FINANCING ACTIVITIES
Net Proceeds from Issuance of Stock 11,991
Principal Repayments of Mortgages Payable (5,117)
Dividends Paid (469)
Repayment of Related Party Loans (3,735)
----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,670
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,593
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD -
----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,593
================
</TABLE>
(1) Operations commenced on January 26, 1999
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
3
<PAGE>
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HERSHA HOSPITALITY TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period:
Interest $ 537
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 June 30, 1999 we declared a $.18 per Class A Common Share dividend which was
paid on July 31, 1999.
The Accompanying Notes Are an Integral Part of This Financial Statement.
4
<PAGE>
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HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT 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 and expect to qualify as a 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 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 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 received units of limited
partnership interests in the partnership aggregating a 63.9% equity interest in
the Partnership. The partnership owns a 99% general partnership interest and we
own a 1% limited partnership interest in the subsidiary partnerships. We began
operations on January 26, 1999, therefore, the historical financial statements
include activity from January 26, 1999 to June 30, 1999.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated balance sheet has
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.
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, 1997
and the straight line method thereafter.
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 - 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.
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.
5
<PAGE>
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HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
INTANGIBLE ASSETS - Intangible assets are carried at cost and consist of
property settlement charges, franchise transfer fees and goodwill. Amortization
is computed using the straight-line method based upon the life of the property
or terms of the franchise agreements which range from 5 to 40 years, 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.
INCOME TAXES - We intend to 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.
MINORITY INTEREST - Minority interest in the partnership represents the limited
partners proportionate share of the equity of the partnership. Income is
allocated to minority interest based on weighted average percentage ownership
throughout the year.
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 4,032,431 shares issuable under
limited partnership units and 533,975 shares issuable under outstanding options.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject us
to concentration of credit risk include cash and cash equivalents and rent
receivable arising from its normal business activities. We place our cash with
high credit quality financial institutions. We do not require collateral to
support its financial instruments.
6
<PAGE>
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HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
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.
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 June 30, 1999,
we declared a $.18 per Class A Common Share dividend which was paid on July 31,
1999.
[3] COMMITMENTS AND CONTINGENCIES
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 will commence 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 we send notice to the holders of the Priority Common Shares,
provided that the closing bid price of the Priority Common Shares is at least $7
on each trading day during such 15-day period.
In conjunction with the initial public offering, the partnership acquired ten
initial hotels and entered into percentage lease agreements with Hersha
Hospitality Management, L.P. 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.
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 June 30, 1999, the aggregate number of Class B Common
Shares issuable to the limited partners upon exercise of the redemption rights
is 4,032,431. The number of shares issuable upon exercise of the redemption
rights will be adjusted upon the occurrence of stock splits, mergers,
7
<PAGE>
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HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
[3] COMMITMENTS AND CONTINGENCIES [CONTINUED]
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.
For the six and three months ending June 30, 1999 the limited partners were
authorized distributions of $565 and $173, respectively. We have a commitment
outstanding to the limited partners of $512 as of June 30, 1999, which is
properly recorded in the Minority Interest account. The Priority Common
shareholders will be entitled to receive dividends in excess of the priority
distribution after the limited partners have received an amount equal to the
priority distribution. The holders of the Priority Common Shares will be
entitled to receive further distributions on a pro rata basis with the holders
of the limited partnership units.
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, but not less than 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,
1998, is as follows:
1999 $ 4,767
2000 4,495
2001 3,140
2002 3,075
2003 3,075
Thereafter 256
-----------
TOTAL $ 18,806
===========
For the period January 26, 1999 through June 30, 1999, we earned initial
fixed rents of $1,627 and earned percentage rents of $1,407.
The hotel properties are operated under franchise agreements assumed by the
lessee that have 10 to 20 year lives but may be terminated by either the
franchisee or franchisor on certain anniversary dates specified in the
agreements. The agreements require annual payments for franchise royalties,
reservation, and advertising services, which are based upon percentages of gross
room revenue. These fees are paid by the lessee.
8
<PAGE>
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HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
[4] 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.
We issued options to purchase 499,975 Class B common shares and units under the
Option Plan. The options were issued to non-employees and are exercisable at
$9.00 per share. 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
9
<PAGE>
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HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
STOCK OPTION PLANS [CONTINUED]
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. The options were issued to non-employees and are exercisable at $9.00 per
share. Utilizing the Black Scholes option pricing model no compensation is
required to be recorded.
[5] EARNINGS PER SHARE
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
------------------ --------------------
<S> <C>
JUNE 30, 1999 JUNE 30, 1999
------------------ --------------------
Net Income for Basic Earnings Per Share $ 658 $ 381
Add: Income Attributable to Minority Interest 661 529
------------------ --------------------
NET INCOME FOR DILUTED EARNINGS PER SHARE $ 1,319 $ 910
- -----------------------------------------
Weighted average Shares for Basic Earnings Per Share 2,275,000 2,275,000
Dilutive Effect of Limited Partnership Units 4,032,431 4,032,431
------------------ --------------------
WEIGHTED AVERAGE SHARES FOR DILUTED EARNINGS PER SHARE 6,307,431 6,307,431
- ------------------------------------------------------
================== ====================
</TABLE>
Options to purchase 533,975 Class B Common Shares for the three months ended
June 30, 1999 were outstanding but were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares and, therefore, the effect
would be antidilutive.
[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
10
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HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
[6] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED]
statements of prior periods. We do not currently have any derivative
instruments and are not currently engaged in any hedging activities.
On March 31, 1999, the FASB released a proposal for public comment that would
resolve certain practice issues raised when accounting for stock options. Since
the issuance of APB Opinion 25, "Accounting for Stock Issued to Employees,"
questions have surfaced about its application and differing practices have
developed. The FASB's broad reconsideration of the stock compensation issue
culminated in the issuance of SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1995. SFAS No. 123 permits the continued application of APB
Opinion 25 for employees. However, questions remain about the proper application
of APB Opinion 25 in a number of circumstances. The FASB's proposed
Interpretation would clarify how to apply APB Opinion 25 in certain situations.
The proposed Interpretation includes the following conclusions:
o Once an option is repriced, that option must be accounted for as a variable
plan from the time it is repriced to the time it is exercised. Consequently,
the final measurement of compensation expense would occur at the date of
exercise.
o Employees would be defined as they are under common law for purposes of
applying APB Opinion 25.
o APB Opinion 25 does not apply to outside directors because, by definition, an
outside director cannot be an employee. Accordingly, the cost of issuing
stock options to outside board members will have to be determined on a fair
value basis in accordance with SFAS No. 123, and recorded as an expense in
the period of the grant (the service period could be prospective, however).
o Since APB Opinion 25 was issued in 1972, the terms of many "section 423" tax
plans have changed from those in existence at the time. Many of those plans
now provide that employees can purchase an employer's stock at the lesser of
85 percent of the stock price at the date of grant or 85 percent of the price
at the date of exercise. This provision is refereed to as a "look-back"
option. The FASB decided that plans with a look-back option do not," in and
of themselves, create a compensatory plan.
o A subsidiary may account for parent company stock issued to its employees
under APB Opinion 25 in their separately issued financial statements,
provided the subsidiary is part of the parent's consolidated financial
statements.
The FASB's proposed Interpretation would be effective upon issuance, which is
expected in September 1999, but generally would cover plan grants and
modifications that occur after December 25, 1998.
[7] PRO FORMA INFORMATION
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 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.
11
<PAGE>
================================================================================
HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
[7] PRO FORMA INFORMATION [CONTINUED]
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
[UNAUDITED]
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ------------------------------
<S> <C>
1999 1998 1999 1998
------------ ------------ ------------- -------------
REVENUE:
Percentage Lease Revenue $ 3,465 $ 3,341 $ 1,857 $ 1,858
Other Revenue 82 75 24 24
------------ ------------ ------------- -------------
Total Revenue $ 3,547 $ 3,416 $ 1,881 $ 1,882
------------ ------------ ------------- -------------
EXPENSES:
Interest 576 581 310 310
Property Tax 249 259 112 148
General and Administrative 216 214 99 99
Depreciation and Amortization 1,006 907 502 502
------------ ------------ ------------- -------------
TOTAL EXPENSES $ 2,047 $ 1,961 $ 1,023 $ 1,059
------------ ------------ ------------- -------------
Income Before Minority Interest 1,500 1,455 858 823
Income Allocated to Minority Interest 788 707 447 442
Net Income $ 712 $ 748 $ 411 $ 381
============ ============ ============= =============
Basic Earning Per Common Share 0.31 0.33 0.18 0.17
============ ============ ============= =============
Diluted Earnings Per Common Share 0.24 0.23 0.14 0.13
============ ============ ============= =============
Weighted Average for Basic Earnings
Per Share 2,275,000 2,275,000 2,275,000 2,275,000
Weighted Average Shares for Diluted
Earnings Per Share 6,307,431 6,307,431 6,307,431 6,307,431
</TABLE>
12
<PAGE>
================================================================================
HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
[8] UNAUDITED INTERIM INFORMATION
The accompanying financial statements have been prepared in accordance with the
instruction to Form 10-Q and accordingly, do not include all of the disclosures
normally required by generally accepted accounting principles. The financial
information has been prepared in accordance with the lessee's customary
accounting practices. In the opinion of management, the information presented
reflects all adjustments [consisting of normal recurring accruals] considered
necessary for a fair presentation of our financial position as of June 30, 1999,
and the results of operations for the six months ended June 30, 1999. The
results of operations for the six months ended June 30, 1999, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. The unaudited financial statements should be read in
conjunction with the financial statements and footnotes thereto included in
Hersha Hospitality Trust's Annual Report on Form 10-K for the year ended
December 31, 1998.
. . . . . . . .
13
<PAGE>
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
BALANCE SHEETS(1)
[IN THOUSANDS]
================================================================================
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------ -------------------
<S> <C>
CURRENT ASSETS: [UNAUDITED]
------------------
Cash and Cash Equivalents $ - $ -
Accounts Receivable 1,368 -
Prepaid Expenses 145 -
Due from Related Parties 1,335 -
Other Assets 16 -
------------------ -------------------
TOTAL CURRENT ASSETS $ 2,864 $ -
PROPERTY IMPROVEMENTS 135 -
CONSTRUCTION IN PROGRESS $ 470 $ -
------------------ -------------------
TOTAL ASSETS $ 3,469 $ -
------------------ -------------------
LIABILITIES AND PARTNERS' CAPITAL:
CURRENT LIABILITIES:
Cash Overdraft $ 38 $ -
Accounts Payable 140 -
Accrued Expenses 581 -
Other Liabilities 623 -
Lease Payments Payable 1,966 -
------------------ -------------------
TOTAL CURRENT LIABILITIES $ 3,348 $ -
COMMITMENTS - -
PARTNERS' CAPITAL 121 -
------------------ -------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 3,469 $ -
================== ===================
</TABLE>
(1) Operations commenced on January 1, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
14
<PAGE>
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENT OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30,
1999 [UNAUDITED](1) [IN THOUSANDS]
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1999
----------------------- ----------------------
<S> <C>
REVENUES FROM HOTEL OPERATIONS
Room Revenue $ 9,214 $ 5,664
Restaurant Revenue 1,054 560
Other Revenue 733 483
----------------------- ----------------------
TOTAL REVENUES FROM HOTEL OPERATIONS $ 11,001 $ 6,707
----------------------- ----------------------
EXPENSES:
Hotel Operating Expenses 4,268 2,423
Restaurant Operating Expenses 827 475
Advertising and Marketing 544 366
Depreciation and Amortization 3 -
General and Administrative 1,397 812
General and Administrative - Related Parties 807 358
Lease Payments 3,034 1,888
----------------------- ----------------------
TOTAL EXPENSES $ 10,880 $ 6,322
----------------------- ----------------------
NET INCOME $ 121 $ 385
======================= ======================
</TABLE>
(1) Operations commenced on January 1, 1999
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
15
<PAGE>
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30,
1999. [UNAUDITED](1) [IN THOUSANDS]
================================================================================
<TABLE>
<CAPTION>
OPERATING ACTIVITIES:
<S> <C>
Net Income $ 121
-------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operations:
Depreciation and Amortization 3
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (1,368)
Prepaid Expenses (145)
Other Assets (16)
Increase (Decrease) in:
Accounts Payable 140
Lease Payments Payable 1,966
Accrued Expenses 581
Other Liabilities 623
--------------
Total Adjustments 1,784
--------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,905
INVESTING ACTIVITIES:
Improvements and Additions (608)
--------------
NET CASH USED IN INVESTING ACTIVITIES (608)
--------------
FINANCING ACTIVITIES:
Cash Overdraft 38
Advances to Affiliates (1,735)
Repayment of Advance from Partners 400
--------------
NET CASH USED IN FINANCING ACTIVITIES (1,297)
--------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 0
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 0
--------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 0
==============
</TABLE>
(1) Operations commenced on January 1, 1999
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
16
<PAGE>
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS, [UNAUDITED]
[IN THOUSANDS]
================================================================================
[1] ORGANIZATION
Hersha Hospitality Management, L.P., the lessee of our hotels, 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. The lessee is
owned by Mr. Hasu P. Shah and certain affiliates some of whom have ownership
interests in these hotels. The lessee also manages certain other properties
owned by Mr. Hasu P. Shah and affiliates which are not owned by the partnership.
The lessee commenced operations on January 1, 1999.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
ACCOUNTS RECEIVABLE - The lessee considers accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts is required. If
amounts become uncollectible, they will be charged to operations when that
determination is made.
REVENUE RECOGNITION - Revenue is recognized as earned which is generally when a
guest occupies a room and utilizes the hotel's services.
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. 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.
INCOME TAXES - The lessee as a partnership is not subject to federal and state
income taxes, however, it 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.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the lessee to concentration of credit risk include cash and cash equivalents and
accounts receivable arising from its normal business activities. The lessee
places its cash with high credit quality financial institutions. The lessee does
not require collateral to support its financial instruments.
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.
ADVERTISING AND MARKETING - Advertising costs are expensed as incurred. 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 are included in advertising and marketing.
17
<PAGE>
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS, [UNAUDITED]
[IN THOUSANDS]
================================================================================
[3] COMMITMENTS
The lessee has entered into percentage leases with us. Each percentage lease
will have an initial non-cancelable term of five years. All, but not less than
all, of the percentage leases for the 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
the hotels for an additional five-year term. Pursuant to the terms of the
percentage leases, the lessee is 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 lessee also will be obligated to pay certain other amounts,
including interest accrued on any late payments or charges. The lessee is
entitled to all profits from the operations of the hotels after the payment of
certain specified operating expenses. The leases commenced on January 26, 1999.
Minimum future lease payments due during the noncancellable portion of the
leases as of December 31, 1998 is as follows:
1999 $ 4,767
2000 4,495
2001 3,140
2002 3,075
2003 3,075
Thereafter 256
------------
TOTAL $ 18,806
----- ============
The lessee will assume 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.
The lessee provides certain administrative services to the partnership for an
annual fee of $55,000 plus $10,000 per hotel.
For the six months ended June 30, 1999, the lessee incurred lease expense of
$3,034. As of June 30, 1999, the amount due to the partnership for lease
payments was $1,888.
18
<PAGE>
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS, [UNAUDITED]
[IN THOUSANDS]
================================================================================
[4] 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 actual results of operations of the lessee 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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
-----------------------------------------------
[IN THOUSANDS]
--------------
[UNAUDITED]
-----------
<TABLE>
<CAPTION>
1999 (1) 1998
--------------- ------------
<S> <C>
Revenue from Hotel Operations:
Room Revenue $ 9,214 $ 7,013
Food & Beverage 1,054 971
Telephone and Other 733 365
--------------- ------------
Total Revenue from Hotel Operations $ 11,001 $ 8,349
Expenses:
Hotel Operations Expenses 4,268 3,079
Restaurant Operating Expenses 827 819
Advertising and Marketing 544 387
General and Administrative 1,400 964
General and Administrative - Related Parties 595 153
Lease Payments 3,465 3,341
--------------- ------------
Total Expenses $ 11,099 $ 8,743
--------------- ------------
Net Loss $ (98) $ (394)
=============== ============
</TABLE>
(1) The 1999 Pro Forma results vary from the historical results due to the
assumption that Lease Payments expense was incurred for the entire three month
period per the pro forma results instead of from January 26, 1999 per the
historical results. Pro forma Related Party Management Fees have been reduced as
these fees would not have been applicable for the entire pro forma period.
[5] 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
19
<PAGE>
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS, [UNAUDITED]
[IN THOUSANDS]
================================================================================
[5] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED]
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.
On March 31, 1999, the FASB released a proposal for public comment that would
resolve certain practice issues raised when accounting for stock options. Since
the issuance of APB Opinion 25, "Accounting for Stock Issued to Employees,"
questions have surfaced about its application and differing practices have
developed. The FASB's broad reconsideration of the stock compensation issue
culminated in the issuance of SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1995. SFAS No. 123 permits the continued application of APB
Opinion 25 for employees. However, questions remain about the proper application
of APB Opinion 25 in a number of circumstances. The FASB's proposed
Interpretation would clarify how to apply APB Opinion 25 in certain situations.
The proposed Interpretation includes the following conclusions:
o Once an option is repriced, that option must be accounted for as a variable
plan from the time it is repriced to the time it is exercised. Consequently,
the final measurement of compensation expense would occur at the date of
exercise.
o Employees would be defined as they are under common law for purposes of
applying APB Opinion 25.
o APB Opinion 25 does not apply to outside directors because, by definition, an
outside director cannot be an employee. Accordingly, the cost of issuing
stock options to outside board members will have to be determined on a fair
value basis in accordance with SFAS No. 123, and recorded as an expense in
the period of the grant (the service period could be prospective, however).
o Since APB Opinion 25 was issued in 1972, the terms of many "section 423" tax
plans have changed from those in existence at the time. Many of those plans
now provide that employees can purchase an employer's stock at the lesser of
85 percent of the stock price at the date of grant or 85 percent of the price
at the date of exercise. This provision is refereed to as a "look-back"
option. The FASB decided that plans with a look-back option do not," in and
of themselves, create a compensatory plan.
o A subsidiary may account for parent company stock issued to its employees
under APB Opinion 25 in their separately issued financial statements,
provided the subsidiary is part of the parent's consolidated financial
statements.
20
<PAGE>
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS, [UNAUDITED]
[IN THOUSANDS]
================================================================================
[5] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED]
The FASB's proposed Interpretation would be effective upon issuance, which is
expected in September 1999, but generally would cover plan grants and
modifications that occur after December 25, 1998.
[6] UNAUDITED INTERIM INFORMATION
The accompanying financial statements have been prepared in accordance with the
instruction to Form 10-Q and accordingly, do not include all of the disclosures
normally required by generally accepted accounting principles. The financial
information has been prepared in accordance with the lessee's customary
accounting practices. In the opinion of management, the information presented
reflects all adjustments [consisting of normal recurring accruals] considered
necessary for a fair presentation of our financial position as of June 30, 1999,
and the results of operations for the six months ended June 30, 1999. The
results of operations for the six months ended June 30, 1999, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. The unaudited financial statements should be read in
conjunction with the financial statements and footnotes thereto included in
Hersha Hospitality Trust's Annual Report on Form 10-K for the year ended
December 31, 1998.
21
<PAGE>
ITEM 2. 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 1999
anticipated revenues, expenses and returns, and future capital requirements.
Words such as "believes," "expects," "anticipates," "intends," "plans" and
"estimates" and variations of such words and similar words also identify
forward-looking statements. Such statements are forward-looking in nature and
involve a number of risks and uncertainties, including the risks described under
the caption "Risk Factors" in our registration statement on Form S-11 (File No.
333-56087). 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.
Hersha Hospitality Trust 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 our Company. We are self-advised Maryland real estate
investment trust that intends to qualify as a real estate investment trust for
federal income tax purposes.
We completed an initial public offering of two million of our Class A
Priority Common Shares at $6.00 per share and commenced operations on January
26, 1999. 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, of which we are the sole general partner. We currently own
a 36.1% partnership interest in that partnership. With the proceeds of our
initial public offering, we caused the partnership to acquire ten 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.
The purchase prices we paid for seven of those ten hotels will be
adjusted at certain dates in the future by applying the initial pricing
methodology to such hotels' cash flows as shown for the year ended on the
adjustment dates. Any 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 offers of our Company) will receive
an additional number of subordinated units, valued at $6 per unit, that equals
the increase in value plus the value of any distributions that would have been
made in connection with such subordinated units if such units had been issued in
connection with the acquisition of such hotels. If, however, the repricing
produces a lower aggregate value for such hotels, the sellers will forfeit to
the partnership that number of subordinated units that equals the decrease in
value plus the value of any distributions made with respect to such subordinated
units.
22
<PAGE>
As of July 31, 1999, we owned three Holiday Inn Express(R) hotels, two
Hampton Inn(R) hotels, two Holiday Inn(R) hotels, two Comfort Inn(R) hotels and
one Clarion Suites(R) hotel, which contain an aggregate of 989 rooms.
SIX MONTHS ENDED JUNE 30, 1999, RESULTS OF OPERATIONS
($'s in thousands, except for ADR and REVPAR)
Our revenues for the six months ended June 30, 1999, substantially
consisted of percentage lease revenues recognized pursuant to the percentage
leases. Pro forma percentage lease revenues during the six month period ended
June 30, 1999 was $3,465 an increase of $124, or 3.7%, as compared to pro forma
percentage lease revenue of $3,341 for the same period during 1998. The
improvement in pro forma revenues is primarily attributable to additional
percentage lease revenue derived from the increase in the number of operating
hotels from 9 properties to 10. Pro forma revenues were slightly offset by
decreases in percentage lease revenues at certain properties. Pro forma net
income increased by $45 or 3.1% to $1,500 for the six months ended June 30, 1999
as compared to Pro forma net income of $1,455 for the same period during 1998.
The improvement in net income is primarily attributable to additional percentage
lease revenue as mentioned above and was offset in part by additional expenses
associated with the additional hotel.
The following table shows certain other pro forma information for the periods
indicated.
PRO FORMA SIX MONTHS ENDED
JUNE 30,
1999 1998
---------------- ----------------
Occupancy rate 52.7% 55.8%
ADR $65.97 $68.21
REVPAR $34.80 $38.09
Room revenue $9,214 $7,013
Room nights available 264,803 184,100
Room nights occupied 139,668 102,818
Rooms available 1,457 1,308
The lessee's pro forma room revenues from the hotels increased by $2,652,
or 31.8%, to $11,001 for the six months ended June 30, 1999, as compared to
$8,349 for the same period in 1998. This increase in revenues is primarily
attributable to the increase in the number of hotels managed from 9 properties
to 15. The lessee maintains the ability to borrow funds from related entities,
partners and stockholders. The lessee's borrowing costs range from 8.5% on
short-term loans to 10.5% on longer term loans.
THREE MONTHS ENDED JUNE 30, 1999, RESULTS OF OPERATIONS
($'s in thousands, except ADR and REVPAR)
Our revenues for the three months ended June 30, 1999, substantially
consisted of percentage lease revenues recognized pursuant to the percentage
leases. Pro forma percentage lease revenues during the three month period ended
June 30, 1999 was $1,857 compared to pro forma percentage lease revenue of
$1,858 for the same period during 1998. Pro forma revenues were slightly offset
by decreases in percentage lease revenues at certain properties. Pro forma net
income increased by $35 or 4.3% to $858, for the three months ended June 30,
1999 as compared to pro forma net income of $823 for the same period during
1998. The improvement in net income is primarily attributable to a reduction in
operating expenses.
23
<PAGE>
The following table shows certain other pro forma information for the periods
indicated.
PRO FORMA THREE MONTHS ENDED
JUNE 30,
1999 1998
---------------- ----------------
Occupancy rate 61.8% 60.5%
ADR $68.52 $71.84
REVPAR $42.34 $43.46
Room revenue $5,664 $4,441
Room nights available 133,803 102,100
Room nights occupied 82,668 61,818
Rooms available 1,457 1,308
The lessee's pro forma room revenues from the hotels increased by $1,223,
or 27.5%, to $5,664 for the three months ended June 30, 1999, as compared to
$4,441 for the same period in 1998. This increase in revenues is primarily
attributable to the increase in the number of hotels managed from 9 properties
to 15. The lessee maintains the ability to borrow funds from related entities,
partners and stockholders. The lessee's borrowing costs range from 8.5% on
short-term loans to 10.5% on longer term loans.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to shareholders, is our share of the partnership's cash flow. The
partnership's principal source of revenue is rent payments under the percentage
leases. The lessee's obligations under the leases are unsecured. The lessee's
ability to make rent payments, and our liquidity, including our ability to make
distributions to common shareholders, is dependent on the lessee's ability to
generate sufficient cash flow from the operation of the hotels.
Pro forma FFO (net income plus minority interest and depreciation and
amortization) was $2,506 for the six months ended June 30, 1999, which is an
increase of $144, or 6.1% over pro forma FFO in the comparable period in 1998,
which was $2,362. The improvements in pro forma FFO can be attributed to the
additional hotels opened during 1998. 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 Investments
Trusts (NAREIT), FFO represents net income (loss) (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from debt
restructuring or sales of property, plus depreciation, 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. However, our FFO is comparable to the FFO of the real
estate companies that use the current definition of NAREIT.
24
<PAGE>
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 a secured line of credit. We believe that
our net cash provided by operations will be adequate to fund both operating
requirements and payment of dividends by us in accordance with real estate
investment trust requirements.
We expect to meet our long-term liquidity requirements, such as
scheduled debt maturities and property acquisitions, through long-term secured
and unsecured borrowing, the issuance of our additional equity securities, or,
in connection with acquisitions of hotel properties, issuance of units in the
partnership.
We intend to make additional investments in hotel properties and may
incur, or cause the partnership to incur, indebtedness to make such investments
or to meet distribution requirements imposed on a real estate investment trust
under the Internal Revenue Code of 1986, as amended, to the extent that working
capital and cash flow from our investments are insufficient to make such
distributions. Our policy is to limit consolidated indebtedness to less than 65%
of the total purchase prices paid by us for the hotels in which we have
invested. However, our organizational documents do not limit the amount of
indebtedness that the we may incur and our Board of Trustees may modify the debt
policy at any time without shareholder approval.
The hotel business is seasonal, with hotel revenue generally greater in
the second and third quarters than in the first and fourth quarters. To the
extent that cash flow from operating activities is insufficient to provide all
of the estimated quarterly distributions, we anticipate that we will be able to
fund any such deficit from future working capital. As of June 30, 1999, our cash
and current accounts receivable balances exceed the current obligations by
$2,681.
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.
YEAR 2000 COMPLIANCE
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the year
1900. Like other organizations, we could be adversely affected if the computer
systems used by us or our service providers do not properly address this problem
prior to January 1, 2000. Currently, we do not anticipate that the transition to
the year 2000 will have any material impact on our performance. Our plan to
respond to the Year 2000 Problem, which is being conducted jointly with the
lessee of all of our hotels, consists of three phases that address the state of
readiness, Year 2000 costs, risks and contingency plans.
25
<PAGE>
Phase I includes a plan to respond to the Year 2000 Problem, which
includes the following areas:
o Telephone and call accounting systems;
o Credit card readers;
o Sprinkler systems and fire suppression system;
o Security systems;
o Card entry systems;
o Elevator systems;
o Computer systems and vendor contracts (hardware);
o Fax machines and laundry equipment;
o HVAC (heating and air conditioning systems) and utility companies; and
o Computer software systems.
In cooperation with our lessee, we have created a task force and
procedures to survey, test and report results for management's review. We
believe that the cost to remediate our Year 2000 Problems will be minimal and
have allocated funds of $25,000 to cover such costs. The Holiday Inn hotel and
conference center, Harrisburg, PA has been used as an example for our other
hotels. We reviewed this hotel for Year 2000 compliance, and the review resulted
in hardware and software compliance. The credit card readers, card entry system
and computers have been tested and are compliant. Based on the results
experienced for the Holiday Inn hotel and conference center, Harrisburg, PA,
management believes that the $25,000 allocation for funding will be adequate.
In cooperation with the lessee, we are currently proceeding with Phase
II of our assessment of the Year 2000 Problem. Phase II involves initiating a
survey and checklist to each hotel manager for completion and return to
management. The survey was customized for our hotels to include (1) the current
vendor list with a column for a listing of current product usage and (2) a
vendor address log and telephone number listing. Each hotel checklist included
the front desk, business center, housekeeping/back office, beverage and guest
rooms. Phase II also involves the testing of our computer systems. We obtained a
test computer disk-copy to test each of our computers and the lessee's
computers. All written tests and written confirmation that relate to our or our
lessee's hotel products, equipment and software are logged to monitor our
progress towards Year 2000 compliance. We are in the process of conducting such
testing and have yet to encounter any material Year 2000 compliance problems.
Phase III of our assessment of the Year 2000 Problem includes the
results of testing, action plans, reporting of results and contingency plans to
remediate any Year 2000 Problems. The risks and contingency plans include a
"reasonably likely worst case Year 2000 scenario." We believe that the
consequences of a worst case scenario rest almost exclusively with outside
vendors (not including the lessee) and not in systems within our hotels. The
contingency plan, which we are currently initiating, is to replace non-compliant
vendors with new compliant vendors. A thorough review of all vendors will
continue to be an ongoing Year 2000 strategy. However, our contingency plan has
back-up support to address each of our focus areas.
26
<PAGE>
The franchisors of our hotels have provided compliance guides to assist
in our response to the Year 2000 Problem. Promus Hotel Corporation (Hampton Inn
Hotels), Holiday Hospitality/ Bass Hotels & Resorts (Holiday Inn and Holiday Inn
Express Hotels) and Choice Hotels International (Comfort Inn and Clarion Suites
Hotels) have completed third party vendor checks, reviewed computer systems and
provided for reference and preferred compliant vendor list. A checklist for Year
2000 issues, a work plan and a sample vendor letter was provided to help us
complete our assessment of the Year 2000 Problem.
In cooperation with the lessee, we are mailing a questionnaire to third
party vendors to assess third party risks. In addition, we have sought
assurances from our lessee and other service provider shat they are taking all
necessary steps to ensure that their computer systems will accurately reflect
the year 2000, and we will continue to monitor the situation. There can be no
assurance that the systems of such third parties will be Year 2000 compliant or
that any third party's failure to have Year 2000 compliant systems would not
have a material adverse effect on our systems and operations.
SUBSEQUENT EVENTS
On July 27, 1999, the Board of Trustees approved the acquisition of a
60-room Comfort Inn hotel located near the John F. Kennedy International Airport
in Jamaica, New York from an unrelated third party. The Company closed on this
acquisition on August 12, 1999. The Board of Trustees also approved the
acquisition of a 72-room Hampton Inn hotel in Danville, Pennsylvania and a
77-room Clarion Suites in Harrisburg, Pennsylvania pursuant to the Option
Agreement entered into on June 3, 1998 among the Company and certain related
parties. On August 2, 1999, the Company entered into purchase contracts to
purchase these two properties. The closing for these properties is expected to
be completed by no later than September, 1999.
The second quarter dividend was paid on July 31, 1999 at the rate
of $.18 per share. This dividend represents an annualized rate of 12%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the general instructions to Item 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to our Company at this time.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 20, 1999, the Securities and Exchange Commission declared
effective our Company's registration statement on Form S-11 (File No. 333-56087)
relating to the initial public offering of two million Priority Class A Common
Shares of Beneficial interest of the Company at an initial public offering price
of $6.00 per share. As part of our Company's initial public offering, 166,666 of
the Priority Common Shares were sold to affiliates of our Company. The remaining
1,833,334 shares were sold to the public through their underwriter, Anderson &
Strudwick, Incorporated. On February 5, 1999, the Company closed the sale of an
additional 275,000 Priority Common Shares to the underwriter pursuant to the
over-allotment option granted to the underwriter in our initial public offering.
The gross proceeds from these sales was approximately $13.7 million. The
aggregate net proceeds received by our Company in connection with these sales
was approximately $12.0 million. These aggregate underwriting discounts of
approximately $1 million paid to the underwriter and an aggregate of
approximately $0.7 million of other expenses. Our Company has used the net
proceeds as follows: (i) approximately $8.7 million to repay certain of the
outstanding indebtedness related to the ten hotels owned by Hersha Hospitality
Limited Partnership, including approximately $3.7 million in debt owed to
certain affiliates of our Company and related principally to the hotel
development expenses in connection with the ten hotels; (ii) approximately $0.8
million to purchase certain hotel property assets and intangible assets; (iii)
approximately $0.5 million to fund the ongoing operations of our Company; and
(iv) approximately $2.0 million for working capital, which currently is invested
in interest-bearing, short-term, investment grade securities or money market
accounts.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
HERSHA HOSPITALITY TRUST
/s/ Hasu P. Shah
By: -----------------------
Hasu P. Shah
Chief Executive Officer
Date: August 16, 1999
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Financial Statements contained in Part I. Item 1 of their Form 10-Q and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 1,593 1,593
<SECURITIES> 0 0
<RECEIVABLES> 1,966 1,966
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,559 3,559
<PP&E> 39,903 39,903
<DEPRECIATION> 790 474
<TOTAL-ASSETS> 45,550 45,550
<CURRENT-LIABILITIES> 468 468
<BONDS> 14,429 14,429
0 0
0 0
<COMMON> 23 23
<OTHER-SE> 11,920 11,920
<TOTAL-LIABILITY-AND-EQUITY> 45,550 45,550
<SALES> 3,034 1,888
<TOTAL-REVENUES> 3,097 1,912
<CGS> 0 0
<TOTAL-COSTS> 1,224 714
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 554 288
<INCOME-PRETAX> 658 381
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 658 381
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 658 381
<EPS-BASIC> 0.29 0.17
<EPS-DILUTED> 0.21 0.14
</TABLE>
