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.
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HERSHA HOSPITALITY TRUST
INDEX
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FORM 10-K
REPORT
ITEM NO. PAGE
PART I
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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
</TABLE>
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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
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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.
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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.
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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
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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.
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ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
hotels we owned as of December 31, 1999.
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Twelve Months Ended December 31, 1999
Average
Year Number of Room Other Daily
Opened Rooms Revenue Revenue(1) Occupancy Rate REVPAR(2)
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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
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Total Revenue........................... $22,003,062
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(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,
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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
<PAGE>
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
<PAGE>
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
<PAGE>
The following table sets forth certain information with respect to each
of our hotels:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C>
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
- ---------------
</TABLE>
(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
<PAGE>
(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
<PAGE>
The following table sets forth the initial fixed rent, if applicable,
the annual base rent and the percentage rent formulas:
<TABLE>
<CAPTION>
Initial Annual Percentage
Hotel Property Fixed Rent(1) Base Rent(1) Rent Formula
<S> <C>
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
<PAGE>
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.
- -----------------
</TABLE>
(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.
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995
<S> <C>
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)
========= ========= ======== ========
</TABLE>
19
<PAGE>
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
<PAGE>
$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
<PAGE>
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
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
23
<PAGE>
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
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (1)
[IN THOUSANDS EXCEPT SHARE AMOUNTS]
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C>
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 $ --
==================== ==================
</TABLE>
(1) Operations commenced on January 26, 1999
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
25
<PAGE>
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]
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
<S> <C>
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
========================
</TABLE>
(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
<PAGE>
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]
<TABLE>
<CAPTION>
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
----------- ------ ------- ------ ------- ------- ------------ -----
<S> <C>
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
========== ========= ========== =========== ============ ============ ==========
</TABLE>
(1) Operations commenced on January 26, 1999
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
27
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------------- ---------------------------------------
<S> <C>
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 - -
</TABLE>
The number of shares available at December 31, 1999 and 1998 for granting of
options was 316,000 and 0, respectively.
39
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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]
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1999 1998
---------------- --------------
<S> <C>
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
</TABLE>
43
<PAGE>
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
<PAGE>
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]
<TABLE>
<CAPTION>
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
----------- ------------ ---- ------------ ---- ------------ ---- ------------ -----
<S> <C>
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
============ =============
</TABLE>
45
<PAGE>
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
<PAGE>
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
<PAGE>
HERSHA HOSPITALITY MANAGEMENT, L.P.
BALANCE SHEETS(1)
[IN THOUSANDS]
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
CURRENT ASSETS: 1999 1998
---- ----
<S> <C>
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 $ -
==================== ==================
</TABLE>
(1) Operations commenced on January 1, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
48
<PAGE>
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
<PAGE>
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1999 (1)
[IN THOUSANDS]
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
<S> <C>
Partners Capital - December 31, 1998 $ - $ - $ -
Contribution by Partners - 458 458
Net loss (4) (382) (386)
--------------- ------------- -------------
Partners Capital - December 31, 1999 $ (4) $ 76 $ 72
=============== ============= =============
</TABLE>
(1) Operations commenced on January 1, 1999
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
50
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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]
<TABLE>
<CAPTION>
1999 1998
--------------------- ------------------------
<S> <C>
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)
===================== ========================
</TABLE>
[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
<PAGE>
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
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
COMBINED BALANCE SHEETS
[IN THOUSANDS]
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1 9 9 8 1 9 9 7
------- -------
<S> <C>
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
============== ===============
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
60
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
[IN THOUSANDS]
<TABLE>
<CAPTION>
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
------- ------- -------
<S> <C>
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)
============= ============= ==============
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
61
<PAGE>
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
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
[IN THOUSANDS]
<TABLE>
<CAPTION>
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
------- ------- -------
<S> <C>
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
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
63
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
December 31,
1 9 9 8 1 9 9 7
<S> <C>
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
</TABLE>
68
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #5
[AMOUNTS IN THOUSANDS]
[4] MORTGAGES PAYABLE [CONTINUED]
<TABLE>
<CAPTION>
December 31,
1 9 9 8 1 9 9 7
<S> <C>
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
- ------ ======= =======
</TABLE>
69
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
(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.
<TABLE>
<CAPTION>
Exhibit Document
<S> <C>
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
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
- ---------------------
* Filed herewith
(d) Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation as of December
31, 1999.
76
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C>
/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
</TABLE>
77
<PAGE>
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.
<TABLE>
<CAPTION>
Exhibit Document
<S> <C>
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
- -------------------
*Filed herewith.
Exhibit 10.25
LOAN AND SECURITY AGREEMENT
BETWEEN
1444 ASSOCIATES AND MEPS ASSOCIATES
AND
SOVEREIGN BANK
DATED AS OF AUGUST 9,1999
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
By: /s/ Hasu P. Shah
------------------------------------
Name: Hasu P. Shah
Title: President
(signatures continued on next page)
21
<PAGE>
(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
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 124
<SECURITIES> 0
<RECEIVABLES> 2,116
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 51,908
<DEPRECIATION> 1,979
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0
0
<COMMON> 23
<OTHER-SE> 11,782
<TOTAL-LIABILITY-AND-EQUITY> 56,382
<SALES> 7,264
<TOTAL-REVENUES> 7,370
<CGS> 0
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<EPS-BASIC> 0.59
<EPS-DILUTED> 0.48
</TABLE>
