FILED PURSUANT TO RULE 424(B)(1)
FILE NO. 333-15897
1,000,000 Shares
HUMPHREY HOSPITALITY TRUST, INC. [Logo]
Common Stock
Humphrey Hospitality Trust, Inc. (the "Company") is a self-advised and
self-administered equity real estate investment trust ("REIT") that, through
Humphrey Hospitality Limited Partnership (the "Partnership"), owns interests in
nine existing limited-service hotels (the "Hotels"). The Hotels include seven
Comfort Inn(R) hotels, one Best Western(R) hotel, and one Days Inn(R) hotel with
an aggregate of 617 rooms and are located in Maryland, Tennessee, Virginia and
West Virginia. In addition, the Company is currently developing a 64-room
Comfort Suites(R) hotel located in Dover, Delaware (the "New Development") which
is expected to open in early 1997.
All of the shares of the Company's common stock, $0.01 par value per
share (the "Common Stock") offered hereby are being sold by the Company. The
last reported bid price of the Common Stock, which is quoted under under the
symbol "HUMP" on The Nasdaq Stock Market, on December 5, 1996 was $8.25 per
share. To ensure compliance with certain rules relating to the Company's
qualification as a REIT, the Company's Articles of Incorporation generally
prohibit direct or indirect ownership of more than 9.9% of the outstanding
shares of Common Stock by any person. See "Description of Capital Stock -
Restrictions on Transfer".
The net proceeds to the Company from this offering will be
approximately $ 7.5 million. The Company will contribute all of the net proceeds
of this offering to the Partnership and, after such contribution, will own an
approximately 84.24% interest in the Partnership. The Partnership will use the
net proceeds of this offering to repay certain indebtedness, to pay the
remaining costs of the New Development and to establish a reserve to pay for
future hotel acquisitions or development.
See "Risk Factors" beginning on page 14 of this Prospectus for a
discussion of certain factors that should be considered by prospective
purchasers of the shares of Common Stock offered hereby.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECUR-
ITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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Price to Selling Proceeds to
Public Commission(1) Company(2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Per Share $8.25 $0.5671875 $7.682.8125
Total(3) ............................... $8,250,000 $567,188 $7,682,813
=============================================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters.
(2) Before deducting expenses payable by the Company, estimated at $225,000.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 150,000 shares at the public offering price per share, less
the underwriting discount, solely to cover over-allotments. If such option is
exercised in full, the total initial public offering price, underwriting
discount and proceeds to the Company will be $9,487,500, $652,266 and
$8,835,234, respectively. See "Underwriting".
The shares of Common Stock offered hereby are being offered by Anderson
& Strudwick Incorporated (the "Underwriter"), as and if delivered to and
accepted by it, and subject to the right of the Underwriter to reject any order
in whole or in part. It is expected that the delivery of the Common Shares will
be made in New York, New York on or about December 10, 1996.
-----------
ANDERSON & STRUDWICK
INCORPORATED
December 6, 1996
<PAGE>
[COLOR PHOTOS AND ART WORK TO COME]
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
Website at http://www.sec.gov, and reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission (including the Company) can be obtained from that site. The Common
Stock of the Company is traded on The Nasdaq Stock Market and such reports,
proxy and information statements and other information concerning the Company
can be inspected and copied at The Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, D.C. 20006-1506.
The Company has filed with the Commission, 450 Fifth Street, N.W.
Washington, D.C. 20549, a Registration Statement on Form S-11 under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations promulgated thereunder, with respect to the Common Shares offered
pursuant to this Prospectus. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits. For further information concerning the Company and
the Common Shares offered hereby, reference is made to the Registration
Statement and the exhibits and schedules filed therewith, which may be examined
without charge at, or copies obtained upon payment of prescribed fees from, the
Commission and its regional offices at the locations listed above. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER (AND SELLING GROUP
MEMBERS IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10b-6A
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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PROSPECTUS SUMMARY................................................................................................... 1
The Company........................................................................................................ 1
Risk Factors....................................................................................................... 1
Recent Developments................................................................................................ 3
The Hotels......................................................................................................... 5
Growth Strategy.................................................................................................... 5
Benefits to Mr. Humphrey and His Affiliates........................................................................ 9
Distribution Policy................................................................................................ 9
Tax Status......................................................................................................... 9
The Offering....................................................................................................... 10
Summary Financial Data............................................................................................. 11
RISK FACTORS......................................................................................................... 14
Risks of Leverage.................................................................................................. 14
Conflicts of Interest.............................................................................................. 14
Tax Risks.......................................................................................................... 15
Risks of Mr. Humphrey's Personal Bankruptcy........................................................................ 16
Risks Associated with Development.................................................................................. 17
Risk Associated with Use of Proceeds............................................................................... 17
Inability to Operate the Properties................................................................................ 17
Growth Strategy.................................................................................................... 17
Dependence on the Lessee........................................................................................... 18
Limited Number of Hotels........................................................................................... 18
Emphasis on Comfort Inn Hotels..................................................................................... 19
Dilution........................................................................................................... 19
Cross-Collateralized Debt.......................................................................................... 19
No Assurance of Return on Property Investments..................................................................... 19
Effect of Market Interest Rates on Price of the Common Stock....................................................... 19
Reliance on Board of Directors and Management...................................................................... 19
Limitation on Liability of Officers and Directors.................................................................. 20
Limitation on Acquisition and Change in Control.................................................................... 20
Ability of Board of Directors to Change Certain Policies........................................................... 21
Hotel Industry Risks............................................................................................... 21
Real Estate Investment Risks....................................................................................... 22
THE COMPANY.......................................................................................................... 25
GROWTH STRATEGY...................................................................................................... 25
Acquisition Strategy............................................................................................... 25
Development Strategy............................................................................................... 26
Internal Growth Strategy........................................................................................... 27
USE OF PROCEEDS...................................................................................................... 28
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS........................................................................ 29
CAPITALIZATION....................................................................................................... 31
DILUTION............................................................................................................. 32
SELECTED FINANCIAL INFORMATION....................................................................................... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................................................. 39
Overview........................................................................................................... 39
Results of Operations.............................................................................................. 39
Liquidity and Capital Resources.................................................................................... 42
Inflation.......................................................................................................... 44
Seasonality of Hotel Business and the Hotels....................................................................... 44
BUSINESS AND PROPERTIES.............................................................................................. 45
The Hotel Industry................................................................................................. 45
Comfort Inn and Comfort Suites Hotels.............................................................................. 45
Best Western Hotels................................................................................................ 45
Days Inn Hotels.................................................................................................... 45
The Hotels......................................................................................................... 46
The New Development................................................................................................ 50
Fixed Leases....................................................................................................... 51
The Percentage Leases.............................................................................................. 51
Franchise Licenses................................................................................................. 55
Operating Practices................................................................................................ 56
Employees.......................................................................................................... 57
Environmental Matters.............................................................................................. 57
Competition........................................................................................................ 58
Depreciation....................................................................................................... 58
Legal Proceedings.................................................................................................. 59
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN
ACTIVITIES......................................................................................................... 59
Investment Policies................................................................................................ 59
Financing.......................................................................................................... 59
Conflict of Interest Policies...................................................................................... 60
Provisions of Virginia Law......................................................................................... 62
Policies with Respect to Other Activities.......................................................................... 62
MANAGEMENT........................................................................................................... 63
Directors and Executive Officers................................................................................... 63
Acquisition Committee.............................................................................................. 64
Audit Committee.................................................................................................... 64
Executive Compensation............................................................................................. 65
Compensation of Directors.......................................................................................... 65
Exculpation and Indemnification.................................................................................... 65
CERTAIN RELATIONSHIPS AND TRANSACTIONS............................................................................... 65
Revised Services Agreement......................................................................................... 66
Credit Facility.................................................................................................... 66
Development Agreement.............................................................................................. 66
Repayment of Debt Guaranteed by Mr. Humphrey....................................................................... 66
Acquisition of Hotels from Humphrey Affiliates..................................................................... 66
Guarantees by Mr. Humphrey and His Affiliates...................................................................... 67
Leases............................................................................................................. 67
Franchise Licenses................................................................................................. 67
Non-Competition Agreement and Option Agreement..................................................................... 67
Other.............................................................................................................. 67
THE LESSEE........................................................................................................... 67
OWNERSHIP OF THE COMPANY'S COMMON STOCK.............................................................................. 69
DESCRIPTION OF CAPITAL STOCK......................................................................................... 70
General............................................................................................................ 70
Common Stock....................................................................................................... 70
Preferred Stock.................................................................................................... 71
Restrictions on Transfer........................................................................................... 71
Other Matters...................................................................................................... 73
CERTAIN PROVISIONS OF VIRGINIA LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND
BYLAWS............................................................................................................... 73
Board of Directors................................................................................................. 73
Amendment.......................................................................................................... 74
Business Combinations.............................................................................................. 74
Control Share Acquisitions......................................................................................... 75
Operations......................................................................................................... 75
Advance Notice of Director Nominations and New Business............................................................ 75
SHARES AVAILABLE FOR FUTURE SALE..................................................................................... 75
PARTNERSHIP AGREEMENT................................................................................................ 77
Management......................................................................................................... 77
Transferability of Interests....................................................................................... 77
Capital Contribution............................................................................................... 77
Redemption Rights.................................................................................................. 78
Operations......................................................................................................... 78
Distributions...................................................................................................... 79
Allocations........................................................................................................ 79
Term............................................................................................................... 79
Tax Matters........................................................................................................ 79
FEDERAL INCOME TAX CONSIDERATIONS.................................................................................... 79
Taxation of the Company............................................................................................ 80
Requirements for Qualification..................................................................................... 81
Failure to Qualify................................................................................................. 90
Taxation of Taxable U.S. Shareholders.............................................................................. 90
Taxation of Shareholders on the Disposition of the Common Stock.................................................... 91
Capital Gains and Losses........................................................................................... 91
Information Reporting Requirements and Backup Withholding.......................................................... 91
Taxation of Tax-Exempt Shareholders................................................................................ 91
Taxation of Non-U.S. Shareholders.................................................................................. 92
Other Tax Consequences............................................................................................. 93
Tax Aspects of the Partnership and the Subsidiary Partnership...................................................... 93
Sale of a Hotel Partnership's Property............................................................................. 96
UNDERWRITING......................................................................................................... 97
EXPERTS.............................................................................................................. 98
REPORTS TO SHAREHOLDERS.............................................................................................. 98
LEGAL MATTERS........................................................................................................ 98
GLOSSARY............................................................................................................. 99
INDEX TO FINANCIAL STATEMENTS........................................................................................F-1
</TABLE>
(i)
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, the information contained in
this Prospectus assumes that the Underwriter's overallotment option is not
exercised and assumes the offering price set forth on the cover of this
Prospectus. Unless the context otherwise indicates, all references herein to the
"Company" include Humphrey Hospitality Trust, Inc., Humphrey Hospitality Limited
Partnership and Solomons Beacon Inn Limited Partnership. Unless the context
otherwise indicates, all references herein to the "Partnership" include Humphrey
Hospitality Limited Partnership and Solomons Beacon Inn Limited Partnership. The
offering of 1,000,000 shares of the Company's Common Stock pursuant to this
Prospectus is referred to herein as the "Offering." The Company's Common Stock,
par value $0.01 per share, is referenced herein as the "Common Stock," and the
shares of the Company's Common Stock that are offered hereby are referenced
herein as the "Common Shares." See "Glossary" for the definitions of certain
additional terms used in this Prospectus.
The Company
The Company is a self-administered REIT that, through the Partnership,
owns interests in the nine existing limited-service Hotels with an aggregate of
617 rooms and an average age of approximately nine years as of September 30,
1996. The Hotels include seven hotels operated as Comfort Inns, one hotel
operated as a Best Western, and one hotel operated as a Days Inn. The Hotels are
located in Maryland (one hotel), Tennessee (one hotel), Virginia (five hotels)
and West Virginia (two hotels). The Hotels were purchased from Affiliates of
James I. Humphrey, Jr., the Company's Chairman and President. An Affiliate of
Mr. Humphrey developed eight of the Hotels. The Company is currently developing
the New Development, a 64-room Comfort Suites hotel located in Dover, Delaware.
The New Development is currently scheduled to be open for business in early
1997. See "- Recent Developments."
The Company will contribute all of the proceeds from the Offering, net
of all Offering expenses and fees ("Net Proceeds"), to the Partnership in
exchange for 1,000,000 units of partnership interest in the Partnership
("Units"). After the closing of the Offering (the "Closing"), the Company will
own an 84.2736 4% partnership interest, and Mr. Humphrey and his affiliates
(collectively, the "Humphrey Affiliates") will collectively own a 15.76% limited
partnership interest in the Partnership. The Company will remain the sole
general partner of the Partnership. The Net Proceeds will be approximately $7.5
million based on the offering price of $8.25 per Common Share offered hereby
(the "Offering Price"), which was the last reported bid price of the Common
Stock on the Nasdaq Stock Market as of December 5, 1996. The Partnership will
use the Net Proceeds (i) to repay approximately $660,000 of outstanding debt on
a credit facility (the "Credit Facility") secured by six of the Hotels and by
the New Development, (ii) to pay the remaining costs associated with the New
Development, which are estimated to be approximately $2.1 million; and (iii) to
establish a fund for future acquisitions and development. Upon the application
of the Net Proceeds, the Company will have approximately $8.2 million of total
indebtedness outstanding (the "Remaining Indebtedness"), which debt shall be
secured by certain of the Hotels and the New Development.
In order to qualify as a REIT, the Company cannot operate hotels.
Therefore, the Hotels are leased to, and operated by, Humphrey Hospitality
Management, Inc. (the "Lessee"). The leases relating to the Hotels (the
"Percentage Leases") are designed to allow the Company to participate in growth
in revenues of the Hotels by providing that percentages of such revenues are
paid by the Lessee as rent. Mr. Humphrey is the sole shareholder of the Lessee.
Risk Factors
An investment in the Common Shares involves various risks, and
investors should carefully consider the matters discussed under "Risk Factors,"
including the following:
o Although the Company has adopted policies and has made
covenants to lenders and the Underwriter limiting its level of
indebtedness, there is no provision in the Company's Articles
<PAGE>
of Incorporation or Bylaws that limits the level of debt that
the Company may incur, and consequently, the Company could
become highly leveraged, which in turn could adversely affect
the Company's ability to make distributions to its
shareholders and increase the risk of default under its
indebtedness.
o Conflicts of interest between the Company, the limited
partners of the Partnership (the "Limited Partners"), which
consist of Mr. Humphrey and certain Humphrey Affiliates, and
the Lessee, including:
o conflicts related to the adverse tax consequences to
the Limited Partners upon a sale of any Hotel in
which they once owned an interest, or the refinancing
or prepayment of any principal on any of the
Remaining Indebtedness related to such a Hotel and
the related risk that Mr. Humphrey's personal
interests with regard to a sale of a Hotel or
refinancing or prepayment of any of the Remaining
Indebtedness could be adverse to those of the Company
and its shareholders;
o lack of arm's-length negotiations with respect to the
terms of the Percentage Leases, the purchase
agreements for the Hotels, Non-Competition Agreement
(as defined herein) and Option Agreement (as defined
herein), and Mr. Humphrey's conflicts relating to
enforcing these agreements; and
o conflicts relating to competing demands on Mr.
Humphrey's and the Lessee's time, including risks
associated with a Humphrey Affiliate's exercise of
its right to purchase the New Development Hotel from
the Company at the Company's cost six years after its
completion.
o Risks associated with distributing substantially all Cash
Available for Distribution to Shareholders (as defined
herein), including the risk that future Cash Available for
Distribution to Shareholders will be insufficient to permit
the Company to maintain its current distribution rate.
o Tax risks, including taxation of the Company as a corporation
if it fails to qualify as a REIT, taxation of the Partnership
as a corporation if it were deemed not to be a partnership,
and the Company's liability for federal and state taxes on its
income as a result of either such event, which would
materially adversely affect Cash Available for Distribution to
Shareholders.
o Mr. Humphrey personally guarantees a substantial portion of
the Remaining Indebtedness, and his personal bankruptcy would
constitute a default under the related loan documents.
o Risks associated with the development of hotels, including the
risk of abandonment of development, unexpected construction
costs or delays, newly developed hotels' failure to perform as
expected, and failure to obtain, or delays in obtaining,
governmental permits and authorizations.
o The Company has not identified properties to be purchased or
developed with a substantial portion of the Net Proceeds and
will also use a portion of the Net Proceeds to pay
construction costs on the New Development, which is not
scheduled to begin operations until early 1997. Until the
Company invests such funds in properties and the New
Development opens for business, these portions of the Net
Proceeds will contribute little or no income to the Company.
There can be no assurances that the Company will find hotel
properties that meet its investment criteria.
o Risks associated with the Company's (and the Company's
shareholders') lack of control over the daily operation of the
Hotels due to federal income tax law prohibitions on a REIT
operating hotels.
o Risks that the Company's growth through acquisitions and
development will be constrained (i) because a REIT generally
cannot retain earnings for acquisitions and development and
(ii) by the limitation on the amount of indebtedness that the
Company can incur under its Debt Policy (as defined herein).
Consequently, the Company's ability to grow through additional
acquisitions and development of hotels will likely depend on
its ability to obtain financing through additional equity
offerings.
2
<PAGE>
o Risks associated with the dependence of the Company on the
Lessee's ability to generate revenue and to control operating
costs at the Hotels and to make payments under the Leases (as
defined herein) in amounts sufficient to permit the Company to
make the anticipated distributions to shareholders.
o The number of the Hotels is limited and, therefore, adverse
changes in the operations of any Hotel could reduce Cash
Available for Distribution to Shareholders.
o Seven of the Hotels and the New Development are licensed under
one franchise brand and any adverse developments to that
franchise brand could reduce distributions to the holders of
Common Stock.
o Purchasers of the Common Shares sold in the Offering will
experience immediate and substantial dilution of $3.15 or
38.2% of the Offering Price in the net tangible book value per
Common Share.
Recent Developments
New Development
On April 15, 1996, the Company purchased, from a third party, a 1.32
acre lot in Dover, Delaware, using borrowings from the Credit Facility, and
commenced the development of the New Development, a 64-unit Comfort Suites
hotel. As of September 30, 1996, the Company has incurred approximately $660,000
in costs associated with the New Development, which have been funded by
borrowings under the Credit Facility. The remaining costs of the New Development
will be financed with a portion of the Net Proceeds and are currently expected
to be approximately $2.1 million. Upon completion and opening for occupancy, the
hotel will be leased by the Lessee for a fixed lease payment of $378,840 a year,
payable in equal monthly installments. This rent represents an annual return to
the Company (net of insurance, real estate and personal property taxes and
reserves for furniture, fixtures and capital expenditures ("FFE Reserves")) of
12% or more of the total costs for the New Development. See "Certain
Relationships and Transactions - Investment Policies." The New Development has
no operating history, therefore the Lessee's payments are based on the Lessee's
projections of operations of that hotel. To the extent that the Lessee's
projections are incorrect, the Lessee will be required to pay the Rent on the
Fixed Lease from its net income or assets. In 1995, the Lessee's net income was
approximately $139,000, which is less than the $378,840 annual rent that the
Lessee will be required to pay. See "Risk Factors - Dependence on the Lessee."
Construction on the New Development began in May 1996 and is expected to be
completed in early 1997.
The Company has executed an amended development services agreement (the
"Development Agreement") with Humphrey Development, Inc. ("Humphrey
Development"), a Humphrey Affiliate, pursuant to which Humphrey Development
provides construction supervision and will pay any development costs in excess
of $2,795,910 in exchange for a right to purchase the New Development from the
Company on the sixth anniversary of its commencement of operations for
$2,795,910. See "Risk Factors - Competing Hotels to be Acquired by Affiliates
of Mr. Humphrey."
The Nasdaq Stock Market
On October 30, 1996, the Common Stock began to be traded on The Nasdaq
Stock Market. Prior to that date, the Common Stock was traded on The Nasdaq
SmallCap Market. The Company believes that by trading on The Nasdaq Stock
Market, shares of the Common Stock may become more liquid and the shareholder
base of the Company may expand geographically and structurally with the
potential for Common Shares to be held by residents of almost every state and by
institutional investors.
New Director
On October 4, 1996, Joseph T. Howell resigned from the Company's Board
of Directors, citing lack of time to devote to the Company. As of November 5,
1996, the Board of Directors appointed Mr. Jeffrey M. Zwerdling to serve the
remainder of Mr. Howell's term, which expires at the 1997 annual meeting of the
Company's shareholders. See "Management - Directors and Executive Officers."
3
<PAGE>
Reduction of Directors Fees
On September 17, 1996, the Board of Directors unanimously voted to
reduce the annual fees paid to them by the Company for serving on the Board from
$20,000 per year to $10,000 per year. The new fees became effective for the last
two quarters of 1996. The Board's action was designed to make their fees more
comparable to those of other public companies (including REITs) that are of a
similar size to the Company.
Revised Services Agreement
The Company recently amended the terms of an agreement between it and
the Lessee (the "Services Agreement") to provide accounting and securities
reporting services for the Company. The initial Services Agreement provided that
these services would be provided to the Company for a fixed fee of $80,000 per
year notwithstanding the size of the Company's portfolio. On November 6, 1996,
the Company amended the Services Agreement to provide for such services for an
initial annual fee of $30,000 per year for so long as the Company's portfolio
includes the Hotels and the New Development. The amended Services Agreement
provides that the fee for such services will increase $10,000 per year (prorated
from the time of acquisition) for each additional hotel added to the Company's
portfolio (excluding the New Development). Under the terms of the amended
Services Agreement, the services fee cannot exceed $100,000 in any year.
Credit Facility
In April 1996, the Company entered into a credit agreement with
Mercantile Safe Deposit and Trust Company ("Mercantile") for the $6.5 million
Credit Facility in order to refinance approximately $1.7 million of prior
existing indebtedness and pay the development costs of the New Development and a
second development that the Company considered but did not pursue in Dublin,
Virginia. The Credit Facility is secured by six of the Hotels that are located
in Solomons, Maryland; Elizabethton, Tennessee; Dahlgren, Virginia; Farmville,
Virginia (both Hotels); Princeton, West Virginia and the New Development.
Investment Policy
The Board of Directors has adopted a policy that will govern all of the
Company's investments in hotel properties (the "Investment Policy") including
the acquisition of existing hotels and the development of hotels until such time
as the Board amends such policy. Under the Investment Policy, the Company will
make no investment in a hotel property unless the Company can demonstrate that
it can reasonably expect an annual return on its investment in such property,
after deducting insurance, real estate and personal property taxes and FFE
Reserves, that is greater than or equal to 12% of the total purchase price to be
paid by the Company for
4
<PAGE>
such property. See "Certain Relationships and Transactions - Investment
Policies." While the Investment Policy may be altered or repealed by a majority
vote of the Directors, the Company has agreed with the Underwriters that the
Policy will not be amended or repealed until all of the Net Proceeds have been
invested in hotel properties. In addition, the Investment Policy will be applied
to a hotel property prior to its acquisition or development by the Company, and
therefore, there can be no assurances that increases in insurance rates, real
estate or personal property tax rates or FFE Reserves, which are based on room
revenues, will not decrease the Company's annual return on its investments in
any hotel property to a level below that set out in the Investment Policy. See
"Risk Factors - No Assurance of Return on Property Investments." and "Business &
Properties The Percentage Leases - Maintenance and Modifications."
<PAGE>
The Hotels
The following table sets forth certain information with respect to the
Hotels for the twelve months ended September 30, 1996:
<TABLE>
<CAPTION>
Twelve months ended September 30, 1996
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Average
Year Number of Average Daily
HOTELS Opened Rooms Occupancy Rate REVPAR(1)
------ --------- --------- ------- ---------
<S> <C>
Comfort Inns & Suites:
Dahlgren, Virginia................. 1989 59 73.9% $42.92 $31.72
Dublin, Virginia................... 1986 98 76.9% 51.87 39.86
Elizabethton, Tennessee............ 1987 58 62.0% 43.74 27.12
Farmville, Virginia................ 1985 51 77.6% 48.64 37.73
Morgantown, West Virginia.......... 1986 80 75.8% 51.74 39.20
Princeton, West Virginia........... 1985 51 93.2% 56.21 52.41
Beacon Marina,
Solomons, Maryland............... 1986 60 70.2% 58.53 41.05
Best Western:
Wytheville, Virginia............... 1985 100 46.3% 47.82 22.15
Days Inn:
Farmville, Virginia................ 1989 60 69.8% 44.79 31.25
---- ----- ----- -----
Consolidated Total/Weighted
Average for all Hotels............ 617 70.2% $49.99 $35.07
=== ===== ====== ======
</TABLE>
- -------------------------
(1) "REVPAR" means room revenue per available room, and is determined by
dividing room revenue by available rooms for the applicable period.
For further information regarding the Hotels, see "Business and Properties - The
Hotels." For further information regarding the Lessee, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview."
Growth Strategy
The Company seeks to enhance shareholder value by increasing Cash
Available for Distribution to Shareholders by acquiring and developing
additional hotels that meet the Company's investment criteria and by
participating in increased revenue from the Hotels through Percentage Leases.
"Cash Available for Distribution to Shareholders" equals net income, or loss, of
the Company plus depreciation and amortization minus capital expenditures or
reserves and principal payments on indebtedness. See "Growth Strategy."
Acquisition Strategy
The Company intends to acquire equity interests in additional operating
hotels that meet its investment criteria as described below. See "Growth
Strategy - Acquisition Strategy." The Company will emphasize limited 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, the Company will consider acquiring limited service
hotels such as Comfort Inn, Comfort Suites, Best Western, Days Inn, Fairfield
Inn(R), Hampton Inn(R), Holiday Inn Express(R) hotels, and limited service
extended-stay hotels such as Hampton Inn and Suites(R), Homewood Suites(R) and
Residence Inn(R) hotels. Under the Bylaws of the Company, any transaction to
acquire any additional properties must be approved by a majority of the members
of the Company's Board of Directors, including a majority of the Directors who,
generally, are not and have not been affiliated with Mr. Humphrey or any of his
Affiliates in the last two years (the "Independent Directors"). See "Certain
Provisions of Virginia Law and of the Company's Articles of Incorporation and
Bylaws -- Board of Directors."
5
<PAGE>
Under the Investment Policy, the Company will only acquire an operating
hotel for which it expects to receive, based on prior operating history, annual
rental income, net of insurance paid by the Company, the FFE Reserve and real
estate and personal property taxes, in an amount greater than or equal to 12% of
the total purchase price to be paid by the Company for such hotel. See "Risk
Factors -- No Assurance of Return on Property Investments." The Company's
additional investments in hotels may be financed, in whole or in part, with
undistributed cash, net proceeds from subsequent issuances of capital stock or
other securities or borrowings. The Company's policy is to limit consolidated
indebtedness to less than 50% of the aggregate purchase price paid by the
Company for the hotels in which it has invested (the "Debt Policy"). The
aggregate total purchase price paid by the Company for the Hotels is currently
approximately $25.5 million and is expected to be approximately $28.3 million
after the New Development is completed. After the Company has applied the Net
Proceeds as set forth herein, the Remaining Indebtedness (approximately $8.2
million) will represent approximately 32% of the aggregate amount paid by the
Company for the Hotels at the present time and, after the completion of the New
Development, the Remaining Indebtedness will represent approximately 29% of such
amount. See "- Recent Developments," "Risk Factors - Risks of Leverage" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The Company has an option to
acquire additional hotels acquired or developed by Mr. Humphrey or his
Affiliates. See "- Recent Developments," "Policies and Objectives with Respect
to Certain Activities Conflict of Interest Policies -- The Non-Competition
Agreement and Option Agreement."
Development Strategy
The Company intends to grow through the development of new hotels as
well as from the acquisition of existing hotels. The Company intends to develop
limited-service hotels in secondary and tertiary markets, typically with under
100 rooms, that are similar to the Company's present hotels. The Company is
interested in sites that offer the potential to attract a diverse mix of
potential market segments.
The Company's development site selection criteria is expected to
include some or all of the following characteristics:
o Relatively low land costs, particularly as compared with major
metropolitan areas.
o Sites that exist on or near major highways.
o Areas that have strong industrial bases with the potential for
future growth.
o Communities with state or federal installations, colleges or
universities.
o Areas that currently have an aging hotel presence.
These criteria describe the basic characteristics that the Company
looks for prior to committing to the development of a new hotel. Sites that are
selected may have some or all of the market characteristics as described above,
as well as characteristics that are not specifically described herein. It is not
anticipated that all sites selected by the Company will possess all of the
characteristics described herein.
Because a development project has no prior revenues on which the
Company's Investment Policy can be tested, the Company intends to invest only in
developments where it reasonably believes it will receive Rent payments from the
Lessee that are consistent with the Investment Policy. The Company has proposed
to the Lessee and the Lessee has agreed to sign a lease agreement (the "Fixed
Lease" and together with Percentage Leases, "Leases") pursuant to which the
Lessee would lease the New Development for a fixed rent payment of $378,840 per
annum which will be payable in equal monthly installments. The annual rent
payment under the Fixed Lease (net of insurance paid by the Company, FFE
reserves and real estate and personal property taxes) represents an
approximately 12% return on the Company's expected total investment in the New
Development. See "Risk Factors - No Assurance of Return on Property
Investments." The New Development has no operating history, therefore the
Lessee's payments are based on the Lessee's projections of operations of that
hotel. To the extent that the Lessee's projections are incorrect, the Lessee
will have to pay the rent on the Fixed Lease from its net income or assets. In
1995, the Lessee's net income was approximately $139,000 which is less than the
$378,840 of annual rent payments that will be required under the Fixed Lease and
the Lessee has no significant assets other than its interests in the Leases. See
"Risk Factors - Dependence on the Lessee." So long as the Investment Policy
remains in effect, the Company intends to enter into similar Fixed Leases on any
new hotel developments because the Company believes this type of Lease mitigates
the risks associated with the initial startup of a hotel such as low occupancy
rates or low room rates.
6
<PAGE>
Internal Growth Strategy
The Percentage Leases relating to the Hotels are designed to allow the
Company to participate in growth in revenues at the Hotels. The Company intends
to use Percentage Leases substantially similar to those applicable to the Hotels
with respect to any additional existing hotels it may acquire because the
Company believes that there are fewer start-up risks associated with acquiring
an existing operating hotel than with hotel developments. See "Business and
Properties - The Percentage Leases." The Percentage Leases provide for the
Lessee to pay monthly base rent ("Base Rent") plus percentage rent ("Percentage
Rent"). The Percentage Rent for each Hotel consists of (i) a set percentage of
quarterly and semi-annual room revenues, which is payable quarterly and
semi-annually, respectively, (ii) a set percentage of annual room revenues in
excess of a threshold amount ("Threshold"), which is payable annually, and (iii)
8% of monthly revenues other than room revenues (including, but not limited to,
telephone charges, movie rental fees and rental payments under any third-party
leases), which is payable monthly. The portion of Percentage Rent that is based
on annual room revenues does not apply to amounts under the Threshold and is
designed to allow the Company to participate in any increases in room revenues
occurring after the acquisition of a Hotel. See "Business and Properties - The
Hotels" and "- The Percentage Leases - Amounts Payable Under the Percentage
Leases." The Base Rent, Percentage Rents and rent payments pursuant to the Fixed
Lease are hereinafter referred to collectively as "Rent."
Management of the Company believes that the Company is benefiting from
positive trends in the hotel industry. According to Smith Travel Research,
occupancy, average daily rate ("ADR") and room revenue per available room
("REVPAR") for all United States ("U.S.") hotels have increased each year from
1991 through 1995. For Upper Economy Hotels, which include the Comfort Inn and
Days Inn brands, occupancy rose from 1991 through 1994, but remained flat from
1994 to 1995, and ADR and REVPAR have increased from 1991 through 1995.
Occupancy at the Hotels has increased from 1991 to 1994 and decreased in 1995,
while ADR and REVPAR at the Hotels have increased from 1991 to 1995. The
following table reflects occupancy, ADR and REVPAR in 1993, 1994, and 1995 for
the Hotels, all upper economy hotels and all U.S. Hotels.
<TABLE>
<CAPTION>
Occupancy ADR REVPAR
---------------------- ------------------------ ---------------------
1993 1994 1995 1993 1994 1995 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C>
Hotels 73.7% 72.7% 71.6% $43.31 $46.37 $48.53 $31.91 $33.74 $34.74
Upper Economy Hotels(1) 63.4 64.3 64.3 43.23 44.97 47.53 27.39 28.92 30.58
All U.S. Hotels(1) 63.0 64.6 65.3 61.93 64.31 67.41 39.04 41.57 44.00
</TABLE>
- ------------------
(1) Source-- Smith Travel Research. Smith Travel Research includes 20 hotel
chains, including Comfort Inn and Days Inn hotels, in the category
designated as "Upper Economy."
7
<PAGE>
The structure and relationships of the Company, the Partnership, the
Hotels and the Lessee are and after the Closing, will be as follows:
<TABLE>
<S> <C>
______________________
| |
| Holders of |
| Common Stock |
|____________________|
|
_________|____________ ______________________
| | | |
|Humphrey Hospitality| | Mr. Humphrey |
|-------------------------------| Trust, Inc. | | and |
| | The "Company" | | Affiliates |
| |____________________| |____________________|
| | |
| | |
| | |
1% | |
Limited Partnership 84.24% 15.76%
Interest Partnership Interest Partnership Interest
| and general partner and limited partners
| | |
| | |
| | ___________________________|
| | |
___________|__________ _________|______|_____ ______________________
| | | | | |
| Solomons | 99% |Humphrey Hospitality| |Humphrey Hospitality|
| Beacon Inn Limited |--- General ----| Limited |-- Percentage ---| Management, Inc. |
| Partnership | Partnership | Partnership | Leases | (solely owned by |
| The Subsidiary | | The "Partnership" | | Mr. Humphrey) |
| Partnership | | | | The "Lessee" |
|____________________| |____________________| |____________________|
| | | |
| | | |
| | | |
| |___________________________________|_____________________________________|
| |
| |
| |
| |
100% 100%
Equity Interest Equity Interest
| |
| |
| |
| |
| |
___________|__________ ___________|__________
| | | Eight |
| One | | Hotels |
| Hotel | | (and New |
| | | Development) |
|____________________| |____________________|
</TABLE>
8
<PAGE>
Benefits to Mr. Humphrey and His Affiliates
As a result of the Offering, Mr. Humphrey and his Affiliates will
receive the following benefits;
o All of the Company's current indebtedness to be repaid with a
portion of the Net Proceeds (approximately $660,000) is
personally guaranteed by Mr. Humphrey; and
o Under the terms of the Development Agreement, Humphrey
Development will have an option to purchase the New
Development on the sixth anniversary of its commencement of
operations at a price equal to the Company's total development
and acquisition costs (which will be $2,795,910).
Distribution Policy
The following table sets forth the cash distributions declared per
share since the Company's initial public offering of Common Stock (the "IPO").
The Closing will occur after the record date for the Company's distribution for
the fourth quarter of 1996, and, consequently purchasers of the Common Shares
offered hereby will not be entitled to receive a distribution on their Common
Shares until the first quarter of 1997.
<TABLE>
<S> <C>
1994
Fourth Quarter (from November 29)............................................................. $0.044(1)
1995
First Quarter................................................................................. $0.15
Second Quarter................................................................................ $0.15
Third Quarter................................................................................. $0.181(2)
Fourth Quarter................................................................................ $0.19
1996
First Quarter................................................................................. $0.19
Second Quarter................................................................................ $0.19
Third Quarter................................................................................. $0.19
</TABLE>
- ------------------
(1) Represents an approximate pro rata distribution for the period November 29,
1994, the closing date of the IPO, through December 31, 1994 based on an
initial quarterly distribution rate of $0.125 per share.
(2) Pro rata distribution for the period July 21, 1995, the closing of the
Company's second public offering of Common Stock, through September 30,
1995 based on a quarterly distribution of $0.19 per share.
Future distributions will depend on the Company's actual results of
operations, Cash Available for Distribution to Shareholders, cash flows from
operations, economic conditions and other factors, such as working capital, cash
requirements to fund investing and financing activities such as debt service
requirements, including the repayment or refinancing of indebtedness, capital
expenditure requirements, including improvements to and expansions of existing
properties, and the acquisition or development of additional hotel properties,
as well as the distribution requirements under federal income tax provisions for
qualification as a REIT, which require that a REIT distribute 95% of its annual
taxable income. Based on the Company's pro forma net income of approximately
$1.73 million for the year ended December 31, 1995, 3,955,050 shares of Common
Stock and Units outstanding after the Offering and a $0.76 annual distribution
per share, approximately 42% of the annual distribution to the holders of Common
Stock is estimated to represent a return of capital for federal income tax
purposes. There are no assurances that Cash Available for Distribution to
Shareholders will be sufficient for the Company to make expected distributions.
See "Distribution Policy" and "Partnership Agreement."
Tax Status
The Company elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended, effective for its short taxable year
ended December 31, 1994. As long as the Company qualifies for taxation as a
REIT, with certain exceptions, the Company will not be subject to federal
corporate income tax on its taxable income that is distributed to its
shareholders. A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute at least 95%
of its annual taxable income, excluding net capital gains. Although the Company
does not intend to request a ruling from the Internal Revenue Service (the
"Service") as to its REIT status, the Company will obtain the opinion of its
legal counsel as to its REIT status, which opinion will be based on certain
assumptions and representations and will not be binding on the Service or any
court. Even if the Company qualifies for taxation as a REIT, the Company or the
Partnership may be subject to certain state and local taxes on its income and
property. In connection with the Company's election to be taxed as a REIT, the
Company's Articles of Incorporation impose restrictions on the transfer of
shares of Common Stock. The Company has adopted the calendar year as its taxable
year. Failure to qualify as a REIT will render the Company subject to federal
income tax (including any applicable minimum tax) on its taxable income at
regular corporate rates and distributions to the Common Shareholders in any such
year will not be deductible by the Company. See "Risk Factors - Tax Risks," " -
Ownership Limitation," "Federal Income Tax Considerations - Taxation of the
Company" and "Description of Capital Stock - Articles of Incorporation and Bylaw
Provisions - Restrictions on Transfer."
9
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Shares offered by the Company.............. 1,000,000
Shares of Common Stock to be outstanding
after the Offering............................. 3,331,700 (1)
Use of Net Proceeds............................... To repay a portion of the
Credit Facility, to pay
the remaining development
costs of the New
Development and to create
a fund for future
potential acquisitions and
development.
Symbol on The Nasdaq Stock Market................. HUMP
</TABLE>
- ---------------
(1) Excludes 623,350 Units held by Mr. Humphrey and the Humphrey Affiliates any
or all of which may be redeemed on a one-for-one basis for shares of Common
Stock at any time.
10
<PAGE>
Summary Financial Data
The following table sets forth audited and unaudited historical and
unaudited pro forma financial information for the Company and the Lessee. Such
data should be read in conjunction with the applicable financial statements and
the notes thereto, which are contained elsewhere in this Prospectus. The pro
forma Revenue and Expenses and Financial Data for the Company is presented as if
the consummation of the Offering and the application of the Net Proceeds had
occurred as of the beginning of the respective period presented. The pro forma
Balance Sheet Data is presented as if the consummation of the Offering and the
application of the Net Proceeds therefrom had occurred on September 30, 1996.
HUMPHREY HOSPITALITY TRUST, INC. (THE COMPANY)
Summary Historical and Pro Forma
Revenue and Expenses and Financial Data(1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Historical (Unaudited)
---------------------------------------------------------- -----------------------------------------
Period from
November 29, 1994
(Date of IPO) Year Twelve Nine Nine
through Ended Months Ended Months Ended Months Ended Year Twelve
December 31, December 31, September 30, September 30, September 30, Ended Months Ended
1994 1995 1996 1995 1996 December 31, September 30,
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) 1995 1996
--------- --------- ----------- ----------- ----------- ---- ----
<S> <C>
Operating Data:
Percentage Lease revenue (2)... $ 273 $ 3,750 $ 3,939 $ 2,753 $ 2,942 $ 3,750 $3,939
Other income (3)............... - 21 28 11 19 361 368
----- --------- --------- --------- --------- -------- --------
Total revenue.................. 273 3,771 3,967 2,764 2,961 4,111 4,307
----- -------- -------- -------- -------- -------- --------
Expenses:
Depreciation and amortization.. 42 680 727 496 543 680 727
Interest expense............... 97 1,011 640 833 462 1,011 640
Real estate and personal
property taxes and insurance. 18 196 213 144 162 196 213
General and administrative..... 15 238 294 200 257 238 294
----- -------- --------- --------- --------- -------- --------
Total expenses............... 172 2,125 1,874 1,673 1,424 2,125 1,874
----- -------- --------- -------- --------- -------- --------
Income before
minority interest............ 101 1,646 2,093 1,091 1,537 1,986 2,433
Minority interest (4).......... 29 396 441 279 324 313 383
----- --------- --------- --------- --------- -------- --------
Net income applicable
to Common Shareholders....... $ 72 $ 1,250 $ 1,652 $ 812 $ 1,213 $1,673 $2,050
====== ======= ======== ======= ======= ====== ======
Earnings per common share (5).. $0.05 $0.71 $0.71 $0.51 $.52 $0.50 $0.62
Other Data:
Weighted average shares
outstanding and common share
equivalents outstanding (6)..1,849,666 2,310,184 2,955,050 2,136,992 2,955,050 3,955,050 3,955,050
Funds from operations (7)...... $ 143 $ 2,326 $ 2,820 $1,587 $ 2,080 $ 2,666 $3,160
Net cash provided by
operating activities (8)..... $170 $1,113 $2,043 $876 $ 2,304 $1,453 $2,383
Net cash used in
investing activities......... $(4,840) ($619) ($496) ($634) ($995) ($619) ($496)
Net cash provided by (used in)
financing activities......... $ 5,223 ($879) ($1,726) ($237) ($1,097) ($879) ($1,726)
</TABLE>
Humphrey Hospitality Trust, Inc.
Summary Historical and Pro Forma Financial and Other Data (1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995 September 30, 1996
----------------- ----------------- ------------------
Historical Historical Historical Pro Forma
---------- ---------- ---------- ---------
(Audited) (Audited) (Unaudited)
--------- --------- -----------
<S> <C>
Balance Sheet Data:
Net investment in hotel properties..... $18,183 $ 19,709 $ 20,474 $ 20,474
Minority interest in Partnership....... 996 2,589 2,558 3,182
Shareholders' equity................... 4,365 10,290 10,174 17,008
Total assets........................... 19,375 21,898 22,399 29,197
Total debt............................. 13,795 8,383 8,970 8,310
</TABLE>
HUMPHREY HOSPITALITY MANAGEMENT, INC. (LESSEE)
Summary Historical Revenue and Expenses
and Financial Data (in thousands)
<TABLE>
<CAPTION>
Period from
November 29, 1994 Year Twelve Nine Nine
(Date of IPO) Ended Months Ended Months Ended Months Ended
through December 31, December 31, September 30, September 30, September 30,
1994 1995 1996 1995 1996
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited)
--------- --------- ----------- ----------- -----------
<S> <C>
Room revenue............................. $ 459 $ 7,499 $ 7,919 $ 5,738 $ 6,158
Other revenue (9)........................ 38 556 634 418 496
----- ------- --------- -------- --------
Total revenue.......................... 497 8,055 8,553 6,156 6,654
Hotel operating expenses................. 314 4,166 4,529 3,118 3,481
Percentage Lease payments................ 273 3,750 3,939 2,753 2,942
----- -------- -------- -------- --------
Net income............................... $(90) $ 139 $ 85 $ 285 $ 231
===== ======== ======== ======== ========
</TABLE>
11
<PAGE>
(1) The pro forma information does not purport to represent what the Company's
financial position or results of operations would actually have been if
consummation of the Offering had, in fact, occurred on such date or at the
beginning of the periods indicated or to project the company's or the
Lessee's financial position or results of operations at any future dates
or for any future period.
(2) Represents annual Base 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 revenues of the Hotels.
(3) Pro forma other income includes interest earnings on approximately $6.8
million of Offering proceeds invested for the period at an estimated rate
of return of 5% per annum, based upon current rates on liquid investments
currently available to the Company.
(4) Pro forma amounts calculated as 15.76% of estimated income before minority
interest.
(5) Represents income before minority interest divided by the weighted average
number of shares of Common Stock and common share equivalents, consisting
of units, outstanding for the period.
(6) Pro forma weighted average shares outstanding represents the weighted
average shares of Common Stock and common share equivalents outstanding
during 1996 (2,955,050 shares) and the 1,000,000 Common Shares to be
issued in connection with the Offering.
(7) Management considers Funds from Operations to be a market accepted measure
of an equity REIT's cash flow, which management believes reflects on the
value of real estate companies such as the Company, in connection with the
evaluation of other measures of operating performances. All REITs do not
calculate Funds from Operations in the same manner, therefore, the
Company's calculation of Funds from Operations may not be the same as the
calculation of Funds from Operations for similar REITs. In accordance
with the resolution adopted by the Board of Governors of the National
Association of Real Estate Investment Trusts, Inc. ("NAREIT"), the Company
has defined Funds from Operations as net income (computed in accordance
with generally accepted accounting principles ("GAAP")), excluding gains
(or losses) from debt restructuring or sales of property, plus
depreciation and amortization on real estate assets, and after adjustments
for unconsolidated partnerships and joint ventures. For the periods
represented, depreciation and amortization and minority interest were the
only non-cash adjustments. Therefore, pro forma Funds from Operations
represents cash flow from operating activities. Funds from Operations
should not be considered as an alternative to net income or other
measurements under generally accepted accounting principles as an
indicator of operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. Funds from
Operations does not reflect working capital changes, cash expenditures for
capital improvement or debt service with respect to the Hotels.
12
<PAGE>
The computation of historical and pro forma Funds from Operations is as
follows:
<TABLE>
<CAPTION>
Pro Forma
Historical (Unaudited)
--------------------------------------------------------------- ----------------------------------------
Period from
November 29, 1994
(Date of IPO) Year Twelve Nine Nine
through Ended Months Ended Months Ended Months Ended Year Twelve
December 31, December 31, September 30, September 30, September 30, Ended Months Ended
1994 1995 1996 1995 1996 December 31, September
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) 1995 1996
--------- --------- ----------- ----------- ----------- ---- ----
<S> <C>
Net income applicable to
common shareholders $ 72 $1,250 $1,652 $ 812 $1,213 $1,673 $2,050
Add:
Minority interests 29 396 441 279 324 313 383
Depreciation and
amortization 42 680 727 496 543 680 727
------ ------- ------- -------- -------- ------- -------
Total $ 143 $2,326 $2,820 $1,587 $2,080 $2,666 $3,160
====== ====== ====== ====== ====== ====== ======
</TABLE>
(8) Pro forma net cash provided by operating activities includes estimated
interest earnings on approximately $6.8 million of the Net Proceeds
invested for the period at an estimated rate of return of 5% per annum,
based upon current rates on liquid investments currently available to the
Company.
(9) Represents marina revenue (for the Comfort Inn - Beacon Marina, Solomons,
Maryland only), telephone revenue, restaurant revenue and other revenue.
13
<PAGE>
RISK FACTORS
In evaluating the Company's business, prospective investors should
carefully consider the following risk factors in addition to the other
information contained in this Prospectus.
Risks of Leverage
Upon completion of the Offering and the application of the Net Proceeds
as set forth herein, the Company will have Remaining Indebtedness of
approximately $8.2 million. All of the Remaining Indebtedness will be secured by
one or more of the Hotels and the New Development. Approximately 20.7% ($1.7
million) of the Remaining Indebtedness will be due or callable by the lender in
April 1999, and approximately 42.6% ($3.5 million) of the Remaining Indebtedness
will be due or callable by the lender in November 1999. Because there is no
assurance that the Company will be able to repay or refinance its debt when due
or called, one or more of the Hotels may be lost to foreclosure. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Although the Company has adopted the Debt Policy and has made covenants
to lenders and the Underwriter limiting its level of indebtedness, there is no
limit on the Company's ability to incur debt contained in the Company's Articles
of Incorporation or Bylaws. The Company may borrow additional amounts from the
same or other lenders in the future, or may issue corporate debt securities in
public or private offerings. Certain of such additional borrowings may be
secured by the Hotels. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and
"Policies and Objectives with Respect to Certain Activities - Financing."
There can be no assurance that the Company will be able to meet its
debt service obligations and, to the extent that it cannot, the Company risks
the loss of some or all of its assets, including the Hotels and the New
Development, to foreclosure. There also can be no assurance that the Company
will be able to adhere to its Debt Policy and such policy may be changed by the
Board of Directors without shareholder approval. The aggregate total purchase
price paid by the Company for the Hotels is currently approximately $25.5
million. After the Company has applied the Net Proceeds as set forth herein, the
Company's total outstanding indebtedness will represent approximately 32% of the
amount paid by the Company for the Hotels, thereby giving the Company additional
borrowing capacity of up to approximately $4.5 million under the Debt Policy.
The amount of the Company's outstanding indebtedness could limit the Company's
ability to acquire additional hotels without issuing equity securities. See
"Risk Factors - Growth Strategy - Competition for Acquisitions."
Conflicts of Interest
Because of Mr. Humphrey's ownership in and/or positions with the
Company, the Partnership, and the Lessee, there are inherent conflicts of
interest in the disposition and operation of the Hotels. Consequently, the
interests of shareholders may not have been, and in the future may not be,
reflected fully in all decisions made or actions taken by officers and Directors
of the Company. See "Policies and Objectives with Respect to Certain Activities
- - Conflicts of Interest Policies."
Conflicts Relating to Sales or Refinancing of Hotels
The Limited Partners, which are Humphrey Affiliates, have unrealized
gain in their interests in the Partnership. Any sale of the Hotels or
refinancing or prepayment of principal on the Remaining Indebtedness by the
Company may cause adverse tax consequences to the Limited Partners. Therefore,
the interests of the Company and the Limited Partners could be different in
connection with the disposition or refinancing of a Hotel. Decisions with
respect to the disposition of the Hotels or refinancing or prepayment of
principal on the Remaining Indebtedness will be made by a majority of the
Directors, including a majority of the Independent Directors. See "Certain
Relationships and Transactions - Acquisition of Hotels from Humphrey
Affiliates."
14
<PAGE>
No Arm's-Length Bargaining on Percentage Leases, Development Agreement,
Services Agreement, Hotel Purchase Agreements, Non-Competition Agreement and
Option Agreement
The terms of the Percentage Leases, the Development Agreement, the
Services Agreement, the agreements pursuant to which the Partnership acquired
the Hotels, the Non-Competition Agreement and the Option Agreement were not
negotiated on an arm's-length basis. See "Business and Properties - The
Percentage Leases" and "Certain Relationships and Transactions." The Company
does not own any interest in the Lessee. Mr. Humphrey is a Director and officer
of the Company and the sole shareholder of the Lessee. Consequently, he has a
conflict of interest regarding the enforcement of the Percentage Leases, the
Development Agreement, the Services Agreement, the Non-Competition Agreement and
the Option Agreement. See "The Lessee."
Competing Hotels to be Acquired by Affiliates of Mr. Humphrey
The Humphrey Affiliates may develop or acquire new hotels, subject to
certain limitations, which may materially affect the amount of time Mr. Humphrey
has to devote to the affairs of the Company. The Humphrey Affiliates, including
the Lessee, may operate hotels that are not owned by the Company, subject to
certain restrictions, which may materially affect the amount of time that Mr
Humphrey or the Lessee has to devote to managing the Hotels. Humphrey
Development, a Humphrey Affiliate, will have the right to purchase the New
Development from the Company at the Company's cost after the sixth anniversary
of the opening of the New Development. The Lessee is expected to execute the
Fixed Lease with the Company which is expected to have a 10-year term and to be
assignable to Humphrey Development. See "Policies and Objectives with Respect to
Certain Activities - Conflict of Interest Policies -- The Non-Competition
Agreement and Option Agreement."
Risk of High Distribution Payout Percentage
The Company's distribution rate to stockholders was approximately 97%
of the Company's Cash Available for Distribution to Shareholders for the twelve
months ended September 30, 1996. See "Distribution Policy." Should the Company's
Cash Available for Distribution to Shareholders decrease, the Company may not be
able to maintain its current level of distributions.
Tax Risks
Failure to Qualify as a REIT
The Company intends to operate so as to qualify as a REIT for federal
income tax purposes. Although the Company has not requested, and does not expect
to request, a ruling from the Service that it qualifies as a REIT, the Company
will receive at the Closing an opinion of its counsel that, based on certain
assumptions and representations, it so qualifies. Investors should be aware,
however, that opinions of counsel are not binding on the Service or any court.
The REIT qualification opinion only represents the view of counsel to the
Company based on counsel's review and analysis of existing law, which includes
no controlling precedent. Furthermore, both the validity of the opinion and the
continued qualification of the Company as a REIT will depend on the Company's
continuing ability to meet various requirements concerning, among other things,
the ownership of its outstanding shares, the nature of its assets, the sources
of its income, and the amount of its distributions to its shareholders. See
"Federal Income Tax Considerations - Taxation of the Company."
If the Company were to fail to qualify as a REIT in any taxable year,
the Company would not be allowed a deduction for distributions to its
shareholders in computing its taxable income and would be subject to federal
income tax (including any applicable minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain Code
provisions, the Company also would be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As a result, Cash Available for Distribution to Shareholders would be reduced
for each of the years involved. Although the Company currently conducts its
operations in a manner designed to qualify as a REIT, it is possible that future
economic, market, legal, tax or other considerations may cause the Board of
Directors, with the consent of two- thirds of the shareholders, to revoke the
REIT election. See "Federal Income Tax Considerations."
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REIT Minimum Distribution Requirements
In order to qualify as a REIT, the Company generally will be required
each year to distribute to its shareholders at least 95% of its net taxable
income (excluding any net capital gain). In addition, the Company will be
subject to a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain
net income for that year, and (iii) 100% of its undistributed taxable income
from prior years.
The Company has made and will continue to make distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The Company's income will consist primarily of its
share of the income of the Partnership, and the Company's Cash Available for
Distribution to Shareholders will consist primarily of its share of cash
distributions from the Partnership. Differences in timing between the
recognition of taxable income and the receipt of Cash Available for Distribution
to Shareholders due to the seasonality of the hotel industry could require the
Company, through the Partnership, to borrow funds on a short-term basis to meet
the 95% distribution requirement and to avoid the nondeductible excise tax. See
"Risk Factors -- Risk of Leverage." For federal income tax purposes,
distributions paid to shareholders may consist of ordinary income, capital
gains, nontaxable return of capital, or a combination thereof. The Company will
provide its shareholders with an annual statement as to its designation of the
taxability of distributions.
Distributions by the Partnership will be determined by the Company's
Board of Directors and will be dependent on a number of factors, including the
amount of the Partnership's distributable cash, the Partnership's financial
condition, any decision by the Board of Directors to reinvest funds rather than
to distribute such funds, the Partnership's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. See "Federal Income Tax
Considerations - Requirements for Qualification - Distribution Requirements."
Failure of the Partnership to be Classified as a Partnership for Federal
Income Tax Purposes; Impact on REIT Status
Although the Company has not requested, and does not expect to request,
a ruling from the Service that the Partnership will be classified as a
partnership for federal income tax purposes, the Company will receive at the
Closing an opinion of its counsel stating that the Partnership will be
classified as a partnership and not as a corporation or an association taxable
as a corporation for federal income tax purposes. If the Service were to
challenge successfully the tax status of the Partnership as a partnership for
federal income tax purposes, the Partnership would be taxable as a corporation.
In such event, the Company likely would cease to qualify as a REIT for a variety
of reasons. Furthermore, the imposition of corporate income tax on the
Partnership would substantially reduce the amount of Cash Available for
Distribution to Shareholders. See "Federal Income Tax Considerations - Tax
Aspects of the Partnership and the Subsidiary Partnership."
Risks of Mr. Humphrey's Personal Bankruptcy
Mr. Humphrey currently personally guarantees 70.7% ($5.8 million) of
the Company's Remaining Indebtedness. In the event of his personal bankruptcy,
the lenders would have the right to call all such indebtedness due. Because
there is no assurance that the Company would be able to repay or refinance such
debt if called, one or more of the Hotels could be lost to foreclosure.
Risks Associated with Development
The Company is currently developing a hotel property and may develop
others in the future. Risks associated with hotel development include:
abandonment of development opportunities; construction costs exceeding estimates
and possibly making the hotel uneconomical; occupancy and room rates at newly
completed hotels may not be sufficient to make the hotel profitable; financing
may not be available on favorable terms to replace a short-term construction
loan; and construction may not be completed on time resulting in increased debt
service expenses and/or a longer time before income is produced. Development
projects are also subject to risks relating to the inability to obtain, or
delays in obtaining, all necessary land-use, building, occupancy and other
required governmental permits and authorizations.
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Risk Associated with Use of Proceeds
A substantial portion of the Net Proceeds will be producing little or
no income immediately after the Closing. Approximately $4.7 million of the Net
Proceeds will be invested in an assortment of short-term treasury bills, bank
certificates of deposit and commercial paper obligations with terms varying from
one to three months until such time as the Company identifies suitable hotel
acquisition or development uses for such funds. These funds are expected to
produce interest income at rate of approximately 5.2% per annum based on current
rates for these investments, which is less than the return on capital that the
Company's Investment Policy is designed to obtain. There can be no assurances
that the Company will identify hotels or hotel development opportunities that
meet its investment criteria including the Investment Policy, or that any hotels
or hotel developments will produce a return on the Company's investment. In
addition, approximately $2.1 million of the Net Proceeds will be used to pay the
remaining costs of the New Development, which will not open and, therefore, will
produce no income until early 1997. Until such costs are paid, the Company will
invest them in commercial paper obligations with terms varying from 35 to 49
days, which currently produces interest income at a rate of approximately 5.2%
per annum.
Inability to Operate the Properties
In order to qualify as a REIT, the Company cannot operate any hotels.
As a result, the Company is unable to make and implement strategic business
decisions with respect to its properties, such as decisions with respect to the
choice of franchise affiliation, redevelopment of food and beverage operations
and other similar decisions. Although the Company consults with the Lessee on
such matters, the Lessee is under no obligation to implement any recommendations
of the Company. Accordingly, there can be no assurance that the Lessee will
operate the Hotels in a manner that is in the best interests of the Company. See
"The Lessee."
Growth Strategy
Constraints on Acquisitions
The Company's growth strategy includes acquiring existing hotel
properties, which will be dependent on its access to cash. The Company generally
cannot retain cash from operating activities because in order to qualify as a
REIT, the Company must distribute 95% of its annual taxable income. See "Federal
Income Tax Considerations -- Requirements for Qualification -- Distribution
Requirements." In addition, the Company's ability to borrow funds is limited by
its Debt Policy. Because the Company cannot retain earnings and, after the
Closing, the Remaining Indebtedness will represent approximately 32% of the
amount paid by the Company for the Hotels, the Company's ability to continue to
make acquisitions may depend on its ability to obtain additional equity
financings. There is no assurance that such financing will be available. See
"Growth Strategy - Acquisition Strategy."
Competition for Acquisitions
There will be competition for investment opportunities in upper-economy
and mid-scale hotels from entities organized for purposes substantially similar
to the Company's objectives, as well as other purchasers of hotels. The Company
will be competing for such investment opportunities with entities that have
substantially greater financial resources than the Company, including access to
capital or better relationships with franchisors, sellers or lenders. The
Company's competitors may generally be able to accept more risk than the Company
can manage prudently and may be able to borrow the funds needed to acquire
hotels. Competition may generally reduce the number of suitable investment
opportunities offered to the Company and increase the bargaining power of
property owners seeking to sell. See "Business and Properties - Competition."
Acquisition Risks
The Company intends to pursue acquisitions of additional hotel
properties. Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that estimates of the cost of improvements
necessary to market and acquire properties will prove inaccurate, as well as
general investment risks associated with any new real estate investment. The
fact that the Company must distribute 95% of its annual net taxable income in
order to maintain its qualification as a REIT may limit the ability of the
Company to rely upon rental income from the Leases or subsequently acquired
properties to finance acquisitions. As a result, if debt or equity financing is
not available on acceptable terms, further acquisition activities might be
curtailed or Cash Available for Distribution to Shareholders might be adversely
affected. See "Growth Strategy - Acquisition Strategy."
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Dependence on the Lessee
In order to generate revenues to enable it to make distributions to
shareholders, the Company relies on the Lessee to make Rent payments. Reductions
in revenues from the Hotels or in the net operating income of the Lessee may
adversely affect the ability of the Lessee to make such Rent payments and thus
the Company's ability to make anticipated distributions to its shareholders.
Although failure on the part of the Lessee to comply materially with the terms
of a Lease would give the Company the right to terminate any or all of the
Leases, to repossess the applicable properties and to enforce the payment
obligations under the Leases, the Company would then be required to find another
lessee. There can be no assurance that the Company would be able to find another
lessee or that, if another lessee were found, the Company would be able to enter
into a lease on terms as favorable as the Leases. See "Business and Properties -
The Percentage Leases."
The Lessee has only nominal assets (other than its leasehold interests
in the Hotels and the working capital necessary to operate the Hotels) and,
therefore, is dependent on the operation of the Hotels to fund its Rent payments
to the Partnership under the Leases. The Company expects to enter into a Fixed
Lease relating to the New Development pursuant to which the Lessee will pay
annual Rent of $378,840 in twelve equal payments. The New Development has no
operating history, therefore the Lessee's payments are based on the Lessee's
projections of operations of that hotel. To the extent that the Lessee's
projections are incorrect, the Lessee will have to pay the Rent on the Fixed
Lease from its net income or assets. In 1995, the Lessee's net income was
approximately $139,000, which is less than the $378,840 of annual Rent payments
that will be required under the Fixed Lease. See "Management's Discussion and
Analyses of Financial Condition and Results of Operations - Results of
Operations - The Lessee."
Limited Number of Hotels
The Company currently owns only nine Hotels, seven of which are
operated as Comfort Inn hotels, one of which is operated as a Best Western hotel
and one of which is operated as a Days Inn hotel. Significant adverse changes in
the operations of any Hotel could have a material adverse effect on the Lessee's
ability to make Rent payments and, accordingly, on the Company's ability to make
expected distributions to its shareholders. See "Business and Properties."
Emphasis on Comfort Inn Hotels
The Company's acquisition and development strategies emphasize hotels
with franchise affiliations similar to those of the Hotels. The Company is
subject to risks inherent in concentrating investments in any franchise brand,
in particular the Comfort Inn brand, which could have an adverse effect on the
Company's lease revenues and Cash Available for Distribution to Shareholders.
These risks include, among others, the risk of a reduction in hotel revenues
following any adverse publicity related to the Comfort Inn brand. See "Business
and Properties - Comfort Inn Hotels" and "- Franchise Licenses."
Dilution
Purchasers of the Common Shares sold in the Offering will experience
immediate and substantial dilution of $3.15 or 38.2% of the Offering Price in
the net tangible book value per Common Share. See "Dilution."
Cross-Collateralized Debt
Approximately $4.07 million of the Remaining Indebtedness is secured by
liens on the Comfort Inn- Morgantown, West Virginia and the Best
Western-Wytheville, Virginia Hotels and the notes related to such debt are
cross-collateralized and cross-defaulted so that the Company will be subject to
a risk of loss to foreclosure of one or both of such Hotels upon a default on
either of such notes. Approximately $1.7 million of the Remaining Indebtedness,
consisting of borrowings under the Credit Facility, is secured by liens on six
Hotels and the New Development. Therefore, the Company will be subject to a risk
of loss to foreclosure of all six Hotels and the New Development upon an event
of default under the Credit Facility. The remainder of the Remaining
Indebtedness is secured by a lien on the Comfort Inn-Dublin, Virginia Hotel
only.
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No Assurance of Return on Property Investments
The Company's Investment Policy will be applied to a hotel property
prior to its acquisition or development by the Company, and therefore, there can
be no assurances that increases in insurance rates, real estate or personal
property tax rates or FFE reserves, which are based on room revenues, will not
decrease the Company's annual return on its investments in any hotel property to
a level below that set out in the Investment Policy. See "Business and
Properties - the Percentage Leases - Maintenance and Modifications."
Effect of Market Interest Rates on Price of the Common Stock
One of the factors that may influence the price of the Common Stock in
public trading markets will be the annual yield from distributions by the
Company on the Common Stock as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in higher
yields on other financial instruments, which could adversely affect the market
price of the Common Stock.
Reliance on Board of Directors and Management
Common Shareholders have no right or power to take part in the
management of the Company except through the exercise of voting rights on
certain specified matters and the annual election of Directors. See "Description
of Capital Stock - Common Stock" and "Certain Provisions of Virginia Law and of
the Company's Articles of Incorporation and Bylaws." The Board of Directors is
responsible for managing the Company. The Company relies upon the services and
expertise of its Directors for strategic business direction. An Acquisition
Committee, consisting of three Directors, including Mr. Humphrey, reviews
potential hotel acquisitions and developments, visits proposed hotel sites,
reviews the terms of proposed leases for proposed hotel acquisitions and
development, and makes recommendations to the full Board of Directors with
respect to proposed hotel acquisitions. See "Management."
In addition, there may be conflicting demands on Mr. Humphrey caused by
his overlapping management of the Company and Humphrey Associates, Inc.
("Humphrey Associates"), a Maryland corporation that is wholly-owned by Mr.
Humphrey. Humphrey Associates is one of the Limited Partners. Because Humphrey
Associates owns and operates properties other than the Hotels, and Mr. Humphrey
serves as President of the Company and Humphrey Associates, Mr. Humphrey may
experience a conflict in allocating his time between such entities. See
"Policies and Objectives with Respect to Certain Activities - Conflict of
Interest Policies."
Limitation on Liability of Officers and Directors
The Articles of Incorporation of the Company contain a provision which,
subject to certain exceptions, eliminates the liability of a Director or officer
to the Company or its shareholders for monetary damages for any breach of duty
as a Director or officer. This provision does not eliminate such liability to
the extent that it is proved that the Director or officer engaged in willful
misconduct or a knowing violation of criminal law or of any federal or state
securities law. See "Management - Exculpation and Indemnification."
Limitation on Acquisition and Change in Control
Ownership Limitation
In order for the Company to maintain its qualification as a REIT, not
more than 50% in value of its outstanding shares of capital stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities). Furthermore, if the Company owns, actually or
constructively, 10% or more of the ownership interests in the Lessee, the Rents
received from the Lessee will not qualify as rents from real property, which
would result in loss of REIT status for the Company. For the purpose of
preserving the Company's REIT qualification, the Articles of Incorporation
generally prohibit direct or indirect ownership of more than 9.9% of the
outstanding shares of Common Stock or 9.9% of any other class of outstanding
shares by any person (the "Ownership Limitation"). The Ownership Limitation
could have the effect of discouraging a takeover or other transaction in which
holders of some, or a majority, of the shares of Common Stock might receive a
premium for their shares of Common Stock over the then prevailing market price
or which such holders might believe to be otherwise in their best interests. See
"Description of Capital Stock - Restrictions on Transfer" and "Federal Income
Tax Considerations - Requirements for Qualification."
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Authority to Issue Preferred Stock
The Articles of Incorporation authorize the Board of Directors to issue
up to 10,000,000 shares of preferred stock and to establish the preferences and
rights of any shares of preferred stock issued. Although the Company has no
current intention to issue any series of preferred stock in the foreseeable
future, the issuance of any series of preferred stock could have the effect of
delaying or preventing a change in control of the Company even if a change in
control were in the interests of the Common Shareholders. See "Description of
Capital Stock - Preferred Stock."
Virginia Anti-Takeover Statutes
As a Virginia corporation, the Company is subject to various provisions
of the Virginia Stock Corporation Act, which impose certain restrictions and
require certain procedures with respect to certain takeover offers and business
combinations, including, but not limited to, combinations with interested
holders and share repurchases from certain holders. See "Certain Provisions of
Virginia Law and the Company's Articles of Incorporation and Bylaws - Business
Combinations" and "- Control Share Acquisitions."
Ability of Board of Directors to Change Certain Policies
The major policies of the Company, including its Investment Policy,
Debt Policy and other policies with respect to acquisitions, financing, growth,
operations, debt and distributions, are determined by its Board of Directors.
The Board of Directors may amend or revise these and other policies from time to
time without a vote of the Common Shareholders. The effect of any such changes
may be positive or negative. Under the Company's Bylaws, the Company cannot
acquire any property, sell any of the Hotels, prepay or refinance the Remaining
Indebtedness, or decrease the expected distributions to shareholders (assuming
the Company has sufficient revenues), without the approval of a majority of the
Directors, including a majority of the Independent Directors. The Company cannot
change these provisions of its Bylaws without the approval of either 80% of the
entire Board of Directors, including a majority of the Independent Directors, or
the holders of two-thirds of the outstanding shares of Common Stock. The Company
cannot change its policy of seeking to maintain its qualification as a REIT
without the approval of the holders of two-thirds of the outstanding shares of
Common Stock. See "Policies and Objectives with Respect to Certain Activities"
and "Certain Provisions of Virginia Law and of the Company's Articles of
Incorporation and Bylaws."
Hotel Industry Risks
Operating Risks
The Hotels are subject to all operating risks common to the hotel
industry. The hotel industry has experienced volatility in the past, as have the
Hotels, and there can be no assurance that such volatility will not occur in the
future. These risks include, among other things, competition from other hotels,
over-building in the hotel industry that could adversely affect hotel revenues,
increases in operating costs due to inflation and other factors, which increases
may not be offset by increased room rates, dependence on business and commercial
travelers and tourism, strikes and other labor disturbances of hotel employees,
increases in energy costs and other expenses of travel and adverse effects of
general and local economic conditions. These factors could reduce revenues of
the Hotels and adversely affect the Lessee's ability to make Rent payments, and
therefore, the Company's ability to make expected distributions to its
shareholders. See "Business and Properties - The Hotel Industry."
Competition for Guests
The hotel industry is highly competitive. The Hotels will compete with
other existing and new hotels in their geographic markets. Many of the Company's
competitors have substantially greater marketing and financial resources than
the Company and the Lessee. See "Business and Properties - Competition."
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Investment Concentration in Single Industry
The Company's current growth strategy is to acquire and develop hotels.
The Company will not seek to invest in assets outside the hotel industry, and
will therefore be subject to the risks created by concentrating its investments
in a single industry. Therefore, the adverse effect on Rent and Cash Available
for Distribution to Shareholders resulting from a downturn in the hotel industry
will be more pronounced than if the Company had diversified its investments
outside of the hotel industry. See "Business and Properties - The Hotel
Industry."
Seasonality of Hotel Business and the Hotels
The hotel industry is seasonal in nature. Generally, hotel revenues for
hotels operating in the geographic areas in which the Hotels operate are greater
in the second and third quarters than in the first and fourth quarters. The
Hotels' operations historically reflect this trend. See "Management's Discussion
and Analysis of Financial Condition and Result of Operations - Seasonality of
Hotel Business and the Hotels."
Risks of Operating Hotels under Franchise Licenses
The continuation of the franchise licenses applicable to the hotels
(the "Franchise Licenses") is subject to specified operating standards and other
terms and conditions. Choice Hotels International, Inc. ("Choice Hotels"), the
franchisor of Comfort Inns and Comfort Suites, Best Western International, Inc.
("Best Western") and Days Inns of America, Inc. ("Days Inn") periodically
inspect their licensed properties to confirm adherence to their operating
standards. The failure of the Partnership or the Lessee to maintain such
standards respecting the Hotels or to adhere to such other terms and conditions
could result in the loss or cancellation of the applicable Franchise License. It
is possible that a franchisor could condition the continuation of a Franchise
License on the completion of capital improvements which the Board of Directors
determines are too expensive or otherwise not economically feasible in light of
general economic conditions or the operating results or prospects of the
affected Hotel. In that event, the Board of Directors may elect to allow the
Franchise License to lapse or be terminated. Under the Franchise Licenses with
Choice Hotels, the franchisor may terminate the Franchise Licenses for the
Comfort Inn-Dahlgren, Virginia and the Comfort Inn-Elizabethton, Tennessee
without cause on April 1, 1999 and December 15, 1997, respectively. Under the
Franchise License with Best Western, the franchisee and franchisor each has the
option to terminate the Franchise License every year. The Franchise License with
Days Inn expires on October 31, 2009. There can be no assurance that a
franchisor will not exercise a termination right or renew a Franchise License at
the expiration of the current terms. If a Franchise License is terminated, the
Partnership and the Lessee may seek to obtain a suitable replacement franchise,
or to operate the Hotel without a franchise affiliation. The loss of a Franchise
License could have a material adverse effect upon the operations or the
underlying value of the related Hotel because of the loss of associated name
recognition, marketing support and centralized reservation systems provided by
the franchisor. Although the Percentage Leases require the Lessee to maintain
the Franchise Licenses for each Hotel, the Lessee's loss of a Franchise License
for one or more of the Hotels could have a material adverse effect on the
Partnership's or the Subsidiary Partnership's revenues under the Percentage
Leases and the Company's Cash Available for Distribution to Shareholders. See
"Business and Properties - Franchise Licenses."
Operating Costs and Capital Expenditures; Hotel Renovation
Hotels generally have an ongoing need for renovations and other capital
improvements, particularly in older structures, including periodic replacement
of furniture, fixtures and equipment. Under the terms of the Percentage Leases,
the Partnership is obligated to pay the cost of (i) expenditures for items that
are classified as capital items under generally accepted accounting principles
and which are necessary for the continued operation of the Hotels and (ii)
replacement or refurbishment of furniture, fixtures and equipment in the Hotels,
to the extent such costs do not exceed the allowance for such costs provided by
the Partnership under each Percentage Lease. If these expenses exceed the
Company's estimate, the additional cost could have an adverse effect on Cash
Available for Distribution to Shareholders. In addition, the Company may acquire
hotels in the future that require significant renovation. Renovation of hotels
involves certain risks, including the possibility of environmental problems,
construction cost overruns and delays, uncertainties as to market demand or
deterioration in market demand after commencement of renovation, and the
emergence of unanticipated competition from hotels. See "Business and the
Properties - The Percentage Leases."
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Real Estate Investment Risks
General Risks of Investing in Real Estate
The Hotels are subject to varying degrees of risk generally incident to
the ownership of real property. The underlying value of the Hotels and the
Company's income and ability to make distributions to its shareholders are
dependent upon the ability of the Lessee to operate the Hotels in a manner
sufficient to maintain or increase revenues in excess of operating expenses to
enable the Lessee to make Rent payments. Hotel revenues may be adversely
affected by adverse changes in national economic conditions, adverse changes in
local market conditions due to changes in general or local economic conditions
and neighborhood characteristics, competition from other hotels, changes in
interest rates and in the availability, cost and terms of mortgage funds, the
impact of present or future environmental legislation and compliance with
environmental laws, the ongoing need for capital improvements (particularly in
older structures) changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including earthquakes, hurricanes and other natural disasters (which may
result in uninsured losses), acts of war, adverse changes in zoning laws, and
other factors which are beyond the control of the Company. See "Business and
Properties."
Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions will be limited. No assurances can be given that the fair market
value of any of the Hotels will not decrease in the future.
Uninsured and Underinsured Losses
Each Percentage Lease requires that comprehensive insurance be
maintained on each of the Hotels, including liability and fire and extended
coverage, in amounts sufficient to permit the replacement of the Hotels in the
event of a total loss, subject to applicable deductibles. Management believes
that such specified coverage is of the type and amount customarily obtained by
owners of hotels similar to the Hotels. Leases for hotels acquired or developed
by the Company in the future may contain similar provisions. However, there are
certain types of losses, generally of a catastrophic nature, such as
earthquakes, floods and hurricanes, that may be uninsurable or not economically
insurable. Inflation, changes in building codes and ordinances, environmental
considerations, and other factors also might make it infeasible to use insurance
proceeds to replace a Hotel, if it is damaged or destroyed. Under such
circumstances, the insurance proceeds received by the Company might not be
adequate to restore its economic position with respect to the affected Hotel.
See "Business and Properties - The Percentage Leases."
Property Taxes
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase or decrease as property tax rates change and as the properties are
assessed or reassessed by taxing authorities. If property taxes increase, the
Company's ability to make expected distributions to its shareholders could be
adversely affected.
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Environmental Matters
Operating costs and the value of the Hotels may be affected by the
obligation to pay for the cost of complying with existing environmental laws,
ordinances and regulations, as well as the cost of future legislation. 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. Therefore, an environmental liability could have
a material adverse effect on the underlying value of the Hotels, the Company's
income and Cash Available for Distribution to Shareholders. Phase I
environmental assessments were obtained on all of the Hotels prior to their
acquisitions by the Company. A Phase I was conducted on the land on which the
New Development is being built in February 1995, and the Company intends to
update that Phase I prior to the completion of the New Development. The purpose
of Phase I environmental assessments is to identify potential environmental
contamination that is made apparent from historical reviews of the Hotels,
reviews of certain public records, preliminary investigations of the sites and
surrounding properties, and screening for the presence of hazardous substances,
toxic substances and underground storage tanks. The Phase I environmental
assessment reports have not revealed any environmental contamination that the
Company believes would have a material adverse effect on the Company's business,
assets, results of operations or liquidity, nor is the Company aware of any such
liability. Nevertheless, it is possible that these reports do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. Because the Solomons Inn-Beacon Marina Hotel
is located on a tributary to the Chesapeake Bay, the Company's ability to expand
any facilities at this hotel will be limited by state and federal environmental
regulations. See "Business and Properties - Environmental Matters."
Compliance with Americans with Disabilities Act
and other Changes in Governmental Rules and Regulations
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. While the Company believes that the
Hotels are substantially in compliance with these requirements, a determination
that the Company is not in compliance with the ADA could result in imposition of
fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use and
operation of the Hotels, including changes to building codes and fire and
life-safety codes, may occur. If the Company were required to make substantial
modifications at the Hotels to comply with the ADA or other changes in
governmental rules and regulations, the Company's ability to make expected
distributions to its shareholders could be adversely affected.
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THE COMPANY
The Company is a self-administered REIT that, through the Partnership,
owns interests in nine existing limited-service Hotels with an aggregate of 617
rooms and an average age of approximately nine years as of September 30, 1996.
The Hotels include seven hotels operated as Comfort Inns, one hotel operated as
a Best Western, and one hotel operated as a Days Inn. The Hotels are located in
Maryland (one hotel), Tennessee (one hotel), Virginia (five hotels) and West
Virginia (two hotels). The Company is a corporation incorporated under the laws
of Virginia.
The Company is currently developing the New Development, a 64-unit
Comfort Suites hotel to be located in Dover, Delaware. The Company believes that
the total costs associated with the New Development will be approximately $2.8
million, of which the Company has paid $660,000 using the Credit Facility, with
the remainder being funded from the Net Proceeds. Construction on the New
Development began in May 1996 and is expected to be completed in early 1997.
The Partnership will use the Net Proceeds (i) to repay approximately
$660,000 of outstanding debt on the Credit Facility, which is secured by six of
the Hotels and by the New Development, (ii) to pay the remaining costs
associated with the New Development, which are estimated to be approximately
$2.1 million; and (iii) to establish a fund for future acquisitions and
development. Upon the application of the Net Proceeds, the Company will have the
Remaining Indebtedness (approximately $8.2 million) outstanding, which debt
shall be secured by certain of the Hotels and the New Development.
In order to qualify as a REIT, the Company cannot operate hotels.
Therefore, the Hotels are leased to and operated by the Lessee. The Percentage
Leases, which relate to the Hotels, are designed to allow the Company to
participate in growth in revenues of the Hotels by providing that percentages of
such revenues are paid by the Lessee as Rent. Mr. Humphrey is the sole
shareholder of the Lessee.
The Company's executive offices are located at 12301 Old Columbia Pike,
Silver Spring, Maryland 20904 and its telephone number is (301) 680-4343.
GROWTH STRATEGY
The Company seeks to enhance shareholder value by increasing Cash
Available for Distribution to Shareholders by acquiring additional operating
hotels and developing hotels that meet the Company's investment criteria and by
participating in increased revenues from the Hotels through the Percentage Rents
provided under Percentage Leases. Therefore, the Company has developed a growth
strategy that management of the Company believes will capitalize on attractive
acquisition and development opportunities.
Acquisition Strategy
The Company intends to acquire equity interests in additional operating
hotels that meet its investment criteria as described below. The Company will
place particular emphasis on limited service hotels with strong, national
franchise affiliations in the upper economy and mid-scale market segments, or
hotels with potential to obtain such franchises. In particular, the Company will
consider acquiring limited service hotels such as Best Western, Comfort Inn,
Comfort Suites, Days Inn, Hampton Inn, Fairfield Inn and Holiday Inn Express
hotels, and limited service extended-stay hotels such as Hampton Inn and Suites,
Homewood Suites and Residence Inn hotels. Under the Bylaws, any transaction to
acquire any additional properties must be approved by a majority of the
Directors, including a majority of the Independent Directors.
The Company believes that there are existing hotels that meet its
investment criteria because of the adverse impact of high leverage on the
profitability and operations of many hotels, and the over-building of hotels
from 1980 through 1991. The Company also believes that the management,
development and construction experience of Mr. Humphrey will enable the Company
to identify underperforming hotels that would benefit substantially from
renovation, implementation of quality management and, in some instances, a new
Franchise License. The Company has an option to acquire any hotel acquired or
developed by Mr. Humphrey or his Affiliates within 12 months after the
acquisition or opening of such hotel. See "Policies and Objectives with Respect
to Certain Activities - Conflict of Interest Policies - The Non-Competition
Agreement and Option Agreement."
24
<PAGE>
Investment Criteria and Financing
The Company intends to consider investments in operating hotels,
primarily limited service hotels, that meet one or more of the following
criteria:
o nationally franchised hotels in locations with relatively high
demand for rooms, with relatively low supply of competing hotels
and with significant barriers to entry into the hotel business,
such as a scarcity of suitable hotel sites or zoning
restrictions;
o poorly managed hotels, which could benefit from new management,
new marketing strategy and/or association with a national
franchisor;
o hotels in a deteriorated physical condition which could benefit
significantly from renovations; and
o hotels in attractive locations that the Company believes could
benefit significantly by changing franchises to a brand the
Company believes is superior.
Under the Investment Policy, the Company will only acquire those hotels
for which it reasonably believes that it will receive annual Rent (net of
insurance paid by the Company, real estate and personal property taxes and the
FFE Reserve) in an amount greater than or equal to 12% of the total purchase
price to be paid by the Company for such hotels. Under the Bylaws, the approval
of a majority of the Board of Directors, including a majority of the Independent
Directors, is required for the Company to acquire any property. Such hotel
investments may be financed, in whole or in part, with undistributed cash,
subsequent issuances of shares of Common Stock or other securities or
borrowings. The Company's Debt Policy limits its consolidated indebtedness to
less than 50% of the aggregate purchase prices of the hotels in which it has
invested. The aggregate total purchase price paid by the Company for the Hotels
is currently approximately $25.5 million and is expected to be approximately
$28.3 million after the New Development is completed. After the Company has
applied the Net Proceeds (approximately $7.5 million) as set forth herein, the
Company's total outstanding indebtedness will represent approximately 32% of the
aggregate amount paid by the Company for the Hotels at the present time and,
after the completion of the New Development, the Remaining Indebtedness will
represent approximately 29% of such amount. The success of the Company's
acquisition strategy will likely depend on its ability to access additional
capital through issuances of equity securities. See "Risk Factors - Risks of
Leverage" and "-- Growth Strategy," "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources," "Policies and Objectives with Respect to Certain Activities -
Investment Policies" and "- Financing."
Development Strategy
The Company intends to grow through the development of new hotels as
well as from the acquisition of existing hotels. The Company intends to develop
limited-service hotels in secondary and tertiary markets, typically with under
100 rooms, that are similar to the Company's present hotels. The Company is
interested in sites that offer the potential to attract a diverse mix of
potential market segments.
The Company's development site selection criteria is expected to
include some or all of the following characteristics:
o Relatively low land costs, particularly as compared with major
metropolitan areas.
o Sites that exist on or near major highways.
o Areas that have strong industrial bases with the potential for
future growth.
o Communities with state or federal installations, colleges or
universities.
25
<PAGE>
o Areas that currently have an aging hotel presence.
These criteria describe the basic characteristics that the Company
looks for prior to committing to the development of a new hotel. Sites that are
selected may have some or all of the market characteristics as described above,
as well as characteristics that are not specifically described herein. It is not
anticipated that all sites selected by the Company will possess all of the
characteristics described herein.
Because a development project has no prior revenues on which the
Company's Investment Policy can be tested, the Company intends to invest only in
developments where it reasonably believes it will receive Rent payments that are
consistent with the Investment Policy. The Company has proposed to the Lessee
and the Lessee has agreed to sign the Fixed Lease pursuant to which the Lessee
would lease the New Development for a fixed rent payment of $378,840 per annum,
which will be payable in equal monthly installments. The annual rent payment
under the Fixed Lease (net of insurance paid by the Company, FFE Reserves and
real estate and personal property taxes) represents an approximately 12% return
on the Company's expected total investment in the New Development. See "Risk
Factors - No Assurance of Return on Property Investments." The New Development
has no operating history, therefore the Lessee's payments area based on the
Lessee's projections of operations of that hotel. To the extent that the
Lessee's projections are incorrect, the Lessee will have to pay the Rent on the
Fixed Lease from its net income or assets. In 1995, the Lessee's net income was
approximately $139,000, which is less than the $378,840 of annual Rent Payments
that will be required under the Fixed Lease and the Lessee has no significant
assets other than its interests in the Leases. See "Risk Factors - Dependence on
the Lessee." So long as the Investment Policy remains in effect, the Company
intends to enter into similar Fixed Leases on any additional hotels it develops
because the Company believes that this type of Lease mitigates the risks
associated with the initial startup of a hotel, such as low occupancy rates or
low room rates.
Internal Growth Strategy
The Percentage Leases are designed to allow the Company to participate
in growth in room revenues at the Hotels because it mitigates the risks
associated with the initial startup of a hotel such as low occupancy rates or
low room rates. The Company intends to use Percentage Leases substantially
similar to those applicable to the Hotels with respect to any additional
existing hotels it may acquire because the Company believes that there are fewer
start-up risks associated with acquiring an existing operating hotel than with
hotel developments. Under each Percentage Lease, the Partnership receives
Percentage Rents. The Percentage Rent for each Hotel is comprised of (i) a set
percentage of quarterly and semi-annual room revenues, which is payable
quarterly and semi-annually, respectively, (ii) a set percentage of annual room
revenues in excess of the Threshold, which is payable annually, and (iii) 8% of
monthly revenues other than room revenues (including, but not limited to,
telephone charges, movie rental fees and rental payments under any third party
leases), which is payable monthly. The portion of Percentage Rent that is based
on annual room revenues does not apply to amounts under the Threshold and is
designed to allow the Company to participate in any future increases in room
revenues. See "Business and Properties - The Hotels" and "- The Percentage
Leases - Amounts Payable Under the Percentage Leases." The Company intends to
use Percentage Leases substantially similar to those applicable to the Hotels
with respect to additional existing hotels it may acquire.
While under the operation of Humphrey Hotels, Inc. (the "Operator"), an
affiliate of the Lessee, consolidated REVPAR for the Hotels increased from
$27.41 for 1989 to $35.23 for 1995. See "Business and Properties." The Lessee
and Operator combined operations in early 1996 and the Operator ceased to exist.
Management believes, based on the increases in REVPAR at the Hotels, and all
upper economy U.S. hotels, that the growth in REVPAR since 1989 reflects the
increased popularity of limited service hotels with business and leisure
travelers, improving industry conditions since the fourth quarter of 1991 and
the Lessee's and the Operator's implementation of consumer-oriented and
site-specific operating practices at the Hotels.
26
<PAGE>
USE OF PROCEEDS
The Net Proceeds (after deducting underwriting discounts and offering
expenses of approximately $792,000) will be approximately $7.5 million based on
the Offering Price ($8.6 million if the over-allotment option is fully
exercised). The Company will contribute all of the Net Proceeds to the
Partnership and after such contribution will own a 84.24% interest in the
Partnership (84.81% if the over-allotment option is fully exercised). The
Partnership will use the Net Proceeds of the Offering as follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
(1) to repay certain amounts under the Credit Facility..............................................$ 660,000
(2) to pay for the estimated remaining costs associated with the New development.................... 2,136,000
(3) to establish reserves for future acquisitions and development....................................4,662,000
---------
Total..................................................................................$7,458,000
=========
</TABLE>
The Company currently has no agreement or understanding to invest in
any specific property other than the New Development. Until the Company
identifies hotel acquisition or development investments and until the New
Development is completed, the company will invest all of the Net Proceeds not
used to repay portions of the Credit Facility in an assortment of short-term
treasury bills, bank certificates of deposit and commercial paper obligations
with terms varying from one to three months.
The following describes the amounts under the Credit Facility to be
repaid with the Net Proceeds:
<TABLE>
<CAPTION>
Amount Interest Rate Maturity Date
------ ------------- -------------
<S> <C>
Amounts Payable to Mercantile
under the Credit Facility............... $ 660,000 8.50%(1) April 10, 1999
</TABLE>
- ----------------------
(1) The interest rate is equal to the prime rate as published in the "Money
Rates" section of The Wall Street Journal (8.25% as of December 4, 1996)
plus .25%.
To the extent that the Underwriters' allotment to purchase up to
150,000 Common Shares is exercised in full, the Company expects to use the
additional net proceeds of up to approximately $1,152,400 for future
acquisitions or development.
27
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock currently trades on The Nasdaq Stock Market under the
symbol "HUMP." The following table sets forth for the indicated periods the high
and low bid prices per share for the Common Stock, as traded through the
facilities of The Nasdaq SmallCap Market, and the cash distributions declared
per share. Beginning October 30, 1996, the Common Stock began trading on The
Nasdaq Stock Market.
<TABLE>
<CAPTION>
Price Range
----------- Cash Distributions
High Low Declared Per Share
<S> <C> ---- --- ------------------
1994
Fourth Quarter (beginning November 29)........ $6.375 $6.00 $0.044(1)
1995
First Quarter................................. $7.75 $6.25 $0.15
Second Quarter................................ $7.75 $7.50 $0.15
Third Quarter ................................ $8.75 $7.50 $0.181(2)
Fourth Quarter................................ $8.375 $7.75 $0.19
1996
First Quarter................................. $9.125 $8.00 $0.19
Second Quarter................................ $9.375 $8.4375 $0.19
Third Quarter................................. $9.25 $8.25 $0.19
Fourth Quarter (through December 5)........... $8.50 $8.25
</TABLE>
- ------------------
(1) Represents a pro rata distribution for the period November 29, 1994, the
closing of the IPO, through December 31, 1994 based on an initial
quarterly distribution of $0.125 per share.
(2) Pro rata distribution for the period July 21, 1995, the closing of the
Company's second public offering of Common Stock, through September 30,
1995 based on a quarterly distribution of $0.19 per share.
On December 5, 1996, the last reported bid price of the Common Stock on
The Nasdaq Stock Market was $8.25 per share. As of December 3, 1996, the Company
had approximately 80 shareholders of record, and estimates that there were
approximately 640 beneficial owners of the Common Stock at that time.
The Closing will occur after the record date for the Company's
distribution to holders of Common Stock for the fourth quarter of 1996, and,
consequently purchasers of the Common Shares offered hereby will not receive a
distribution on their Common Shares until the Company makes its quarterly
distribution for the first quarter of 1997. Although the declaration of
distributions is within the discretion of the Board of Directors and depends on
the Company's results of operations, Cash Available for Distribution to
Shareholders, the financial condition of the Company, tax considerations
(including those related to REITs) and other factors considered important by the
Board of Directors, the Company's policy is to make regular quarterly
distributions to its shareholders. The Company's ability to make distributions
will depend on the receipt of distributions from the Partnership. The Company
has caused and intends to cause the Partnership to distribute to its partners
substantially all of its Cash Available for Distribution to Shareholders; the
Company's distributions to holders of Common Stock represented approximately 97%
of the Company's Cash Available for Distribution to Shareholders in the 12
months ended September 30, 1996. The Partnership's primary source of revenue is
Rent payments from the Lessee under the Percentage Leases for the Hotels. The
Company must rely on the operation of the Hotels to generate sufficient cash
flow from the operation of the Hotels to permit the Lessee to meet its Rent
obligations under the Percentage Leases. The Lessee has nominal assets and its
obligations under the Percentage Leases are unsecured. See "The Lessee."
Under the federal income tax provisions affecting REITs, the Company
must distribute at least 95% of its annual taxable income in order to avoid
taxation as a regular corporation. Moreover, the Company must distribute at
least 85% of its ordinary income and 95% of its capital gain net income (plus
any undistributed income from the prior year) to avoid certain excise taxes
applicable to REITs. Under certain circumstances, the Company may be required to
make distributions in excess of Cash Available for Distribution to Shareholders
in order to meet such distribution requirements. In such event, the Company
would seek to borrow the amount of the deficiency or sell assets to obtain the
cash necessary to make distributions to retain its qualification as a REIT. The
Company expects that a portion of its distributions will constitute a return of
capital. A return of capital generally is not subject to federal income tax
under current law. There can be no assurance that the portion of the
distributions estimated to be a return of capital based on pro forma results is
indicative of the actual return of capital for any future period.
29
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, as adjusted to give effect to the Offering and the use of
the Net Proceeds as described under "Use of Proceeds."
<TABLE>
<CAPTION>
September 30, 1996
---------------------
Pro Forma
Actual As Adjusted
------ -----------
(In thousands)
<S> <C>
Short-term debt........................................... $ 697 $ 697
Long-term debt............................................ 8,970 8,310
Minority interest......................................... 2,558 3,182
Shareholders' Equity:
Preferred Stock, $0.01 par value,
10,000,000 shares authorized,
no shares issued and outstanding ...................... - -
Common Stock, $0.01 par value,
25,000,000 shares authorized, 2,331,700 shares
issued and outstanding and 3,331,700, as adjusted(1)... 23 33
Additional paid-in capital............................... 10,265 17,089
Undistributed income (losses)............................ (114) (114)
---------- -----------
Total shareholders' equity................................ 10,174 17,008
------- -------
Total capitalization...................................... $22,399 $29,197
======= =======
</TABLE>
- ---------------------
(1) Includes 1,000,000 Common Shares offered hereby. Excludes 623,350 shares
of Common Shares issuable upon redemption of Units.
30
<PAGE>
DILUTION
The Offering Price per share to the public of the Common Shares offered
hereby exceeds the pro forma net tangible book value per share or unit after the
offering. Therefore, the holders of Units will realize an immediate increase in
the net tangible book value of their Units, while purchasers of Common Shares in
the Offering will realize an immediate and substantial dilution of $3.15 or
38.2% of the Offering Price in the net tangible book value of their shares. Pro
forma net tangible book value per share is determined by subtracting total
liabilities from total tangible assets and dividing the remainder by the number
of shares of Common Stock and Units that will be outstanding after the Offering.
The following table illustrates the dilution to purchasers of Common Shares in
the Offering, based on the assumed Offering Price.
<TABLE>
<S> <C>
Offering Price per Common Share(1)....................................................... $8.25
Pro forma net tangible book value per Unit (which may be redeemed for Common
Stock on a one-for-one basis in certain circumstances) as of September 30,
1996, prior to the Offering, applicable to the minority interest in the
Partnership(2)......................................................................... $4.10
Reduction in minority interest prior to the
Offering(3)............................................................................ 1.09
Increase in net tangible book value per share
attributable to payments by purchasers of
shares in the Offering(4).............................................................. 1.88
Increase in minority interest resulting from
the Offering(5)........................................................................ (1.97)
-----
Pro forma net tangible book value per share or Unit
after the Offering..................................................................... $5.10
-----
Dilution per share to Common Shareholders................................................ $3.15
=====
</TABLE>
- ---------------------
(1) Before deducting underwriting discounts and estimated expenses of the
Offering.
(2) Represents the minority interest at September 30, 1996, before the
Offering, divided by the Units outstanding (623,350 Units).
(3) Represents the percentage reduction in minority unit holders' interest
from 21.09% prior to the Offering to 15.76% after the Offering or 5.33%
times shareholders' equity at September 30, 1996 ($10,174,000) plus
minority interest ($2,558,000) divided by the Units outstanding (623,350
Units).
(4) Net proceeds of the Offering divided by 3,955,050 shares of Common Stock
and Units.
(5) Net proceeds from the Offering ($7,458,000) times minority interest
(15.76%) divided by 623,350 Units.
31
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth (i) audited and unaudited historical
revenue and expenses and financial data for the Company and the Lessee for the
period from November 29, 1994 (Date of the IPO) through December 31, 1994, the
year ended December 31, 1995, the twelve months ended September 30, 1996, and
the nine months ended September 30, 1995 and 1996, (ii) unaudited pro forma
revenue and expenses and financial data for the Company for the year ended
December 31, 1995, the twelve months ended September 30, 1996 and the nine
months ended September 30, 1995 and 1996, (iii) audited and unaudited selected
historical and pro forma financial and other data for the Company, (iv) selected
combined historical operating and financial data for the eight hotels (the
"Initial Hotels") purchased by the Company in connection with the Company's IPO
for each of the years in the three year period ended December 31, 1993, and the
eleven month period ended November 29, 1994, and pro forma operating and
financial data for the year ended December 31, 1994, and (v) selected historical
financial data for the Days Inn-Farmville, Virginia Hotel for each of the years
in the two year period ended December 31, 1993, the ten months ended October 31,
1994 and the period from January 1, 1995 through July 20, 1995, and pro forma
financial data for the year ended December 31, 1994. The selected historical
operating and financial data for the Company and the Lessee for the periods
ended December 31, 1994 and 1995, the Initial Hotels for the three years ended
December 31, 1993, and the period from January 1, 1994 through November 29,
1994, and the Days Inn-Farmville, Virginia Hotel for the two years ended
December 31, 1993 and the ten months ended October 31, 1994 and the period from
January 1, 1995 through July 20, 1995 have been derived from the historical
financial statements of the Company, the Lessee, the Initial Hotels, the Days
Inn-Farmville, Virginia Hotel and Farmville Lodging Associates, LLC audited by
Reznick Fedder & Silverman, independent public accountants, whose reports with
respect thereto are included elsewhere in this Prospectus. The historical
operating and financial data of the Company and the Lessee as of and for the
nine months ended September 30, 1995 and 1996, have been derived from the
unllaudited internal financial statements of the Company and the Lessee. In the
opinion of management, the unaudited financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. Due to the seasonality of the
hotel business, the results for the nine months ended September 30, 1995 and
1996, are not necessarily indicative of the results for a full year.
The selected pro forma revenue and expenses and financial data are
presented as if the Offering had occurred as of the beginning of the respective
periods, and therefore incorporate certain assumptions that are included in the
Notes to the Pro Forma Condensed Statements of Income included elsewhere in this
Prospectus.
The pro forma balance sheet data of the Company is presented as if the
Offering had occurred as of September 30, 1996. The pro forma information does
not purport to represent what the Company's financial position would actually
have been if the Offering had, in fact, occurred on such date or at the
beginning of the year indicated, or to project the Company's financial position
at any future date.
The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and all of the financial statements and notes thereto
included elsewhere in this Prospectus.
32
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC. (THE COMPANY)
Selected Historical and Pro Forma
Revenue and Expenses and Financial Data(1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical
-------------------------------------------------------------
Period from
November 29, 1994
(Date of IPO) Year Twelve Nine
through Ended Months Ended Months Ended
December 31, December 31, September 30, September 30,
1994 1995 1996 1995
(Audited) (Audited) (Unaudited) (Unaudited)
--------- ----------- ------------ -------------
<S> <C>
Operating Data:
Percentage Lease revenue (2)..... $ 273 $ 3,750 $ 3,939 $ 2,753
Other income(3).................. - 21 28 11
----- --------- --------- ---------
Total revenue.................... 273 3,771 3,967 2,764
----- -------- -------- --------
Expenses:
Depreciation and amortization.... 42 680 727 496
Interest expense................. 97 1,011 640 833
Real estate and personal
property taxes and insurance... 18 196 213 144
General and administrative....... 15 238 294 200
----- --------- --------- ---------
Total expenses................. 172 2,125 1,874 1,673
----- --------- --------- --------
Income before
minority interest.............. 101 1,646 2,093 1,091
Minority interest (4)............ 29 396 441 279
----- --------- --------- ---------
Net income applicable
to Common Shareholders......... $ 72 $ 1,250 $ 1,652 $ 812
====== ======== ======== =======
Earnings per common share(5)..... $0.05 $0.71 $0.71 $0.51
Other Data:
Weighted average shares
outstanding and common share
equivalents outstanding (6)....1,849,666 2,310,184 2,955,050 2,136,992
Funds from operations (7)........ $ 143 $ 2,326 $ 2,820 $1,587
Net cash provided by
operating activities(8)........ $170 $ 1,113 $2,043 $876
Net cash used in
investing activities........... $(4,840) ($619) ($496) ($634)
Net cash provided by (used in)
financing activities........... $ 5,223 ($879) ($1,726) ($237)
<CAPTION>
Pro Forma
(Unaudited)
---------------------------------------------------------------------------
Nine
Months Ended Year Twelve Nine Nine
September 30, Ended Months Ended Months Ended Months Ended
1996 December 31, September 30, September 30, September 30,
(Unaudited) 1995 1996 1995 1996
----------- ------------ ------------ ------------- -------------
<S> <C>
Operating Data:
Percentage Lease revenue (2).... $ 2,942 $ 3,750 $3,939 $2,753 $2,942
Other income(3)................. 19 361 368 265 273
--------- -------- -------- ------ ------
Total revenue................... 2,961 4,111 4,307 3,018 3,215
-------- -------- -------- ------ ------
Expenses:
Depreciation and amortization... 543 680 727 496 543
Interest expense................ 462 1,011 640 833 462
Real estate and personal
property taxes and insurance.. 162 196 213 144 162
General and administrative...... 257 238 294 200 257
--------- -------- -------- ------ ------
Total expenses................ 1,424 2,125 1,874 1,673 1,424
--------- -------- -------- ------ ------
Income before
minority interest............. 1,537 1,986 2,443 1,345 1,791
Minority interest (4)........... 324 313 383 212 282
--------- -------- -------- ------ ------
Net income applicable
to Common Shareholders........ $ 1,213 $1,673 $2,050 $1,133 $1,509
======= ====== ====== ====== ======
Earnings per common share(5).... $0.52 $0.50 $0.62 $ 0.34 $ 0.45
Other Data:
Weighted average shares
outstanding and common share
equivalents outstanding (6)... 2,955,050 3,955,050 3,955,050 3,955,050 3,955,050
Funds from operations (7)....... $ 2,080 $ 2,666 $3,160 $1,841 $2,334
Net cash provided by
operating activities(8)....... $ 2,304 $1,453 $2,383 $1,130 $2,558
Net cash used in
investing activities.......... ($995) ($619) ($496) ($634) ($995)
Net cash provided by (used in)
financing activities.......... ($1,097) ($879) ($1,726) ($237) ($1,097)
</TABLE>
33
<PAGE>
Humphrey Hospitality Trust, Inc.
Selected Historical and Pro Forma Financial and Other Data (1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995 September 30, 1996
----------------- ----------------- ------------------
Historical Historical Historical Pro Forma
---------- ---------- ---------- ---------
(Audited) (Audited) (Unaudited)
--------- --------- -----------
<S> <C>
Balance Sheet Data:
Net investment in hotel properties..... $18,183 $ 19,709 $ 20,474 $ 20,474
Minority interest in Partnership....... 996 2,589 2,558 3,182
Shareholders' equity................... 4,365 10,290 10,174 17,008
Total assets........................... 19,375 21,898 22,399 29,197
Total debt............................. 13,795 8,383 8,970 8,310
</TABLE>
HUMPHREY HOSPITALITY MANAGEMENT, INC. (LESSEE)
Selected Historical Revenue and Expenses
and Financial Data (in thousands)
<TABLE>
<CAPTION>
Period from
November 29, 1994 Year Twelve Nine Nine
(Date of IPO) Ended Months Ended Months Ended Months Ended
through December 31, December 31, September 30, September 30, September 30,
1994 1995 1996 1995 1996
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited)
--------- --------- ----------- ----------- -----------
<S> <C>
Room revenue............................. $459 $ 7,499 $ 7,919 $ 5,738 $ 6,158
Other revenue (9)........................ 38 556 634 418 496
----- -------- -------- -------- --------
Total revenue.......................... 497 8,055 8,553 6,156 6,654
Hotel operating expenses................. 314 4,166 4,529 3,118 3,481
Percentage Lease payments................ 273 3,750 3,939 2,753 2,942
------ -------- -------- -------- --------
Net income (loss)........................$ (90) $ 139 $ 85 $ 285 $ 231
======== ======== ======= ======== ========
</TABLE>
35
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
Selected Combined Historical Operating and Financial Data
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
Historical Historical Pro Forma
1991 1992 1993 1994(10) 1994(10)
------ ------ ------ -------- --------
<S> <C>
Statement of Operations Data:
Room revenue............................. $6,272 $6,295 $6,627 $6,583 $7,042
Other revenue ........................... 864 742 704 715 752(11)
---- ------- ------- ------- ---
Total revenue............................ 7,136 7,037 7,331 7,298 $7,794
Hotel operating expenses ................ 4,584 4,409 4,603 4,513 4,827(11)
------ ------ ------ ------ -----
Operating income before interest,
depreciation, and amortization........... 2,552 2,628 2,728 2,785 2,967
Interest................................. 1,636 1,351 1,272 1,062 1,159
Depreciation and amortization............ 816 743 776 690 732
------- -------- ------- ------- ---
Net income (loss)........................ $ 100 $ 534 $ 680 $ 1,033 $1,076
====== ======= ======= ======= ======
Other Data
Net cash provided by
operating activities................. $769 $1,319 $1,503 $1,698 $1,896
Net cash used in
investing activities................. $(545) $(132) $(40) $(373) $(373)
Net cash used in
financing activities................. $(113) $(779) $(1,275) $(985) $(984)
</TABLE>
Days Inn - Farmville, Virginia
Selected Historical Financial Data
(in thousands)
<TABLE>
<CAPTION>
Historical Historical
---------- ----------
Ten Months January 1, 1995
Ended Proforma Through
1992 1993 October 31, 1994 1994(9) July 21, 1995(9)
---- ---- ---------------- ------- ----------------
<S> <C>
Operating Data:
Total revenue............................ $511 $563 $488 $567 $331
Total direct operating expenses.......... 337 346 303 350 215
--- --- --- --- ---
Excess of revenue over expenses.......... $174 $217 $185 $217 $116
==== ==== ==== ==== ====
</TABLE>
36
<PAGE>
(1) The pro forma information does not purport to represent what the Company's
financial position or results of operations would actually have been if
consummation of the Offering had, in fact, occurred on such date or at the
beginning of the periods indicated or to project the company's financial
position or results of operations at any future dates or for any future
period.
(2) Represents annual Base 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 revenues of the Hotels.
(3) Pro forma other income includes interest earnings on approximately $6.8
million of Offering proceeds invested for the period at an estimated rate
of return of 5% per annum, based upon current rates on liquid investments
currently available to the Company.
(4) Pro forma amounts calculated as 15.76% of estimated income before minority
interest.
(5) Represents income before minority interest divided by the weighted average
number of shares of Common Stock and common share equivalents, consisting
of units, outstanding for the period.
(6) Pro forma weighted average shares outstanding represents the weighted
average shares of Common Stock and common share equivalents outstanding
during 1996 (2,955,050 shares) and the 1,000,000 Common Shares to be
issued in connection with the Offering.
(7) Management considers Funds from Operations to be a market accepted measure
of an equity REIT's cash flow, which management believes reflects on the
value of real estate companies such as the Company, in connection with the
evaluation of other measures of operating performances. All REITs do not
calculate Funds from Operations in the same manner, therefore, the
Company's calculation of Funds from Operations may not be the same as the
calculation of Funds from Operations for similar REITs. In accordance
with the resolution adopted by the Board of Governors of the NAREIT, the
Company has defined Funds from Operations as net income (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
or sales of property, plus depreciation and amortization on real estate
assets, and after adjustments for unconsolidated partnerships and joint
ventures. For the periods represented, depreciation and amortization and
minority interest were the only non-cash adjustments. Therefore, pro forma
funds from operations represents cash flow from operating activities.
Funds from Operations should not be considered as an alternative to net
income or other measurements under generally accepted accounting
principles as an indicator of operating performance or to cash flows from
operating, investing or financing activities as a measure of liquidity.
Funds from Operations does not reflect working capital changes, cash
expenditures for capital improvement or debt service with respect to the
Hotels.
37
<PAGE>
The computation of historical and pro forma Funds from Operations is as
follows:
<TABLE>
<CAPTION>
Historical
-------------------------------------------------------------
Period from
November 29, 1994
(Date of IPO) Year Twelve Nine
through Ended Months Ended Months Ended
December 31, December 31, September 30, September 30,
1994 1995 1996 1995
(Audited) (Audited) (Unaudited) (Unaudited)
--------- --------- ----------- -----------
<S> <C>
Net income applicable to
common shareholders.............. $ 72 $1,250 $1,652 $ 812
Add:
Minority interests............. 29 396 441 279
Depreciation and
amortization................. 42 680 727 496
------ ------- ------- --------
Total............................ $ 143 $2,326 $2,820 $1,587
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Pro (Unaudited) Forma
--------------------------------------------
Nine
Months Ended Year Twelve Nine Nine
September 30, Ended Months Ended Months Ended Months Ended
1996 December 31, September 30, September 30, September 30,
(Unaudited) 1995 1996 1995 1996
----------- ---- ---- ---- ----
<S> <C>
Net income applicable to
common shareholders............. $1,213 $1,673 $2,050 $1,133 $1,509
Add:
Minority interests............ 324 313 383 212 282
Depreciation and
amortization................ 543 680 727 496 543
-------- ------- ------- ------- -------
Total........................... $2,080 $2,666 $3,160 $1,841 $2,334
====== ====== ====== ====== ======
(8) Pro forma net cash provided by operating activities includes estimated
interest earnings on approximately $6.8 million of Offering proceeds
invested for the period at an estimated rate of return of 5% per annum.
(9) Represents marina revenue (for the Comfort Inn - Beacon Marina, Solomons,
Maryland only), telephone revenue, restaurant revenue and other revenue.
(10) The historical 1994 operating data of the Combined Selling Partnerships -
Initial Hotels is for the period January 1, 1994 through November 29,
1994. The pro forma 1994 operating data for the Combined Selling
Partnerships - Initial Hotels represents the historical operating data of
the Initial Hotels for the period January 1, 1994 through November 29,
1994 and the Lessee for the period November 29, 1994 through December 31,
1994. The pro forma 1994 operating data for the Days Inn - Farmville,
Virginia Hotel represents the historical operating data of the Days Inn -
Farmville, Virginia Hotel for the period January 1, 1994 through October
31, 1994 (date of sale to Farmville Lodging Associates, LLC) and the
historical operating data of Farmville Lodging Associates, LLC for the
period November 1, 1994 through December 31, 1994. The historical
operating data for the Days Inn - Farmville, Virginia Hotel for the period
from January 1, 1995 through July 21, 1995 (date of sale) is that of
Farmville Lodging Associates, LLC.
(11) The decrease in pro forma operating expenses as compared to the historical
amounts for the Combined Selling Partnerships -Initial Hotels is
attributable to real estate and personal property taxes and property
insurance being paid by the Partnership on a pro forma basis as well as
the elimination of certain non-recurring management and accounting fees,
repairs and legal expenses. The decrease in pro forma other income as
compared to historical amounts for the Combined Selling Partnerships -
Initial Hotels is attributable to the elimination of certain non-recurring
gains on disposition of assets, debt forgiveness income and other
non-recurring income.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company currently owns a 78.91% interest in the Partnership and is
its sole general partner. After the Closing, the Company will own a 84.24%
partnership interest in the Partnership and will remain the sole general partner
of the Partnership. In order for the Company to qualify as a REIT, neither the
Company nor the Partnership may operate hotels. Therefore, the Partnership
leases the Hotels to the Lessee. The Company's principal source of revenue is
derived 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.
Inasmuch as neither the Company nor the Lessee had operations prior to November
29, 1994, actual year-to-year comparisons for the twelve month period ending
December 31, 1995 of actual historical operations are not possible.
Results of Operations
The following is a discussion of the results of operations for the
Company, the Lessee and the Hotels. Certain periods discussed below include pro
forma information, which assumes that all of the Hotels were operated for the
entire periods presented. Management believes that the comparisons of the pro
forma information demonstrates the internal growth of the Company related to the
operation of the Hotels. In each instance, pro forma lease revenue represents
lease payments from the Lessee to the Partnership on a pro forma basis
calculated by applying the Rent provisions in the Percentage Leases using the
historical room revenues of the Hotels as if the beginning of the period was the
beginning of the lease term. With respect to discussions of actual results,
because the Company and the Lessee commenced operations in November 1994, there
is no actual comparative data for prior periods.
Comparison of nine months ended September 30, 1996 to nine months ended
September 30, 1995
The Company
The Company's revenues for the nine month period ended September 30,
1996 consisted substantially of revenue recognized pursuant to the Percentage
Leases. Total revenue increased by $196,337, or 7.1%, to $2,960,823 from
$2,764,486 for the nine month period ended September 30, 1995. Net income
increased by $401,386, or 49.4%, to $1,212,989 for the nine month period ended
September 30, 1996, from $811,603 for the same period ended 1995. The
improvement in net income is attributed to the additional lease revenue from the
Days Inn-Farmville, Virginia Hotel, which was acquired in July 1995, and the
refinancing and/or retirement of Company debt on the hotels located in Solomons,
Maryland; Dahlgren, Dublin and Farmville, Virginia; Elizabethton, Tennessee, and
Princeton, West Virginia.
The Lessee
The Lessee's room revenues increased by $419,965, or 7.3%, to
$6,157,769 for the nine month period ended September 30, 1996 as compared to
$5,737,804 for the same period in 1995. Occupancy at the Hotels decreased to
72.1% for the nine month period ended September 30, 1996, from 73.9% for the
same period in 1995. The decrease in occupancy is attributed to record snowfall
in the first quarter of 1996 that all of the Hotels experienced and a slowdown
in construction related business at the Hotels located in Dublin, Virginia and
Elizabethton, Tennessee. During the second quarter of 1995, both hotels received
business as the result of special industrial construction projects that were
occurring in their respective locales. ADR at the Hotels increased to $50.56, or
by 3.8%, for the nine month period ended September 30, 1996, from $48.63 for the
same nine month period in 1995. Lessee operating expenses, including Percentage
Lease payments, increased by $552,245, as the result of the addition of the Days
Inn-Farmville Virginia Hotel, which was acquired on July 21, 1995, and
consolidating the Operator with the Lessee, to $6,423,040 for the nine months
ended September 30, 1996, as compared to $5,870,795 for the same period in 1995.
Comparison of year ended December 31, 1995 to pro forma year ended December 31,
1994
39
<PAGE>
The Company
The Company's total revenues for the twelve month period ended December
31, 1995 substantially consisted of revenue recognized pursuant to the
Percentage Leases. The Company's revenue was approximately $3,771,000, an
increase of 5.9% as compared to pro forma revenue of $3,560,000 for the period
ended December 31, 1994. Net income for the period was approximately $1,250,000,
an increase of 7.9% as compared to net income of $1,158,000 for the pro forma
period ended December 31, 1994. The improvement in revenue is attributed to the
addition of the Days Inn-Farmville, Virginia Hotel, which substantially
strengthened the Company's market position for the hotels located in Farmville,
Virginia. The improvement in net income is attributed to the additional revenue
from the Days Inn-Farmville, Virginia Hotel and the refinancing and/or the
retirement of debt on the Hotels located in Solomons, Maryland; Dahlgren, Dublin
and Farmville, Virginia; Elizabethton, Tennessee; and Princeton, West Virginia.
See "Humphrey Hospitality Trust, Inc. - Pro Forma Condensed Consolidated
Statement of Income for the Year Ended December 31, 1994."
The Lessee
Actual Lessee net income for the period ended December 31, 1995 was
approximately $139,000. The Lessee's revenues increased by approximately
$369,000, or 4.8%, to $8,055,000 for the twelve months ended December 31, 1995,
as compared to $7,686,000 of pro forma room revenue for the same period of 1994.
Occupancy for the hotels decreased from 74.3% for the year ended 1994, to 72.2%
for the year ended 1995. The decrease in occupancy is attributed to a decrease
in business activity at the Hotels located in Solomons, Maryland, and the
Comfort Inn-Farmville, Virginia. In 1994, Solomons received business from the
nearby nuclear plant, which typically performs specialized maintenance work
during the first quarter of each year. In 1995 this work was curtailed
dramatically. At the Comfort Inn - Farmville, Virginia, the Hotel realized
increased commercial activity related to highway construction on U.S. Route 460
near the Hotel that occurred in the third quarter in 1994. The construction was
substantially completed during the second quarter of 1995. The Days
Inn-Farmville, Virginia has an annual occupancy below the average for the
Company; accordingly, its inclusion for 1995's occupancy lowered the average
occupancy for the Hotels. ADR at the Hotels increased to $48.77 for the year
ended December 31, 1995, or 4.2%, as compared to $46.68 for the same period of
1994. REVPAR increased to $35.23 for 1995, from $34.68 for the same period in
1994. Operating expenses increased by approximately $121,000, or 1.2%, for the
twelve months ended December 31, 1995 as compared to pro forma operating
expenses for the same period last year. See "Humphrey Hospitality Management,
Inc. - Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 1994."
The following table sets forth certain combined historical and pro
forma financial information for the eight Hotels acquired by the Company in the
IPO (the "Initial Hotels") for the periods indicated.
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------- Histo- Pro
Historical rical Forma
---------- ------ -----
1991 1992 1993 1994(2) 1994(2)
---- ---- ---- ---- ----
<S> <C>
Room revenue $6,272 $6,295 $6,627 $6,583 $7,042
Other revenue 864 742 704 715 752
--- --- --- --- ---
Total revenue 7,136 7,037 7,331 7,298 7,794
Operating expenses 4,584 4,409 4,603 4,513 4,827
----- ----- ----- ----- -----
Operating income before interest,
depreciation, and amortization(1) 2,552 2,628 2,728 2,785 2,967
Interest 1,636 1,351 1,272 1,062 1,159
Depreciation and amortization 816 743 776 690 732
--- --- --- --- ---
Net income $100 $534 $680 $1,033 $1,076
==== ==== ==== ====== ======
</TABLE>
- --------------------
(1) The Company believes that operating income before interest, depreciation
and amortization provides a good indicator of the financial performance of
the Initial Hotels and is a significant factor in determining the Lessee's
ability to make lease payments to the Partnership and the Subsidiary
Partnership. Industry analysts generally consider operating income before
interest, depreciation and amortization to be an appropriate measure of the
performance of the Initial Hotels. This indicator, however, should not be
considered as an alternative to net income as an indication of the Lessee's
performance or to cash flow as a measure of liquidity.
40
<PAGE>
(2) The historical 1994 operating data of the Initial Hotels is for the period
January 1, 1994 through November 28, 1994. The pro forma 1994 operating
data represents the historical operating data of the Initial Hotels for the
period January 1, 1994 through November 28, 1994 and the Lessee for the
period November 29, 1994 through December 31, 1994.
Comparison of year ended December 31, 1994 to year ended December 31, 1993
Room revenue increased approximately $415,000, or 6.3% to approximately
$7.04 million in 1994 from approximately $6.63 million in 1993. The increase is
attributed to the improvement in ADR, which increased by 6.8% to $46.68 in 1994
from $43.79 in 1993. Occupancy decreased by .4% to 74.3% for 1994 as compared to
74.7% for 1993. REVPAR increased by 6.0% to $34.68 for 1994 from $32.71 for
1993.
Hotel operating expenses increased by approximately $224,000, or 4.9%,
to approximately $4.83 million from approximately $4.60 million, largely the
result of increased marketing expenses that are directly attributable to
franchisor mandated improvements in continental breakfast. In prior years of
operation, continental breakfast was voluntary and was not offered at all of the
Initial Hotels. The franchise mandated continental breakfast required more
extensive and costly food choices for the Initial Hotels than were previously
provided voluntarily. Net income improved by 58.2%, to approximately $1.08
million from approximately $680,000. The improvement in net income is attributed
to an increase in operating income before interest, depreciation, and
amortization and lower interest payments due to the curtailment of debt.
Comparison of year ended December 31, 1993 to year ended December 31, 1992
Room revenue increased approximately $332,000, or 5.2% to approximately
$6.63 million in 1993 from approximately $6.30 million in 1992. The increase was
primarily the result of an increase in ADR and a greater increase in occupancy.
ADR increased 1.3% to $43.79 in 1993 from $43.21 in 1992, and occupancy
increased 3.0% to 74.7% from 71.7%. REVPAR increased by 5.6% in 1993 from $30.99
to $32.71.
Hotel operating expenses increased by approximately $194,000, or 4.4%,
to approximately $4.60 million from approximately $4.41 million, principally as
the result of increased occupancy but remained at the same percentage of total
revenue, 63%. Net income improved by approximately $146,000, or 27.3%, to
approximately $680,000 from approximately $534,000. The improvement in net
income is attributed to an increase in operating income before interest,
depreciation, and amortization and lower interest payments due to the
curtailment of debt.
Comparison of year ended December 31, 1992 to year ended December 31, 1991
Room revenue increased approximately $23,000, or .3%, to approximately
$6.30 million in 1992 from approximately $6.27 million in 1991. The increase in
revenue is attributable to a 1% increase in ADR to $43.21 from $42.78, which
offset a decline in occupancy of .4% to 71.7% from 72.1%.
Hotel operating expenses decreased by approximately $175,000, or 3.7%,
to $4.41 million from approximately $4.58 million, causing net income to improve
by 434% from approximately $100,000 to approximately $534,000. The improvement
in net income is attributed to an increase in operating income before interest,
depreciation, and amortization and lower interest payments due to the
curtailment of debt.
Liquidity and Capital Resources
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, is its share of the Partnership's cash
flow. The Partnership's principal source of revenue is Rent payments under the
Percentage Leases. The Lessee's obligations under the Percentage Leases are
unsecured. The Lessee's ability to make Rent payments, and the Company's
liquidity, including its ability to make distributions to Common Shareholders,
is dependent on the Lessee's ability to generate sufficient cash flow from the
operation of the Hotels.
The hotel business is seasonal with hotel revenues generally greater in
the second and third quarters than in the first and fourth quarters. Because the
Company commenced operations in the fourth quarter and had no working capital
41
<PAGE>
reserves after the IPO, cash flow from operating activities from the Initial
Hotels was insufficient to fund distributions to shareholders in the partial
fourth quarter of 1994 and the first quarter of 1995. The distributions in both
such periods were partially funded with borrowings from a line of credit. After
the first quarter in 1995, the Company was able to make its expected
distributions by using undistributed cash from the second and third quarters to
fund any shortfall in cash flow from operating activities from the Hotels in the
first and fourth quarters.
After the Closing Date, to the extent that cash flow from operating
activities from the Hotels is insufficient to provide all of the estimated
quarterly distributions (particularly in the first and fourth quarters), the
Company anticipates that it will be able to fund any such deficit from
undistributed cash from prior periods (particularly the second and third
quarters).
The Company's long term debt as of September 30, 1996 was approximately
$8.9 million as follows:
Approximately $2.4 million from the Credit Facility, which is secured
by and cross- collateralized and cross-defaulted on the Hotels located
in Solomons, Maryland; Farmville, Virginia; Elizabethton, Tennessee;
Dahlgren, Virginia; Princeton, West Virginia; and the New Development.
The interest rate is variable at 25 basis points above prime rate, at a
current rate of 8.5% per annum. The Credit Facility matures in April,
1999.
Approximately $4.2 million, secured by a first deed of trust on the
Hotels located in Wytheville, Virginia and Morgantown, West Virginia.
Interest accrues at the rate necessary to remarket bonds at a price
equal to 100% of the outstanding principal balance. The interest rate
is approximately one half of the prime rate, which is adjusted weekly
and is not to exceed 15% and 11.3636% for Wytheville and Morgantown,
respectively. At December 4, 1996, the interest rate was approximately
3.6% for both. In addition, letter of credit fees, trustee fees and
financing fees increased the effective rate on the bonds to
approximately 6.75% as of the same date. The loans mature in November,
1999.
Approximately $2.4 million, secured by a first deed of trust on the
Comfort Inn-Dublin, Virginia. The outstanding principal bears interest
at a rate equal to 7.75% per annum with additional underwriters' fees
increasing the effective interest rate to 8%. The loan matures in
November, 2005.
The aggregate annual principal payments and payments to bond sinking
funds for the three years following September 30, 1996 are approximately as
follows:
1997 $ 180,000
1998 $ 193,000
1999 $2,571,000
Upon completion of the Offering and the concurrent payment of
approximately $660,000 of the Company's currently outstanding debt, the Company
will have Remaining Indebtedness in the aggregate principal amount of
approximately $8.2 million outstanding. All of the Remaining Indebtedness is
secured by one or more of the Hotels and the New Development.
Approximately $4.1 million of the Remaining Indebtedness (50.0%), is
secured by liens on the Comfort Inn-Morgantown, West Virginia and the Best
Western-Wytheville, Virginia Hotels and the notes related to such debt are
cross-collateralized and cross-defaulted so that the Company will risk losing
one or both of such Hotels to foreclosure upon a default on either of such
notes. Approximately $1.7 million of the Remaining Indebtedness, consisting of
borrowings under the Credit Facility, is secured by liens on six Hotels and the
New Development, and therefore the Company will be subject to a risk of loss to
foreclosure of all six Hotels and the New Development upon an event of default
under the Credit Facility. The remainder of the Remaining Indebtedness is
secured by a lien on the Comfort Inn-Dublin, Virginia Hotel only.
The Company's Debt Policy limits consolidated indebtedness to less than
50% of the aggregate purchase prices of the hotels in which it has invested. The
aggregate total purchase price paid by the Company for the Hotels is
42
<PAGE>
approximately $25.5 million and is expected to be approximately $28.3 million
after the New Development is completed. After the Company has applied the Net
Proceeds as set forth herein, the Company's total outstanding indebtedness will
represent approximately 32% of the aggregate amount paid by the Company for the
Hotels at the present time and, after the completion of the New Development, the
Remaining Indebtedness will represent approximately 29% of such amount. Because
of the amount of the Remaining Indebtedness, the success of the Company's
acquisition strategy will likely depend on its ability to access additional
capital through issuances of equity securities. See "Risk Factors -- Growth
Strategy."
The Company will invest in additional hotels only as suitable
opportunities arise. The Company will not undertake investments in such hotels
unless adequate sources of financing are available. The Bylaws require the
approval of a majority of the Directors, including a majority of the Independent
Directors, to acquire any additional hotel. It is expected that future
investments in hotels will be dependent on and financed by, in whole or in part,
the proceeds from additional issuances of shares of Common Stock or other
securities or borrowings. The Company currently has no agreement or
understanding to invest in any hotel other than the New Development and there
can be no assurance that the Company will make any investments in any other
hotels which meet its investment criteria, including the Investment Policy. See
"Growth Strategy - Acquisition Strategy."
Pursuant to the Percentage Leases, the Partnership is required to make
available to the Lessee the FFE Reserve, which is equal to 4% of room revenues
per quarter, on a cumulative basis, for capital improvements and periodic
replacement or refurbishment of furniture, fixtures and equipment at each of the
Hotels. The average annual expenditures for capital improvements and
refurbishments of furniture, fixtures and equipment for the Hotels for the years
1991 through 1995 was approximately 3.8% of annual room revenues. Therefore, the
Company believes that a 4% set-aside represents a prudent estimate of future
expenditure requirements for such items. The Company intends to cause the
Partnership to spend amounts in excess of the obligated amounts if necessary to
comply with the reasonable requirements of any Franchise License and otherwise
to the extent that the Company deems such expenditures to be in the best
interests of the Company. The Partnership is obligated to fund the cost of
certain capital improvements to the Hotels. The Company expects to use
undistributed cash flow from operations to fund the cost of capital improvements
and any furniture, fixture and equipment requirements in excess of the amount
required to be set aside by the Partnership as described above. See "Business
and Properties - The Percentage Leases."
The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its initial taxable year ended December
31, 1994, and as such the Company generally is not subject to federal income tax
on its net income. REITs are subject to a number of organizational and
operational requirements. See "Risk Factors - Tax Risks." For example, a REIT,
and therefore the Company, is required to distribute to its shareholders at
least 95% of its annual taxable income. The Company intends to make those
distributions from operating cash flows. The Company intends to retain as a
reserve such amounts as it considers necessary for the acquisition, expansion
and renovation of hotel properties consistent with continuing to distribute to
its shareholders amounts sufficient to maintain the Company's qualification as a
REIT.
The Company expects to meet its short-term liquidity requirements
generally through net cash provided by operations and existing cash balances.
The Company believes that its net cash provided by operations will be adequate
to fund both operating requirements and payments of dividends by the Company in
accordance with REIT requirements.
The Company expects to meet its 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
of the Company, or, in connection with acquisitions of hotel properties, the
issuance of Units.
Inflation
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures have limited and may, in the future,
limit the Lessee's ability to raise room rates in the face of inflation.
Industry-wide ADR generally has failed to keep pace with inflation since 1987.
43
<PAGE>
Seasonality of Hotel Business and the Hotels
The hotel industry is seasonal in nature. Generally, hotel revenues for
hotels operating in the geographic areas in which the Hotels operate are greater
in the second and third quarters than in the first and fourth quarters. The
Hotels' operations historically reflect this trend. Although the hotel business
is seasonal in nature, the Company believes that it generally will be able to
make its expected distributions by using undistributed cash from the second and
third quarters to fund any shortfall in cash flow from operating activities from
the Hotels in the first and fourth quarters.
44
<PAGE>
BUSINESS AND PROPERTIES
The Hotel Industry
According to Smith Travel Research, ADR and occupancy in U.S. hotels
has increased each year for the last three years. The upper economy hotel
segment, as defined by Smith Travel Research, is comprised of 20 hotel chains,
including the Comfort Inn, Hampton Inn, Fairfield Inn, Days Inn and Holiday Inn
Express chains. Within this segment, both room demand and room supply increased
by 5.5% in 1995 as compared to 1994. As a result, occupancy was 64.3% in 1995
and 1994. ADR, however, increased 5.7% to $47.53 in 1995 from $44.97 in 1994 and
REVPAR increased 5.7% to $30.57 in 1995 from $28.92 in 1994.
The following table contains occupancy, ADR and REVPAR information for
the periods indicated for the Hotels, all upper economy U.S. hotels and all U.S.
Hotels for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
---------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ----- -----
<S> <C>
Occupancy:
Hotels........................... 70.4 69.9 73.7 74.3 72.2 73.9 72.1
All Upper Economy U.S. Hotels(1). 61.6 62.4 63.4 64.3 64.3 66.6 65.9
All U.S. Hotels(1)............... 60.7 61.7 63.0 64.6 65.3 67.1 67.6
ADR:
Hotels........................... $42.65 $43.16 $43.31 $46.68 $48.77 48.63 50.56
All Upper Economy U.S. Hotels(1). $41.84 $42.16 $43.23 $44.97 $47.53 47.87 50.59
All U.S. Hotels(1)............... $58.98 $59.87 $61.93 $64.31 $67.41 67.16 71.59
REVPAR:
Hotels........................... $30.05 $30.14 $31.91 $34.68 $35.23 35.93 36.42
All Upper Economy U.S. Hotels(1). $25.77 $26.31 $27.39 $28.92 $30.57 31.89 33.33
All U.S. Hotels(1)............... $35.80 $36.94 $39.03 $41.56 $44.00 45.07 48.39
</TABLE>
- -------------------------
(1) Source - Smith Travel Research. The "All Upper Economy U.S. Hotels"
category includes approximately 20 hotel chains designated by Smith Travel
Research as "upper economy," including Comfort Inn and Days Inn.
Comfort Inn and Comfort Suites Hotels
Seven of the Hotels operate as Comfort Inn hotels. Since the inception
of the Comfort Inn brand in 1981, the number of hotels licensed under that brand
has grown to approximately 1,500 inns, hotels, and suites worldwide. Comfort Inn
and Comfort Suites are part of the worldwide Choice Hotels System of over 3,200
Sleep Inns, Comfort Inn, Comfort Suites, Mainstay, Quality, Clarion, Econo
Lodge, Rodeway and Friendship Inns, hotels, suites and resorts.
Best Western Hotels
One of the Hotels operates as a Best Western hotel. Best Western was
established in 1946 as a reservation referral system by hoteliers and has
developed into the world's largest hotel chain. As of September 30, 1996, Best
Western had 3,614 properties worldwide, with hotels located in 68 countries and
2,150 member properties located in North America.
Days Inn Hotels
One of the Hotels operates as a Days Inn hotel. Days Inn has been
operating for more than 20 years and presently has more than 150,000 rooms and
1,600 properties worldwide. Days Inn is part of HFS Incorporated's blend of
hotel brands which includes Ramada, Howard Johnson, Super 8, Park Inns, Villager
and Travelodge.
The Hotels
Set forth below is certain information regarding the Hotels for the
year ended December 31, 1995.
45
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------------------------------------------------------------
Percentage
Year Number of Room Other Lease Average
HOTELS Opened Rooms Revenue Revenue(1) Payment Occupancy ADR REVPAR
------ ----- ------- ------- ------- --------- --- ------
<S> <C>
Comfort Inn:
Dahlgren, Virginia........ 1989 59 $703,671 $30,871 $299,819 76.2% $42.89 $32.68
Dublin, Virginia.......... 1986 98 1,418,343 51,555 690,521 80.1% 49.51 39.65
Elizabethton, Tennessee... 1987 58 630,766 40,030 260,150 74.2% 40.17 29.80
Farmville, Virginia....... 1985 51 667,062 19,610 309,221 75.9% 47.22 35.83
Morgantown, West Virginia. 1986 80 1,142,716 37,059 557,057 77.3% 50.78 39.26
Princeton, West Virginia.. 1985 51 955,908 23,906 496,273 95.5% 53.78 51.35
Beacon Marina,
Solomons, Maryland...... 1986 60 864,650 298,686 680,633 67.1% 58.86 39.48
Best Western:
Wytheville, Virginia...... 1985 100 822,397 15,611 324,491 47.9% 47.23 22.64
Days Inn:
Farmville, Virginia(2).... 1989 60 293,732 17,307 132,291 66.2% 45.10 29.85
-- ------- ------ ------- ----- ----- -----
Consolidated Total/Weighted
Average for all Hotels... 617 $7,499,245 $534,635 $3,750,456 72.2% $48.77 $35.23
=== ========== ======== ========== ===== ====== ======
</TABLE>
- -------------------------
(1) Represents recurring marina rental revenue (for the Beacon Marina,
Solomons, Maryland only), telephone revenue, restaurant revenue and other
miscellaneous service revenue.
(2) Information for the Days Inn - Farmville, Virginia is for the period July
21, 1995 (date of acquisition) through December 31, 1995.
Comfort Inn-Dahlgren, Virginia
Description. The Comfort Inn-Dahlgren, Virginia is located off of U.S.
Route 301 within one mile of the U.S. Naval Surface Warfare Center (Dahlgren).
The hotel, which opened in 1989, is a 59-room, two-story, limited service hotel
with no restaurant or lounge, although a complimentary continental breakfast is
available for guests. Amenities include an exercise center, outdoor pool, indoor
jacuzzi, conference room and four extended stay rooms that are equipped with
refrigerators and microwave ovens.
Guest Profile and Local Competition. Approximately 70% of the hotel's
business is related to business from the adjacent Naval Surface Warfare Center.
The remainder of the hotel's business consists of tourists, overnight travelers
and people visiting local residents. The Company considers its primary
competition here to be the Days Inn in Colonial Beach, Virginia, and the Best
Western hotel in LaPlata, Maryland, both of which are located more than 15 miles
away from the Comfort Inn-Dahlgren, Virginia.
Comfort Inn-Dublin, Virginia
Description. The Comfort Inn-Dublin, Virginia is located at the
intersection of Interstate 81 and Virginia Route 100. The hotel, which opened in
1986, is a 98-room, two-story, limited service hotel with meeting and banquet
rooms. Amenities include an outdoor pool, hot tub, interior corridor and
complimentary continental breakfast. A free-standing restaurant, which the
Company leases to an unrelated operator, is located on the property.
Guest Profile and Local Competition. Approximately 35% of the hotel's
business is related to commercial activity from local businesses. The hotel's
group business, which accounts for approximately 20% 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,
visitors to area residents and demand generated by the hotel's proximity to
Virginia Polytechnic Institute and State University and Radford University. The
Company considers its primary competition here to be the Best Western hotel in
Radford, Virginia and the Hampton Inn in Christiansburg, Virginia.
46
<PAGE>
Comfort Inn-Elizabethton, Tennessee
Description. The Comfort Inn-Elizabethton, Tennessee is located off of
joint U.S. Routes 19E and 321 near the Tri-Cities of Bristol,
Tennessee/Virginia, Johnson City, Tennessee and Kingsport, Tennessee. The hotel,
which opened in 1987, is a 58-room, two-story, limited service hotel with no
restaurant or lounge, although a complimentary continental breakfast and evening
cider are available for guests. Amenities include an outdoor swimming pool,
exercise center, interior corridor and conference room. The hotel has received
three Gold Awards from Choice Hotels for excellence in service, maintenance,
housekeeping and employee training.
Guest Profile and Local Competition. Approximately 40% of the hotel's
business is related to commercial activity from local businesses. Approximately
50% of the hotel's business is generated by leisure travelers as a result of its
proximity to ski resorts, and other nearby tourist attractions. The remainder of
the hotel's business consists of overnight travelers and visitors to area
residents. The Company considers its primary competition here to be the
Fairfield Inn and the Red Roof Inn in Johnson City, Tennessee.
Comfort Inn-Farmville, Virginia
Description. The Comfort Inn-Farmville, Virginia, is located at the
intersection of U.S. Routes 15 and 460 between Hampden-Sydney College and
Longwood College, adjacent to the Company's Days Inn-Farmville, Virginia Hotel.
The hotel, which opened in 1985, is a 51-room, two-story, limited service hotel
with no restaurant or lounge, although a complimentary continental breakfast is
available for guests. Amenities include a swimming pool, interior corridor and
exercise room. The hotel received the first Gold Award awarded by Choice Hotels
for excellence in service, maintenance, housekeeping and employee training.
Guest Profile and Local Competition. Approximately 75% 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 Hampden-Sydney College and Longwood
College. The Company considers its primary competition here to be the Company's
Days Inn-Farmville, Virginia Hotel, and the Super 8 Motel(R) in Farmville,
Virginia.
Comfort Inn-Morgantown, West Virginia
Description. The Comfort Inn-Morgantown, West Virginia is located off
of Interstate 68, approximately three miles from West Virginia University. The
hotel, which opened in 1986, is an 80-room, two-story hotel with no restaurant
or lounge, although complimentary continental breakfast is available for guests.
Amenities include a swimming pool, indoor hot tub and exercise center. A
free-standing restaurant, which is leased to an unrelated operator, is located
on the property. This hotel has received one Gold Award and two Silver Awards
from Choice Hotels for excellence in service, housekeeping and maintenance.
Guest Profile and Local Competition. Approximately 35% 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 West Virginia University. The
Company considers its primary competition here to be the Hampton Inn and the
Ramada Inn in Morgantown, West Virginia.
Comfort Inn-Princeton, West Virginia
Description. The Comfort Inn-Princeton, West Virginia is located at the
end of the West Virginia Turnpike and near the intersection of Interstate 77 and
U.S. Route 460. The hotel, which opened in 1987, is a 51-room, two-story,
limited service hotel with no restaurant or lounge, although a complimentary
continental breakfast is available for guests. Amenities include an outdoor hot
tub and interior corridor.
Guest Profile and Local Competition. Approximately 45% 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 people visiting
Winterplace Ski Resort, area residents or Bluefield State College. The Company
considers its primary competition here to be the Days Inn, Hampton Inn, and
Sleep Inn in Princeton, West Virginia.
47
<PAGE>
Comfort Inn-Beacon Marina, Solomons, Maryland
Description. The Comfort Inn-Beacon Marina, Solomons, Maryland is
located on a tributary of the Patuxent River and a quarter of a mile off of
joint U.S. Routes 2 and 4. The hotel is also located near the Patuxent Naval Air
Station. The hotel which opened in 1986, is a 60-room, two-story, limited
service hotel. Amenities include a swimming pool, hot tub, complimentary
continental breakfast and a 187-slip marina. A free-standing waterfront
restaurant and a yacht yard, which are each leased to an unrelated third party,
are located on the property. Because of its location on a tributary to the
Chesapeake Bay, the Company's ability to expand any facilities at this hotel
will be limited by state and federal environmental regulations. This hotel has
received two Gold Awards for excellence in service, maintenance and
housekeeping.
Guest Profile and Local Competition. Approximately 70% of the hotel's
business is related to commercial activity from local businesses and demand
generated by the Patuxent River Naval Air Station. Approximately 25% of the
hotel's business consists of leisure travelers visiting the many tourist
attractions around Solomons Island. The Company considers its primary
competition here to be the Holiday Inn in Solomons, Maryland.
Best Western-Wytheville, Virginia
Description. The Best Western-Wytheville, Virginia is located at the
intersection of Interstates 77 and 81. The hotel, which opened in 1985, is a
100-room, two-story hotel with no restaurant or lounge although a complimentary
continental breakfast is available. Amenities include a swimming pool, meeting
room, interior corridor and free in-room movies.
Guest Profile and Local Competition. Approximately 70% of the hotel's
business is comprised of leisure travelers and transient guests related to its
location at the cross roads 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. The Company considers its primary competition
here to be the Days Inn and the Ramada Inn in Wytheville, Virginia.
Days Inn-Farmville, Virginia
Description. The Days Inn-Farmville, Virginia is located at the
intersection of U.S. Routes 15 and 460 between Hampden-Sydney College and
Longwood College, adjacent to the Company's Comfort Inn - Farmville, Virginia.
The hotel, which opened in 1989, is a 60-room, two-story, limited service hotel
with no restaurant or lounge, although a complimentary continental breakfast is
available for guests. Amenities include an outdoor pool and interior and
exterior corridor rooms.
Guest Profile and Local Competition. Approximately 75% of the hotel's
business is related to commercial activities from local businesses. The
remainder of the hotel's business consists of overnight travelers and general
demand generated by the hotel's proximity to Hampden-Sydney College and Longwood
College. The Company considers its primary competition here to be the Company's
Comfort Inn-Farmville, Virginia, and the Super 8 Motel in Farmville, Virginia.
48
<PAGE>
The following table sets forth certain information with respect to each
Hotel:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
---------------------------------------------- -------------------
The Hotels 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C>
Comfort Inn - Dahlgren, Virginia
Occupancy 69.1% 70.7% 74.4% 70.5% 76.2% 79.4% 76.3%
ADR $42.63 $42.30 $42.66 $43.55 $42.89 $42.93 $42.97
REVPAR $29.46 $29.99 $31.76 $30.70 $32.68 $34.07 $32.80
Comfort Inn - Dublin, Virginia
Occupancy 70.7% 68.8% 74.6% 80.7% 80.1% 80.0% 75.7%
ADR $42.54 $44.04 $42.80 $45.97 $49.51 $49.07 $52.24
REVPAR $30.08 $30.10 $31.94 $37.08 $39.65 $39.27 $39.55
Comfort Inn - Elizabethton, Tennessee
Occupancy 64.3% 63.8% 74.6 68.8% 74.2% 78.9% 62.6%
ADR $38.65 $39.32 $39.43 $39.98 $40.17 $40.01 $44.70
REVPAR $24.86 $25.07 $26.82 $27.52 $29.80 $31.55 $27.97
Comfort Inn - Farmville, Virginia
Occupancy 69.0% 72.8% 80.7% 84.3% 75.9% 79.5% 81.7%
ADR $41.91 $41.40 $40.10 $41.81 $47.22 $47.06 $48.87
REVPAR $28.91 $30.13 $32.38 $35.24 $35.83 $37.42 $39.95
Comfort Inn - Morgantown, West Virginia
Occupancy 77.8% 77.9% 81.9% 81.8% 77.3% 80.6% 78.5%
ADR $45.12 $44.87 $46.28 $49.00 $50.78 $50.65 $52.10
REVPAR $35.12 $34.71 $37.88 $40.10 $39.26 $40.81 $40.88
Comfort Inn - Princeton, West Virginia
Occupancy 93.6% 93.5% 93.9% 95.9% 95.5% 96.3% 93.3%
ADR $43.42 $46.88 $48.08 $50.37 $53.78 $53.61 $56.85
REVPAR $40.64 $43.66 $45.16 $48.31 $51.35 $51.61 $53.02
Comfort Inn - Beacon Marina,
Solomons, Maryland
Occupancy 71.8% 72.1% 72.5% 78.6% 67.1% 71.4% 75.5%
ADR $54.80 $49.92 $53.49 $55.37 $58.86 $59.33 $58.89
REVPAR $39.35 $35.91 $38.79 $43.50 $39.48 $42.39 $44.47
Best Western - Wytheville, Virginia
Occupancy 66.2% 63.8% 61.4% 48.9% 47.9% 49.6% 47.8%
ADR $35.44 $37.48 $38.08 $45.12 $47.23 $48.91 $49.73
REVPAR $23.45 $23.91 $23.39 $22.07 $22.64 $24.27 $23.75
Days Inn - Farmville, Virginia
Occupancy 54.6% 58.7% 64.2% 58.0% 62.7% 63.8% 73.2%
ADR $41.03 $38.61 $38.10 $42.55 $44.27 $44.57 $45.20
REVPAR $22.40 $22.66 $24.48 $24.68 $27.78 $28.44 $33.08
</TABLE>
Occupancy and REVPAR for the Best Western - Wytheville, Virginia
declined from 1993 to 1994. The Company believes that the decline in occupancy
and REVPAR is a result of the loss of a year-to-year contract pursuant to which
a trucking firm reserved at least ten rooms daily at rates significantly below
quoted market rates. In 1993, the contract was awarded to another hotel that
submitted a lower bid. The Company believes that the effects of the loss of such
contract have been partially offset by increases in ADR, as shown in the table
above. There can be no assurances, however, that the increase in ADR can return
REVPAR at this Hotel to the historical levels achieved prior to the termination
of the contract. The decrease in occupancy in 1994 compared to 1993 at the
Comfort Inn-Dahlgren, Virginia was primarily due to a higher than normal
occupancy in 1993 that was attributable to an increase in construction at the
adjacent Naval Surface Warfare Center during that year. Occupancy and REVPAR at
the Comfort Inn-Morgantown, West Virginia, declined in 1995 from 1994 due to the
bankruptcy of the lessee of the restaurant at that hotel. The Company executed a
new lease for this restaurant in early 1996. The decrease in occupancy and
REVPAR from 1994 to 1995 at the Comfort Inn-Beacon Marina, Solomons, Maryland,
was primarily attributable to the fact that in 1995 a nearby nuclear power
station dramatically curtailed the amount of specialized maintenance work it
historically had performed in the first quarter of each year. The occupancy of
many of the Hotels decreased in the nine months ended
49
<PAGE>
September 30, 1996, as compared with comparable periods in 1995 due to the
record snowfall in the first quarter of 1996. At the Comfort Inn-Dahlgreen,
Virginia, and the Best Western-Wytheville, the impact of the weather was great
enough to impact negatively REVPAR. In addition, the Hotels in Dublin, Virginia
and Elizabethton, Tennessee both experienced a slowdown in construction-related
business in 1996 which had a negative impact on occupancy and REVPAR during the
nine months ended September 30, 1996.
The New Development
On April 15, 1996, the Company purchased, from a third party, a 1.32
acre lot in Dover, Delaware, using borrowings from the Credit Facility, and
commenced the development of the New Development, which will be a 64-room
Comfort Suites hotel. To date, the Company has incurred approximately $660,000
in costs associated with the New Development, which has been funded by
borrowings under the Credit Facility. The remaining costs of the New Development
will be financed with a portion of the Net Proceeds and will be $2,136,000
because the Company has executed the Development Agreement with Humphrey
Development pursuant to which Humphrey Development provides construction
supervision and will pay any development costs in excess of $2,795,910 in
exchange for a right to purchase the New Development from the Company on the
sixth anniversary of its commencement of operations for $2,795,910. See "Risk
Factors - Competing Hotels to be Acquired by Affiliates of Mr. Humphrey." Upon
completion and opening for occupancy, the hotel will be leased by the Lessee for
a fixed rent of $378,840 a year, payable in equal monthly installments.
Construction on the New Development began in May 1996 and is expected to be
completed in January 1997. The New Development has no operating history,
therefore the Lessee's payments area based on the Lessee's projections of
operations of that hotel. To the extent that the Lessee's projections are
incorrect, the Lessee will have to pay the Rent on the Fixed Lease from its net
income or assets. In 1995, the Lessee's net income was approximately $139,000,
which is less than the $378,840 of annual Rent Payments that will be required
under the Fixed Lease.
The New Development will be a limited service, all-suite Comfort Suites
hotel. It will contain 64 units, each of which will contain a partitioned
bedroom and living room suite, a compact refrigerator, a microwave oven, an
in-room coffee maker and an oversized bath. The facility will contain interior
corridors, a swimming pool and a hot tub. The facility will also offer its
guests a complimentary continental breakfast.
The New Development is located on U.S. Route 13, approximately one mile
north of the center of Dover. The property is set back from the highway with a
Bob Evans restaurant shielding the hotel from some of the noise generated by
U.S. Route 13. The New Development will be the only nationally-branded all-suite
hotel in the Dover market. In addition, from points north of Dover, the New
Development will be the first nationally-branded lodging facility that travelers
on U.S. Route 13, which is one of two major North/South corridors on the
Delmarva peninsula, will encounter upon arriving in Dover.
The New Development is located in Dover, Delaware, which is in Kent
County, the middle county of three counties comprising Delaware. Dover is the
capital of Delaware. The major employers in the Dover/Kent County area are the
State of Delaware, Dover Air Force Base and several food and poultry processing
facilities. The area has many tourist attractions which include historical
sites, auto racing at Dover Downs and Delaware's ocean beaches. The Company
believes that approximately one-half of the New Development's customers will be
commercial travelers and the other half will be leisure travelers.
The New Development's main competitors will be a 156-room Sheraton
Dover hotel and a 80-room Hampton Inn hotel. The average age of all the
competitors is 25 years. The Company believes that the New Development's age and
smaller guest room content will make the hotel attractive to guests and allow
the hotel to have a quick market absorption. The potential disadvantages that
the Company foresees are (i) the traffic congestion on U.S. Route 13 during
special events could cause ingress, egress and parking problems for guests, (ii)
possible increased usage of the new U.S. Route 13 Bypass could channel some
potential transient customers away for the hotel, and (iii) the Sheraton Dover
hotel is in good condition and may not be vulnerable to new supply offering. The
Company believes that the competitive and market penetration attributes of the
New Development are greater than the anticipated disadvantages.
50
<PAGE>
Fixed Leases
Because development projects have no prior income to which the Company
can apply the Investment Policy, the Company intends to invest in developments
only where it reasonably believes it will receive rent payments from the Lessee
consistent with the Investment Policy. See "Growth Strategy -- Development
Strategy." The Company has proposed to the Lessee and the Lessee has agreed to
sign a lease agreement for the Fixed Lease pursuant to which the Lessee will
lease the New Development for a fixed rent payment of $378,840 per annum, which
will be payable in equal monthly installments. See "-- The New Development." So
long as the Investment Policy remains in effect, the Company intends to enter
into similar Fixed Leases on any new hotel developments because the Company
believes that this type of Lease mitigates the risks associated with the initial
startup of a hotel, such as low occupancy rates or low room rates. The Company
anticipates that all material terms of the Fixed Leases except for the Rent
payment terms will be substantially similar to the terms of the Percentage
Leases described below.
The Percentage Leases
In order for the Company to qualify as a REIT, neither the Company nor
the Partnership may operate hotels. The Partnership, therefore, leases the
Hotels to the Lessee for a term of ten years pursuant to Percentage Leases which
may be renewed for a period of five years at the Lessee's option. The Percentage
Leases provide for both Base Rent and Percentage Rents. The Company intends to
use similar leases with respect to additional existing hotels it may acquire
because the Company believes that there are fewer start-up risks associated with
acquiring an existing operating hotel than with hotel developments. The Board of
Directors may, however, in its discretion, alter any of these provisions with
respect to any proposed Percentage Lease, depending on the purchase price paid,
economic conditions and other factors deemed relevant at the time. The following
summary is qualified in its entirety by the Percentage Leases, which have been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
Percentage Lease Terms. Each Percentage Lease has a non-cancelable term
of ten years, which may be renewed for an additional term of five years at the
Lessee's option, subject to earlier termination upon the occurrence of defaults
thereunder and certain other events described therein (including, particularly,
the provisions described herein under "Damage to Hotels," "Condemnation of
Hotels" and "Termination of Percentage Leases on Disposition of the Hotels").
Amounts Payable Under the Percentage Leases. During the term of each
Percentage Lease, the Lessee is obligated to pay (i) the Base Rent and
Percentage Rents, and (ii) certain other amounts, including interest accrued on
any late payments or charges (the "Additional Charges"). Base Rent accrues and
is required to be paid monthly. The Percentage Rent for each Hotel is comprised
of (i) a set percentage of quarterly and semi-annual room revenues, which is
payable quarterly and semi-annually, respectively, (ii) a set percentage of
annual room revenues in excess of the Threshold, which is payable annually, and
(iii) 8% of monthly revenues other than room revenues (including, but not
limited to, telephone charges, movie rental fees and rental payments under any
third-party leases), which is payable monthly. Annual Percentage Rent does not
apply to amounts under the Threshold. The portion of Percentage Rent that is
based on annual room revenues is designed to allow the Company to participate in
any future increases in room revenues. Therefore, the Thresholds are set at
levels higher than the applicable room revenue for the year ended December 31,
1994. All Percentage Rents are due 30 days after the end of the applicable
calendar period.
51
<PAGE>
The following table sets forth (i) the annual Base Rent, (ii)
Percentage Rents formulas and (iii) the Rent that was paid for each Hotel
pursuant to the terms of the Percentage Leases in 1995.
<TABLE>
<CAPTION>
Aggregate
Aggregate Percentage
Annual Percentage Hotel Percentage Rent Plus
Hotels Base Rent Rent Formula Revenues Rent Base Rent
------ --------- ------------ -------- ---- ---------
<S> <C>
Comfort Inns $153,096 14.0% of quarterly room revenues, Rooms - $ 703,671 144,253 $299,819
Dahlgren, Virginia plus 6.5% of semi-annual room Other - $ 30,871 2,470
revenues, plus 30% of annual room -----
revenues in excess of $705,000, $146,723
plus 8% of monthly other revenues --------
Dublin, Virginia 253,350 17.5% of quarterly room revenues, Rooms - $1,418,343 $433,047 690,521
plus 10.0% of semi-annual room Other - $ 51,555 4,124
revenues, plus 30% of annual room -----
revenues in excess of $1,275,000, $437,171
plus 8% of monthly other revenues
Elizabethton, 96,950 14.5% of quarterly room revenues, Rooms - $ 630,766 $159,998 260,150
Tennessee plus 7.5% of semi-annual room Other - $ 40,030 3,202
revenues, plus 30% of annual room -----
revenues in excess of $560,000, $163,200
plus 8% of monthly other revenues --------
Farmville, Virginia 132,432 16.0% of quarterly room revenues, Rooms - $ 667,062 $175,220 309,221
plus 9.5% of semi-annual room Other - $ 19,610 1,569
revenues, plus 30% of annual room -----
revenues in excess of $650,000 plus $176,789
8% of monthly other revenues --------
Morgantown, West 210,136 6.1% of quarterly room revenues, Rooms - $1,142,716 $343,957 557,057
Virginia plus 24.0% of semi-annual room Other - $ 37,059 2,964
revenues, plus 33% of annual room -----
revenues in excess of $1,150,000, $346,921
plus 8% of monthly other revenues --------
Princeton, West 208,610 11.1% of quarterly room revenues, Rooms - $ 955,908 $285,751 496,273
Virginia plus 16.0% of semi-annual room Other - $ 23,906 1,912
revenues, plus 33% of annual room -----
revenues in excess of $875,000, $287,663
plus 8% of monthly other revenues --------
Beacon Marina, 288,397 17.6% of quarterly room revenues, Rooms - $ 864,650 $368,342 680,633
Solomons, plus 25.0% of semi-annual room Other - $ 298,686 23,894
Maryland revenues, plus 25.1% of annual ------
room revenues in excess of $392,236
$900,000, plus 8% of monthly other --------
revenues
Best Western 210,000 6.5% of quarterly room revenues, Rooms - $ 822,397 $113,243 324,491
Wytheville, Virginia plus 7.0% of semi-annual room Other - $ 15,611 1,248
revenues, plus 30.0% of annual -----
room revenues in excess of $114,491
$815,000, plus 8% of monthly other --------
revenues
Days Inn 56,005 16% of quarterly room revenues, Rooms - $ 293,732 $74,902 132,291
Farmville, Virginia(1) ------ plus 9.5% of semi-annual room -------
revenues plus 30.0% annual room Other - $ 17,307 1,384
revenues in excess of $760,000, -----
plus 8% of other revenue $76,286
-------
Total $1,608,976 $2,141,480 $3,750,456
========= ========== ==========
</TABLE>
- --------------------
(1) Information for the Days Inn - Farmville, Virginia is for the period July
21, 1995 through December 31, 1995.
Other than real estate and personal property taxes, ground lease rent
(where applicable), the cost of certain furniture, fixtures and equipment,
expenditures for items that are classified as capital items under generally
accepted accounting principles which are necessary for the continued operation
of the Hotels, and property and casualty insurance premiums, which are
obligations of the Partnership, the Percentage Leases require the Lessee to pay
Base Rent, Percentage Rents, Additional Charges and the operating expenses of
the Hotels (including insurance other than property and casualty insurance, all
costs and expenses and all utility and other charges incurred in the operation
of the Hotels) during the term of the Percentage Leases. The Percentage Leases
also provide for rent reductions and abatements in the event of damage to or
destruction or a partial taking of any Hotel as described under "Damage to
Hotels" and "Condemnation of Hotels."
Maintenance and Modifications. Under the Percentage Leases, the
Partnership is required to maintain structural elements and underground
utilities and to pay for certain expenditures for items that are classified as
capital items under generally accepted accounting principles and which are
necessary for the continued operation of the Hotels. In addition, the
Partnership will make available to the Lessee for the repair, replacement and
refurbishment of furniture, fixtures and equipment in the Hotels, when and as
deemed necessary by the Lessee, the FFE Reserve, which is an amount equal to 4%
of room revenues per quarter on a cumulative basis. The Partnership's obligation
will be carried forward to the extent that the Lessee has not expended such
amount, and any unexpended amounts will remain the property of the Partnership
upon termination of the Percentage Leases. Other than as described above, the
Lessee is responsible for all repair and maintenance of the Hotels.
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The Lessee, at its expense, may make non-capital and capital additions,
modifications or improvements to the Hotels, provided that such action does not
significantly alter the character or purposes of the Hotels or significantly
detract from the value or operating efficiencies of the Hotels. All such
alterations, replacements and improvements shall be subject to all the terms and
provisions of the Percentage Leases and will become the property of the
Partnership upon termination of the Percentage Leases. The Partnership owns
substantially all personal property (other than inventory, linens, and other
nondepreciable personal property) not affixed to, or deemed a part of, the real
estate or improvements on the Hotels, except to the extent that ownership of
such personal property would cause the Rent under a Percentage Lease not to
qualify as "rents from real property" for REIT income test purposes. See
"Federal Income Tax Considerations - Requirements for Qualification Income
Tests."
Insurance and Property Taxes. The Partnership is responsible for paying
real estate and personal property taxes on the Hotels (except to the extent that
personal property associated with the Hotels is owned by the Lessee), and all
premiums for property and casualty insurance. The Lessee is required to pay or
reimburse the Partnership for all other insurance on the Hotels, including
comprehensive general public liability, workers' compensation and other
insurance appropriate and customary for properties similar to the Hotels and
naming the Partnership as an additional named insured.
Assignment and Subleasing. The Lessee is not permitted to sublet all or
any part of the Hotels or assign its interest under any of the Percentage Leases
without the prior written consent of the Partnership. No assignment or
subletting will release the Lessee from any of its obligations under the
Percentage Leases.
Damage to Hotels. In the event of damage to or destruction of any Hotel
covered by insurance which renders the Hotel unsuitable for the Lessee's use and
occupancy, the Lessee is obligated to repair, rebuild, or restore the Hotel,
except as to structural elements of such hotel and underground utilities, or
offer to acquire the Hotel on the terms set forth in the applicable Percentage
Lease. If the Lessee rebuilds the Hotel, the Partnership is obligated to
disburse to the Lessee, from time to time and upon satisfaction of certain
conditions, any insurance proceeds actually received by the Partnership as a
result of such damage or destruction, and any excess costs of repair or
restoration will be paid by the Lessee. If the Lessee decides not to rebuild and
the Partnership exercises its right to reject the Lessee's mandatory offer to
purchase the Hotel on the terms set forth in the Percentage Lease, the
Percentage Lease will terminate and the insurance proceeds will be retained by
the Partnership. If the Partnership accepts the Lessee's offer to purchase the
Hotel, the Percentage Lease will terminate and the Lessee will be entitled to
the insurance proceeds. In the event that damage to or destruction of a Hotel
that is covered by insurance does not render the Hotel wholly unsuitable for the
Lessee's use and occupancy, the Lessee generally will be obligated to repair or
restore the Hotel. The Percentage Lease shall remain in full force and effect
during any period required for repair or restoration of any damaged or destroyed
Hotel except that if damage to the hotel renders the Hotel wholly unsuitable for
Lessee's use and occupancy within the final 24 months of the term of the
Percentage Lease, either the Partnership or the Lessee may terminate the
Percentage Lease on the terms set forth therein.
Condemnation of Hotel. In the event of a total condemnation of any
Hotel, the relevant Percentage Lease will terminate with respect to such Hotel
as of the date of taking, and the Partnership and the Lessee will be entitled to
their shares of the condemnation award in accordance with the provisions of the
Percentage Lease. In the event of a partial taking that does not render the
Hotel unsuitable for the Lessee's use, the Lessee will restore the untaken
portion of the Hotel to a complete architectural unit and the Partnership shall
contribute the cost of such restoration in accordance with the provisions of the
Percentage Lease.
Events of Default. Events of Default under the Percentage Leases
include, among others, the following:
(i) the occurrence of an Event of Default under any other
Percentage Lease between the Partnership and the Lessee;
(ii) the failure by the Lessee to pay Base Rent when due and
the continuation of such failure for a period of 10 days thereafter;
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(iii) the failure by the Lessee to pay Percentage Rent when
due and the continuation of such failure for a period of 20 days
thereafter;
(iv) the failure by the Lessee to observe or perform any other
term of a Percentage Lease and the continuation of such failure for a
period of 30 days after receipt by the Lessee of notice from the
Partnership thereof, unless such failure cannot be cured within such
period and the Lessee commences appropriate action to cure such failure
within such 30 day period and thereafter acts, with diligence, to
correct such failure within such time as is necessary, provided in no
event shall such period exceed ninety days;
(v) if the Lessee shall file a petition in bankruptcy or
reorganization pursuant to any federal or state bankruptcy law or any
similar federal or state law, or shall be adjudicated a bankrupt or
shall make an assignment for the benefit of creditors or shall admit in
writing its inability to pay its debts generally as they become due, or
if a petition or answer proposing the adjudication of the Lessee as a
bankrupt or its reorganization pursuant to any federal or state
bankruptcy law or any similar federal or state law shall be filed in
any court and the Lessee shall be adjudicated a bankrupt and such
adjudication shall not be vacated or set aside or stayed within 60 days
after the entry of an order in respect thereof, or if a receiver of the
Lessee or of the whole or substantially all of the assets of the Lessee
shall be appointed in any proceeding brought by the Lessee or if any
such receiver, trustee or liquidator shall be appointed in any
proceeding brought against the Lessee and shall not be vacated or set
aside or stayed within 60 days after such appointment;
(vi) if the Lessee voluntarily discontinues operations of any
Hotel except as a result of damage, destruction, or condemnation; or
(vii) if the Franchise License with respect to a Hotel is
terminated by the franchisor as a result of any action or failure to
act by the Lessee or its agents, other than the failure to complete
improvements required by a franchisor because the Partnership fails to
pay the costs of such improvements.
If an Event of Default occurs and continues beyond any curative period,
the Partnership has the option of terminating the Percentage Lease or any or all
other Percentage Leases by giving the Lessee 10 days' written notice of the date
for termination of the Percentage Leases and, unless such Event of Default is
cured prior to the termination date set forth in such notice, the Percentage
Leases shall terminate on the date specified in the Partnership's notice and the
Lessee shall be required to surrender possession of the affected Hotel.
Termination of Percentage Leases on Disposition of the Hotels. In the
event the Partnership enters into an agreement to sell or otherwise transfer a
Hotel, the Partnership has the right to terminate the Percentage Lease with
respect to such Hotel if within six months of the termination the Partnership
either (i) pays the Lessee the fair market value of the Lessee's leasehold
interest in the remaining term of the Percentage Lease to be terminated, or (ii)
offers to lease to the Lessee one or more substitute hotels on terms that would
create a leasehold interest in such hotels with a fair market value equal to or
exceeding the fair market value of the Lessee's remaining leasehold interest
under the Percentage Lease to be terminated.
Franchise License. The Lessee is the licensee under the Franchise
Licenses on the Hotels. See "Business and Properties - Franchise Licenses."
Other Lease Covenants. The Lessee has agreed that during the term of
the Percentage Leases it will maintain a ratio of total debt to consolidated net
worth (as defined in the Percentage Leases) of less than or equal to 25%,
exclusive of capitalized leases.
Breach by Partnership. Upon notice from the Lessee that the Partnership
has breached the Lease, the Partnership will have 30 days to cure the breach or
proceed to cure the breach, which period may be extended in the event of certain
specified, unavoidable delays.
Inventory. All inventory required in the operation of the Hotels is
owned by the Lessee at its expense. The Partnership has the option to purchase
all inventory related to a particular Hotel at fair market value upon
termination of the Percentage Lease for that Hotel.
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Franchise Licenses
Comfort Inn(R) and Comfort Suites(R) are registered trademarks of
Choice Hotels. Best Western(R) is a registered trademark of Best Western. Days
Inn(R) is a registered trademark of Days Inn.
The Company anticipates that most of the additional hotels in which it
invests will be operated under similar franchise licenses. The Company believes
that the public's perception of quality associated with a franchisor is an
important feature in the operation of a hotel. Franchisors provide a variety of
benefits for franchisees which include national advertising, publicity and other
marketing programs designed to increase brand awareness, training of personnel,
continuous review of quality standards and centralized reservation systems.
The Franchise Licenses generally specify certain management,
operational, recordkeeping, accounting, reporting and marketing standards and
procedures with which the franchisee must comply. The Franchise Licenses
obligate the Lessee to comply with the franchisors' standards and requirements
with respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services
that may be provided by the Lessee, display of signage, and the type, quality
and age of furniture, fixtures and equipment included in guest rooms, lobbies
and other common areas.
With the exception of the Franchise License for the New Development and
the two licenses noted below, all Franchise Licenses from Choice Hotels will
terminate on November 29, 2014. The Franchise License for the New Development
will terminate in early 2016. Further, the Franchise License from Choice Hotels
for the Comfort Inn-Dahlgren, Virginia may be terminated without cause by the
franchisor on April 1, 1999 upon three months written notice. The Franchise
License from Choice Hotels for the Comfort Inn- Elizabethton, Tennessee may be
terminated without cause by the franchisor on December 15, 1997 upon three
months written notice. Otherwise, these Franchise Licenses may be terminated by
the franchisor only upon a violation of their terms.
The Franchise License from Best Western may be terminated by the
franchisor or franchisee on each annual anniversary upon 90 days notice to the
other party. The anniversary of the Franchise License from Best Western is on
November 30 of each year.
The Franchise License from Days Inn expires on October 31, 2009. During
the term of that Franchise License, Days Inn may terminate the license only for
a violation of its terms.
Under the Franchise Licenses from Choice Hotels relating to the Choice
Hotels, the Lessee currently pays fees of approximately 6% of monthly room
revenue. Under the Franchise License from Choice Hotels relating to the New
Development, the Lessee will pay a franchise fee of 8% of monthly room revenue.
Under the Best Western Franchise License, the Lessee currently pays a franchise
fee of $3,511 per month and annual dues of $3,262. Under the Days Inn Franchise
License, the Lessee pays franchise and reservation fees equal to 8.8% of monthly
room revenue. In addition, the Days Inn Franchise License requires the Lessee to
pay to any travel agent arranging a reservation for a room, 10% of the gross
room revenues generated by such reservation.
Although management of the Company believes that each of the Hotels is
currently in compliance with the terms of the related Franchise License, there
can be no assurance that a franchisor will not exercise its option to terminate
a Franchise License at the designated anniversary. The Franchise Licenses also
provide for termination at the franchisor's option upon the occurrence of
certain events, including the Lessee's failure to pay royalties and fees or
perform its other covenants under the Franchise License, bankruptcy, abandonment
of the franchise or material breach of any term of a mortgage or lease relating
to the related Hotel. The Lessee is responsible for making all payments under
the Franchise Licenses to the franchisors.
COMFORT INN(R) AND COMFORT SUITES(R) ARE REGISTERED TRADEMARKS OF
CHOICE HOTELS. CHOICE HOTELS HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT
OF A COMFORT INN AND COMFORT SUITES FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS
IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED
APPROVAL OR ENDORSEMENT BY CHOICE HOTELS (OR ANY OF ITS AFFILIATES, SUBSIDIARIES
OR DIVISIONS) OF THE COMPANY, THE PARTNERSHIP OR THE COMMON SHARES OFFERED
HEREBY.
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BEST WESTERN(R) IS A REGISTERED TRADEMARK OF BEST WESTERN. BEST WESTERN
HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF A BEST WESTERN FRANCHISE
LICENSE FOR ONE OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED
AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY BEST WESTERN (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE PARTNERSHIP OR THE
COMMON SHARES OFFERED HEREBY.
DAYS INN(R) IS A REGISTERED TRADEMARK OF DAYS INN. DAYS INN HAS NOT
ENDORSED OR APPROVED THE OFFERING. A GRANT OF A DAYS INN FRANCHISE LICENSE FOR
THE HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY DAYS INN HOTELS (OR ANY OF ITS AFFILIATES,
SUBSIDIARIES OR DIVISIONS) OR THE COMPANY, THE PARTNERSHIP OR THE COMMON SHARES
OFFERED HEREBY.
Operating Practices
The Company's management recognizes the need for aggressive, market
driven, creative management given the competition in the hospitality industry.
Each of the Hotels is managed by the Lessee. The Lessee intends to continue the
management systems developed by it and its Affiliates. The Lessee currently
manages the Hotels and has experience satisfying the requirements imposed by the
Comfort Choice Hotels, Best Western and Days Inn Franchise Licenses.
Employees
The Company is self-advised and thus utilizes the services of its
officers and Directors rather than retaining an advisor. See "Management -
Directors and Executive Officers." In addition, the Lessee provides the Company
with accounting and securities reporting services pursuant to the terms of the
amended Services Agreement. See "Certain Relationships and Transactions --
Revised Services Agreement." The Lessee employs approximately 150 people in
operating the Hotels and has advised the Company that its relationship with its
employees is good.
Environmental Matters
Under various federal, state and local laws and regulations, an owner
or operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment a
hazardous substance at a property owned by another may be liable for the costs
of removal or remediation of hazardous substances released into the environment
at that property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remediate such substances, may adversely affect the owner's ability to sell such
real estate or to borrow using such real estate as collateral. In connection
with the ownership and operation of the Hotels, the Company, the Partnership, or
the Lessee, as the case may be, may be potentially liable for any such costs.
Phase I environmental assessments were obtained on all of the Hotels
prior to their acquisitions by the Company. A Phase I was conducted on the land
on which the New Development is being built in February 1995, and the Company
intends to update that Phase I prior to the completion of the New Development.
The 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 environmental 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 Company aware of any such liability. Nevertheless, it is possible
that these environmental assessments do not reveal all environmental liabilities
or that there are material environmental liabilities of which the Company is
unaware. Moreover, no assurances can be given that (i) future laws, ordinances
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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 the 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, 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 and other environmental matters. Neither the
Company nor, to the knowledge of the Company, the Selling Partnerships, the LLC
or the LLC's predecessor in interest with regard to 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.
Competition
The hotel industry is highly competitive. Each of the Hotels is located
in a developed area that includes other hotels, many of which are competitive
with the Hotels in their locality. The number of competitive hotels in a
particular area could have a material adverse effect on revenues of the Hotels
or hotels acquired in the future. See "Business and Properties - The Hotels."
There will be competition for investment opportunities in upper-economy
and mid-scale hotels from entities organized for purposes substantially similar
to the Company's objectives as well as other purchasers of hotels. The Company
will be competing for such investment opportunities with entities which have
substantially greater financial resources than the Company including access to
capital or better relationships with franchisors, lenders and sellers. The
Company's Debt Policy limits its consolidated indebtedness to less than 50% of
the aggregate purchase prices of the hotels in which it has invested. The
aggregate amount paid by the Company for the Hotels is currently approximately
$25.5 million. After the Company has applied the Net Proceeds as set forth
herein, the Company's Remaining Indebtedness ($8.2 million) will represent
approximately 32% of the aggregate amount paid by the Company for the Hotels.
Because of the amount of the Remaining Indebtedness, the success of the
Company's acquisition strategy will likely depend on its ability to access
additional capital through issuances of equity securities. The Company's
competitors may generally be able to accept more risk than the Company can
manage prudently and may be able to borrow the funds needed to acquire hotels.
Competition may generally reduce the number of suitable investment opportunities
offered to the Company and increase the bargaining power of property owners
seeking to sell. See "Risk Factors - Conflicts of Interest Competing Hotels to
be Acquired by Affiliates of Mr. Humphrey" and "-- Growth Strategies."
Depreciation
To the extent that the Partnership has acquired, or will acquire,
equity interests in the Hotels for cash, the Partnership's initial basis in the
Hotels for federal income tax purposes generally equals or will equal the
purchase price paid by the Partnership. The Partnership plans to depreciate such
depreciable hotel property for federal income tax purposes under either the
modified accelerated cost recovery system of depreciation ("MACRS") or the
alternative depreciation system of depreciation ("ADS"). The Partnership uses
MACRS for furnishings and equipment. Under MACRS, the Partnership generally
depreciates such furnishings and equipment over a five-year recovery period
using a 200% declining balance method and a half-year convention. If, however,
the Partnership places more than 40% of its furnishings and equipment in service
during the last three months of a taxable year, a mid-quarter depreciation
convention must be used for the furnishings and equipment placed in service
during that year. The Partnership uses ADS for buildings and improvements. Under
ADS, the Partnership generally depreciates such buildings and improvements over
a 40-year recovery period using a straight-line method and a mid-month
convention.
To the extent that the Partnership has acquired, or will acquire,
equity interests in the Hotels in exchange for Units, the Partnership's initial
basis in each Hotel for federal income tax purposes should be the same as the
transferor's basis in such Hotel on the date of acquisition. Although the law is
not entirely clear, the Partnership intends to depreciate such depreciable hotel
property for federal income tax purposes under MACRS with respect to furnishings
and equipment and under ADS with respect to buildings and improvements. The
Partnership's tax depreciation deductions will be allocated among the partners
in accordance with their respective interests in the Partnership (except to the
extent that the Partnership is required under Code Section 704(c) to use a
method for allocating depreciation deductions attributable to the Hotels or
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other contributed properties that results in the Company receiving a
disproportionately larger share of such deductions). The Partnership generally
has elected to use the "traditional method" for allocating Code Section 704(c)
items with respect to Hotels that it acquires in exchange for Units. Because the
Partnership's initial basis in the Initial Hotels acquired in exchange for Units
was less than the fair market value of those hotels on the date of acquisition,
the Company's depreciation deductions may be less than they otherwise would have
been if the Partnership had purchased the partnership interests in the
partnerships that sold the Company the Initial Hotels ("Selling Partnerships")
entirely for cash.
Legal Proceedings
Neither the Company nor the Partnership is currently involved in any
material litigation nor, to the Company's knowledge, is any material litigation
currently threatened against the Company, the Partnership or any of the Hotels.
The Lessee has advised the Company that it currently is not involved in any
material litigation.
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, financing, conflicts of interest and certain other activities that
have not been discussed elsewhere. The policies with respect to these activities
have been determined by the Board of Directors of the Company and may be amended
or revised from time to time at the discretion of the Board of Directors without
a vote of the shareholders of the Company, except that (i) changes in certain
policies with respect to conflicts of interest must be consistent with legal
requirements, (ii) certain policies with respect to competition are imposed
pursuant to contracts that cannot be amended without the consent of all parties
thereto, and (iii) the Company cannot take any action intended to terminate its
qualification as a REIT without the approval of the holders of two-thirds of the
outstanding shares of Common Stock.
Investment Policies
The Company's investment objective is to acquire and develop hotels
that meet its investment criteria. The Company's business is focused solely on
hotels. See "The Company - Growth Strategy" and "Risk Factors - Growth
Strategy." Under the Investment Policy, the Company intends to acquire only
those hotels for which it expects to receive annual Rent (net of insurance paid
by the Company, the FFE Reserve and real estate and personal property taxes) in
an amount greater than or equal to 12% of the total purchase price to be paid by
the Company for such hotels. Under the Bylaws, the approval of a majority of the
Board of Directors, including a majority of the Independent Directors, is
required for the Company to acquire any property. Although the Company intends
primarily to acquire hotels, it also may participate with other entities in
property ownership, through joint ventures or other types of co-ownership.
Equity investments may be subject to existing mortgage financing and other
indebtedness which may have priority over the equity interest of the Company.
While the Company will emphasize equity investments in hotels, it may,
in its discretion, invest in mortgages and other real estate interests,
including securities of other REITs. The Company may invest in participating,
convertible or other types of mortgages if it concludes that by doing so it may
benefit from the cash flow or any appreciation in the value of the subject
property. Such mortgages are similar to equity participation, because they
permit the lender to either participate in increasing revenues from the property
or convert some or all of that mortgage to equity ownership interest. The
Company does not presently intend to invest in mortgages or real estate
interests other than hotels.
Financing
The Company intends to make additional investments in operating hotels
and may incur additional indebtedness to make such investments or to meet the
distribution requirements imposed by the REIT provisions of the Code, to the
extent that cash flow from the Company's investments and working capital is
insufficient. The proceeds of any borrowing by the Partnership may be used for
the payment of distributions or dividends, working capital or to finance
acquisitions, expansions, additions or renovations of operating hotels. Under
the Bylaws, any refinancing of or prepayment of principal on the Remaining
Indebtedness must be approved by a majority of the Directors, including a
majority of the Independent Directors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" and "Federal Income Tax Considerations - Requirements for
Qualification - Distribution Requirements."
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The Company's Debt Policy limits its consolidated indebtedness to less
than 50% of the aggregate purchase prices of the hotels in which it has
invested. The aggregate amount paid by the Company for the Hotels is currently
approximately $25.5 million and is expected to be approximately $28.3 million
after the New Development is completed. After the Company has applied the Net
Proceeds, as set forth herein, the Company's total outstanding indebtedness will
represent approximately 32% of the amount paid by the Company for the Hotels at
the present time and, after the completion of the New Development, the Remaining
Indebtedness will represent approximately 29% of such amount. Because of the
amount of the Remaining Indebtedness, the success of the Company's acquisition
strategy will likely depend on its ability to access additional capital through
issuances of equity securities.
The Company will invest in additional hotels only as suitable
opportunities arise. The Company will not undertake investments in such hotels
unless adequate sources of financing are available. The Bylaws require the
approval of a majority of the Directors, including a majority of the Independent
Directors, to acquire any additional hotel. It is expected that future
investments in hotels will be dependent on and financed by the proceeds from
additional issuances of Common Stock or other securities or borrowings. If the
Board of Directors determines to raise additional equity capital, the Board has
the authority, without shareholder approval, to issue additional Common Stock or
other capital shares of the Company in any manner (and on such terms and for
such consideration) as it deems appropriate, including in exchange for property.
Common Shareholders have no preemptive right to purchase shares issued in any
offering, and any such offering might cause a dilution of a shareholder's
investment in the Company.
Conflict of Interest Policies
The Company has adopted certain policies and entered into certain
agreements designed to minimize the effects of potential conflicts of interest.
The Company's Board of Directors is subject to certain provisions of Virginia
law, which are designed to eliminate or minimize certain potential conflicts of
interest. However, there can be no assurance that these policies always will be
successful in eliminating the influence of such conflicts, and if they are not
successful, decisions could be made that might fail to reflect fully the
interests of all shareholders.
Articles of Incorporation and Bylaw Provisions
The Company's Articles of Incorporation, with limited exceptions,
require that a majority of the Company's Board of Directors be comprised of
Independent Directors, persons who, within the last two years, have not (i)
owned an interest in any of Mr. Humphrey's Affiliates, (ii) been employed by Mr.
Humphrey or any of his Affiliates, (iii) been an officer or director of any of
Mr. Humphrey's Affiliates, (iv) performed services for the Company, (v) been a
director for more than three REITs organized by Mr. Humphrey or any of his
Affiliates or (vi) had any material business or professional relationship with
Mr. Humphrey or any of his Affiliates. Currently, four of the seven Directors of
the Company are Independent Directors. The Articles of Incorporation provide
that the Independent Director requirement may not be amended, altered, changed
or repealed without the affirmative vote of at least 80% of the members of the
Board of Directors or the affirmative vote of the holders of not less than
two-thirds of the outstanding shares of Common Stock (and other shares of
capital stock of the Company entitled to vote, if any exist). In addition, the
Company's Bylaws provide that any action pertaining to any transaction in which
the Company is purchasing, selling, leasing or mortgaging any real estate asset
or engaging in any other transaction in which an advisor, director or officer of
the Company, any lessee or contract manager of any property of the Company or
any Affiliate of the foregoing, has any direct or indirect interest, must be
approved by a majority of the Directors, including a majority of the Independent
Directors. This provision of the Bylaws may not be amended, altered, changed or
repealed without the affirmative vote of at least 80% of the members of the
Board of Directors including a majority of the Independent Directors or the
affirmative vote of the holders of not less than two-thirds of the outstanding
shares of Common Stock (and other shares of capital stock of the Company
entitled to vote, if any exist).
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The Non-Competition Agreement and Option Agreement
Pursuant to the Non-Competition Agreement among Mr. Humphrey, Humphrey
Associates, a Maryland corporation wholly-owned by Mr. Humphrey and the Company,
while Mr. Humphrey is an officer or Director of the Company or owns any
ownership interest in the Company, and for five years thereafter, neither Mr.
Humphrey nor any Affiliate of Mr. Humphrey, will acquire, develop, own, operate,
manage or have any interest in any hotel that is within 20 miles of a hotel in
which the Company or the Partnership has invested. The 20-mile prohibition may
be waived by the Independent Directors if they determine that such development,
ownership, management, or operation will not have a material adverse affect on
the operations of one or more of the Hotels. The Board of Directors, including a
majority of the Independent Directors, have agreed to waive the provisions of
the Non-Competition Agreement as they apply to Humphrey Development's right to
purchase the New Development. In addition, Mr. Humphrey has agreed that neither
he nor any of his Affiliates will receive any brokerage commissions or other
fees with respect to hotels purchased by the Company. The Non- Competition
Agreement was executed by the parties in connection with the IPO.
Pursuant to the Option Agreement among Mr. Humphrey, Humphrey
Associates and the Company, the Company has an option to acquire any hotels
acquired or developed by Mr. Humphrey or any of his Affiliates. At any time
during 12 months after a hotel is acquired by, or after the opening of a hotel
developed by, Mr. Humphrey or any of his Affiliates, the Company may purchase
the applicable hotel under the option for a price equal to the fair market value
of the hotel, as determined by independent third-party appraisal, but in no
event less than the sum of the following: (i) acquisition or development costs
paid to unaffiliated third parties, (ii) capitalized interest expense, (iii) the
amount of equity investment in the hotel, including the cash investment or
advances of Mr. Humphrey and his Affiliates, if any (to the extent not covered
in sections (i) and (ii)), and (iv) a cumulative, non-compounded return on the
equity investment not to exceed the prime rate, as reported by The Wall Street
Journal, Eastern Edition, plus five percent (less any net cash flow received by
Mr. Humphrey or any of his Affiliates with respect to such equity investment).
All transactions to acquire additional properties and all and any transactions
between the Company or the Partnership and Mr. Humphrey or his Affiliates must
be approved by a majority of the Directors, including a majority of the
Independent Directors. In addition, the Option Agreement provides that in the
event the Company acquires a hotel from Mr. Humphrey or any of his Affiliates in
connection with the Company's issuance of additional securities, Mr. Humphrey or
any of his Affiliates may receive consideration for such property in additional
Units provided that his and his Affiliates' interests in the Partnership shall
not exceed 28.54% of the total partnership interests in the Partnership. The
Option Agreement was executed by the parties in connection with the IPO.
The Partnership
The Limited Partners have unrealized taxable gain associated with their
interests in the Hotels that were contributed to the Partnership. Consequently,
a conflict of interest may arise between the Company, as general partner of the
Partnership, and the Limited Partners, because the Limited Partners may suffer
different and more adverse tax consequences than the Company upon the sale of a
Hotel or refinancing or prepayment of principal on any of the Remaining
Indebtedness. The Company's Bylaws provide that the Company's decisions with
respect to the sale of a Hotel must be approved by a majority of the Directors,
including a majority of the Independent Directors. This provision of the Bylaws
may not be amended, altered, changed or repealed without the affirmative vote of
at least 80% of the members of the Board of Directors, including the Independent
Directors, or the affirmative vote of the holders of not less than two-thirds of
the outstanding shares of Common Stock (and other shares of capital stock of the
Company entitled to vote, if any exist). The Partnership Agreement gives the
Company, as General Partner of the Partnership, full, complete and exclusive
discretion in managing and controlling the business of the Partnership and in
making all decisions affecting the business and assets of the Partnership.
Provisions of Virginia Law
Pursuant to the Virginia Stock Corporation Act, each Director is
required to discharge his or her duties in accordance with his or her good faith
business judgment of the best interest of the Company. In addition, Virginia law
provides that a transaction with the Company in which a Director or officer of
the Company has a direct or indirect interest is not voidable by the Company
solely because of any Director's or officer's interest in the transaction if (i)
the material facts of the transaction and interest are disclosed to or known by
the Directors and the transaction is authorized, approved or ratified by the
disinterested Directors, (ii) the material facts of the transaction and interest
are disclosed to or known by the shareholders and the transaction is authorized,
approved or ratified by the disinterested shareholders, or (iii) the transaction
is established to have been fair to the Company.
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Policies with Respect to Other Activities
The Company has authority to offer shares of capital stock or other
securities and to repurchase or otherwise reacquire its Common Stock or any
other securities and may engage in such activities in the future. As described
under "Shares Available for Future Sale," the Company may issue shares of Common
Stock to holders of Units upon exercise of their Redemption Rights (as defined
herein). The Company has no outstanding loans to other entities or persons,
including its officers and Directors. The Company has not engaged in trading,
underwriting or agency distribution or sale of securities of other issuers, nor
has the Company invested in the securities of other issuers other than the
Partnership for the purpose of exercising control. The Company intends to make
investments in such a way that it will not be treated as an investment company
under the Investment Company Act of 1940.
At all times, the Company intends to make investments in such a manner
consistent with the requirements of the Code for the Company to qualify as a
REIT unless, because of changing circumstances or changes in the Code (or in the
Treasury Regulations), the Company's Board of Directors, with the consent of the
holders of two-thirds of the outstanding shares of Common Stock, determines that
it is no longer in the best interests of the Company to qualify as a REIT.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The Board of Directors consists of seven members, four of whom are
Independent Directors. All of the Directors are serving one-year terms that will
expire at the Company's 1997 annual meeting of shareholders. Mr. Humphrey is
serving as the Company's Chairman of the Board, President and Secretary. Charles
A. Mills, III is serving as the Company's Treasurer and Vice President.
Certain information regarding the directors and executive officers of
the Company is set forth below.
Name Age Position
---- --- --------
James I. Humphrey, Jr. 55 Chairman of the Board,
President and Secretary
Charles A. Mills, III 50 Treasurer, Vice President
and Director
Margaret Allen 50 Director
Andrew A. Mayer, M.D. 60 Director
Dr. Leah T. Robinson 65 Director
George R. Whittemore 46 Director
Jeffrey M. Zwerdling 52 Director
- ------------------------
James I. Humphrey, Jr. is the President and Chairman of Humphrey
Associates and has held that position since 1978. Humphrey Associates, formerly
Harkins-Humphrey Associates, Inc., is a full service real estate corporation.
Mr. Humphrey also served as President of the Operator from 1989 to 1994. He
currently serves on the Credit Assurance Review Committee of the Maryland
Housing Fund. Mr. Humphrey served on the governor's Housing Task Force in
Maryland, the Maryland Housing Policy Commission and the Maryland International
Division Private Sector Advisory Council. Mr. Humphrey is a graduate of the
University of Maryland and obtained an M.B.A. degree from Loyola College.
Charles A. Mills, III is a Senior Vice President and the Chairman of
Anderson & Strudwick Incorporated, which is the Underwriter of the Common Shares
offered by this Prospectus, and has served as its Chairman since July 1994. Mr.
Mills also served as Chairman of Anderson & Strudwick Incorporated from 1990 to
1992. Mr. Mills has been employed by Anderson & Strudwick since 1986, and is its
largest shareholder. Mr. Mills is also the majority shareholder, Chairman and
President of Mills Value Advisor, Inc., a registered investment advisor, and a
director of Virginia Gas Company, an Abingdon, Virginia based company engaged in
the business of the distribution and storage of natural gas products. Mr. Mills
also served as a director of Pioneer Federal Savings & Loan from 1985 to 1987
and of Koger Equity, Incorporated, a real estate investment trust, from 1992 to
1993. Mr. Mills attended the University of Nebraska.
Margaret Allen is a Senior Vice President and 50% owner of AGM
Financial Services, Inc. ("AGM"), which she co-founded in 1990. AGM is a
mortgagee licensed by the Federal Housing Authority (the "FHA"), a division of
the United States Department of Housing and Urban Development. As a licensed
mortgagee, AGM represents borrowers who wish to obtain mortgage insurance from
the FHA for multifamily housing, assisted living facilities and nursing homes.
Prior to 1990, Ms. Allen was a Regional Vice President for ABG Financial
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<PAGE>
Services, Inc., a FHA licensed mortgagee. Ms. Allen currently serves on the
Credit Assurance Review Committee of the Maryland Department of Housing and
Community Development, the Board of Directors of the Baltimore City Chapter of
the Home Builders Association of Maryland and the Insured Projects Committee of
the Mortgage Bankers Association. She has served on the Maryland Housing Policy
Commission and chaired that commission from 1991-1992. Ms. Allen is a graduate
of the University of California, Berkeley.
Dr. Leah T. Robinson is a clinical psychologist in a part-time private
practice. She was a member of the faculty of Virginia Commonwealth University
until 1973 when she joined Psychiatric Associates of Tidewater, remaining with
this group until it dissolved in 1989.
Andrew A. Mayer, M.D., is presently retired. He was a partner of
Medical Center Radiologists from 1965 to 1992 and served as a Director and
Treasurer until 1991. Dr. Mayer was also Chief of Radiology at Leigh Memorial
Hospital, Norfolk, Virginia. Dr. Mayer served as a Director of Mills Value
Fund, a mutual fund, from July 1988 to December 1991, and has served as managing
partner for partnerships formed to develop and own residential and commercial
property.
George R. Whittemore served as director and President and Managing
Officer of Pioneer Federal Savings Bank and its parent Pioneer Financial
Corporation from September 1982 until these institutions were acquired by a
merger with Signet Banking Corporation in August 1994. Mr. Whittemore joined
Pioneer Federal Savings Bank in 1975 as Treasurer and was made Executive Vice
President in March 1982. Mr. Whittemore was appointed President of Mills Value
Advisor, Inc. a registered investment adviser, in April 1996. In October 1996,
he was named a Senior Vice President of Anderson & Strudwick Incorporated, which
is the Underwriter of the Common Shares offered by this Prospectus. He is a
graduate of the University of Richmond.
Jeffrey M. Zwerdling, Esq., is Senior Partner at the law firm of
Zwerdling and Oppleman located in Richmond, Virginia. Mr. Zwerdling specializes
in commercial real estate law and general litigation. He is presently Vice
President and Director of The Corporate Center, the owner of a 225,000 square
foot office park complex located in Richmond, Virginia. Mr. Zwerdling is a
graduate of Virginia Commonwealth University and obtained his J.D. degree from
William & Mary Law School.
Acquisition Committee
The Board of Directors has appointed an Acquisition Committee
consisting of Ms. Allen, Mr. Humphrey and Mr. Whittemore. The Acquisition
Committee reviews potential hotel acquisitions and developments, visits the
sites of proposed hotel acquisitions or developments, reviews the terms of
proposed leases for proposed hotel acquisitions or developments and makes
recommendations to the full Board of Directors with respect to proposed hotel
acquisitions or developments. Under the Bylaws, the approval of a majority of
the Board of Directors, including a majority of the Independent Directors, is
required for the Company to acquire any property. The Company's Independent
Directors consist of Drs. Mayer and Robinson, Ms. Allen and Mr. Zwerdling.
Audit Committee
The Audit Committee consists of three Independent Directors, Ms. Allen,
Dr. Mayer and Mr. Zwerdling. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plans and results of the audit engagement,
approves professional services provided by the independent public accountants,
reviews the independence of the independent public accountants, considers the
range of audit and non-audit fees and reviews the adequacy of the Company's
internal accounting controls. The Audit Committee, with advice from the
Company's attorneys and independent public accountants, will establish
procedures to monitor compliance with the REIT provisions of the Code and the
Exchange Act, and such other laws and regulations applicable to the Company.
Executive Compensation
The Company does not pay its executives any salary above and beyond the
compensation that they receive as directors.
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<PAGE>
Compensation of Directors
On September 17, 1996, the Board of Directors unanimously voted to
reduce the annual fees paid to them by the Company for serving on the Board from
$20,000 per year to $10,000 per year effective for the last two quarters of
1996. The Board's action was designed to make their fees more comparable to
those of other public companies (including REITs) that are of a similar size to
the Company.
Exculpation and Indemnification
The Articles of Incorporation of the Company contain a provision which,
subject to certain exceptions described below, eliminates the liability of a
Director or officer to the Company or its shareholders for monetary damages for
any breach of duty as a Director or officer. This provision does not eliminate
such liability to the extent that it is proved that the Director or officer
engaged in willful misconduct or a knowing violation of criminal law or of any
federal or state securities law.
The Company's Articles of Incorporation also require the Company to
indemnify any Director or officer who is or was a party to a proceeding,
including a proceeding by or in the right of the Company, by reason of the fact
that he is or was such a Director or officer or is or was serving at the request
of the Company as a director, officer, employee or agent of another entity
provided that the Board of Directors determines that the conduct in question was
in the best interest of the Company and such person was acting on behalf of the
Company. A Director or officer of the Company is entitled to be indemnified
against all liabilities and expenses incurred by the Director or officer in the
proceeding, except such liabilities and expenses as are incurred (i) if such
person is an Independent Director or officer, because of his or her gross
negligence, willful misconduct or knowing violation of the criminal law or (ii)
in the case of the Director other than the Independent Directors, because of his
or her negligence or misconduct. Unless a determination has been made that
indemnification is not permissible, a Director or officer also is entitled to
have the Company make advances and reimbursement for expenses prior to final
disposition of the proceeding upon receipt of a written undertaking from the
Director or officer to repay the amounts advanced or reimbursed if it is
ultimately determined that he or she is not entitled to indemnification. Such
advance shall be permissible when the proceeding has been initiated by a
shareholder of the Company only if such advance is approved by a court of
competent jurisdiction. The Board of Directors of the Company also has the
authority to extend to any person who is an employee or agent of the Company, or
who is or was serving at the request of the Company as a director, officer,
employee or agent of another entity, the same indemnification rights held by
Directors and officers, subject to all of the accompanying conditions and
obligations.
The Virginia Stock Corporation Act permits a court, upon application of
a Director or officer, to review the Company's determination as to a Director's
or officer's request for advances, reimbursement or indemnification. If it
determines that the Director or officer is entitled to such advances,
reimbursement or indemnification, the court may order the Company to make
advances and/or reimbursement for expenses or to provide indemnification.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company and the Partnership have entered into a number of
transactions with Mr. Humphrey and his Affiliates in connection with the
organization of the Company and the acquisition of the Hotels. Mr. Humphrey, the
Chairman of the Board of Directors and the President of the Company, is the sole
shareholder of the Lessee.
Revised Services Agreement
The Company amended the terms of the Services Agreement between it and
the Lessee to provide accounting and securities reporting services for the
Company. The initial Services Agreement provided that these services would be
provided to the Company for a fixed fee of $80,000 notwithstanding the size of
the Company's portfolio. The Company amended the agreement to provide for such
services for an initial annual fee of $30,000 for so long as the Company's
portfolio includes the Hotels and the New Development. The amended Services
Agreement provides that the fee for such services will increase $10,000 per year
(prorated for the time of acquisition) for each additional hotel added to the
Company's portfolio (excluding the New Development). Under the terms of the
amended Services Agreement, the services fee cannot exceed $100,000 in any year.
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Credit Facility
On April 15, 1996, the Company entered into a credit agreement with
Mercantile for the $6.5 million Credit Facility and refinanced approximately
$1.7 million of prior existing indebtedness. The Credit Facility is secured by
six Hotels and the New Development.
Development Agreement
The Company has executed the Development Agreement with Humphrey
Development, Inc., a Humphrey Affiliate, pursuant to which Humphrey Development
provides construction supervision for the New Development and will pay any
development costs in excess of $2,795,910 in exchange for a right to purchase
the New Development from the Company on the sixth anniversary of its
commencement of operations for $2,795,910. See "Risk Factors - Competing Hotels
to be Acquired by Affiliates of Mr. Humphrey."
Repayment of Debt Guaranteed by Mr. Humphrey
All of the debt being repaid with a portion of the Net Proceeds is
personally guaranteed by Mr. Humphrey.
Acquisition of Hotels from Humphrey Affiliates
The Initial Hotels were acquired, directly and indirectly, by the
Partnership from limited partnerships in which Mr. Humphrey was a limited
partner and one of his affiliates was the general partner. The Partnership's
interests in the Initial Hotels and the Subsidiary Partnership were acquired in
exchange for (i) the assumption of approximately $13.4 million of outstanding
indebtedness of the sellers of the Initial Hotels, most of which was guaranteed
by Mr. Humphrey and one of his Affiliates and secured by the Initial Hotels,
(ii) the issuance of an aggregate of 527,866 Units to the Humphrey Affiliates,
(iii) the assumption and repayment of approximately $2.1 million of outstanding
indebtedness of the sellers of the Initial Hotels (in addition to the
indebtedness in clause (i) above) of which approximately $1.2 million was repaid
to a Humphrey Affiliate, (iv) the payment of $247,000 in cash to satisfy the
obligations of Humphrey Associates, Inc. to restore its negative capital account
in one of the limited partnerships selling an Initial Hotel, and (v) the payment
of approximately $4.6 million in cash to persons not affiliated with Mr.
Humphrey.
The Partnership acquired the Days Inn-Farmville, Virginia Hotel in
exchange for (i) 95,484 Units, which will be redeemable, subject to certain
limitations, for an aggregate of approximately 95,484 shares of Common Stock and
(ii) the assumption of approximately $1.2 million of debt secured by that Hotel,
which was repaid immediately with proceeds from the Company's second public
stock offering.
The Humphrey Affiliates own 623,350 Units with a value of approximately
$4.8 million based on the offering price of the stock in the Company's second
public stock offering. Upon exercise of the Redemption Rights, which are
currently all exercisable, such Units will be redeemed on a one-for-one basis
for shares of stock or for an equivalent amount of cash, at the sole election of
the Company or if the issuance of shares of stock would result in any person
owning more than 9.9% of the outstanding shares of stock.
Guarantees by Mr. Humphrey and His Affiliates
Mr. Humphrey currently guarantees the payment of interest and principal
on approximately $5.8 million of the Company's long-term debt. The debt is
secured by the Hotels located at Solomons, Maryland; Dahlgren, Virginia;
Farmville, Virginia (both Hotels); Elizabethton, Tennessee; Princeton, West
Virginia; Wytheville, Virginia; Morgantown, West Virginia and the New
Development.
Leases
During 1995, the Partnership and the Lessee were parties to Percentage
Leases with respect to each Hotel. In addition, the Partnership and the Lessee
have agreed to enter into a Fixed Lease with respect to the New Development when
it opens for business in early 1997. Each Lease has or will have a
non-cancelable term of ten years, which may be renewed for an additional term of
five years at the Lessee's option, subject to earlier termination upon the
occurrence of defaults thereunder and certain other events described therein.
Pursuant to the terms of the Leases, the Lessee is required to pay rent and
certain other additional charges and is entitled to all profits from the
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<PAGE>
operations of the Hotels after the payment of Rent, operating and other
expenses. Payments of Rent under the Percentage Leases have constituted all of
the Partnership's and the Company's revenue since their respective inceptions.
For the period January 1, 1995 through December 31, 1995, the Lessee incurred an
aggregate of approximately $3,750,456 in Rent under the Percentage Leases.
Franchise Licenses
The Lessee, which is owned by Mr. Humphrey, holds all of the franchise
licenses for the hotels currently owned by the Partnership and is expected to
hold all of the franchise licenses for any subsequently acquired hotel
properties. During 1995, the Lessee paid franchise fees in the aggregate amount
of $387,853.
Non-Competition Agreement and Option Agreement
Mr. Humphrey, certain Humphrey Affiliates and the Company entered into
the Non-Competition Agreement and the Option Agreement in connection with the
IPO. See "Risk Factors - and "Policies and Objectives with Respect to Certain
Activities - The Non-Competition Agreement and Option Agreement."
Other
Mr. Mills, who is the Vice President, Treasurer, and a director of the
Company, is Senior Vice President and Chairman of the Underwriter, Anderson &
Strudwick Incorporated. Mr. Whittemore, who is a director of the Company, is
Senior Vice President of the Underwriter. The Underwriter will receive
approximately $567,000 in fees in connection with this Offering. Anderson &
Strudwick was the underwriter of the Company's previous two public stock
offerings and received approximately $1,103,000 in investment banking fees in
connection with those transactions. Anderson & Strudwick also served as
underwriter for $2,460,000 principal amount fixed rate first mortgage refunding
revenue bonds, series 1995 issued by the Industrial Development Authority of
Pulaski County which are secured by the Comfort Inn-Dublin, Virginia. Anderson &
Strudwick Incorporated and one of its senior officers together receive an
ongoing annual fee equal to .25% of the outstanding principal of those bonds.
THE LESSEE
The Lessee is a Maryland corporation. The Lessee currently leases each
Hotel from the Partnership pursuant to individual Percentage Leases relating to
each Hotel. The Partnership intends to lease to the Lessee (i) additional
existing hotels acquired by the Partnership on terms and conditions
substantially similar to the Percentage Leases applicable to the Hotels, and
(ii) hotels developed by the Partnership pursuant to Fixed Leases, which will
provide for the payment of a fixed monthly Rent and otherwise have terms and
conditions substantially similar to the Percentage Leases applicable to the
Hotels. The Lessee's ability to perform its obligations, including making Rent
payments under the Leases, is dependent on the Lessee's ability to generate
sufficient net cash flow from the operation of the Hotels and any other hotels
leased to the Lessee by the Partnership. The Lessee's obligations under the
Leases are and will be unsecured. Mr. Humphrey does not guarantee the Lessee's
obligations under the Percentage Leases, but the Percentage Leases currently
contain cross-default provisions. Accordingly, the Lessee's failure to make
required payments under any Percentage Lease will allow the Company to terminate
any or all of the Percentage Leases. See "Risk Factors -- Dependence on the
Lessee." The Percentage Leases have terms of ten years and are renewable for an
additional term of five years at the option of the Lessee, but are subject to
earlier termination upon the occurrence of certain events. Under the Percentage
Leases, the Partnership is entitled to receive from the Lessee Base and
Percentage Rents. Mr. Humphrey is the sole shareholder of the Lessee and
President and Chairman of the Board of the Company. Consequently, he has a
conflict of interest regarding the enforcement of the Percentage Leases. See
"Risk Factors - Conflicts of Interest - No Arm's Length Bargaining on the
Purchase Agreements Percentage Leases, Development Agreement, Services
Agreement, Hotel Purchase Agreements, Non-Competition Agreements, Option
Agreement and Credit Facility" and "Business and Properties."
The Operator, an affiliate of the Lessee, managed the Initial Hotels
from 1989 to 1996 and managed the Days Inn hotel since it was acquired by a
Humphrey Affiliate in November 1994 until the Operator combined its operations
with the Lessee effective January 1, 1996. The Lessee provides all employees and
performs all marketing, accounting and management functions necessary to operate
the Hotels. The Lessee has in-house programs for accounting and the management
and marketing of the Hotels. The Lessee utilizes its sales management program to
coordinate, direct and manage the sales activities of personnel located at the
Hotels.
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The Lessee's primary philosophy for each hotel it operates is to
provide the best service and cleanest setting for the most value in the market
that the hotel serves. In 1990, the Operator, an affiliate of the Lessee
received the first Choice Hotels Gold Award ever presented by Choice Hotels for
its operation of the Comfort Inn-Farmville, Virginia. The Choice Hotels Gold
Award is presented annually to those hotels that have excelled in service,
appearance, housekeeping and employee training. The Operator received three
additional Choice Hotels Gold Awards for its operation of the Comfort
Inn-Elizabethton, Tennessee and two Choice Hotels Gold Awards for its operation
of the Comfort Inn-Beacon Marina, Solomons, Maryland. An affiliate of the
Operator also received four nominations for Comfort Inn's Inn of the Year for
its operation of the Comfort Inns-Dublin, Virginia, -Elizabethton, Tennessee,
- -Farmville, Virginia and -Solomons, Maryland. Choice Hotels awards the "Inn of
the Year" to one hotel, which is chosen from the approximately 35 hotels
nominated for that Award. The Operator has received one Choice Hotels Gold Award
and two Choice Hotels Silver Awards for excellence in service and housekeeping
for its operation of the Comfort Inn-Morgantown, West Virginia.
The Lessee believes that in order to carry out its philosophy, it must
allow its managers the flexibility to quickly meet the needs and desires of
customers of an individual hotel. The Lessee monitors the performance of its
managers by conducting frequent on-site reviews and by closely reviewing and
controlling expenditures and cash flows at individual hotels.
The Lessee's President, Randy P. Smith, has been employed in the hotel
business since 1978 and has operated a variety of hotels under many franchise
brands. He joined the Operator in 1989 as Director of Operations and in 1991 he
was appointed Vice President of Operations. He was appointed President of the
Lessee in 1994. He has been appointed to the Comfort Inn Advisory Council, the
International Operators Council for Choice Hotels ("IOC") National Marketing
Committee, the IOC National Operations and Standards Committee, the IOC National
Awards Committee, the Region 4 (Virginia) Regional Advisory Board for Choice
Hotels and numerous boards for the IOC. Mr. Smith received an M.B.A. degree from
Loyola College in 1995.
The Lessee's Vice President, Bethany H. Hooper, joined Humphrey
Associates in 1988 after working for the accounting firm of Reznick Fedder &
Silverman as a certified public accountant. In 1991, she was appointed Vice
President of Accounting and Administration of Humphrey Associates and the
Operator. Ms. Hooper continues to work for both the Lessee and Humphrey
Associates. She received a B.S. degree in Business Administration from Lewis and
Clark College in 1986 and an M.B.A. degree in Finance from Loyola College in
1991.
The Lessee's Controller, Hoa N. Moe, has been employed in the hotel
business since 1978. From 1978 to 1989, she worked for Ramada Inn's Washington
Regional Office, Coakley & Williams, a hotel management company, primarily as a
controller and credit investigator. She joined the Operator in 1989 and served
as Internal Auditor until she was appointed Controller in 1992.
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OWNERSHIP OF THE COMPANY'S COMMON STOCK
Security Ownership of Certain Beneficial Owners
The following table sets forth as of September 30, 1996 each person
known by the Company to be a beneficial owner of more than five percent (5%) of
its Common Stock. The Company has no other class of equity securities
outstanding. Unless otherwise indicated, said shares are owned directly and the
indicated person has sole voting and investment power.
Name and Address Amount and Nature
of Beneficial of Beneficial Percent
Owner Ownership of Class
- --------------------- ------------------ --------
James T. Martin 224,000(1) 9.6%
Odyssey Capital Reg.
6 Front Street
Hamilton, HMII, Bermuda
James H. Wallace, Jr. 122,080(2) 5.2%
3029 Cambridge Place, NW
Washington, DC 20007
- ---------------------
(1) Based upon information contained in Schedule 13D dated March 14, 1996, and
filed with the SEC on March 14, 1996.
(2) Based upon information contained in Schedule 13D dated July 17, 1995, and
filed with the SEC on July 17, 1995.
Security Ownership by Management
The following table sets forth certain information as of September 30,
1996 regarding the beneficial ownership of Common Stock by (i) each Director of
the Company, (ii) each executive officer of the Company, and (iii) by all
Directors and executive officers of the Company as a group. Unless otherwise
indicated, all shares are owned directly and the indicated person has sole
voting and investment power.
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<TABLE>
<CAPTION>
Shares of Common Stock Percent of
Name of Beneficial Owner Beneficially Owned Class
- ------------------------ ---------------------- -------------
Before Offering After Offering
--------------- --------------
<S> <C>
Margaret Allen 2,800 * *
James I. Humphrey, Jr. 623,350(1) 21.1% 15.7%
Andrew A. Mayer, M.D. 91,000 3.1% 2.3%
Charles A. Mills, III 20,625(2) * *
Dr. Leah T. Robinson 84,800 2.9% 2.1%
George R. Whittemore 89,800(3) 3.0% 2.3%
Jeffrey M. Zwerdling 53,510(4) 1.8% 1.3%
- ------------------------- --------- ---- ----
Total 965,885(5) 32.7%(5) 24.4%(5)
- ---------------------
</TABLE>
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Represents 623,350 shares of Common Stock issuable to Mr. Humphrey,
Humphrey Associates or Farmville Lodging Associates, LLC, upon redemption
of their Units. Mr. Humphrey is the sole shareholder of Humphrey
Associates and owns a 98% interest in Farmville Lodging Associates, LLC.
The redemption rights are exercisable at any time subject to certain
conditions.
(2) Includes 5,050 shares of Common Stock held by Mills Management
Corporation, of which Mr. Mills is President, 1,000 shares owned by Mr.
Mills' wife and 75 shares held by Mr. Mills as custodian for his children.
(3) Includes 87,400 shares of Common Stock owned by Mr. Whittemore and 2,400
shares owned by Mr. Whittemore's wife.
(4) Includes 14,500 shares of Common Stock owned by Mr. Zwerdling, 18,810
shares of Common Stock over which Mr. Zwerdling has dispositive power, and
20,200 shares of Common Stock that Mr. Zwerdling intends to acquire in the
Offering.
(5) Assumes that all Units held by Mr. Humphrey, Humphrey Associates and the
Farmville Lodging Associates are redeemed for shares of Common Stock.
DESCRIPTION OF CAPITAL STOCK
General
The Articles of Incorporation of the Company provide that the Company
may issue up to 35,000,000 shares of capital stock, consisting of 25,000,000
shares of Common Stock, $0.01 par value per share, and 10,000,000 shares of
preferred stock, $0.01 par value per share ("Preferred Stock"). Upon completion
of the Offering, 3,331,700 shares of Common Stock will be issued and
outstanding, 623,350 shares of Common Stock will be reserved for issuance upon
redemption of Units and no Preferred Stock will be issued and outstanding.
Common Stock
All shares of Common Stock are duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of shares of capital stock, Common Shareholders are entitled to receive
dividends if and when authorized and declared by the Board of Directors of the
Company out of assets legally available therefor and to share ratably in the
assets of the Company legally available for distribution to its shareholders in
the event of its liquidation, dissolution or winding-up after payment of, or
adequate provision
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for, all known debts and liabilities of the Company. The Company intends to pay
quarterly dividends. For the period beginning November 29, 1994, the closing
date of the IPO, and ending December 31, 1994, the Company made a distribution
of $0.044 per share to the Common Shareholders, which is the equivalent of a
$0.125 quarterly or a $0.50 annual distribution. For each of the quarters ended
March 31, 1995, and June 30, 1995, the Company made a distribution of $0.15 per
share, which is the equivalent of a $0.60 annual distribution. For the quarter
ended September 30, 1995, the Company made a distribution of $0.181 per share,
which represents a pro rata distribution of $0.19 per share from the closing
date of the Company's second public stock offering to the end of the quarter.
For each of the quarters ended December 31, 1995; March 31, 1996; June 30, 1996;
and September 30, 1996, the Company made a distribution of $0.19 per share,
which is the equivalent of a $0.76 annual distribution. See "Price Range of
Common Stock and Distributions."
Each outstanding share of Common Stock entitles the holder to one vote
on all matters submitted to a vote of shareholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of capital stock, the Common
Shareholders will possess the exclusive voting power. There is no cumulative
voting in the election of directors, which means in all elections of directors,
each Common Shareholder has the right to cast one vote for each share of stock
for each candidate.
Preferred Stock
Series of Preferred Stock may be issued from time to time, in one or
more series, as authorized by the Board of Directors. Because the Board of
Directors has the power to establish the preferences and rights of each class or
series of Preferred Stock, the Board of Directors may afford the holders of any
series or class of Preferred Stock preferences, powers and rights, voting or
otherwise, senior to the rights of Common Shareholders. The Board could
authorize the issuance of Preferred Stock with terms and conditions which could
have the effect of discouraging a takeover or other transaction which holders of
some, or a majority, of the shares of Common Stock might believe to be in their
best interests or in which holders of some, or a majority, of the shares of
Common Stock might receive a premium for their shares of Common Stock over the
then market price of such shares of Common Stock. As of the date hereof, no
shares of Preferred Stock are outstanding and the Company has no present plans
to issue any Preferred Stock.
Restrictions on Transfer
For the Company to qualify as a REIT under the Code, it must meet
certain requirements concerning the ownership of its outstanding shares of
capital stock. Specifically, not more than 50% in value of the Company's
outstanding capital stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a taxable year, and the Company must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. See "Federal Income Tax
Considerations - Requirements for Qualification." In addition, the Company must
meet certain requirements regarding the nature of its gross income in order to
qualify as a REIT. One such requirement is that at least 75% of the Company's
gross income for each year must consist of rents from real property and income
from certain other real property investments. The rents received by the
Partnership from the Lessee will not qualify as rents from real property, which
likely would result in loss of REIT status for the Company, if the Company were
to own, actually or constructively, 10% or more of the ownership interests in
the Lessee within the meaning of Section 856(d)(2)(B) of the Code. See "Federal
Income Tax Considerations - Requirements for Qualification - Income Tests."
Because the Board of Directors believes it is essential for the Company
to continue to qualify as a REIT, the Articles of Incorporation, subject to
certain exceptions described below, provide that no person may own, or be deemed
to own by virtue of the attribution provisions of the Code, more than 9.9% of
(i) the number of outstanding shares of Common Stock or (ii) the number of
outstanding shares of Preferred Stock (the "Ownership Limitation"). Any transfer
of shares of Common Stock or Preferred Stock that would (i) result in any person
owning, directly or indirectly, shares of Common Stock or Preferred Stock in
excess of the Ownership Limitation, (ii) result in the shares of Common Stock
and Preferred Stock being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iii) result in the Company being
"closely held" within the meaning of Section 856(h) of the Code, or (iv) cause
the Company to own, actually or constructively, 10% or more of the ownership
interests in a tenant of the Company's or the Partnership's real property,
within the meaning of Section 856(d)(2)(B) of the Code, will be null and void,
and the intended transferee will acquire no rights in such shares of Common
Stock or Preferred Stock.
Subject to certain exceptions described below, any purported transfer
of shares of Common Stock or Preferred Stock that would (i) result in any person
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owning, directly or indirectly, shares of Common Stock or Preferred Stock in
excess of the Ownership Limitation, (ii) result in the shares of Common Stock
and Preferred Stock being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iii) result in the Company being
"closely held" within the meaning of Section 856(h) of the Code, or (iv) cause
the Company to own, actually or constructively, 10% or more of the ownership
interests in a tenant of the Company's, the Partnership's or the Subsidiary
Partnership's real property, within the meaning of Section 856(d)(2)(B) of the
Code, will be designated as "Shares-in-Trust" and transferred automatically to a
trust (the "Trust") effective on the day before the purported transfer of such
shares of Common Stock or Preferred Stock. The record holder of the shares of
Common Stock or Preferred Stock that are designated as Shares-in-Trust (the
"Prohibited Owner") will be required to submit such number of shares of Common
Stock or Preferred Stock to the Company for registration in the name of the
Trust (the "Trustee"). The Trustee will be designated by the Company, but will
not be affiliated with the Company. The beneficiary of the Trust (the
"Beneficiary") will be one or more charitable organizations that are named by
the Company.
Shares-in-Trust will remain issued and outstanding shares of Common
Stock or Preferred Stock and will be entitled to the same rights and privileges
as all other shares of the same class or series. The Trustee will receive all
dividends and distributions on the Shares-in-Trust and will hold such dividends
or distributions in trust for the benefit of the Beneficiary. The Trustee will
vote all Shares-in-Trust. The Trustee will designate a permitted transferee of
the Shares-in-Trust, provided that the permitted transferee (i) purchases such
Shares-in- Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required
to repay to the Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in- Trust. The Prohibited Owner generally will receive from the Trustee
the lesser of (i) the price per share such Prohibited Owner paid for the shares
of Common Stock or Preferred Stock that were designated as Shares-in- Trust (or,
in the case of a gift or devise, the Market Price (as defined below) per share
on the date of such transfer) or (ii) the price per share received by the
Trustee from the sale of such Shares-in-Trust. Any amounts received by the
Trustee in excess of the amounts to be paid to the Prohibited Owner will be
distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept such
offer for a period of ninety days after the later of (i) the date of the
purported transfer which resulted in such Shares-in-Trust or (ii) the date the
Company determines in good faith that a transfer resulting in such
Shares-in-Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price
(as defined below) for the five consecutive Trading Days (as defined below)
ending on such date. The "Closing Price" on any date shall mean the last quoted
price as reported by The Nasdaq Stock Market. "Trading Day" shall mean a day on
which the principal national securities exchange on which the shares of Common
Stock or Preferred Stock are listed or admitted to trading is open for the
transaction of business or, if the shares of Common Stock or Preferred Stock are
not listed or admitted to trading on any national securities exchange, shall
mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
Any person who acquires or attempts to acquire shares of Common Stock
or Preferred Stock in violation of the foregoing restrictions, or any person who
owned shares of Common Stock or Preferred Stock that were transferred to a
Trust, will be required (i) to give immediately written notice to the Company of
such event and (ii) to provide to the Company such other information as the
Company may request in order to determine the effect, if any, of such transfer
on the Company's status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such
lower percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock and Preferred Stock must, within 30 days
after January 1 of each year, provide to the Company a written statement or
affidavit stating the name and address of such direct or indirect owner, the
number of shares of Common Stock and Preferred Stock owned directly or
indirectly, and a description of how such shares are held. In addition, each
direct or indirect shareholder shall provide to the Company such additional
information as the Company may request in order to determine the effect, if any,
of such ownership on the Company's status as a REIT and to ensure compliance
with the Ownership Limitation.
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The Ownership Limitation generally will not apply to the acquisition of
shares of Common Stock or Preferred Stock by an underwriter that participates in
a public offering of such shares. In addition, the Board of Directors, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Directors may direct, may exempt a person from
the Ownership Limitation under certain circumstances. The foregoing restrictions
will continue to apply until (i) the Board of Directors determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT and (ii) there is an affirmative vote of
two-thirds of the number of shares of Common Stock and Preferred Stock entitled
to vote on such matter at a regular or special meeting of the shareholders of
the Company.
All certificates representing shares of Common Stock or Preferred Stock
will bear a legend referring to the restrictions described above.
The Ownership Limitation could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of shares
of Common Stock might receive a premium for their shares of shares of Common
Stock over the then prevailing market price or which such holders might believe
to be otherwise in their best interest.
Other Matters
The transfer agent and registrar for the Company's shares of Common
Stock is First Union National Bank of North Carolina.
CERTAIN PROVISIONS OF VIRGINIA LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following summary of certain provisions of Virginia law and of the
Articles of Incorporation and Bylaws of the Company does not purport to be
complete and is subject to and qualified in its entirety by reference to
Virginia law and the Articles of Incorporation and Bylaws of the Company.
Certain provisions of Virginia law and the Articles of Incorporation and Bylaws
are described elsewhere in this Prospectus.
Board of Directors
The Bylaws provide that the number of Directors of the Company may be
established by the Board of Directors but may not be fewer than three nor more
than nine. Any vacancy will be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining Directors,
except that a vacancy resulting from an increase in the number of Directors must
be filled by a majority of the entire Board of Directors.
The Company's Bylaws also provide that a Director may be removed with
or without cause with the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of Directors. This provision, when coupled
with the provisions of the Bylaws authorizing the Board of Directors to fill
vacant directorships, precludes the Company's shareholders from removing
incumbent directors except upon the existence of a substantial affirmative vote
and filling the vacancies created by such removal with their own nominees.
Amendment
The Articles of Incorporation may be amended by the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock, with the
shareholders voting as a class with one vote per share; provided, that the
Articles of Incorporation provision relating to the Company's election to be
taxed as a REIT shall not be amended, altered, changed or repealed without the
affirmative vote of at least 80% of the members of the Board of Directors or the
affirmative vote of holders of two-thirds of the outstanding shares of Common
Stock and any other shares of capital stock entitled to vote generally in the
election of directors voting as a class. The Company's Bylaws may be amended by
the Board of Directors or by vote of the holders of a majority of the
outstanding shares of Common Stock, provided that provisions with respect to
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removal of directors, quorum requirements and approval of certain matters by a
majority of the Directors, cannot be amended without the affirmative vote of 80%
of the members of the entire Board of Directors, including a majority of the
Independent Directors, or the holders of two-thirds of the outstanding shares of
Common Stock and any other shares of capital stock entitled to vote generally in
the election of directors.
Business Combinations
The Virginia Stock Corporation Act contains provisions restricting
"Affiliated Transactions." These provisions, with several exceptions discussed
below, require approval of material acquisition transactions between a Virginia
corporation having more than 300 shareholders of record and any holder of more
than 10% of any class of its outstanding voting shares (an "Interested
Shareholder") by the holders of at least two-thirds of the remaining voting
shares. Affiliated Transactions subject to this approval requirement include
mergers, share exchanges, material dispositions of corporate assets not in the
ordinary course of business, any dissolution of the corporation proposed by or
on behalf of an Interested Shareholder, or any reclassification, including, a
reverse stock split, a recapitalization or a merger of the corporation with its
subsidiaries that increases the percentage of voting shares owned beneficially
by an Interested Shareholder by more than 5%.
For three years following the time that an Interested Shareholder
becomes an owner of 10% of the outstanding voting shares, a Virginia corporation
cannot engage in an Affiliated Transaction with such Interested Shareholder
without approval of two-thirds of the voting shares other than those shares
beneficially owned by the Interested Shareholder, and majority approval of the
"Disinterested Directors." A Disinterested Director means, with respect to a
particular Interested Shareholder, a member of the Company's Board of Directors
who was (i) a member on the date on which an Interested Shareholder became an
Interested Shareholder and (ii) recommended for election by, or was elected to
fill a vacancy and received the affirmative vote of, a majority of the
Disinterested Directors then on the Board. At the expiration of the three year
period, the statute requires approval of Affiliated Transactions by two-thirds
of the voting shares other than those beneficially owned by the Interested
Shareholder.
The principal exceptions to the special voting requirement apply to
transactions proposed after the three year period has expired and require either
that the transaction be approved by a majority of the corporation's
Disinterested Directors or that the transaction satisfy the fair-price
requirements of the statute. In general, the fair-price requirement provides
that in a two-step acquisition transaction, the Interested Shareholder must pay
the shareholders in the second step either the same amount of cash or the same
amount and type of consideration paid to acquire the Virginia corporation's
shares in the first step.
None of the foregoing limitations and special voting requirements
applies to a transaction with an Interested Shareholder whose acquisition of
shares making such person an Interested Shareholder was approved by a majority
of the Virginia corporation's Disinterested Directors.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation can adopt an amendment to its Articles of
Incorporation or Bylaws providing that the Affiliated Transactions provisions
shall not apply to the corporation. The Company has not "opted out" of the
Affiliated Transactions provisions.
Control Share Acquisitions
The Virginia Stock Corporation Act also contains provisions regulating
certain "Control Share Acquisitions," which are transactions causing the voting
strength of any person acquiring beneficial ownership of shares of a public
corporation in Virginia to meet or exceed certain threshold percentages (20%,
331/3% or 50%) of the total votes entitled to be cast for the election of
directors. Shares acquired in a control share acquisition have no voting rights
unless: (i) the voting rights are granted by a majority vote of all outstanding
shares other than those held by the acquiring person or any officer or employee
Director of the corporation, or (ii) the Articles of Incorporation or Bylaws of
the corporation provide that these Virginia law provisions do not apply to
acquisitions of its shares. The acquiring person may require that a special
meeting of the shareholders be held to consider the grant of voting rights to
the shares acquired in the control share acquisition. These provisions were
designed to deter certain takeovers of Virginia public corporations. Under
Virginia law, a corporation may "opt out" of the Control Share Acquisitions
provisions in its Articles of Incorporation or Bylaws. The Company has not
"opted out" of the Control Share Acquisitions provisions.
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Operations
The Company is generally prohibited from engaging in certain activities
and acquiring or holding property or engaging in any activity that would cause
the Company to fail to qualify as a REIT.
Advance Notice of Director Nominations and New Business
The Bylaws of the Company provide (a) with respect to an annual meeting
of shareholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by such shareholders may be made
only (i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Directors or (iii) by a shareholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and (b)
with respect to special meetings of shareholders, nominations of persons for
election to the Board of Directors may be made only (i) pursuant to the
Company's notice of meeting, (ii) by the Board of Directors or (iii) provided
that the Board of Directors has determined that directors shall be elected at
such meeting, by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have 3,331,700
shares of Common Stock outstanding, 623,350 shares of Common Stock reserved for
issuance upon redemption of Units and no shares of Preferred Stock outstanding.
After the Closing Date, all shares of Common Stock will be freely tradeable by
persons other than "Affiliates" of the Company without restriction under the
Securities Act, subject to certain limitations on ownership set forth in the
Articles of Incorporation. See "Description of Capital Stock - Restrictions on
Transfer."
Pursuant to the Partnership Agreement, the Limited Partners, which are
Mr. Humphrey and two of his Affiliates, have the right to redeem their Units in
exchange for shares of Common Stock (the "Redemption Rights") on a one-for-one
basis (or for cash, at the election of the Company or if the issuance of shares
of Common Stock would result in any person owning, directly or indirectly, more
than 9.9% of the shares of Common Stock). The Redemption Rights relating to all
outstanding Units currently are exercisable at any time. See "The Partnership
Agreement - Redemption Rights." Any amendment to the Partnership Agreement that
would affect the Redemption Rights requires the consent of Limited Partners
holding more than 50% of the Units held by all Limited Partners (except the
Company).
Shares of Common Stock issued to holders of Units upon exercise of the
Redemption Rights will be "restricted" securities under the meaning of Rule 144
promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of the shares of Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the date of
acquisition of restricted shares from the Company or from any "affiliate" of the
Company (as defined in Rule 144), and the acquiror or subsequent holder thereof
is deemed not to have been an "affiliate" of the Company at any time during the
90 days preceding a sale, such person would be entitled to sell such shares in
the public market under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.
The Company has agreed to file a registration statement with the
Commission covering the resale of any shares of Common Stock issued to a Limited
Partner upon redemption of Units. Upon request from a Limited Partner at any
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time, the Company will file such registration statement and use its best efforts
to have the registration statement declared effective and to keep it effective
for a period of two years. Upon effectiveness of such registration statement,
those persons who receive shares of Common Stock upon redemption of Units may
sell such shares in the secondary market without being subject to the volume
limitations or other requirements of Rule 144. The Company will bear expenses
incident to its registration requirements, except that such expenses shall not
include any selling commissions, Securities and Exchange Commission or state
securities registration fees, transfer taxes or certain other fees or taxes
relating to such shares. Registration rights may be granted to future sellers of
hotels to the Partnership who may receive, in lieu of cash, shares of Common
Stock, Units, or other securities convertible into shares of Common Stock.
The Common Stock trades on The Nasdaq Stock Market under the symbol
"HUMP." See "Underwriting." No prediction can be made as to the effect, if any,
that the Offering or the availability of shares for future sale, will have on
the market price for shares of Common Stock or Preferred Stock prevailing from
time to time. Sales of substantial amounts of shares of Common Stock, or the
perception that such sales could occur, may affect adversely prevailing market
prices of the shares of Common Stock. See "Risk Factors - and "The Partnership
Agreement - Transferability of Interests."
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PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, and the
descriptions of certain provisions thereof set forth elsewhere in this
Prospectus, is qualified in its entirety by reference to the Partnership
Agreement, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
Management
The Partnership has been organized as a Virginia limited partnership
pursuant to the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Partnership, has
full, exclusive and complete responsibility and discretion in the management and
control of the Partnership, and the Limited Partners have no authority in their
capacity as Limited Partners to transact business for, or participate in the
management activities or decisions of, the Partnership. However, any amendment
to the Partnership Agreement that would (i) affect the Redemption Rights, (ii)
adversely affect the Limited Partners' rights to receive cash distributions,
(iii) alter the Partnership's allocations of income or loss, or (iv) impose on
the Limited Partners any obligations to make additional contributions to the
capital of the Partnership, requires the consent of Limited Partners holding
more than 50% of the Units held by such partners (other than the Company).
Transferability of Interests
The Company may not voluntarily withdraw from the Partnership or
transfer or assign its interest in the Partnership unless the transaction in
which such withdrawal or transfer occurs results in the Limited Partners
receiving property in an amount equal to the amount they would have received had
they exercised their Redemption Rights immediately prior to such transaction, or
unless the successor to the Company contributes substantially all of its assets
to the Partnership in return for an interest in the Partnership. With certain
limited exceptions, the Limited Partners may not transfer their interests in the
Partnership, in whole or in part, without the written consent of the Company,
which consent the Company may withhold in its sole discretion. The Company may
not consent to any transfer that would cause the Partnership to be treated as a
corporation for federal income tax purposes.
Capital Contribution
The Company will contribute to the Partnership substantially all the
Net Proceeds of the Offering in exchange for 1,000,000 Units. After the Closing
Date, the Company will own a 84.24% general partnership interest in the
Partnership, and the Limited Partners will collectively own a 15.76% limited
partnership interest in the Partnership. Upon the Company's contribution of the
Net Proceeds to the Partnership, the property of the Partnership will be
revalued to its fair market value (based on the Offering Price of the Common
Shares) and the capital accounts of the partners will be adjusted to reflect the
manner in which the unrealized gain or loss inherent in such property would be
allocated among the partners under the terms of the Partnership Agreement if
there were a taxable disposition of such property for such fair market value on
the date of the revaluation. The Partnership Agreement provides that if the
Partnership requires additional funds at any time or from time to time in excess
of funds available to the Partnership from borrowing or capital contributions,
the Company may borrow such funds from a financial institution or other lender
and lend such funds to the Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. Under the Partnership
Agreement, the Company generally is obligated to contribute the proceeds of a
share offering as additional capital to the Partnership. Moreover, the Company
is authorized to cause the Partnership to issue partnership interests for less
than fair market value if the Company has concluded in good faith that such
issuance is in the best interests of the Company and the Partnership. If the
Company so contributes additional capital to the Partnership, the Company will
receive additional Units and the Company's percentage interest in the
Partnership will be increased on a proportionate basis based upon the amount of
such additional capital contributions and the value of the Partnership at the
time of such contributions. Conversely, the percentage interests of the Limited
Partners will be decreased on a proportionate basis in the event of additional
capital contributions by the Company. In addition, if the Company contributes
additional capital to the Partnership, the Company will revalue the property of
the Partnership to its fair market value (as determined by the Company) and the
capital accounts of the partners will be adjusted to reflect the manner in which
the unrealized gain or loss inherent in such property (that has not been
reflected in the capital accounts previously) would be allocated among the
partners under the terms of the Partnership Agreement if there were a taxable
disposition of such property for such fair market value on the date of the
revaluation.
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Redemption Rights
Pursuant to the Partnership Agreement, the Limited Partners have the
Redemption Rights, which enable them to cause the Partnership to redeem their
interests in the Partnership in exchange for shares of Common Stock on a
one-for-one basis or, at the option of the Company, an equivalent amount of
cash. The redemption price will be paid in cash in the discretion of the Company
or in the event that the issuance of shares of Common Stock to the redeeming
Limited Partner would (i) result in any person owning, directly or indirectly,
shares of Common Stock in excess of the Ownership Limitation, (ii) result in
shares of capital stock of the Company being owned by fewer than 100 persons
(determined without reference to any rules of attribution), (iii) result in the
Company being "closely held" within the meaning of Section 856(h) of the Code,
(iv) cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of the Company's or the Partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, or (v) cause
the acquisition of shares of Common Stock by such redeeming Limited Partner to
be "integrated" with any other distribution of shares of Common Stock for
purposes of complying with the Securities Act. The Redemption Rights currently
are exercisable at any time, provided that (i) no Limited Partner may exercise
the Redemption Right for less than 1,000 Units or, if such Limited Partner holds
less than 1,000 Units, less than all of the Units held by such Limited Partner
and (ii) no Limited Partner may exercise the Redemption Right if, as a result,
such partner or any other person would, upon redemption, own, directly or
indirectly, shares of Common Stock in excess of the Ownership Limitation. The
aggregate number of shares of Common Stock issuable upon exercise of the
Redemption Rights is 623,350. The number of shares of Common Stock issuable upon
exercise of the Redemption Rights will be adjusted upon the occurrence of share
splits, mergers, consolidations or similar pro rata share transactions, which
otherwise would have the effect of diluting or increasing the ownership
interests of the Limited Partners or the shareholders of the Company.
Operations
The Partnership Agreement requires that the Partnership be operated in
a manner that will enable the Company to satisfy the requirements for being
classified as a REIT, to avoid any federal income or excise tax liability
imposed by the Code, and to ensure that the Partnership will not be classified
as a "publicly traded partnership" for purposes of Section 7704 of the Code.
In addition to the administrative and operating costs and expenses
incurred by the Partnership, the Partnership pays all administrative costs and
expenses of the Company (the "Company Expenses") and the Company Expenses are be
treated as expenses of the Partnership. The Company Expenses generally include
(A) all expenses relating to the formation and continuity of existence of the
Company, (B) all expenses relating to the registration of securities by the
Company, (C) all expenses associated with the preparation and filing of any
periodic reports by the Company under federal, state or local laws or
regulations, (D) all expenses associated with compliance by the Company with
laws, rules and regulations promulgated by any regulatory body and (E) all other
operating or administrative costs of the Company incurred in the ordinary course
of its business on behalf of the Partnership. The Company Expenses, however, do
not include any administrative and operating costs and expenses incurred by the
Company that are attributable to hotel properties or partnership interests in
the Subsidiary Partnership that are owned by the Company directly. The Company
currently does not own any hotel directly.
Distributions
The Partnership Agreement provides that the Partnership will distribute
cash from operations (including net sale or refinancing proceeds, but excluding
net proceeds from the sale of the Partnership's property in connection with the
liquidation of the Partnership) on a quarterly (or, at the election of the
Company, more frequent) basis, in amounts determined by the Company in its sole
discretion, to the partners in accordance with their respective percentage
interests in the Partnership. Upon liquidation of the Partnership, 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 all partners with positive capital accounts in accordance with
their respective positive capital account balances. If the Company has a
negative balance in its capital account following a liquidation of the
Partnership, it will be obligated to contribute cash to the Partnership equal to
the negative balance in its capital account.
Allocations
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Income, gain and loss of the Partnership for each fiscal year generally
are allocated among the partners in accordance with their respective interests
in the Partnership, subject to compliance with the provisions of Code Sections
704(b) and 704(c) and Treasury Regulations promulgated thereunder.
Term
The Partnership will continue until December 31, 2050, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the Company
(unless the Limited Partners elect to continue the Partnership), (ii) the sale
or other disposition of all or substantially all the assets of the Partnership,
(iii) the redemption of all Units (other than those held by the Company, if
any), or (iv) the election of the General Partner.
Tax Matters
Pursuant to the Partnership Agreement, the Company is the tax matters
partner of the Partnership and, as such, will have authority to handle tax
audits and to make tax elections under the Code on behalf of the Partnership.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax
considerations that may be relevant to a prospective holder of Common Stock.
Hunton & Williams has acted as counsel to the Company and has reviewed this
summary and is of the opinion that the discussion contained herein fairly
summarizes the federal income tax considerations that are likely to be material
to a Common Shareholder. The discussion does not address all aspects of taxation
that may be relevant to particular shareholders in light of their personal
investment or tax circumstances, or to certain types of shareholders (including
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers, foreign corporations, and persons who are not citizens or
residents of the United States) subject to special treatment under the federal
income tax laws.
The statements in this discussion and the opinion of Hunton & Williams
are based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations, the legislative history of the Code, existing
administrative rulings and practices of the Service, and judicial decisions. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements in this Prospectus with respect to the transactions
entered into or contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
Taxation of the Company
The Company elected to be taxed as a REIT under Sections 856 through
860 of the Code, effective for its short taxable year ended December 31, 1994.
The Company believes that, commencing with such taxable year, it has been
organized and has operated in such a manner as to qualify for taxation as a REIT
under the Code, and the Company intends to continue to operate in such a manner,
but no assurance can be given that the Company will operate in a manner so as to
qualify or remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retrospectively.
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Hunton & Williams has acted as counsel to the Company in connection
with the IPO, the Company's second public stock offering, the Offering and the
Company's election to be taxed as a REIT. In the opinion of Hunton & Williams,
the Company qualified to be taxed as a REIT for its taxable years ended December
31, 1994 and December 31, 1995, and the Company's organization and current and
proposed method of operation will enable it to continue to qualify as a REIT for
its taxable year ended December 31, 1996 and in the future. Investors should be
aware, however, that opinions of counsel are not binding upon the Service or any
court. It must be emphasized that Hunton & Williams' opinion is based on various
assumptions and is conditioned upon certain representations made by the Company
as to factual matters, including representations regarding the nature of the
Company's properties, the Percentage Leases, and the future conduct of the
Company's business. Such factual assumptions and representations are described
below in this discussion of "Federal Income Tax Considerations" and are set out
in the federal income tax opinion that will be delivered by Hunton & Williams at
the closing of the Offering. Moreover, such qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis, through actual
annual operating results, distribution levels, and share ownership, the various
qualification tests imposed under the Code discussed below. Hunton & Williams
will not review the Company's compliance with those tests on a continuing basis.
Accordingly, no assurance can be given that the actual results of the Company's
operation for any particular taxable year will satisfy such requirements. For a
discussion of the tax consequences of failure to qualify as a REIT, see "Federal
Income Tax Considerations - Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" of income (i.e., taxation at both the corporate and
shareholder levels) that generally results from investment in a corporation.
However, the Company will be subject to federal income tax in the following
circumstances. First, the Company will be taxed at regular corporate rates on
any undistributed REIT taxable income, including undistributed net capital
gains. Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference. Third, if the Company
has (i) net income from the sale or other disposition of "foreclosure property"
that is held primarily for sale to customers in the ordinary course of business
or (ii) other nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income. Fourth, if the Company has
net income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, the Company will be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if the Company acquires any asset from a C
corporation (i.e., a corporation generally subject to full corporate-level tax)
in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the disposition of
such asset during the 10-year period beginning on the date on which such asset
was acquired by the Company, then to the extent of such asset's "built-in gain"
(i.e., the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such time),
such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in gain" assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition.
Requirements for Qualification
The Code defines a REIT as a corporation, trust or association (i) that
is managed by one or more trustees or directors; (ii) the beneficial ownership
of which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such
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election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Service that must be met in
order to elect and to maintain REIT status; (viii) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (i) to (iv), inclusive, must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made by the Company to be taxed as a
REIT. For purposes of determining share ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual, although a trust that is a
qualified trust under Code Section 401(a) generally is not considered an
individual and the beneficiaries of such trust are treated as holding shares of
a REIT in proportion to their actuarial interests in the trust for purposes of
the 5/50 Rule.
The Company has issued sufficient shares of Common Stock with
sufficient diversity of ownership to allow it to satisfy requirements (v) and
(vi). In addition, the Company's Articles of Incorporation restrict the transfer
of shares of Common Stock in a manner intended to assist the Company in
continuing to satisfy the share ownership requirements described in (v) and (vi)
above. Such transfer restrictions are described in "Description of Capital Stock
- - Restrictions on Transfer."
The Company does not currently have any corporate subsidiaries, nor
will it have any corporate subsidiaries immediately after completion of the
Offering, although it may have corporate subsidiaries in the future. Code
Section 856(i) provides that a corporation that is a "qualified REIT subsidiary"
shall not be treated as a separate corporation, and all assets, liabilities, and
items of income, deduction, and credit of a "qualified REIT subsidiary" shall be
treated as assets, liabilities, and items of income, deduction, and credit of
the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital
stock of which has been held by the REIT at all times during the period such
corporation was in existence. Thus, in applying the requirements described
herein, any "qualified REIT subsidiaries" acquired or formed by the Company will
be ignored, and all assets, liabilities, and items of income, deduction, and
credit of such subsidiaries will be treated as assets, liabilities and items of
income, deduction, and credit of the Company.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of Section 856 of the Code, including satisfying the
gross income and asset tests, described below. Thus, the Company's proportionate
share of the assets, liabilities and items of income of the Partnership are
treated as assets and gross income of the Company for purposes of applying the
requirements described herein.
Income Tests
In order for the Company to maintain its qualification as a REIT, there
are three requirements relating to the Company's gross income that must be
satisfied annually. First, at least 75% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. Third, not more that 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year may be gain from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) dealer property that is not
foreclosure property, and (iii) certain real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property).
The specific application of these tests to the Company is discussed below.
Rents received by the Company will qualify as "rents from real
property" for purposes of the gross income requirements for a REIT described
above only if several conditions are met. First, the amount of rent must not be
based in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not
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be excluded from the term "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Second, the
Code provides that rents received from a tenant will not qualify as "rents from
real property" for purposes of the gross income tests if the Company, or an
owner of 10% or more of the Company, directly or constructively owns 10% or more
of such tenant (a "Related Party Tenant"). Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." Finally, for rents received to qualify as "rents from real property,"
the Company generally must not operate or manage the property or furnish or
render services to the tenants of such property, other than through an
"independent contractor" who is adequately compensated and from whom the Company
derives no revenue. The "independent contractor" requirement, however, does not
apply to the extent the services provided by the Company are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and are not otherwise considered "rendered to the occupant."
Pursuant to the Percentage Leases, the Lessee leases from the
Partnership the land, buildings, improvements, furnishings and equipment
comprising the Hotels for a 10-year period. The Percentage Leases provide that
the Lessee is obligated to pay to the Partnership (i) the Base Rent and the
Percentage Rent (collectively, the "Rents") and (ii) certain other Additional
Charges. The Percentage Rent is calculated by multiplying fixed percentages by
the gross room and other revenues for each of the Hotels. The Base Rent accrues
and is required to be paid monthly and the Percentage Rent accrues and is
required to be paid monthly, quarterly, semi-annually and annually (if
applicable). The Partnership plans to enter into the Fixed Lease with the Lessee
with respect to the New Development. The Fixed Lease provides that the Lessee is
obligated to pay to the Partnership annual fixed rent of $378,840 (the "Annual
Fixed Rent"). For purposes of this section entitled "Federal Income Tax
Considerations," the term "Percentage Leases" includes the Fixed Lease and
assumes that the terms of the Fixed Lease (other than as otherwise described in
this prospectus) are substantially similar to the terms of the existing
Percentage Leases, and the term "Rent" includes the Annual Fixed Rent.
In order for the Base Rent, the Percentage Rent, the Additional
Charges, and the Annual Fixed Rent to constitute "rents from real property," the
Percentage Leases must be respected as true leases for federal income tax
purposes and not treated as service contracts, joint ventures or some other type
of arrangement. The determination of whether the Percentage Leases are true
leases depends on an analysis of all the surrounding facts and circumstances. In
making such a determination, courts have considered a variety of factors,
including the following: (i) the intent of the parties, (ii) the form of the
agreement, (iii) the degree of control over the property that is retained by the
property owner (e.g., whether the lessee has substantial control over the
operation of the property or whether the lessee was required simply to use its
best efforts to perform its obligations under the agreement), and (iv) the
extent to which the property owner retains the risk of loss with respect to the
property (e.g., whether the lessee bears the risk of increases in operating
expenses or the risk of damage to the property) or the potential for economic
gain (e.g., appreciation) with respect to the property.
In addition, Code Section 7701(e) provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (i) the
service recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the property's operating costs,
or the recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient, and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination whether a service
contract should be treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every case.
Hunton & Williams is of the opinion that the Percentage Leases
(excluding the Fixed Lease) will be treated as true leases for federal income
tax purposes. Such opinion is based, in part, on the following facts: (i) the
Partnership and the Lessee intend for their relationship to be that of a lessor
and lessee and such relationship is documented by lease agreements, (ii) the
Lessee has the right to exclusive possession and use and quiet enjoyment of the
Hotels during the
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term of the Percentage Leases, (iii) the Lessee bears the cost of, and is
responsible for, day-to-day maintenance and repair of the Hotels, other than the
cost of capital expenditures that are classified as capital items under
generally accepted accounting principles which are necessary for the continued
operation of the Hotels, and dictates how the Hotels are operated, maintained,
and improved, (iv) the Lessee bears all of the costs and expenses of operating
the Hotels (including the cost of any inventory used in their operation) during
the term of the Percentage Leases (other than real and personal property taxes,
property and casualty insurance, and the cost of replacement or refurbishment of
furniture, fixtures and equipment, to the extent such costs do not exceed the
allowance for such costs provided by the Partnership under each Percentage
Lease), (v) the Lessee benefits from any savings in the costs of operating the
Hotels during the term of the Percentage Leases, (vi) in the event of damage to
or destruction of a Hotel, the Lessee is at economic risk because it generally
is obligated either (A) to restore the property to its prior condition, in which
event it will bear all costs of such restoration in excess of any insurance
proceeds or (B) to purchase the Hotel for an amount generally equal to the fair
market value of the property, less any insurance proceeds, (vii) the Lessee has
indemnified the Partnership against all liabilities imposed on the Partnership
during the term of the Percentage Leases by reason of (A) injury to persons or
damage to property occurring at the Hotels or (B) the Lessee's use, management,
maintenance or repair of the Hotels, (viii) the Lessee is obligated to pay
substantial fixed rent for the period of use of the Hotels, and (ix) the Lessee
stands to incur substantial losses (or reap substantial gains) depending on how
successfully it operates the Hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, the
opinion of Hunton & Williams with respect to the relationship between the
Partnership and the Lessee is based upon all of the facts and circumstances and
upon rulings and judicial decisions involving situations that are considered to
be analogous. Opinions of counsel are not binding upon the Service or any court,
and there can be no complete assurance that the Service will not assert
successfully a contrary position. If the Percentage Leases are recharacterized
as service contracts or partnership agreements, rather than true leases, part or
all of the payments that the Partnership receives from the Lessee may not be
considered rent or may not otherwise satisfy the various requirements for
qualification as "rents from real property." In that case, the Company likely
would not be able to satisfy either the 75% or 95% gross income tests and, as a
result, would lose its REIT status.
Due to Humphrey Development's right to purchase the New Development
from the Company on the sixth anniversary of commencement of operations of the
New Development for an amount approximately equal to the aggregate costs
incurred by the Company to develop the New Development, there is a risk that
Humphrey Development, rather than the Company, will be treated as the owner of
the New Development for federal income tax purposes. In that case, the Company
would be treated for federal income tax purposes as making a loan to Humphrey
Development that is secured by the New Development. To the extent that such
mortgage loan is secured by real property, the mortgage loan will be considered
a real estate asset for purposes of the 75% asset test, and the interest accrued
on the mortgage loan will be considered mortgage interest for purposes of the
75% gross income test. See "Asset Tests." If the Company's investment in the New
Development is recharacterized as a mortgage loan, the Company's "REIT taxable
income" may be adjusted because (i) the Company would not be entitled to
depreciation deductions with respect to the New Development and (ii) a portion
of the payments that the Company receives with respect to the New Development
would be nontaxable as principal repayments on the mortgage loan. In that case,
there is a risk that the Company might be deemed retroactively to have failed to
meet the distribution requirements and would have to rely on the payment of a
"deficiency dividend" in order to retain its REIT status. See "Distribution
Requirements."
In order for the Rent to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rent
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel must not be greater than 15% of the Rent
received under the Percentage Lease. The Rent attributable to the personal
property in a Hotel is the amount that bears the same ratio to total Rent for
the taxable year as the average of the adjusted bases of the personal property
in the Hotel at the beginning and at the end of the taxable year bears to the
average of the aggregate adjusted bases of both the real and personal property
comprising the Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio"). With respect to each Hotel that the Partnership has
acquired, or will acquire, in exchange for Units, the initial adjusted bases of
the personal property in such hotel was, or will be, less than 15% of the
initial adjusted bases of both the real and personal property comprising such
Hotel. In addition, the Company obtained an appraisal of the personal property
at each Hotel acquired for cash that
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indicates that the fair market value of the personal property was less than 15%
of the purchase price of such Hotel. Further, in no event will the Partnership
acquire additional personal property for a Hotel to the extent that such
acquisition would cause the Adjusted Basis Ratio for that hotel to exceed 15%.
There can be no assurance, however, that the Service would not assert that the
personal property acquired by the Partnership had a value in excess of the
appraised value, or that a court would not uphold such assertion. If such a
challenge were successfully asserted, the Company could fail the 15% Adjusted
Basis Ratio as to one or more of the Hotels, which in turn potentially could
cause the Company to fail to satisfy the 95% or 75% gross income test and thus
lose its REIT status.
Another requirement for qualification of the Rent as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages (i) are fixed at the time the Percentage Leases are entered
into, (ii) are not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(iii) conform with normal business practice. More generally, the Percentage Rent
will not qualify as "rents from real property" if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means of basing the
Percentage Rent on income or profits. Since the Percentage Rent is based on
fixed percentages of the gross revenues from the Hotels that are established in
the Percentage Leases, and the Company has represented that the percentages (i)
will not be renegotiated during the terms of the Percentage Leases in a manner
that has the effect of basing the Percentage Rent on income or profits and (ii)
conform with normal business practice, the Percentage Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company has represented that, with respect to other hotels that
it acquires in the future, it will not charge rent for any property that is
based in whole or in part on the income or profits of any person (except by
reason of being based on a fixed percentage of gross revenues, as described
above).
A third requirement for qualification of the Rent as "rents from real
property" is that the Company must not own, actually or constructively, 10% or
more of the Lessee. The constructive ownership rules generally provide that, if
10% or more in value of the shares of the Company is owned, directly or
indirectly, by or for any person, the Company is considered as owning the shares
owned, actually or indirectly, by or for such person. The Company does not own
directly any stock of the Lessee. The Limited Partners, including Mr. Humphrey,
who is the sole shareholder of the Lessee, may acquire shares of Common Stock by
exercising their Redemption Rights. The Partnership Agreement, however, provides
that a redeeming Limited Partner will receive cash, rather than shares of Common
Stock, if the Company so elects or if the acquisition of shares of Common Stock
by such partner would cause the Company to own, actually or constructively, 10%
or more of the ownership interests in a tenant of the Company's or the
Partnership's real property, within the meaning of Section 856(d)(2)(B) of the
Code. The Articles of Incorporation likewise prohibit a shareholder of the
Company from owning shares of Common Stock if such ownership would cause the
Company to own, actually or constructively, 10% or more of the ownership
interests in a tenant of the Company's real property, within the meaning of
Section 856(d)(2)(B) of the Code. Thus, the Company should never own, actually
or constructively, 10% or more of the Lessee. Furthermore, the Company has
represented that, with respect to other hotels that it acquires in the future,
it will not rent any property to a Related Party Tenant. However, because the
Code's constructive ownership rules for purposes of the Related Party Tenant
rules are broad and it is not possible to monitor continually direct and
indirect transfers of shares of Common Stock, no absolute assurance can be given
that such transfers or other events of which the Company has no knowledge will
not cause the Company to own constructively 10% or more of the Lessee at some
future date.
A fourth requirement for qualification of the Rent as "rents from real
property" is that the Company cannot furnish or render noncustomary services to
the tenants of the Hotels, or manage or operate the Hotels, other than through
an independent contractor who is adequately compensated and from whom the
Company itself does not derive or receive any income. Provided that the
Percentage Leases are respected as true leases, the Company should satisfy that
requirement because the Partnership is not performing any services other than
customary ones for the Lessee. Furthermore, the Company has represented that,
with respect to other hotels that it acquires in the future, it will not perform
noncustomary services with respect to the tenant of the property. As described
above, however, if the Percentage Leases are recharacterized as service
contracts or partnership agreements, the Rent likely would be disqualified as
"rents from real property" because the Company would be considered to furnish or
render services to the occupants of the Hotels and to manage or operate the
Hotels other than through an independent contractor who is adequately
compensated and from whom the Company derives or receives no income.
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If the Rent does not qualify as "rents from real property" because the
Rent attributable to personal property exceeds 15% of the total Rent for a
taxable year, the portion of the Rent that is attributable to personal property
will not be qualifying income for purposes of either the 75% or 95% gross income
test. Thus, if the Rent attributable to personal property, plus any other income
that is nonqualifying income for purposes of the 95% gross income test, during a
taxable year exceeds 5% of the Company's gross income during the year, the
Company would lose its REIT status. If, however, the Rent does not qualify as
"rents from real property" because either (i) the Percentage Rent is considered
based on income or profits of the Lessee, (ii) the Company owns, actually or
constructively, 10% or more of the Lessee, or (iii) the Company furnishes
noncustomary services to the tenants of the Hotels, or manages or operates the
Hotels, other than through a qualifying independent contractor, none of the Rent
would qualify as "rents from real property." In that case, the Company likely
would lose its REIT status because it would be unable to satisfy either the 75%
or 95% gross income test.
In addition to the Rent, the Lessee is required to pay the Additional
Charges to the Partnership. To the extent that the Additional Charges represent
either (i) reimbursements of amounts that the Lessee is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such amounts,
the Additional Charges should qualify as "rents from real property." To the
extent, however, that the Additional Charges represent interest that is accrued
on the late payment of the Rent or the Additional Charges, the Additional
Charges should not qualify as "rents from real property," but instead should be
treated as interest that qualifies for the 95% gross income test.
Based on the foregoing, Hunton & Williams is of the opinion that the
Rent and the Additional Charges will qualify as "rents from real property" for
purposes of the 75% and 95% gross income tests, except to the extent that the
Additional Charges represent interest that is accrued on the late payment of the
Rent or the Additional Charges (which will be qualifying gross income for the
95% test but not the 75% test). As described above, the opinion of Hunton &
Williams is based upon an analysis of all the facts and circumstances and upon
rulings and judicial decisions involving situations that are considered to be
analogous, as well as representations by the Company and assumptions that are
described above and set out in the federal income tax opinion of Hunton &
Williams, the form of which is attached as an Exhibit to the Registration
Statement of which this Prospectus is a part. Opinions of counsel are not
binding upon the Service or a court. Accordingly, there can be no complete
assurance that the Service will not assert successfully a contrary position and,
therefore, prevent the Company from qualifying as a REIT.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Furthermore, to the extent that interest from a loan that is based on
the residual cash proceeds from the sale of the property securing the loan
constitutes a "shared appreciation provision" (as defined in the Code), income
attributable to such participation feature will be treated as gain from the sale
of the secured property.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. All inventory required in the operation
of the Hotels will be purchased by the Lessee or its designee as required by the
terms of the Percentage Leases. Accordingly, the Company believes that no asset
owned by the Company or the Partnership is held for sale to customers and that a
sale of any such asset will not be in the ordinary course of business of the
Company or the Partnership. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those related
to a particular property. Nevertheless, the Company and the Partnership will
attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company or
the Partnership can comply with the safe-harbor provisions of the Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
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connected with the production of such income. However, gross income from such
foreclosure property will qualify for purposes of the 75% and 95% gross income
tests. "Foreclosure property" is defined as any real property (including
interests in real property) and any personal property incident to such real
property (i) that is acquired by a REIT as the result of such REIT having bid in
such property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was a
default (or default was imminent) on a lease of such property or on an
indebtedness that such property secured and (ii) for which such REIT makes a
proper election to treat such property as foreclosure property. However, a REIT
will not be considered to have foreclosed on a property where such REIT takes
control of the property as a mortgagee-in-possession and cannot receive any
profit or sustain any loss except as a creditor of the mortgagor. Under the
Code, property generally ceases to be foreclosure property with respect to a
REIT on the date that is two years after the date such REIT acquired such
property (or longer if an extension is granted by the Secretary of the
Treasury). The foregoing grace period is terminated and foreclosure property
ceases to be foreclosure property on the first day (i) on which a lease is
entered into with respect to such property that, by its terms, will give rise to
income that does not qualify for purposes of the 75% gross income test or any
amount is received or accrued, directly or indirectly, pursuant to a lease
entered into on or after such day that will give rise to income that does not
qualify for purposes of the 75% gross income test, (ii) on which any
construction takes place on such property (other than completion of a building,
or any other improvement, where more than 10% of the construction of such
building or other improvement was completed before default became imminent), or
(iii) which is more than 90 days after the day on which such property was
acquired by the REIT and the property is used in a trade or business that is
conducted by the REIT (other than through an independent contractor from whom
the REIT itself does not derive or receive any income). As a result of the rules
with respect to foreclosure property, if the Lessee defaults on its obligations
under a Percentage Lease for a Hotel, the Company terminates the Lessee's
leasehold interest, and the Company is unable to find a replacement Lessee for
such Hotel within 90 days of such foreclosure, gross income from hotel
operations conducted by the Company from such Hotel would cease to qualify for
the 75% and 95% gross income tests. In such event, the Company likely would be
unable to satisfy the 75% and 95% gross income tests and, thus, would fail to
qualify as a REIT.
It is possible that, from time to time, the Company or the Partnership
will enter into hedging transactions with respect to one or more of its assets
or liabilities. Any such hedging transactions could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the Company or the
Partnership enters into an interest rate swap or cap contract to hedge any
variable rate indebtedness incurred to acquire or carry real estate assets, any
periodic income or gain from the disposition of such contract should be
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. Furthermore, any such contract would be considered a
"security" for purposes of applying the 30% gross income test. To the extent
that the Company or the Partnership hedges with other types of financial
instruments or in other situations, it may not be entirely clear how the income
from those transactions will be treated for purposes of the various income tests
that apply to REITs under the Code. The Company intends to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
Those relief provisions generally will be available if the Company's failure to
meet such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations - Taxation of the
Company," even if those relief provisions apply, a 100% tax would be imposed
with respect to the greater of the amount by which the Company fails the 75% or
95% gross income test. No such relief is available for violations of the 30%
income test.
Asset Tests
The Company, at the close of each quarter of its taxable year, also
must satisfy two tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes
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interests in real property, interests in mortgages on real property to the
extent the mortgage balance does not exceed the value of the associated real
property, and shares of other REITs. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold in real property, and an option to acquire real property (or a
leasehold in real property). Second, of the investments not included in the 75%
asset class, the value of any one issuer's securities owned by the Company may
not exceed 5% of the value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting securities (except for
its ownership interest in the Partnership or a qualified REIT subsidiary).
For purposes of the asset tests, the Company will be deemed to own its
proportionate share of the assets of the Partnership, rather than its
partnership interest in the Partnership. The Company has represented that, at
all relevant times (including the taxable periods preceding the Offering), (i)
at least 75% of the value of its total assets has been and will be represented
by real estate assets, cash and cash items (including receivables), and
government securities and (ii) it has not and will not own any securities that
do not satisfy the 75% asset requirement (except for the stock of qualified REIT
subsidiaries). In addition, the Company has represented that it will not acquire
or dispose, or cause the Partnership to acquire or dispose, of assets in the
future in a way that would cause it to violate either asset test. Based on the
foregoing, Hunton & Williams is of the opinion that the Company has satisfied,
and will continue to satisfy, both asset tests for REIT status.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset tests either did not exist immediately after the acquisition of any
particular asset or was not wholly or partly caused by such an acquisition
(i.e., the discrepancy arose from changes in the market values of its assets).
If the condition described in clause (ii) of the preceding sentence were not
satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the quarter in which it arose.
Distribution Requirements
The Company, in order to qualify as a REIT, is required each taxable
year to distribute dividends (other than capital gain dividends) to its
shareholders in an amount at least equal to (i) the sum of (A) 95% of its "REIT
taxable income" (computed without regard to the dividends paid deduction and its
net capital gain) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
date after such declaration. To the extent that the Company does not distribute
all of its net capital gain or distributes at least 95%, but less than 100%, of
its "REIT taxable income," as adjusted, it will be subject to tax thereon at
regular ordinary and capital gains corporate tax rates. Furthermore, if the
Company should fail to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed. The
Company has made, and has represented that it will continue to make, timely
distributions sufficient to satisfy all annual distribution requirements.
It is possible that, from time to time, the Company may experience
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, under the
Percentage Leases, the Lessee may defer payment of the excess of the Percentage
Rent over the Base Rent for a period of up to 90 days after the end of the
calendar year in which such payment was due. In that case, the Partnership still
would be required to recognize as income the excess of the Percentage Rent over
the Base Rent in the calendar quarter to which it relates. Further, it is
possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciated property that exceeds its
allocable share of cash attributable to that sale. Therefore, the Company may
have less Cash Available for Distribution to Shareholders than is necessary to
meet its annual 95% distribution requirement or to avoid corporate income tax or
the excise tax imposed on certain undistributed income. In such a situation,
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the Company may find it necessary to arrange for short-term (or possibly
long-term) borrowings or to raise funds through the issuance of additional
common or preferred shares.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
Recordkeeping Requirement
Pursuant to applicable Treasury Regulations, in order to be able to
elect to be taxed as a REIT, the Company must maintain certain records and
request on an annual basis certain information from its shareholders designed to
disclose the actual ownership of its outstanding shares. The Company has
complied, and represents that it will continue to comply, with such
requirements.
Partnership Anti-Abuse Rule
The U.S. Department of Treasury recently issued a final regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions") that would authorize the Service, in certain "abusive"
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule would apply where a partnership is formed or availed of in
connection with a transaction (or series of related transactions) a principal
purpose of which is to reduce substantially the present value of the partners'
aggregate federal tax liability in a manner inconsistent with the intent of the
Partnership Provisions. The Anti-Abuse Rule states that the Partnership
Provisions are intended to permit taxpayers to conduct joint business (including
investment) activities through a flexible economic arrangement that accurately
reflects the partners' economic agreement and clearly reflects the partners'
income without incurring an entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that
elects to be treated as a REIT contributes substantially all of the proceeds
from a public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners have
the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of the redemption. The
example concludes that the use of the partnership is not inconsistent with the
intent of the Partnership Provisions and, thus, cannot be recast by the Service.
Based on the foregoing, Hunton & Williams is of the opinion that the Anti-Abuse
Rule will not have any adverse impact on the Company's ability to qualify as a
REIT. However, the Redemption Rights do not conform in all respects to the
redemption rights described in the foregoing example. Moreover, the Anti-Abuse
Rule is extraordinarily broad in scope and is applied based on an analysis of
all of the facts and circumstances. As a result, there can be no assurance that
the Service will not attempt to apply the Anti-Abuse Rule to the Company. If the
conditions of the Anti-Abuse Rule are met, the Service is authorized to take
appropriate enforcement action, including disregarding the Partnership for
federal tax purposes or treating one or more of its partners as nonpartners. Any
such action potentially could jeopardize the Company's status as a REIT.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income and, subject to certain
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limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which the Company ceased to
qualify as a REIT. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.
Taxation of Taxable U.S. Shareholders
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a Common Shareholder that for
U.S. federal income tax purposes is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized in
or under the laws of the United States or of any political subdivision thereof,
or (iii) an estate or trust the income of which is subject to U.S.
federal income taxation regardless of its source.
Distributions that are designated as capital gain dividends will be
taxed as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the shareholder has held his shares of Common Stock. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Distributions in excess of current and accumulated
earnings and profits will not be taxable to a Common Shareholder to the extent
that they do not exceed the adjusted basis of the Common Shareholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a Common Shareholder's shares, such distributions will be
included in income as long-term capital gain (or short-term capital gain if the
shares of Common Stock have been held for one year or less) assuming the shares
of Common Stock are capital assets in the hands of the Common Shareholder. In
addition, any distribution declared by the Company in October, November, or
December of any year and payable to a Common Shareholder of record on a
specified date in any such month shall be treated as both paid by the Company
and received by the Common Shareholder on December 31 of such year, provided
that the distribution is actually paid by the Company during January of the
following calendar year.
Common Shareholders may not include in their individual income tax
returns any net operating losses or capital losses of the Company. Instead, such
losses would be carried over by the Company for potential offset against its
future income (subject to certain limitations). Taxable distributions from the
Company and gain from the disposition of shares of Common Stock will not be
treated as passive activity income and, therefore, shareholders generally will
not be able to apply any "passive activity losses" (such as losses from certain
types of limited partnerships in which the shareholder is a limited partner)
against such income. In addition, taxable distributions from the Company and
gain from the disposition of shares of Common Stock generally will be treated as
investment income for purposes of the investment interest limitations. The
Company will notify shareholders after the close of the Company's taxable year
as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital, and capital gain.
Taxation of Shareholders on the Disposition of the Common Stock
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Stock by a shareholder who has held such
shares for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss to the extent of distributions from the
Company required to be treated by such shareholder as long-term capital gain.
All or a portion of any loss realized upon a taxable disposition of the Common
Stock may be disallowed if other shares of Common Stock are purchased within 30
days before or after the disposition.
Capital Gains and Losses
A capital asset generally must be held for more than one year in order
for gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%,
and the tax rate on net capital gains applicable to individuals is 28%. Thus,
the tax rate differential between capital gain and
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ordinary income for individuals may be significant. In addition, the
characterization of income as capital or ordinary may affect the deductibility
of capital losses. Capital losses not offset by capital gains may be deducted
against an individual's ordinary income only up to a maximum annual amount of
$3,000. Unused capital losses may be carried forward. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
Information Reporting Requirements and Backup Withholding
The Company will report to its U.S. shareholders and the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their nonforeign status to the Company. The Service issued
proposed regulations in April 1996 regarding the backup withholding rules as
applied to Non- U.S. Shareholders. The proposed regulations would alter the
technical requirements relating to backup withholding compliance. See "Federal
Income Tax Considerations - Taxation of Non-U.S. Shareholders."
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions by a REIT to an exempt employee pension trust
do not constitute UBTI, provided that the shares of the REIT are not otherwise
used in an unrelated trade or business of the exempt employee pension trust.
Based on that ruling and on the intention of the Company to invest its assets in
a manner that will avoid the recognition of UBTI by the Company, amounts
distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition of
shares of Common Stock with debt, a portion of its income from the Company will
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts, and qualified group legal services plans that are exempt from
taxation under paragraphs (7), (9), (17), and (20), respectively, of Code
Section 501(c) are subject to different UBTI rules, which generally will require
them to characterize distributions from the Company as UBTI. In addition, in
certain circumstances, a pension trust that owns more than 10% of the Company's
shares of capital stock is required to treat a percentage of the dividends from
the Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross
income derived by the Company from an unrelated trade or business (determined as
if the Company were a pension trust) divided by the gross income of the Company
for the year in which the dividends are paid. The UBTI rule applies to a pension
trust holding more than 10% of the Company's shares of capital stock only if (i)
the UBTI Percentage is at least 5%, (ii) the Company qualifies as a REIT by
reason of the modification of the 5/50 Rule that allows the beneficiaries of the
pension trust to be treated as holding shares of the Company in proportion to
their actuarial interests in the pension trust, and (iii) either (A) one pension
trust owns more than 25% of the value of the Company's shares of capital stock
or (B) a group of pension trusts individually holding more than 10% of the value
of the Company's shares of capital stock collectively owns more than 50% of the
value of the Company's shares of capital stock.
Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND
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LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON STOCK,
INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by the Company of U.S. real property interests and
are not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in shares of Common Stock is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a foreign corporation). The
Company expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Shareholder unless (i) a
lower treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is effectively
connected income. The Service issued proposed regulations in April 1996 that
would modify the manner in which the Company complies with the withholding
requirements.
Distributions in excess of current and accumulated earnings and profits
of the Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's shares of
Common Stock, but rather will reduce the adjusted basis of such shares. To the
extent that distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Shareholder's shares of Common
Stock, such distributions will give rise to tax liability if the Non-U.S.
Shareholder would otherwise be subject to tax on any gain from the sale or
disposition of his shares of Common Stock, as described below. Because it
generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. However, amounts so withheld are
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of the current and accumulated earnings and profits of
the Company.
In August 1996, the President signed into law the Small Business Job
Protection Act of 1996, which requires the Company to withhold 10% of any
distribution in excess of the Company's current and accumulated earnings and
profits. That statute is effective for distributions made after August 20, 1996.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of U.S.
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S.
real property interests are taxed to a Non-U.S. Shareholder as if such gain were
effectively connected with a U.S. business. Non-U.S. Shareholders thus would be
taxed at the normal capital gain rates applicable to U.S. shareholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty relief or exemption. The Company is required
to withhold 35% of any distribution that is designated by the Company as a
capital gains dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his shares of
Common Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. It is currently anticipated that
the Company will be a "domestically controlled REIT" and, therefore, the sale of
the shares of Common Stock will not be subject to taxation under FIRPTA.
However, because the shares of Common Stock are publicly traded, no assurance
can be given that the Company will continue to be a "domestically controlled
REIT." Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (i) investment in the shares of Common Stock is effectively
connected with the Non-U.S. Shareholder's U.S. trade or business, in which case
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the Non-U.S. Shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of the shares of Common
Stock were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder will
be subject to the same treatment as U.S. shareholders with respect to such gain
(subject to applicable alternative minimum tax, a special alternative minimum
tax in the case of nonresident alien individuals, and the possible application
of the 30% branch profits tax in the case of non-U.S. corporations).
Other Tax Consequences
The Company, the Partnership or the Company's shareholders may be
subject to state or local taxation in various state or local jurisdictions,
including those in which it or they own property, transact business, or reside.
The state and local tax treatment of the Company and its shareholders may not
conform to the federal income tax consequences discussed above. CONSEQUENTLY,
PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY.
Tax Aspects of the Partnership and the Subsidiary Partnership
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in the
Partnership and the Subsidiary Partnership (each, a "Hotel Partnership"). The
discussion does not cover state or local tax laws or any federal tax laws other
than income tax laws.
Classification as a Partnership
The Company will be entitled to include in its income its distributive
share of each Hotel Partnership's income and to deduct its distributive share of
each Hotel Partnership's losses only if each Hotel Partnership is
classified for federal income tax purposes as a partnership rather than as a
corporation or an association taxable as a corporation. An organization formed
as a partnership will be treated as a partnership, rather than as a corporation,
for federal income tax purposes if it (i) has no more than two of the four
corporate characteristics that the Treasury Regulations use to distinguish a
partnership from a corporation for tax purposes and (ii) is not a "publicly
traded" partnership. Those four corporate characteristics are continuity of
life, centralization of management, limited liability, and free transferability
of interests. A publicly traded partnership is a partnership whose interests are
traded on an established securities market or are readily tradable on a
secondary market (or the substantial equivalent thereof). A publicly traded
partnership will be treated as a corporation for federal income tax purposes
unless at least 90% of such partnership's gross income for a taxable year
consists of "qualifying income" under Section 7704(d) of the Code, which
generally includes any income that is qualifying income for purposes of the 95%
gross income test applicable to REITs (the "90% Passive-Type Income Exception").
See "Federal Income Tax Considerations -- Requirements for Qualification --
Income Tests."
The U.S. Treasury Department recently issued regulations effective for
taxable years beginning after December 31, 1995 (the "PTP Regulations") that
provide limited safe harbors from the definition of a publicly traded
partnership. Pursuant to one of those safe harbors, (the "Private Placement
Exclusion"), interests in a partnership will not be treated as readily tradable
on a secondary market or the substantial equivalent thereof if (i) all interests
in the partnership were issued in a transaction (or transactions) that was not
required to be registered under the Securities Act of 1933, as amended, and (ii)
the partnership does not have more than 100 partners at any time during the
partnership's taxable year. In determining the number of partners in a
partnership, a person owning an interest in a flow-through entity (i.e., a
partnership, grantor trust, or S corporation) that owns an interest in the
partnership is treated as a partner in such partnership only if (a)
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (b) a principal purpose of the use of the
flow-through entity is to permit the partnership to satisfy the 100-partner
limitation. Each Hotel Partnership currently qualifies for the Private Placement
Exclusion.
Each Hotel Partnership has not requested, and does not intend to
request, a ruling from the Service that it will be classified as a partnership
for federal income tax purposes. Instead, Hunton & Williams is of the opinion
that, based
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on the provisions of the partnership agreement of each Hotel Partnership,
certain factual assumptions, and certain representations described in the
opinion, each Hotel Partnership does not possess more than two corporate
characteristics and thus will be treated for federal income tax purposes as a
partnership and not as a corporation or an association taxable as a corporation.
Unlike a tax ruling, an opinion of counsel is not binding upon the Service, and
no assurance can be given that the Service will not challenge the status of each
Hotel Partnership as a partnership for federal income tax purposes. If such
challenge were sustained by a court, each Hotel Partnership would be treated as
a corporation for federal income tax purposes, as described below. The opinion
of Hunton & Williams is based on existing law, which is to a great extent the
result of administrative and judicial interpretation. No assurance can be given
that administrative or judicial changes would not modify the conclusions
expressed in the opinion.
If for any reason either Hotel Partnership were taxable as a
corporation, rather than as a partnership, for federal income tax purposes, the
Company would not be able to qualify as a REIT. See "Federal Income Tax
Considerations - Requirements for Qualification - Income Tests" and "-
Requirements for Qualification - Asset Tests." In addition, any change in either
Hotel Partnership's status for tax purposes might be treated as a taxable event,
in which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations - Requirements for
Qualification - Distribution Requirements." Further, items of income and
deduction of such Hotel Partnership would not pass through to its partners, and
its partners would be treated as shareholders for tax purposes. Consequently,
such Hotel Partnership would be required to pay income tax at corporate tax
rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing such Hotel Partnership's
taxable income.
Income Taxation of Each Hotel Partnership and its Partners
Partners, Not the Hotel Partnership, Subject to Tax. A partnership is
not a taxable entity for federal income tax purposes. Rather, the Company is
required to take into account its allocable share of each Hotel Partnership's
income, gains, losses, deductions, and credits for any taxable year of such
Hotel Partnership ending within or with the taxable year of the Company, without
regard to whether the Company has received or will receive any distribution from
such Hotel Partnership.
Partnership Allocations. Although a partnership agreement generally
will determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes under Section 704(b) of the
Code if they do not comply with the provisions of Section 704(b) of the Code and
the Treasury Regulations promulgated thereunder. If an allocation is not
recognized for federal income tax purposes, the item subject to the allocation
will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. Each Hotel Partnership's allocations of taxable income,
gain and loss are intended to comply with the requirements of Section 704(b) of
the Code and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The U.S. Department of Treasury
recently issued regulations requiring partnerships to use a "reasonable method"
for allocating items affected by Section 704(c) of the Code and outlining
several reasonable allocation methods. The application of Section 704(c) to the
Partnership is not entirely clear, however, and may be affected by Treasury
Regulations promulgated in the future.
Under the Partnership Agreement, depreciation or amortization
deductions of the Partnership generally will be allocated among the partners in
accordance with their respective interests in the Partnership, except to the
extent that the Partnership is required under Code Section 704(c) to use a
method for allocating tax depreciation deductions attributable to the Hotels or
other contributed properties that results in the Company receiving a
disproportionately large share of such deductions. In addition, gain on the sale
of an Hotel will be specially allocated to the Limited Partners to the extent of
any "built-in" gain with respect to such Hotel for federal income tax purposes.
The Partnership generally
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has elected to use the "traditional method" for allocating items of income,
gain, and expense as required by Section 704(c) of the Code with respect to
Hotels that it acquires in exchange for Units.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally is equal to (i) the amount of
cash and the basis of any other property contributed to the Partnership by the
Company, (ii) increased by (A) its allocable share of the Partnership's income
and (B) its allocable share of indebtedness of the Partnership, and (iii)
reduced, but not below zero, by (I) the Company's allocable share of the
Partnership's loss and (II) the amount of cash distributed to the Company, and
by constructive distributions resulting from a reduction in the Company's share
of indebtedness of the Partnership.
If the allocation of the Company's distributive share of the
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Partnership below zero, the recognition of such loss
will be deferred until such time as the recognition of such loss would not
reduce the Company's adjusted tax basis below zero. To the extent that the
Partnership's distributions, or any decrease in the Company's share of the
indebtedness of the Partnership (such decrease being considered a constructive
cash distribution to the partners), would reduce the Company's adjusted tax
basis below zero, such distributions (including such constructive distributions)
will constitute taxable income to the Company. Such distributions and
constructive distributions normally will be characterized as capital gain, and,
if the Company's partnership interest in the Partnership has been held for
longer than the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain.
Depreciation Deductions Available to the Partnership. To the extent
that a Hotel Partnership has acquired, or will acquire, equity interests in the
Hotels for cash, the Hotel Partnership's initial basis in the Hotels for federal
income tax purposes generally equals or will equal the purchase price paid by
the Hotel Partnership. The Hotel Partnerships plan to depreciate such
depreciable hotel property for federal income tax purposes under either MACRS or
ADS. The Hotel Partnerships plan to use MACRS for furnishings and equipment.
Under MACRS, the Hotel Partnerships generally will depreciate such furnishings
and equipment over a seven-year recovery period using a 200% declining balance
method and a half-year convention. If, however, a Hotel Partnership places more
than 40% of its furnishings and equipment in service during the last three
months of a taxable year, a mid-quarter depreciation convention must be used for
the furnishings and equipment placed in service during that year. The Hotel
Partnerships plan to use ADS for buildings and improvements. Under ADS, the
Hotel Partnerships generally will depreciate such buildings and improvements
over a 40-year recovery period using a straight line method and a mid-month
convention. However, to the extent that a Hotel Partnership has acquired, or
will acquire, equity interests in the Hotels in exchange for Units, the Hotel
Partnership's initial basis in each Hotel for federal income tax purposes should
be the same as the transferor's basis in such Hotel on the date of acquisition.
The Hotel Partnerships intend to depreciate such depreciable hotel property for
federal income tax purposes under MACRS with respect to furnishings and
equipment and under ADS with respect to buildings and improvements. A Hotel
Partnership's tax depreciation deductions will be allocated among its partners
in accordance with their respective interests in the partnership (except to the
extent that the Hotel Partnership is required under Code Section 704(c) to use a
method for allocating depreciation deductions attributable to the Hotels or
other contributed properties that results in the Company receiving a
disproportionately large share of such deductions).
Sale of a Hotel Partnership's Property
Generally, any gain realized by a Hotel Partnership on the sale of
property by the Hotel Partnership held for more than one year will be long-term
capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture. Any gain recognized by a Hotel
Partnership on the disposition of the Hotels will be allocated first to the
Limited Partners under Section 704(c) of the Code to the extent of their
"built-in gain" on those hotels for federal income tax purposes. The Limited
Partners' "built-in gain" on the Hotels sold will equal the excess of the
Limited Partners' proportionate share of the book value of the Hotels over the
Limited Partners' tax basis allocable to the Hotels at the time of the sale. Any
remaining gain recognized by the Hotel Partnership on the disposition of the
Hotels will be allocated among the partners in accordance with their respective
percentage interests in the Hotel Partnership. The Board of Directors has
adopted a policy that any decision to sell a Hotel will be made by a majority of
the Directors, including a majority of the Independent Directors. See "Risk
Factors - Conflicts of Interest - Conflicts Relating to Sales or Refinancings of
Hotels."
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The Company's share of any gain realized by a Hotel Partnership on the
sale of any property held by the partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the partnership's
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. See "Federal Income Tax Considerations -
Requirements for Qualification - Income Tests." Such prohibited transaction
income also may have an adverse effect upon the Company's ability to satisfy the
income tests for REIT status. See "Federal Income Tax Considerations -
Requirements For Qualification - Income Tests" above. The Company, however, does
not presently intend to allow a Hotel Partnership to acquire or hold any
property that represents inventory or other property held primarily for sale to
customers in the ordinary course of the Company's or the Hotel Partnerships'
trade or business.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Company, all 1,000,000 Common Shares offered hereby.
Under the terms and conditions of the Underwriting Agreement, the
Underwriter is committed to take and pay for all of the Common Shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Shares in part
directly to the public at the Offering Price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such prices less a
concession of $0.33 per share. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company has granted the Underwriter an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 150,000
additional shares of Common Stock solely to cover over-allotments, if any.
In connection with the IPO, the Company also has granted the
Underwriter a right of first refusal, expiring November 29, 1999, to act as
underwriter or sales agent with respect to any future offering by the Company or
the Partnership of any debt or equity securities, or the placement of any
long-term debt by the Company or the Partnership. This right of first refusal,
by limiting the ability of the Company and the Partnership to use other
potential underwriters or selling agents, might have the effect of limiting the
access of the Company and the Partnership to capital markets.
Mr. Mills, the Chairman of the Underwriter, serves as a Director, Vice
President and Treasurer of the Company and currently owns directly and
indirectly 20,550 shares of Common Stock. Mr. Whittemore, a Senior Vice
President of the Underwriter, serves as a Director of the Company and currently
owns directly and indirectly 70,000 shares of Common Stock. Mr. Mills and Mr.
Whittemore will each receive $15,000 in 1996 and $10,000 per year thereafter for
serving as a Director of the Company.
The Company and the Partnership have agreed to indemnify the
Underwriter or to contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
In addition, the Company has agreed with the Underwriter that the
Investment Policy will not be amended or repealed by the Board of Directors
until all of the Net Proceeds have been invested in hotel properties.
The Underwriter makes a market in the Common Stock. During the two days
immediately prior to the offer and sale of the Common Shares offered hereby,
regulations under the Exchange Act impose restrictions on the market making
activities of the Underwriter, including price and volume limitations. The
Underwriter may engage in permitted passive market making activities with
respect to the Common Stock during the two business days immediately prior to
the offer and sale of the Common Shares offered hereby.
The Underwriter does not intend to sell the Common Shares offered
hereby to any accounts over which it is exercising discretionary authority.
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The Directors will each agree, subject to certain limited exceptions,
not to offer, sell, contract to sell or otherwise dispose of any Common Shares
(or any securities convertible into, or exercisable or exchangeable for shares
in the Company) for a period of 90 days after the date of this Prospectus,
without the prior written consent of the Underwriter.
The Common Stock trades on The Nasdaq Stock Market under the symbol
"HUMP."
EXPERTS
The consolidated financial statements of the Company as of December 31,
1994 and 1995 and for the period August 23, 1994 (date of incorporation) through
December 31, 1994 and the year ended December 31, 1995 and the financial
statement schedules of the Company as of December 31, 1994 and 1995, included in
this Prospectus, the financial statements of the Lessee as of December 31, 1994
and 1995 and for the period August 18, 1994 (date of incorporation) through
December 31, 1994 and the year ended December 31, 1995 included in this
Prospectus, the combined financial statements of the Initial Hotels as of
December 31, 1992 and 1993 and November 28, 1994 and for each of the three years
in the period ended December 31, 1993 and the period from January 1, 1994
through November 28, 1994 included in this Prospectus, the Historical summaries
of gross revenue and direct operating expenses of the Days Inn-Farmville for the
years ended December 31, 1992 and 1993 and for the period from January 1, 1994
through October 31, 1994 included in this Prospectus, and the financial
statements and the financial schedule of Farmville Lodging Associates, LLC as of
December 31, 1994 and July 20, 1995 and for the period November 1, 1994 (date of
inception) through December 31, 1994 and January 1, 1995 to July 20, 1995 (date
of sale) included in this Prospectus, have been audited by Reznick Fedder &
Silverman, independent accountants, as set forth in their reports thereon
included elsewhere herein and in the Registration Statement. Such consolidated
financial statements, financial statements, combined financial statements, and
historical summaries are included in reliance upon such reports given on their
authority as experts in accounting and auditing.
REPORTS TO SHAREHOLDERS
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three quarters
of each fiscal year.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon
for the Company by Hunton & Williams. In addition, the description of federal
income tax consequences contained in the section of the Prospectus entitled
"Federal Income Tax Considerations" is based on the opinion of Hunton &
Williams. Certain legal matters related to this Offering will be passed upon for
the Underwriter by Willcox & Savage, P.C. Hunton & Williams will rely on
Gallagher, Evalius & Jones in Baltimore, Maryland as to certain matters of
Maryland law.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus.
"ADA" means the Americans with Disabilities Act of 1990.
"ADR" means average daily room rate.
"Affiliate" means (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held, with power to vote, by such other person, (iii) any person
directly or indirectly controlling, controlled by, or under common control with
such other person, (iv) any executive officer, director, trustee or general
partner of such other person, and (v) any legal entity for which such person
acts as an executive officer, director, trustee or general partner. The term
"person" means and includes any natural person, corporation, partnership,
association, limited liability company or any other legal entity. An indirect
relationship shall include circumstances in which a person's spouse, children,
parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has
been associated with a person.
"Affiliated Transaction" means any material acquisition transaction
between a Virginia corporation having more than 300 holders of record and any
Interested Shareholder.
"Articles of Incorporation" means the Articles of Incorporation of the
Company.
"Base Rent" means the fixed obligation of the Lessee to pay a sum
certain in monthly Rent under each of the Percentage Leases.
"Best Western" means Best Western International, Inc.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Bylaws of the Company.
"Cash Available for Distribution to Shareholders" means net income, or
loss, plus depreciation and amortization and minority interest, minus capital
expenditures or reserves therefor and principal payments on indebtedness.
"Choice Hotels" means Choice Hotels International, Inc.
"Code" means the Internal Revenue Code of 1986, as amended.
"Closing" means the closing of the Offering.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means 1,000,000 shares of Common Stock to be issued in
connection with the Offering.
"Common Shareholders" means the holders of shares of Common Stock.
"Common Stock" means the common stock, par value $0.01 per share, of
the Company.
"Company" means Humphrey Hospitality Trust, Inc., a Virginia
corporation.
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"Control Share Acquisitions" means transactions causing the voting
strength of any person acquiring beneficial ownership of shares of a public
corporation in Virginia to meet or exceed certain threshold percentages (20%,
331/3% or 50%) of the total votes entitled to be cast for the election of
directors.
"Credit Facility" means the $6.5 million secured line of credit which
Mercantile Safe Deposit and Trust Company has extended to the Partnership.
"Days Inn" means Days Inn of America, Inc.
"Debt Policy" means the policy adopted by the Board of Directors
limiting the Company's consolidated indebtedness to less than 50% of the
aggregate purchase prices paid by the Company for the Hotels in which it has
invested.
"Development Agreement" means the amended development services
agreement, as amended, between the Company and Humphrey Development.
"Directors" means the members of the Company's Board of Directors.
"Escrow Agent" means First Union National Bank of North Carolina,
Charlotte, North Carolina.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FFE Reserves" means the reserves for furniture, fixtures and capital
expenditures equal to 4% of room revenues per quarter on a cumulative basis that
the Company sets aside for the Lessee to use on the Hotels.
"Fixed Lease" means the operating leases between the Partnership and
the Lessee pursuant to which the Lessee will lease the New Development and any
additional hotels developed by the Company in the future from the Partnership.
"Franchise Licenses" means the franchise licenses held by the Lessee
for the Hotels.
"Funds From Operations" represents net income (computed in accordance
with generally accepted accounting principles), excluding gains (or losses) from
debt restructuring or sales of property, plus depreciation, and after
adjustments for unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting practices.
"General Partner" means Humphrey Hospitality Trust, Inc., as the sole
general partner of the Partnership.
"Hotel Partnership" means either the Partnership or the Subsidiary
Partnership.
"Hotels" means collectively the Initial Hotels and the Days Inn --
Farmville, Virginia Hotel.
"Humphrey Affiliates" means Mr. Humphrey and his affiliates.
"Humphrey Associates" means Humphrey Associates, Inc., a Maryland
corporation.
"Humphrey Development" means Humphrey Development, Inc., a Maryland
corporation.
"Independent Director" means a Director of the Company who within the
last two years, has not (i) owned an interest in any of Mr. Humphrey's
Affiliates, (ii) been employed by Mr. Humphrey or any of his Affiliates, (iii)
been an officer or director of any of Mr. Humphrey's Affiliates, (iv) performed
services for the Company, (v) been a director for more than three REITs
organized by Mr. Humphrey or any of his Affiliates or (vi) had any material
business or professional relationship with Mr. Humphrey or any of his
Affiliates.
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"Initial Hotels" means the eight hotels acquired directly or indirectly
by the Partnership in connection with the IPO, which hotels include seven
Comfort Inn & Suites hotels and one Best Western hotel.
"Interested Shareholder" means any holder of more than 10% of any class
of outstanding voting shares of a Virginia corporation having more than 300
shareholders of record.
"Investment Policy" means the policy of the Board of Directors limiting
the Company's investments in hotel properties, including the acquisition of
existing hotels and development of hotels to properties that the Company can
reasonably demonstrate will yield an annual return on its investment in such
property, after deducting insurance, real estate and personal property taxes and
FFE Reserves that is greater than or equal to 12% of the total purchase price to
be paid by the Company for such Property.
"IOC" means the International Operators Council for Choice Hotels.
"IPO" means the initial public offering of Common Stock of the Company,
which closed on November 29, 1994.
"Leases" means Fixed Leases and/or Percentage Leases.
"Lessee" means Humphrey Hospitality Management, Inc., a Maryland
corporation, which leases the Hotels from the Partnership pursuant to the
Percentage Leases.
"Limited Partners" means the limited partners of the Partnership.
"LLC" means the Farmville Lodging Associates, LLC, a Maryland limited
liability company, which sold the Acquisition Hotel to the Company.
"NAREIT" means the National Association of Real Estate Investment
Trusts, Inc.
"Net Proceeds" means the proceeds of the Offering to be received by the
Company net of all Offering expenses and fees to the Underwriter.
"New Development" means the Comfort Suites hotel under development by
the Company in Dover, Delaware.
"Non-Competition Agreement" means the acquisition agreement and
covenant not to compete between Mr. Humphrey, his Affiliates and the Company
pursuant to which Mr. Humphrey and his Affiliates agreed that none of them will
compete with the Company for hotel acquisition, development and management
opportunities within 20 miles of the Hotels or any other hotel acquired by the
Company.
"Offering" means the offering of Common Shares hereby.
"Offering Price" means the offering price of $8.25 per Common Share
offered hereby.
"Operator" means Humphrey Hotels, Inc., a Maryland corporation, which
operated the Hotels for the Lessee.
"Option Agreement" means the option agreement to be executed by the
Company and Mr. Humphrey and granting the Company certain rights in any hotels
to be developed or acquired by Mr. Humphrey or of any Affiliate of Mr. Humphrey
within the United States.
"Ownership Limitation" means the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of more than 9.9%
of the outstanding Common Shares or any other class of outstanding shares of
capital stock.
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"Partnership" means Humphrey Hospitality Limited Partnership, a limited
partnership organized under the laws of the State of Virginia.
"Partnership Agreement" means the partnership agreement of the
Partnership, as amended and restated.
"Percentage Leases" means operating leases between the Lessee and the
Partnership pursuant to which the Lessee leases the Hotels from the Partnership
and any additional existing hotels acquired by the Company after the date of the
Offering.
"Percentage Rents" means Rent based on percentages of revenues payable
by the Lessee pursuant to the Percentage Leases.
"Preferred Stock" means the preferred stock, par value $0.01 per share,
of the Company.
"Redemption Right" means the right of the persons receiving Units to
cause the redemption of Units in exchange for Common Shares on a one-for-one
basis (or for cash at the election of the Company or in certain other
circumstances).
"REIT" means real estate investment trust, as defined in section 856 of
the Code.
"Remaining Indebtedness" means that certain indebtedness in the
aggregate approximate principal amount of $8.2 million to remain outstanding
after the application of the Net Proceeds.
"Rent" means the Base Rent and the Percentage Rents.
"REVPAR" means revenue per available room for the applicable period.
"Rule 144" means the rule promulgated under the Securities Act that
permits holders of restricted securities as well as affiliates of an issuer of
the securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Partnerships" means the limited partnerships that sold the
Initial Hotels to the Company in connection with the IPO.
"Service" means the Internal Revenue Service.
"Services Agreement" means the amended and restated services agreement
between the Lessee and the Company.
"Subsidiary Partnership" means the Solomons Beacon Inn Limited
Partnership, a Maryland limited partnership, which owns one Initial Hotel, the
Comfort Inn-Beacon Marina, Solomons, Maryland.
"Threshold" means the amount of annual room revenues set out in each
Percentage Lease above which the Lessee will pay the Partnership or Limited
Partnership, as applicable, a Percentage Rent relating to annual room revenues
above that Threshold.
"Treasury Regulations" means the final, temporary and proposed tax
regulations promulgated under the Code.
"Trustee" means the trustee of the Trust.
99
<PAGE>
"Underwriter" means Anderson & Strudwick Incorporated.
"Units" means units of partnership interest in the Partnership.
100
<PAGE>
INDEX TO FINANCIAL STATEMENTS
HUMPHREY HOSPITALITY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994 F-4
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995 F-5
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 F-7
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS
OF SEPTEMBER 30, 1996 F-9
INDEPENDENT AUDITORS' REPORT F-12
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1995
AND SEPTEMBER 30, 1996 (UNAUDITED) F-13
CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIOD AUGUST 23,
1994 (DATE OF INCORPORATION) THROUGH DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995, AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 (UNAUDITED) F-14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE
PERIOD AUGUST 23, 1994 (DATE OF INCORPORATION) THROUGH
DECEMBER 31, 1994, THE YEAR ENDED DECEMBER 31, 1995, AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) F-15
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD
AUGUST 23, 1994 (DATE OF INCORPORATION) THROUGH DECEMBER
31, 1994, THE YEAR ENDED DECEMBER 31, 1995, AND THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-19
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION F-33
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION F-35
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS - CONTINUED
HUMPHREY HOSPITALITY MANAGEMENT, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1994 F-36
INDEPENDENT AUDITORS' REPORT F-38
BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1995 AND SEPTEMBER
30, 1996 (UNAUDITED) F-39
STATEMENTS OF OPERATIONS FOR THE PERIOD FROM AUGUST 18, 1994
(DATE OF INCORPORATION) THROUGH DECEMBER 31, 1994, THE
YEAR ENDED DECEMBER 31, 1995, AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 (UNAUDITED) F-40
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD
FROM AUGUST 18, 1994 (DATE OF INCORPORATION) THROUGH
DECEMBER 31, 1994, THE YEAR ENDED DECEMBER 31, 1995, AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) F-41
STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM AUGUST 18, 1994
(DATE OF INCORPORATION) THROUGH DECEMBER 31, 1994, THE YEAR
ENDED DECEMBER 31, 1995, AND THE NINE MONTHS ENDED SEPTEMBER
30, 1996 (UNAUDITED) F-42
NOTES TO FINANCIAL STATEMENTS F-43
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
INDEPENDENT AUDITORS' REPORT F-48
COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1992 AND 1993
AND NOVEMBER 28, 1994 F-49
COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1991, 1992, AND 1993 AND THE PERIOD
JANUARY 1, 1994 THROUGH NOVEMBER 28, 1994 F-50
COMBINED STATEMENTS OF PARTNERS' DEFICIT FOR THE YEARS
ENDED DECEMBER 31, 1991, 1992, 1993 AND THE PERIOD
JANUARY 1, 1994 THROUGH NOVEMBER 28, 1994 F-51
F-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS - CONTINUED
COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1991, 1992, AND 1993 AND THE PERIOD JANUARY 1,
1994 THROUGH NOVEMBER 28, 1994 F-52
NOTES TO COMBINED FINANCIAL STATEMENTS F-53
DAYS INN - FARMVILLE
INDEPENDENT AUDITORS' REPORT F-64
HISTORICAL SUMMARIES OF GROSS REVENUE AND DIRECT
OPERATING EXPENSES FOR THE YEARS ENDED DECEMBER
31, 1992 AND 1993 AND THE PERIOD FROM JANUARY 1, 1994
THROUGH OCTOBER 31, 1994 F-65
NOTE TO HISTORICAL SUMMARIES OF GROSS REVENUE AND
DIRECT OPERATING EXPENSES F-66
FARMVILLE LODGING ASSOCIATES, LLC
INDEPENDENT AUDITORS' REPORT F-67
BALANCE SHEETS AS OF DECEMBER 31, 1994 AND JULY 20, 1995
(DATE OF SALE) F-68
STATEMENTS OF OPERATIONS FOR THE PERIOD NOVEMBER 1, 1994 (DATE OF
INCEPTION) THROUGH DECEMBER 31, 1994 AND THE PERIOD JANUARY 1,
1995 THROUGH JULY 20, 1995
(DATE OF SALE) F-69
STATEMENTS OF PARTNERS' EQUITY FOR THE PERIOD NOVEMBER 1, 1994
(DATE OF INCEPTION) THROUGH DECEMBER 31, 1994 AND THE PERIOD
JANUARY 1, 1995 THROUGH JULY 20, 1995 (DATE OF SALE) F-70
STATEMENTS OF CASH FLOWS FOR THE PERIOD NOVEMBER 1, 1994 (DATE OF
INCEPTION) THROUGH DECEMBER 31, 1994 AND THE PERIOD JANUARY 1,
1995 THROUGH JULY 20, 1995
(DATE OF SALE) F-71
NOTES TO FINANCIAL STATEMENTS F-72
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION F-75
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION F-77
F-3
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
Year ended December 31, 1994
(Unaudited, in thousands)
This unaudited Pro Forma Condensed Consolidated Statement of Income of
Humphrey Hospitality Trust, Inc. is presented as if the consummation of the
Company's initial public offering of common stock (IPO) and the acquisition and
operation of the Initial Hotels by the Company and the Lessee, respectively, had
occurred and/or commenced on January 1, 1994. It should be read in conjunction
with the consolidated financial statements of Humphrey Hospitality Trust, Inc.
at pages F-12 through F-35. In management's opinion, all adjustments necessary
to reflect the effects of the above transactions have been made.
This unaudited Pro Forma Condensed Consolidated Statement of Income is
not necessarily indicative of what actual results of operations of the Company
would have been assuming such transactions had been completed as of January 1,
1994, nor does it purport to represent the results of operations for future
periods.
Pro Forma
Operating data
Lease revenue $3,560 (A)
Real estate taxes and casualty insurance 217
Depreciation and amortization 504
Interest expense 1,050
General and administrative 168 (B)
Minority interest 463 (C)
------
Net income applicable to common shareholders $1,158
=====
- --------------
(A) Represents Rent paid by the Lessee to the Partnership or the Subsidiary
Partnership pursuant to the Percentage Leases, which payments are
calculated by applying the rent provisions in the Percentage Leases to
the historical room revenue of the Initial Hotels for the periods
indicated.
(B) Represents estimated legal, audit, office, franchise taxes, salaries
and other expenses to be paid by the Company and the Lessee, estimated
at $42,000 per quarter.
(C) Calculated as 28.54% of estimated income before minority interest of
the Limited Partners.
F-4
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
Year ended December 31, 1995
(Unaudited, in thousands)
This unaudited Pro Forma Condensed Consolidated Statement of Income of
Humphrey Hospitality Trust, Inc. is presented as if the consummation of the
offering of 1,000,000 shares of the Company's common stock pursuant to this
Prospectus (the Offering) and the application of the proceeds of the Offering
had occurred on January 1, 1995. It should be read in conjunction with the
consolidated financial statements of Humphrey Hospitality Trust, Inc. at pages
F-12 through F-35. In management's opinion, all adjustments necessary to reflect
the effects of the above transactions have been made.
This unaudited Pro Forma Condensed Consolidated Statement of Income is
not necessarily indicative of what actual results of operations of the Company
would have been assuming such transactions had been completed as of January 1,
1995, nor does it purport to represent the results of operations for future
periods.
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
<S> <C>
Operating data:
Percentage lease revenue $3,750 $ - $3,750
Other revenue 21 340 (A) 361
Depreciation and amortization 680 - 680
Real estate and personal property taxes
and property insurance 196 - 196
Interest expense 1,011 - 1,011
General and administrative 238 - 238
Minority interest 396 (83)(B) 313
------ ---- ------
Net income applicable to common shareholders $1,250 $423 $1,673
===== === =====
</TABLE>
F-5
<PAGE>
Historical Pro Forma
Net income per common share $.71 $.50
=== ===
Weighted average common shares and common
share equivalents outstanding 2,310,184 3,955,050 (C)
========= =========
- --------------
(A) Represents interest earned on approximately $6.8 million of Offering
proceeds invested for the year at an estimated rate of return of 5% per
annum, based on average current rates for liquid investments currently
available to the Company.
(B) Represents an adjustment to reflect the reduction in the minority
interest to 15.76% as a result of the Offering.
(C) Represents the weighted average common shares and common share
equivalents outstanding during 1996 (2,955,050 shares) and 1,000,000
shares to be issued in connection with the Offering.
F-6
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
Nine months ended September 30, 1996
(Unaudited, in thousands)
This unaudited Pro Forma Condensed Consolidated Statement of Income of
Humphrey Hospitality Trust, Inc. is presented as if the consummation of the
Offering and the application of the proceeds of the Offering had occurred on
January 1, 1996. It should be read in conjunction with the consolidated
financial statements of Humphrey Hospitality Trust, Inc. at pages F-12 through
F-35. In management's opinion, all adjustments necessary to reflect the effects
of the above transactions have been made.
This unaudited Pro Forma Condensed Consolidated Statement of Income is not
necessarily indicative of what actual results of operations of the Company would
have been assuming such transactions had been completed as of January 1, 1996,
nor does it purport to represent the results of operations for future periods.
Historical Adjustments Pro Forma
Operating data:
Percentage lease revenue $2,942 $ - $2,942
Other revenue 19 254 (A) 273
Depreciation and amortization 543 - 543
Real estate and personal property taxes
and property insurance 162 - 162
Interest expense 462 - 462
General and administrative 257 - 257
Minority interest 324 (42) (B) 282
------ ---- ------
Net income applicable to common shareholders $1,213 $296 $1,509
===== === =====
F-7
<PAGE>
Historical Pro Forma
Net income per common share $.52 $.45
=== ===
Weighted average common shares and common share
equivalents outstanding 2,955,050 3,955,050 (C)
========= =========
- --------------
(A) Represents interest earned on approximately $6.8 million of Offering
proceeds invested for the period at an estimated rate of return of 5%
per annum, based on average current rates for liquid investments
currently available to the Company.
(B) Represents an adjustment to reflect the reduction in the minority
interest from 21.09% to 15.76% as a result of the Offering.
(C) Represents the weighted average common shares and common share
equivalents outstanding during 1996 (2,955,050 shares) and 1,000,000
shares to be issued in connection with the Offering.
F-8
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1996
(Unaudited, in thousands)
This unaudited pro forma Condensed Consolidated Balance Sheet is
presented as if the consummation of the Offering had occurred on September 30,
1996. Such pro forma information is based upon the consolidated balance sheet of
Humphrey Hospitality Trust, Inc. as of September 30, 1996. It should be read in
conjunction with the consolidated financial statements of Humphrey Hospitality
Trust, Inc. at pages F-12 through F-35. In management's opinion, all adjustments
necessary to reflect the effects of the above transactions have been made.
This unaudited pro forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been
assuming such transactions had been completed as of September 30, 1996, nor does
it purport to represent the future financial position of the Company.
F-9
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1996
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Proceeds Pro Forma Pro Forma
of Offering Company Company
Historical (A) (B) Use of Proceeds (C)
ASSETS
<S> <C>
Net investment in hotel properties $20,474 $ - $20,474 $ - $20,474
Cash 381 7,458 7,839 (660) (D) 7,179
Accounts receivable 781 - 781 - 781
Reserve for replacements 171 - 171 - 171
Deferred expenses, net 370 - 370 - 370
Other assets 222 - 222 - 222
------ ----- ------ ------ ------
$22,399 $ 7,458 $29,857 $ (660) $29,197
====== ===== ====== ==== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgages and bonds payable $ 8,930 $ - $ 8,930 $ (660) (D) $ 8,270
Obligations under capital leases 40 - 40 - 40
Dividends payable 561 - 561 - 561
Accounts payable 136 - 136 - 136
------ ----- ------ ------ ------
9,667 - 9,667 (660) 9,007
------ ----- ------ ---- ------
MINORITY INTEREST 2,558 - 2,558 624 (E) 3,182
------ ----- ------ ---- ------
SHAREHOLDERS' EQUITY
Common stock 23 10 33 - 33
Additional paid-in capital 10,265 7,448 17,713 (624) (F) 17,089
Undistributed earnings (deficit) (114) - (114) - (114)
------ ----- ------ ------ -------
10,174 7,458 17,632 (624) 17,008
------ ----- ------ ---- ------
$22,399 $ 7,458 $29,857 $ (660) $29,197
====== ===== ====== ==== ======
</TABLE>
F-10
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET - CONTINUED
September 30, 1996
(Unaudited, in thousands)
- -------------------
(A) Represents proceeds of the Offering ($8,250) less expenses of the
Offering ($792).
(B) Represents the combined interests of Humphrey Hospitality Trust, Inc.
after the proceeds of the Offering, but before the use of proceeds.
(C) Represents the combined interests of the Company after the use of the
proceeds of the Offering.
(D) Net decrease reflects the repayment of certain loans payable the
interest on which has been capitalized into the construction costs of
the New Development.
(E) Represents an adjustment to arrive at the interest in the Partnership
that will not be owned by the Company, determined as follows:
Net proceeds of the Offering $ 7,458
Stockholders' equity as of September 30, 1996 10,174
Minority interest in the Partnership as of
September 30, 1996 2,558
---------
20,190
Minority interest percentage x 15.76%
------
Minority interest $ 3,182
========
(F) Net decrease reflects the adjustment to the minority interest in the
Partnership.
F-11
[REZNICK FEDDER & SILVERMAN LETTERHEAD]
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Humphrey Hospitality Trust, Inc.
We have audited the accompanying consolidated balance sheets of
Humphrey Hospitality Trust, Inc. and Subsidiaries as of December 31, 1994 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for the period August 23, 1994 (date of incorporation) to
December 31, 1994, and the year ended December 31, 1995. Our audits also
included the financial statement schedules included on pages F-33 through F-35.
These consolidated financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and the financial statement schedules
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Humphrey Hospitality Trust, Inc. and subsidiaries as of December 31, 1994 and
1995, and the results of their operations and their cash flows for the period
from August 23, 1994 (date of incorporation) to December 31, 1994, and the year
ended December 31, 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 27, 1996
F-12
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, 1994 and 1995
and September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995 1996
(Unaudited)
ASSETS
<S> <C>
Investment in hotel properties, net of accumulated
depreciation of $38, $524 and $978 $18,183 $19,709 $20,474
Cash and cash equivalents 554 169 381
Accounts receivable from lessee 144 1,025 781
Reserve for replacements - 407 171
Deferred expenses, net of accumulated amortization
of $4, $61, and $237 394 445 370
Other assets 100 143 222
------ ------ ------
Total assets $19,375 $21,898 $22,399
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgages and bonds payable $13,743 $ 8,327 $ 8,930
Obligations under capital leases 52 56 40
Dividends payable 81 561 561
Accounts payable and accrued expenses 138 75 136
------ ------ ------
Total liabilities 14,014 9,019 9,667
------ ------ ------
MINORITY INTEREST 996 2,589 2,558
------ ------ ------
COMMITMENTS AND CONTINGENCIES - - -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000 shares authorized, 1,321,800,
2,331,700 and 2,331,700 shares issued and
outstanding, respectively 13 23 23
Additional paid-in capital 4,338 10,265 10,265
Undistributed earnings (deficit) 14 2 (114)
------ ------ ------
4,365 10,290 10,174
------ ------ ------
Total liabilities and shareholders' equity $19,375 $21,898 $22,399
====== ====== ======
</TABLE>
See notes to consolidated financial statements
F-13
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the period August 23, 1994 (date of
incorporation) through December 31, 1994, the
year ended December 31, 1995
and the nine months ended September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
August 23, 1994 Nine
through December months ended
December 31, 1994 31, 1995 September 30, 1996
----------------- -------------- ------------------
(Unaudited)
<S> <C>
Revenue
Percentage lease revenue $ 273 $ 3,750 $ 2,942
Other revenue - 21 19
--------- ------------ -------------
Total revenue 273 3,771 2,961
--------- ------------ -------------
Expenses
Interest 97 1,011 462
Real estate and personal property taxes and
property insurance 18 196 162
General and administrative 15 238 257
Depreciation and amortization 42 680 543
--------- ------------ -------------
Total expenses 172 2,125 1,424
--------- ------------ -------------
Income before allocation to minority
interest 101 1,646 1,537
Income allocated to minority interest 29 396 324
--------- ------------ -------------
NET INCOME $ 72 $ 1,250 $ 1,213
========= ============ ============
Earnings per common share and common share
equivalents outstanding $ .05 $ .71 $ .52
========= ============ ============
Weighted average common shares and common
share equivalents outstanding 1,849,666 2,310,184 2,955,050
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-14
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
For the period August 23, 1994 (date of
incorporation) through December 31,
1994, the year ended December 31, 1995
and the nine months ended September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Additional Undistributed
Common Stock Paid-in Earnings
Shares Dollars Capital (Deficit) Total
<S> <C>
Balance at August 23, 1994 100 $ - $ 1 $ - $ 1
Issuance of shares, net of offering expenses 1,321,700 13 6,937 - 6,950
Net decrease resulting from the acquisition of Humphrey
Hospitality Limited Partnership - - (2,600) - (2,600)
Dividends declared - - - (58) (58)
Net income - - - 72 72
--------- --- ------ ----- -------
Balance at December 31, 1994 1,321,800 13 4,338 14 4,365
Redemption of shares (100) - (1) - (1)
Issuance of shares, net of offering expenses 1,010,000 10 6,947 - 6,957
Net decrease to record the minority interest in the proceeds
from the second offering - - (1,467) - (1,467)
Net increase resulting from the acquisition of Farmville, LLC - - 448 - 448
Dividends declared - - - (1,262) (1,262)
Net income - - - 1,250 1,250
--------- --- ------ ----- -------
Balance at December 31, 1995 2,331,700 23 10,265 2 10,290
Dividends declared - - - (1,329) (1,329)
Net Income - - - 1,213 1,213
--------- --- ------ ----- -------
Balance at September 30, 1996 (unaudited) 2,331,700 $ 23 $10,265 $ (114) $ 10,174
========= === ====== ===== ======
</TABLE>
See notes to consolidated financial statements
F-15
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the period August 23, 1994 (date of
incorporation) through December 31,
1994, the year ended December 31, 1995
and the nine months ended September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
August 23, 1994 Nine
through December months ended
December 31, 1994 31, 1995 September 30, 1996
----------------- -------------- ------------------
(Unaudited)
<S> <C>
Cash flows from operating activities
Net income $ 72 $ 1,250 $ 1,213
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 42 680 543
Income allocated to minority interests 29 396 324
Changes in assets and liabilities
(Increase) decrease in accounts receivable (144) (881) 243
Decrease (increase) in other assets 105 (43) (80)
Increase in financing costs - (221) -
Increase (decrease) in accounts payable and accrued expenses 66 (68) 61
-------- ------ -------
Net cash provided by operating activities 170 1,113 2,304
-------- ------ -------
Cash flows from investing activities
Investment in hotel properties (4,840) (212) (1,232)
Deposits to reserve for replacements - (407) (387)
Interests earned on reserve for replacements - - (3)
Withdrawals from reserve for replacements - - 627
-------- ------ -------
Net cash used in investing activities (4,840) (619) (995)
-------- ------ -------
Cash flows from financing activities
Proceeds from sale of stock 6,950 6,957 -
Proceeds from mortgages payable - 1,283 -
Principal payments on mortgages and bonds payable (562) (7,930) (56)
Proceeds from line of credit - 600 660
Repayment of line of credit - (600) -
Dividends paid - (1,172) (1,684)
Principal payments on capital leases (1) (16) (17)
Redemption of common stock - (1) -
Payment of amounts payable to affiliates and partners (1,164) - -
-------- ------ -------
Net cash provided by (used in) financing activities 5,223 (879) (1,097)
-------- ------ -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 553 (385) 212
Cash and cash equivalents, beginning 1 554 169
-------- ------ -------
Cash and cash equivalents, ending $ 554 $ 169 $ 381
======== ======= =======
</TABLE>
(continued)
F-16
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
For the period August 23, 1994 (date of
incorporation) through December 31,
1994, the year ended December 31, 1995
and the nine months ended September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
August 23, 1994 Nine
through December months ended
December 31, 1994 31, 1995 September 30, 1996
----------------- -------------- ------------------
(Unaudited)
<S> <C>
Supplemental disclosures of cash flow information
Cash paid during the period for interest (net of amount
capitalized of $21 in 1996) $ 24 $ 1,074 $ 462
========= ======= ========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities
During 1994, the Partnership issued units of limited partnership interest
which are redeemable for an aggregate of 527,866 common shares with a value
of approximately $3,200 based upon the initial offering price of $6 per
common share, in exchange for the interests of Mr. Humphrey and Humphrey
Associates, Inc. in the Selling Partnerships.
During 1995, the Partnership issued units of limited partnership interest to
Farmville Lodging Associates, LLC, which are redeemable for an aggregate of
95,484 common shares with a value of approximately $740 based on the
offering price of $7.75 per common share, in connection with the acquisition
of the Days Inn Hotel in Farmville, Virginia.
During 1994, the Partnership acquired the Initial Hotels in exchange for (i)
approximately $4,840 in cash, (ii) units of limited partnership interest
referred to above, and (iii) the assumption of approximately $15,500 of
indebtedness. The assets acquired and the liabilities assumed consisted of:
Investment in hotel properties $ 18,221
Deferred expenses 398
Prepaid and other assets 205
Mortgages and bonds payable (14,305)
Obligations under capital leases (53)
Amounts payable to affiliates and partners (1,164)
Accounts payable and accrued expenses (72)
Minority interest (990)
Net decrease in additional paid-in capital resulting from acquisition
of Humphrey Hospitality Limited Partnership 2,600
-------
$ 4,840
=======
(continued)
F-17
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
For the period August 23, 1994 (date of
incorporation) through December 31,
1994, the year ended December 31, 1995
and the nine months ended September 30, 1996 (Unaudited)
The decrease in additional paid-in capital reflects the recognition of the
net combined deficits of the Initial Hotels attributable to the sponsor
($1,610) and the recording of the minority interest ($990).
During 1995, the Partnership acquired the Days Inn Hotel in Farmville,
Virginia in exchange for (i) units of limited partnership interest referred
to above, and (ii) the assumption of approximately $1,231 of indebtedness.
The assets acquired and the liabilities assumed consisted of:
Investment in hotel properties $ 1,800
Deferred expenses 24
Mortgages payable (1,231)
Obligations under capital leases (20)
Accounts payable and accrued expenses (6)
Minority interest (119)
Net increase in additional paid-in capital resulting from acquisition
of Farmville Lodging Associates, LLC (448)
------
$ -
======
Dividends declared on December 15, 1994, December 12, 1995, and September
19, 1996, of $81, $561, and $561, respectively, are payable as of December
31, 1994 and 1995 and September 30, 1996, respectively. Dividends declared
during 1994, 1995, and 1996, included $23, $390, and $237, respectively, to
the minority interest which has been deducted from the minority interest on
the balance sheets as of December 31, 1994 and 1995 and September 30, 1996,
respectively.
See notes to consolidated financial statements
F-18
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Trust, Inc. (the Company) was incorporated on
August 23, 1994, to acquire equity interests in eight existing hotel properties.
The Company is a self-administered, Virginia corporation and qualifies as a real
estate investment trust (REIT) for federal income tax purposes. During the
fourth quarter of 1994, the Company completed an initial public offering (IPO)
of 1,321,700 shares of $.01 par value common stock. The offering price per share
was $6 resulting in gross proceeds of $7,930,200. Net of selling commissions and
offering expenses, the Company received net proceeds of $6,949,899.
Upon completion of the IPO, the Company contributed substantially all
of the net proceeds of the offering to Humphrey Hospitality Limited Partnership
(the Partnership) in exchange for a 71.46% general partnership interest in the
Partnership. The Partnership used the proceeds from the Company to acquire an
equity interest in seven existing hotel properties and a general partnership
interest in Solomons Beacon Inn Limited Partnership (the Subsidiary Partnership)
(collectively the Initial Hotels) and to retire certain indebtedness of the
Initial Hotels. The Partnership acquired the Initial Hotels in exchange for (i)
approximately $4.8 million in cash, (ii) units of limited partnership interest
in the Partnership which are redeemable, subject to certain limitations, for an
aggregate of 527,866 Common Shares, with a value of approximately $3.2 million,
and (iii) the assumption of approximately $15.5 million of indebtedness. James
I. Humphrey, Jr. and Humphrey Associates, Inc. (the Humphrey Affiliates)
received limited partnership interests in the Partnership aggregating a 28.54%
equity interest in the Partnership (collectively the Formation Transaction). The
Partnership owns a 99% general partnership interest and the Company owns a 1%
limited partnership interest in the Subsidiary Partnership. The Company began
operations on November 29, 1994.
On July 21, 1995, the Company completed a public offering (the
Secondary Offering) of 1,010,000 shares of common stock. The gross proceeds were
$7,827,500 based on the offering price of $7.75 per share (the Offering Price).
Net of selling commissions and offering expenses, the Company received proceeds
of approximately $6,957,000. The Company used the proceeds to repay certain debt
and through the Partnership, acquired the Days Inn Hotel in Farmville, Virginia
(the Acquisition Hotel and together with the Initial Hotels, the Hotels), which
has 60 rooms and was built in 1989. The Partnership acquired the Acquisition
Hotel from Farmville Lodging Associates, LLC (the LLC), a Maryland limited
liability company in which James I. Humphrey, Jr., Chairman of the Board of
Directors and President of the Company, owns a 98% equity interest. The
Partnership acquired the Acquisition Hotel in exchange for (i) 95,484 units,
which will be redeemable, subject to certain limitations, for an aggregate of
approximately 95,484 shares of common stock and (ii) assumption of approximately
$1.23 million of debt secured by the Acquisition Hotel, which was repaid
immediately with proceeds of the Secondary Offering. The 95,484 units issued to
the LLC in connection with the purchase of the Acquisition Hotel have a value of
approximately $740,000 based on the Offering Price. The acquisition of the
Acquisition Hotel has been recorded by the Company at the affiliates historical
cost which is
F-19
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
less than net realizable value. The equity of the Acquisition Hotel, net of the
portion allocated to the minority interest, has been recorded as an increase in
paid-in capital. As of December 31, 1995 and September 30, 1996, the Company
owns a 78.91% interest, and Mr. Humphrey, Humphrey Associates and the LLC
collectively own a 21.09% interest in the Partnership.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, the Partnership and the Subsidiary Partnership. All significant
intercompany balances and transactions 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 amounts 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
Hotel properties are stated at cost. Depreciation is based upon the
straight-line method over estimated useful lives of the assets ranging from 5 to
40 years. For tax purposes, the Modified Accelerated Cost Recovery System
(MACRS) and the Alternative Depreciation System (ADS) are used in accordance
with the Internal Revenue Code. 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 cost and related accumulated
depreciation are removed from the accounts, and the gain or loss is included in
income from operations.
Cash and Cash Equivalents
Cash and cash equivalents includes cash and a repurchase agreement with
an original maturity of three months or less when acquired, carried at cost
which approximates fair value.
Deferred Expenses
Deferred expenses consist of deferred loan costs. Amortization is
computed using the straight-line method over the terms of the loan agreements.
F-20
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Revenue Recognition
Lease income is recognized when due from Humphrey Hospitality
Management, Inc. (the Lessee) under the lease agreements (see Note 6). Mr.
James I. Humphrey, Jr., Chairman of the Board of Directors of the Company, is
the sole shareholder of the Lessee.
Earnings Per Common Share and Common Share Equivalents
Earnings per common share and common share equivalents are computed by
dividing net income before allocation to minority interest by the weighted
average number of shares of common stock and common stock equivalents
outstanding for the period. The redemption rights referred to in Note 6 are
common stock equivalents and the number of shares issuable upon redemption are
added to the common shares outstanding.
Distributions
The Company intends to pay regular quarterly dividends which are
dependent upon the receipt of distributions from the Partnership.
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 and
860 of the Internal Revenue Code effective with its taxable period ended
December 31, 1994. Accordingly, no provision for federal income taxes has been
reflected in the financial statements.
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.
Concentration of Credit Risk
The Company places cash deposits with three major banks. At December
31, 1995 and September 30, 1996, the balances reported by the banks exceeded the
federal depository insurance limits by $355,128, and $275,288, respectively.
Management believes that no significant concentration of credit risk exists with
respect to these cash balances.
F-21
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 2. Investment in Hotel Properties
Hotel properties consist of the following at December 31, 1994 and
1995, and September 30, 1996:
December 31, September
1994 1995 30, 1996
(Unaudited)
Land $ 2,758 $ 3,048 $ 3,048
Buildings and improvements 14,321 15,809 15,884
Furniture and equipment 1,069 1,276 1,760
Leased equipment 73 100 100
Construction-in-progress - - 660
------ ------ -------
18,221 20,233 21,452
Less accumulated depreciation 38 524 978
------ ------ -------
$ 18,183 $ 19,709 $ 20,474
====== ====== ======
The nine hotel properties are limited service hotels located in Virginia, West
Virginia, Maryland and Tennessee and are subject to leases as described in Note
6.
Depreciation expense was $38,000 and $486,000 and $454,167 for the
periods ended December 31, 1994 and 1995 and September 30, 1996, respectively.
Note 3. Dividends Payable
On December 15, 1994, the Company declared a $.044 dividend on each
share of common stock and each unit of interest outstanding on December 31,
1994. The dividend was paid on February 6, 1995.
On December 12, 1995, the Company declared a $.19 dividend on each
share of common stock and each unit of interest outstanding on December 31,
1995. The dividend (including the distribution to minority interests) was paid
on January 29, 1996.
On September 19, 1996, the Company declared a $.19 dividend on each
share of common stock and each unit of interest outstanding on September 30,
1996. The dividend (including the distribution to minority interests) was paid
on October 31, 1996.
F-22
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 4. Mortgages and Bonds Payable
Mortgages and bonds payable at December 31, 1994 and 1995 and September
30, 1996, consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
------------------------------
December 31, September
1994 1995 30, 1996
---- ---- -----------
(Unaudited)
<S> <C>
Comfort Inn - Morgantown, West Virginia
Bonds payable; see (a) below for repayment terms,
interest rates, and maturity; collateralized by a first
mortgage on the hotel facility and equipment with a
net book value of $3,007,235, $2,954,828 and
$2,977,371 at December 31, 1994 and 1995, and
September 30, 1996 respectively, secured by a letter
of credit issued by Crestar Bank in the amount of
$2,406,507 expiring in April 2000 and cross-
collateralized by the Best Western-Wytheville,
Virginia. The outstanding principal and interest are
guaranteed jointly and severally by the Company
and James I. Humphrey, Jr. $2,350 $2,315 $2,275
Comfort Inn - Dublin, Virginia
Bonds payable; see (b) below for repayment terms,
interest rates, and maturity; collateralized by a first
mortgage on the hotel facility and equipment with a
net book value of $2,898,239, $2,852,770 and
$2,829,246 at December 31, 1994 and 1995, and
September 30, 1996, respectively. 2,460 2,420 2,420
</TABLE>
F-23
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for
the nine months then ended are unaudited)
Note 4. Mortgages and Bonds Payable (Continued)
<TABLE>
<CAPTION>
(in thousands)
-----------------------------
December 31, September
1994 1995 30, 1996
---- ---- --------
(Unaudited)
<S> <C>
Best Western - Wytheville, Virginia
Bonds payable; see (c) below for repayment terms,
interest rates, and maturity; collateralized by a first
mortgage on the hotel facility and equipment with a
net book value of $2,054,264, $2,024,362 and
$2,091,936 at December 31, 1994 and 1995 and
September 30, 1996, respectively, and secured by a
letter of credit issued by Crestar Bank in the amount
of $2,256,309 which expires November 1, 1999 and
cross-collateralized by the Comfort Inn-Morgan-
town, West Virginia. The outstanding principal and
accrued interest are guaranteed jointly and severally
by the Company and James I. Humphrey, Jr. 1,940 1,870 1,870
Comfort Inn - Beacon Marina, Solomons, Maryland
First mortgage payable to a bank with principal
payments, adjusted annually ranging from $7,960 to
$11,455, plus interest at 7.83% per annum due
monthly, with the remaining balance of $934,000
due on October 20, 1996; collateralized by a first
and third mortgage on the hotel facility and
equipment having a net book value of $3,516,955 at
December 31, 1994. The outstanding principal and
interest are guaranteed by the Company and the
Humphrey Affiliates. 1,175 - -
</TABLE>
F-24
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 4. Mortgages and Bonds Payable (Continued)
<TABLE>
<CAPTION>
(in thousands)
------------------------------
December 31, September
1994 1995 30, 1996
---- ---- --------
(Unaudited)
<S> <C>
Comfort Inn - Beacon Marina, Solomon, Maryland
Bonds payable with principal payments, adjusted
annually, ranging from $1,421 to $3,481 plus
accrued interest at the prime rate plus 1% (9.5% at
December 31, 1994) payable monthly with the
remaining balance of $1,523,004 due on December
1, 1996; collateralized by a second mortgage on the
hotel facility and equipment having a net book value
of $3,516,955 at December 31, 1994. The
outstanding principal and interest are guaranteed by
the Company and the Humphrey Affiliates. 1,603 - -
Comfort Inn - Elizabethton, Tennessee
First mortgage payable to a bank with monthly
principal payments, adjusted annually, ranging from
$7,500 to $12,500, plus accrued interest at the
prime rate plus 1% per annum (9.5% at December
31, 1994) with the remaining balance due in full on
October 31, 1997; collateralized by a first mortgage
on the hotel facility and equipment with a net book
value of $1,279,909 at December 31, 1994. The
outstanding principal and interest are guaranteed by
the Company and the Humphrey Affiliates. 809 - -
Comfort Inn - Farmville, Virginia
First mortgage payable to a bank with principal
payments adjusted annually, ranging from $1,542 to
$9,224 plus accrued interest at 97.77% of the prime
rate, subject to a floor rate of 8% (8.186% at
December 31, 1994), payable monthly with the
F-25
</TABLE>
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 4. Mortgages and Bonds Payable (Continued)
<TABLE>
<CAPTION>
(in thousands)
------------------------------
December 31, September
1994 1995 30, 1996
---- ---- ----------
(Unaudited)
<S> <C>
remaining principal balance due on January 1, 2005;
the outstanding principal amount plus accrued
interest is subject to mandatory prepayment with
ninety days written notice; collateralized by a first
mortgage on the hotel facility and equipment with a
net book value of $1,442,295 as of December 31,
1994. The outstanding principal and interest are
guaranteed jointly and severally by the Company
and the Humphrey Affiliates. The bank agreed to
forbear from exercising its right to mandatory
prepayment through March 31, 1996. 748 - -
Comfort Inn - Dahlgren, Virginia
First mortgage payable, see (d) below for repayment
terms, interest rate, and maturity; collateralized by
a mortgage on the hotel facility and equipment with
a net book value of $1,871,368 as of December 31,
1994. The outstanding principal and interest are
guaranteed by the Company and James I.
Humphrey, Jr. 1,833 - -
Comfort Inn - Princeton, West Virginia
First mortgage payable, see (e) below for repayment
terms, interest rate, and maturity; collateralized by
a mortgage on the hotel facility and equipment with
a net book value of $2,040,802 as of December 31,
1995. The outstanding principal and interest are
guaranteed jointly and severally by the Company
and the Humphrey Affiliates. 825 - -
</TABLE>
F-26
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 4. Mortgages and Bonds Payable (Continued)
<TABLE>
<CAPTION>
(in thousands)
------------------------------
December 31, September
1994 1995 30, 1996
---- ---- --------
(Unaudited)
<S> <C>
In January 1995, mortgages and notes payable
collateralized by five of the hotel properties were
consolidated and refinanced with NationsBank, N.A.
in the original amount of $3,661,731. The terms of
the new mortgage require monthly principal
installments of $5,600 plus interest at 8.64% per
annum. The remaining outstanding balance plus
any accrued interest are payable in full on January
11, 1998. The mortgage is collateralized by hotel
facilities and equipment having a combined net
book value of $6,567,156 at December 31, 1995,
and is guaranteed jointly and severally by the Comp-
any and the Humphrey Affiliates. - 1,722 -
On April 10, 1996, the Company obtained a $6.5
million credit facility with Mercantile Safe Deposit
and Trust Company. The term of the credit facility
is for three years with two one-year extensions at the
option of the bank. The line of credit bears interest
at prime rate plus 25 points, 8.5% at September 30,
1996. The credit facility is collateralized by hotel
facilities and equipment having a combined net
book value of $12,575,039. - - 2,365
------ ----- -----
$13,743 $8,327 $8,930
====== ===== =====
</TABLE>
- ---------------
(a) The bonds are Monongalia County, West Virginia Commercial Development
Variable Rate Demand Refunding Revenue Bonds, Series 1988 issued
through Crestar Bank in the amount of $2,500,000.
F-27
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 4. Mortgages and Bonds Payable (Continued)
Interest is accrued at the rate necessary to remarket the bonds at a
price equal to 100% of the outstanding principal balance. The rate is
adjusted weekly and is not to exceed 11.3636%. At December 31, 1994 and
1995 and September 30, 1996, the interest rate was 5.6%, 4.9%, and
3.8%, respectively. In addition, letter of credit fees and financing
fees increase the effective rate on the bonds. The bonds may be
redeemed at the option of the Partnership in denominations greater than
$25,000. Mandatory redemptions are pursuant to a sinking fund
redemption schedule which began on April 1, 1989, in the amount of
$15,000 increasing annually until April 1, 2017, when the payment
equals $140,000. The Partnership is required to fund a principal
reserve fund monthly equal to one-twelfth of the mandatory sinking fund
redemption. In addition, the Partnership is required to fund an
interest reserve fund. All principal and interest payments will be
automatically deducted by the trustee. Any deficiencies will be drawn
down under the letter of credit.
(b) On October 14, 1992, $2,528,000 of Variable Rate First Mortgage
Refunding Revenue Bonds were issued by the Industrial Development
Authority of Pulaski County, Virginia. Crestar Bank is the trustee.
The outstanding principal balance bears interest at a rate equal to the
Wall Street Prime Rate of Interest adjusted upward or downward by a
factor that incorporates the maximum marginal federal corporate income
tax rate (8.371% 8% and 8% at December 31, 1994 and 1995 and September
30, 1996, respectively). In August 1995, the bonds were refinanced
with approximately $2,460,000 of 1995 First Mortgage Refunding Revenue
Bonds bearing interest at 8% per annum. The agreement establishes a
sinking fund from which principal payments on the bonds will be made.
The bonds mature in varying amounts November 1, 1995 through November
1, 2005.
(c) The original $2,600,000 bond issue financing of 1984 was refunded with
$2,270,000, 1993 Series Industrial Development Revenue Bonds on
December 21, 1993. Crestar Bank is the lender and bond trustee.
Interest is accrued at the rate necessary to remarket the bonds at a
price equal to 100% of the outstanding principal balance. The rate is
adjusted weekly and is not to exceed 15%. At December 31, 1994 and
1995 and September 30, 1996, the interest rate was 5.6%, 4.85%, and
3.8%, respectively. The bonds are subject to mandatory redemption at a
redemption price equal to the principal amount thereof plus all unpaid
accrued interest thereon, pursuant to the sinking fund installments
beginning on November 1, 1994, in the amount of $65,000 increasing
annually until November 1, 2009, when the payment equals $300,000. The
Partnership is required to fund a principal reserve monthly equal to
one- twelfth of the mandatory sinking fund redemption. In addition,
the Partnership is required to fund an interest reserve fund. All
principal and interest payments will be automatically deducted by the
trustee. Any deficiencies will be drawn under the letter of credit
described above.
F-28
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 4. Mortgages and Bonds Payable (Continued)
(d) Interest was adjusted every five years to a rate equal to three hundred
twenty-five (325) basis points over the weekly average gross yield on
five-year United States Treasury notes for the most recently available
month and is subject to a floor of 12.55%, the rate at closing. At
December 31, 1994, the interest rate was 12.55%. Principal and interest
were payable by the Partnership in monthly installments sufficient to
amortize the mortgage over a thirty-year term at the current rate of
interest. For the five-year period beginning January 1, 1994, the
monthly installments were $20,243. The mortgage was refinanced in
January 1995.
(e) The mortgage was financed through a tax-exempt bond issue of Mercer
County, West Virginia Industrial Development Revenue Bonds, 1984
Series. Interest was accrued at prime plus 1.5% (10.0% at December 31,
1994). Principal payments, as outlined in the bond document, plus
accrued interest were payable monthly through January 1, 2011. The
mortgage was refinanced in January 1995.
Aggregate annual principal payments and payments to bond sinking funds
for the five years following December 31, 1995 and September 30, 1996,
respectively, and thereafter are as follows:
December September
31, 1995 30, 1996
--------- -----------
(Unaudited)
1996 $ 227 $ -
1997 242 180
1998 1,783 193
1999 205 2,571
2000 225 223
Thereafter 5,645 5,763
----- -----
$8,327 $8,930
===== =====
Bond sinking funds and escrows for taxes and insurance in the amount of
approximately $69,000, $99,000 and $202,000 are included in other assets at
December 31, 1994 and 1995 and September 30, 1996, respectively.
The Company's outstanding debt at December 31 1995, and September 30,
1996, consists of variable rate bonds and fixed rate bonds and mortgages, the
terms of which were modified in 1995. Management believes that the carrying
amounts of the Company's mortgages and bonds payable approximate fair value at
December 31, 1995 and September 30, 1996.
F-29
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 5. Obligations Under Capital Leases
Certain of the hotel properties lease equipment under noncancellable
capital leases expiring at various intervals through 1999. The leases provide
for bargain purchase options at the end of the respective terms. Future minimum
lease payments under the capital leases, together with the present value of the
net minimum lease payments are as follows:
December September
31, 1995 30, 1996
-------- -----------
(Unaudited)
Years ended December 31, 1996 $28 $ -
1997 26 28
1998 11 13
1999 1 4
--- ----
66 45
Less amount representing interest 10 5
--- ----
Present value of net minimum $56 $ 40
lease payments === ====
Note 6. Commitments and Contingencies
Pursuant to the Humphrey Hospitality Limited Partnership
Agreement (the Partnership Agreement), the Humphrey Affiliates and the
LLC received Redemption Rights, which will enable them to cause the
Partnership to redeem their interests in the Partnership in exchange for
shares of Common Stock or for cash at the election of the Company. The
Redemption Rights may be exercised by Humphrey Affiliates and the LLC at
any time. The number of shares of Common Stock issuable to Humphrey
Affiliates and the LLC upon exercise of the Redemption Rights is
623,350, consisting of 527,866 Redemption Rights received by the
Humphrey Affiliates in connection with the IPO determined based on the
cash value of their interests in the Selling Partnerships divided by the
initial offering price of $6 per share and 95,484 Redemption Rights
received by the LLC in connection with the acquisition of the
Acquisition Hotel. The number of shares issuable upon exercise of the
Redemption Rights will be adjusted upon the occurrence of stock splits,
mergers, consolidations or similar pro rata share transactions, which
otherwise would have the effect of diluting the ownership interests of
the Humphrey Affiliates, the LLC, or the shareholders of the Company.
The Company acts as the general partner in the Partnership, which acts
as a general partner in the Subsidiary Partnership and as such, is liable for
all recourse debt of the partnerships to the extent not paid by the
partnerships. In the opinion of management, the Company does not anticipate any
losses as a result of its general partner obligations.
F-30
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 6. Commitments and Contingencies (Continued)
The Company has entered into percentage leases relating to each of the
Hotels with the Lessee, for a term of 10 years, with a five-year renewal option
at the option of the Lessee. Pursuant to the terms of the percentage leases, the
Lessee is required to pay both base rent and 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. Also pursuant
to the terms of the percentage leases, the Company is required to make available
to the Lessee an amount equal to 4% of room revenue on a quarterly cumulative
basis for capital improvements and refurbishments. The Company has future lease
commitments from the Lessee through November 2004. Minimum future rental income
under these noncancellable operating leases at December 31, 1995 are as follows:
Year (in thousands)
1996 $ 1,678
1997 1,678
1998 1,678
1999 1,679
2000 1,679
Thereafter 6,657
-------
$15,049
=======
The Company earned base rents of $140,404, $1,608,976 and $1,258,761
and percentage rents of $132,413, $2,141,480 and $1,682,982 for the period from
November 29, 1994 (inception of operations) through December 31, 1994, the year
ended December 31, 1995 and the nine months ended September 30, 1996,
respectively. As of December 31, 1994 and 1995 and September 30, 1996
approximately $143,404, $1,024,848, and $781,170, respectively, of lease revenue
was due from the Lessee. The percentage rents are based on a percentage of gross
room and other revenue.
The Company has executed an Amended Development Agreement with Humphrey
Development, Inc., an affiliate of Mr. Humphrey. The Agreement provides for the
development of a 64-unit Comfort Suites hotel in Dover, Delaware (the New
Development) for a fixed price of $2,795,910. Humphrey Development, Inc. will
pay any development costs in excess of $2,795,910 in exchange for a right to
purchase the New Development from the Company on the sixth anniversary of its
commencement of operations for $2,795,910. As of September 30, 1996, $660,213
has been incurred.
F-31
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 6. Commitments and Contingencies (Continued)
On January 1, 1996, the Company executed an agreement with the Lessee
to provide accounting and securities reporting services for the Company. The
initial terms of the agreement provided for a fixed fee of $80,000 per year. As
of September 30, 1996, the Company has paid $60,000 under the terms of the
Agreement. On October 1, 1996, the Company amended the Agreement reducing the
initial annual fee to $30,000 per year, with an increase of $10,000 per year
(prorated from the time of acquisition) for each hotel added to the Company's
portfolio (excluding the New Development). Under the terms of the amended
Agreement, the service fee cannot exceed $100,000 in any year.
The hotel properties are operated under franchise agreements assumed by
the Lessee that generally have lives of fifteen years or more. The agreements
require annual payments for franchise royalties, reservation, and advertising
services which are based upon percentages of gross room revenue. These fees are
paid by the Lessee.
Note 7. Pro Forma Financial Information (Unaudited)
Unaudited pro forma condensed statements of operations of the Company
are presented as if the acquisition of the Hotels had occurred on January 1,
1994. These unaudited pro forma condensed statements of operations are not
necessarily indicative of what actual results of operations of the Company would
have been assuming such transactions had been completed as of January 1, 1994,
nor do they purport to represent the results of operations for future periods.
Pro Forma
(in thousands)
----------------
1994 1995
---- ----
Operating data
Revenue
Lease revenue $3,824 $3,901
Other revenue - 21
----- -----
Total revenue 3,824 3,922
----- -----
Expense
Real estate taxes and casualty insurance 182 174
Depreciation and amortization 543 704
Interest expense 764 710
General and administrative 224 268
Minority interest 445 436
----- -----
Total expense 2,158 2,292
----- -----
Net income applicable to common shareholders $1,666 $1,630
===== =====
F-32
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994
(in thousands)
<TABLE>
<CAPTION>
Cost Capitalized Gross Amounts at
Subsequent to Which Carried at
Initial Cost Acquisition Close of Period
-------------------- -------------------- ------------------------------
Buildings Buildings Buildings
and and and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------- ------------ ------ ------------ ------ ------------ ------ ------------ -------
<S> <C>
Comfort Inn Hotel
Morgantown, West
Virginia $ 2,350 $ 277 $ 2,574 $ - $ - $ 277 $ 2,574 $ 2,851
Comfort Inn Hotel
Dublin, Virginia 2,460 118 2,611 - - 118 2,611 2,729
Best Western Hotel
Wytheville, Virginia 1,940 137 1,737 - - 137 1,737 1,874
Solomons Beacon Inn
Solomons Island,
Maryland 2,778 1,354 2,012 - - 1,354 2,012 3,366
Comfort Inn Hotel
Elizabethton,
Tennessee 809 156 1,040 - - 156 1,040 1,196
Comfort Inn Hotel
Farmville, Virginia 748 148 1,202 - - 148 1,202 1,350
Comfort Inn Hotel
Dahlgren, Virginia 1,833 205 1,545 - - 205 1,545 1,750
Comfort Inn Hotel
Princeton, West
Virginia 825 363 1,600 - - 363 1,600 1,963
------ ----- ------ ----- --- ----- ------ ------
$13,743 $2,758 $14,321 $ - $ - $2,758 $14,321 $17,079
====== ===== ====== ===== === ===== ====== ======
</TABLE>
(continued)
F-33
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - (Continued)
December 31, 1994
(in thousands)
<TABLE>
<CAPTION>
Accumulated Net Life Upon Which
Deprecia- Book Value Depreciation in
tion Build- Build- Latest Income
ings and ings and Date of Statement is
Description Improvements Improvements Acquisition Computed
- ----------- ------------ ------------ ----------- ---------------
<S> <C>
Comfort Inn Hotel
Morgantown, West
Virginia $ 5 $ 2,846 11/29/94 (d)
Comfort Inn Hotel
Dublin, Virginia 5 2,724 11/29/94 (d)
Best Western Hotel
Wytheville, Virginia 7 1,867 11/29/94 (d)
Solomons Beacon Inn
Solomons Island,
Maryland 4 3,362 11/29/94 (d)
Comfort Inn Hotel
Elizabethton,
Tennessee 2 1,194 11/29/94 (d)
Comfort Inn Hotel
Farmville, Virginia 3 1,347 11/29/94 (d)
Comfort Inn Hotel
Dahlgren, Virginia 3 1,747 11/29/94 (d)
Comfort Inn Hotel
Princeton, West
Virginia 3 1,960 11/29/94 (d)
-- ------
$32 $17,047
== ======
</TABLE>
(continued)
F-33
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Cost Capitalized Gross Amounts at
Subsequent to Which Carried at
Initial Cost Acquisition Close of Period
-------------------- -------------------- ------------------------------
Buildings Buildings Buildings
and and and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------- ------------ ------ ------------ ------ ------------ ------ ------------ -------
<S> <C>
Comfort Inn Hotel
Morgantown, West
Virginia $2,315 $ 277 $ 2,574 $ - $21 $ 277 $ 2,595 $ 2,872
Comfort Inn Hotel
Dublin, Virginia 2,420 118 2,611 - 4 118 2,615 2,733
Best Western Hotel
Wytheville, Virginia 1,870 137 1,737 - 3 137 1,740 1,877
Solomons Beacon Inn
Solomons Island,
Maryland (e) 1,354 2,012 - 29 1,354 2,041 3,395
Comfort Inn Hotel
Elizabethton,
Tennessee (e) 156 1,040 - 28 156 1,068 1,224
Comfort Inn Hotel
Farmville, Virginia (e) 148 1,201 - - 148 1,201 1,349
Comfort Inn Hotel
Dahlgren, Virginia (e) 205 1,546 - 3 205 1,549 1,754
Comfort Inn Hotel
Princeton, West
Virginia (e) 363 1,600 - - 363 1,600 1,963
Days Inn Hotel
Farmville, Virginia - 290 1,389 - 11 290 1,400 1,690
----- ----- ------ ----- -- ----- ------ ------
$8,327 (e) $3,048 $15,710 $ - $99 $3,048 $15,809 $18,857
===== ===== ====== ===== == ===== ====== ======
</TABLE>
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Accumulated Net Life Upon Which
Deprecia- Book Value Depreciation in
tion Build- Build- Latest Income
ings and ings and Date of Statement is
Description Improvements Improvements Acquisition Computed
- ----------- ------------ ------------ ----------- -----------
<S> <C>
Comfort Inn Hotel
Morgantown, West
Virginia $ 70 $ 2,846 1994 (d)
Comfort Inn Hotel
Dublin, Virginia 71 2,724 1994 (d)
Best Western Hotel
Wytheville, Virginia 47 1,870 1994 (d)
Solomons Beacon Inn
Solomons Island,
Maryland 56 3,362 1994 (d)
Comfort Inn Hotel
Elizabethton,
Tennessee 28 1,194 1994 (d)
Comfort Inn Hotel
Farmville, Virginia 33 1,346 1994 (d)
Comfort Inn Hotel
Dahlgren, Virginia 42 1,748 1994 (d)
Comfort Inn Hotel
Princeton, West
Virginia 43 1,960 1994 (d)
Days Inn Hotel
Farmville, Virginia 16 1,674 1995 (d)
--- ------
$406 $18,724
=== ======
</TABLE>
See notes to schedules
F-34
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
(a) Reconciliation of real estate:
Balance at August 23, 1994 $ -
Additions during period
Building and improvements 14,321
------
Balance at December 31, 1994 14,321
Additions during period
Building and improvements 1,488
-----
Balance at December 31, 1995 $ 15,809
======
(b) Reconciliation of accumulated depreciation:
Balance at beginning of year $ -
Depreciation for the period ended December 31, 1994 29
-------
Balance at December 31, 1994 29
Depreciation for the period ended December 31, 1995 377
-------
Balance at December 31, 1995 $ 406
=======
(c) The aggregate cost of land, buildings and furniture and equipment for
federal income tax purposes is approximately $24,117.
(d) Depreciation is computed based upon the following useful lives:
Buildings and improvements 40 years
Furniture and equipment 5-12 years
(e) The Company has a mortgage payable with a bank which is collateralized
by five of the Hotels. The outstanding balance at December 31, 1995 was
$1,722.
F-35
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 1994
(Unaudited, in thousands)
This unaudited Pro Forma Condensed Statement of Operations of Humphrey
Hospitality Management, Inc. is presented as if the consummation of the IPO and
the acquisition and operation of the Initial Hotels by the Company and the
Lessee, respectively, had occurred and/or commenced on January 1, 1994. It
should be read in conjunction with the consolidated financial statements of
Humphrey Hospitality Management, Inc. and the Combined Selling Partnerships -
Initial Hotels at pages F-38 through F-63. In management's opinion, all adjust
ments necessary to reflect the effects of the above transactions have been made.
This unaudited Pro Forma Condensed Statement of Operations is not
necessarily indicative of what actual results of operations of the Company would
have been assuming such transactions had been completed as of January 1, 1994,
nor does it purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
Initial Hotels The Lessee
January November
1, 1994 29, 1994
to to
November December Pro Forma
28, 1994 31, 1994 Adjustments 1994
----------- ------------ ------------ ---------
<S> <C>
Revenue $7,298 $497 $ (109) (A) $7,686
----- --- ------ -----
Expenses
Hotel operating costs 2,074 154 - 2,228
General and administrative 360 32 (151) (B) 241
Advertising and promotion 234 18 - 252
Utilities 548 43 - 591
Repairs and maintenance 249 15 - 264
Real estate and personal prop-
erty taxes and insurance 227 9 (217) (C) 19
Franchise fees 379 28 - 407
Management fees 419 15 (204) (D) 230
Other 23 - (20) (E) 3
Percentage lease payment - - 3,560 (F) 3,560
----- --- ------ -----
Total expenses 4,513 314 2,968 7,795
----- --- ------ -----
Lessee operating income $2,785 $183 $(2,859) $ (109)
===== === ====== ======
</TABLE>
F-36
<PAGE>
- --------------
(A) Represents the elimination of nonrecurring revenue due to the
forgiveness of certain debts to affiliates during 1994.
(B) Represents the elimination of nonrecurring write-off of receivables
from affiliates and costs incurred in connection with the sale of the
Initial Hotels.
(C) Reflects the elimination of real estate and personal property taxes and
certain types of insurance to be paid by the Partnership.
(D) Represents the reduction of management and accounting fees to reflect
the current management fees at 3% of total revenue.
(E) Represents the reduction of nonrecurring legal costs associated with
the sale of the Initial Hotels.
(F) Represents the percentage lease payments.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder
Humphrey Hospitality Management, Inc.
We have audited the accompanying balance sheets of Humphrey Hospitality
Management, Inc. as of December 31, 1994 and 1995, and the related statements of
operations, shareholder's equity (deficit), and cash flows for the period August
18, 1994 (date of incorporation) through December 31, 1994 and year ended
December 31, 1995. 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 Humphrey Hospitality
Management, Inc. as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the period August 18, 1994 (date of
incorporation) through December 31, 1994 and year ended December 31, 1995, in
conformity with generally accepted accounting principles.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
March 1, 1996
F-38
<PAGE>
Humphrey Hospitality Management, Inc.
BALANCE SHEETS
December 31, 1994 and 1995 and September 30, 1996 (Unaudited)
December 31,
1994 1995 September 30, 1996
-------- ----------- ------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $197,598 $1,253,229 $ 957,070
Accounts receivable 87,556 78,585 145,699
Prepaid expenses 17,608 17,976 57,197
-------- ---------- -----------
Total current assets $302,762 $1,349,790 $ 1,159,966
======= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $140,457 $ 170,455 $ 134,893
Prepaid slip rentals - Marina 48,596 38,065 57,463
Due to affiliates 203,307 1,092,473 788,959
------- --------- -----------
Total current liabilities 392,360 1,300,993 981,315
------- --------- -----------
COMMITMENTS - - -
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock, $.01 par value, 1,000
shares authorized, 100 shares
issued and outstanding 1 1 1
Retained earnings (deficit) (89,599) 48,796 178,650
-------- -------- ----------
Total shareholder's equity
(deficit) (89,598) 48,797 178,651
-------- ---------- ----------
Total liabilities and
shareholder's equity $302,762 $1,349,790 $1,159,966
======= ========= =========
See notes to financial statements
F-39
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF OPERATIONS
For the period August 18, 1994 (date of
incorporation) through December 31, 1994, the
year ended December 31, 1995
and the nine months ended September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
August 18, 1994 Nine
through December months ended
December 31, 1994 31, 1995 September 30, 1996
----------------- ----------- ------------------
(Unaudited)
<S> <C>
Revenue from hotel operations
Room revenue $459,353 $7,499,245 $6,157,769
Telephone revenue 12,612 168,385 135,374
Slip revenue 18,412 262,113 191,558
Other revenue 6,472 104,137 151,608
Interest revenue - 20,972 17,835
------- --------- -----------
Total revenue 496,849 8,054,852 6,654,144
------- --------- ---------
Expenses
Salaries and wages 119,556 1,737,805 1,573,438
Room expense 31,614 407,335 323,041
Telephone 11,436 145,777 124,491
Marina expense 3,235 33,822 30,153
General and administrative 31,899 299,591 318,334
Marketing and promotion 17,425 240,438 186,927
Utilities 31,986 390,894 325,609
Repairs and maintenance 14,516 150,932 178,099
Taxes and insurance 9,098 130,544 107,406
Management fees 14,904 241,010 -
Franchise fees 27,962 387,853 313,799
Lease payments 272,817 3,750,456 2,941,743
------- --------- ---------
Total expenses 586,448 7,916,457 6,423,040
------- --------- ---------
NET INCOME (LOSS) $ (89,599) $ 138,395 $ 231,104
======== ========== =========
</TABLE>
See notes to financial statements
F-40
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
For the period August 18, 1994 (date of incorporation) through
December 31, 1994, the year ended December 31, 1995
and the nine months ended September 30, 1996 (Unaudited)
Common Stock Retained
---------------------- Earnings
Shares Dollars (Deficit) Total
------ ------- --------- -----
Issuance of common stock 100 $ 1 $ - $ 1
Net loss - - (89,599) (89,599)
------ --- ------- ---------
Balance, December 31, 1994 100 1 (89,599) (89,598)
Net income - - 138,395 138,395
------ --- -------- -------
Balance, December 31, 1995 100 1 48,796 48,797
Net Income - - 231,104 231,104
Distributions - - (101,250) (101,250)
------ --- -------- -------
Balance, September 30, 1996
(Unaudited) 100 $ 1 $ 178,650 $ 178,651
===== ==== ======== =======
See notes to financial statements
F-41
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF CASH FLOWS
For the period August 18, 1994 (date of incorporation) through
December 31, 1994, the year ended December 31, 1995
and the nine months ended September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
August 18, 1994 Nine
through December months ended
December 31, 1994 31, 1995 September 30, 1996
----------------- -------------- ------------------
(Unaudited)
<S> <C>
Cash flows from operating activities
Net (loss) income $(89,599) $ 138,395 $ 231,104
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Changes in assets and liabilities
(Increase) decrease in accounts receivable (87,556) 8,971 (67,114)
(Increase) decrease in prepaid expenses (17,608) (368) (39,221)
Increase (decrease) in accounts payable 140,457 29,998 (35,562)
Increase (decrease) in prepaid slip rentals - Marina 48,596 (10,531) 19,398
Increase (decrease) in due to affiliates 203,307 889,166 (303,514)
------- --------- -----------
Net cash provided by operating activities 197,597 1,055,631 (194,909)
------- --------- -----------
Cash flows from financing activities
Issuance of common stock 1 - -
Distributions - - (101,250)
------- --------- ----------
Net cash provided by (used in) financing activities 1 - (101,250)
------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 197,598 1,055,631 (296,159)
Cash and cash equivalents, beginning of year - 197,598 1,253,229
------- --------- ---------
Cash and cash equivalents, end of year $197,598 $1,253,229 $ 957,070
======= ========= ==========
</TABLE>
See notes to financial statements
F-42
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Management, Inc. (the Lessee) was incorporated
under the laws of the State of Maryland on August 18, 1994 to lease and operate
seven existing hotel properties (the Initial Partnership Hotels) from Humphrey
Hospitality Limited Partnership (the Partnership), one hotel property from
Solomons Beacon Inn Limited Partnership (the Subsidiary Partnership) (together
with the Initial Partnership Hotels, the Initial Hotels), and the Days Inn Hotel
(the Acquisition Hotel) (together with the Initial Hotels, the Hotels) which was
acquired by the Partnership on July 21, 1995. James I. Humphrey, Jr. is the sole
shareholder of the Lessee. The Lessee began operations on November 29, 1994.
Prior to November 29, 1994, the Initial Hotels were operated by Humphrey Hotels,
Inc. From November 1, 1994, the Acquisition Hotel was operated by Humphrey
Hotels, Inc., and was owned and operated by an unaffiliated party prior to
November 1994.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Accounts Receivable
The Lessee considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
Income Taxes
The Lessee has elected to be treated as an S Corporation for federal
and state income tax purposes. Therefore, no provision or benefit for income
taxes has been included in these financial statements since taxable income or
loss passes through to, and is reportable by, the stockholder individually.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and a repurchase agreement
with a bank with an original maturity of three months or less when acquired,
carried at cost, which approximates fair value.
F-43
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Concentration of Credit Risk
The Company places cash deposits with major banks. At December 31,
1995, and September 30, 1996, the balances reported by one bank exceeded the
federal depository insurance limits by $1,008,772 and $695,424, respectively.
Management believes that no significant concentration of credit risk exists with
respect to these cash balances.
Note 2. Related Party Transactions
Management Fees and Payroll Reimbursements
The Lessee had entered into separate management agreements, relating to
each of the Initial Hotels, with Humphrey Hotels, Inc. (the Operator), an
affiliate. Pursuant to the management agreements, a fee equal to 3% of total
revenue is payable to Humphrey Hotels, Inc. and is subordinate in all respects
to the Lessee's obligations under the percentage leases. For the period August
18, 1994 through December 31, 1994 and the year ended December 31, 1995,
management fees of $14,904 and $241,010, respectively, have been accrued and
charged to operations.
The Operator provided all site employees for the Lessee and was
reimbursed for the salaries and related costs. During the period from August 18,
1994 through December 31, 1994 and the year ended December 31, 1995, the Lessee
incurred charges of $119,556 and $1,737,805, respectively, for such payroll
reimbursements.
As of December 31, 1994 and 1995, the amount due the Operator for
management fees and payroll reimbursements was $59,903 and $67,625,
respectively, which are included in due to affiliates on the balance sheet.
On February 9, 1996, the Lessee announced the termination of its
operating agreements with the Operator effective January 1, 1996. The Lessee
immediately began operating all of the hotels that it leases from the
Partnership. All personnel from the Operator were hired in identical capacities
by the Lessee. The Lessee intends to operate the hotels throughout the lease
term.
F-44
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 2. Related Party Transactions (Continued)
Percentage Lease Payment
The Lessee has entered into percentage leases, each with a term of 10
years, relating to each of the Hotels with the Partnership and the Subsidiary
Partnership (the Lessors). Pursuant to the terms of the percentage leases, the
Lessee is required to pay both base rent and percentage rent and certain other
additional charges. The Lessee has future lease commitments through July 2005.
Minimum future lease payments due under these noncancellable operating leases as
of December 31, 1995 are as follows:
Year Amount
1996 $ 1,678,334
1997 1,678,334
1998 1,678,334
1999 1,678,334
2000 1,678,334
Thereafter 6,657,059
-----------
$15,048,729
==========
The Lessee has incurred base rents of $140,404, $1,608,976 and
$1,258,761 and percentage rents of $132,413, $2,141,480 and $1,682,982 for the
period from November 29, 1994 through December 31, 1994, the year ending
December 31, 1995, and September 30, 1996 respectively. As of December 31, 1994
and 1995 and September 30, 1996, the amount due Humphrey Hospitality Limited
Partnership and Solomons Beacon Inn Limited Partnership for lease payments was
$143,404, $1,024,848, and $781,170, respectively, and is included in due to
affiliates on the balance sheet.
Services Agreement
On January 1, 1996, the Lessee executed an Agreement with Humphrey
Hospitality Trust, Inc., to provide accounting and securities reporting
services. The initial terms of the Agreement provided for a fixed fee of $80,000
per year. As of September 30, 1996, the Lessee has received $60,000 under the
terms of the Agreement. On October 1, 1996, the Agreement was amended reducing
the initial annual fee to $30,000 per year with an increase of $10,000 per year
(prorated from the time of acquisition) for each hotel acquired by Humphrey
Hospitality Trust, Inc. Under the terms of the amendment, the service fee cannot
exceed $100,000 in any year.
F-45
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 3. Commitments
Franchise Agreements
The Lessee assumed the rights and obligations under the terms of
existing franchise agreements relating to the Hotels upon acquisition of the
hotels by the Partnership and the Subsidiary 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 period from August 18, 1994 through December 31, 1994, the year ended
December 31, 1995 and September 30, 1996, $27,962, $387,854 and $313,799 of
franchise fees were paid, respectively.
Restaurant Leases
Three of the eight Hotels have executed lease agreements for the
hotel's restaurant facilities with varying expiration dates, including renewal
periods, through December 1, 2023. Monthly rent is payable during the terms of
the leases on a monthly basis in accordance with the terms of the respective
agreements.
Note 4. Economic Dependency
The Lessee receives the majority of its income from related hotel
entities. The related hotels are located in the Mid-Atlantic region of the
United States.
Note 5. Pro Forma Financial Information (Unaudited)
The following pro forma condensed statements of operations of the
Lessee are presented as if the operation of the hotel properties had commenced
on January 1, 1994. These unaudited pro forma condensed statement of operations
are not necessarily indicative of what actual results of operations of the
Lessee would have been assuming such operations had commenced as of January 1,
1994, nor does it purport to represent the results of operations for future
periods.
F-46
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995 and September 30,
1996 (Amounts and disclosures as of September 30,
1996 and for the nine months then ended are unaudited)
Note 5. Pro Forma Financial Information (Unaudited) (Continued)
(in thousands)
--------------------
1994 1995
---- ----
Revenue $8,218 $8,386
----- -----
Expenses
Hotel operating costs 2,443 2,428
General and administrative 272 282
Advertising and promotion 259 247
Utilities 535 409
Repairs and maintenance 292 163
Real estate and personal property taxes and
insurance 138 137
Franchise fees 383 411
Management fees 247 251
Other 14 -
Percentage lease payment 3,824 3,901
----- -----
Total expenses 8,407 8,229
----- -----
Lessee operating income (loss) $ (189) $ 157
====== ======
F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Humphrey Hospitality Trust, Inc.
We have audited the accompanying combined balance sheets of the
Combined Selling Partnerships Initial Hotels as of December 31, 1992 and 1993,
and November 28, 1994, and the related combined statements of operations,
partners' deficit, and cash flows for each of the three years in the period
ended December 31, 1993 and the period from January 1, 1994 to November 28,
1994. These combined 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 combined financial statements referred to above
present fairly, in all material respects, the financial position of the Combined
Selling Partnerships - Initial Hotels as of December 31, 1992 and 1993, and
November 28, 1994, and the combined results of their operations and their cash
flows for each of the three years in the period ended December 31, 1993 and the
period from January 1, 1994 to November 28, 1994, in conformity with generally
accepted accounting principles.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
March 18, 1996
F-48
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
COMBINED BALANCE SHEETS
(in thousands)
December 31, 1992 and 1993 and November 28, 1994
<TABLE>
<CAPTION>
December 31,
------------------- November
1992 1993 28, 1994
---- ---- --------
ASSETS
<S> <C>
Investment in hotel properties
Land $ 2,401 $ 2,401 $ 2,401
Buildings and improvements 12,527 12,565 12,561
Furniture and equipment 2,131 2,454 2,844
Equipment under capital lease 377 122 60
------ ------ -------
17,436 17,542 17,866
Less accumulated depreciation 5,209 5,829 6,356
------ ------ ------
Net investment in hotel properties 12,227 11,713 11,510
Cash 637 825 1,165
Accounts receivable 96 101 136
Bond sinking funds and escrows 222 167 204
Inventories 13 4 -
Deferred expenses, net 465 382 399
Prepaid expenses and other assets 62 50 84
Due from affiliates 32 24 42
------ ------ ------
$13,754 $13,266 $13,540
====== ====== ======
LIABILITIES AND PARTNERS' DEFICIT
Mortgage notes and bonds payable $15,268 $14,804 $14,305
Obligations under capital leases 51 45 53
Accounts payable 172 253 336
Accrued expenses and other liabilities 347 304 303
Due to affiliates 34 34
Advances from partners 1,123 1,163 1,374
------ ------ ------
16,995 16,603 16,405
Commitments - - -
Partners' deficit (3,241) (3,337) (2,865)
------ ------ ------
$13,754 $13,266 $13,540
====== ====== ======
</TABLE>
See notes to combined financial statements
F-49
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
Years ended December 31, 1991, 1992, and 1993 and the period
from January 1, 1994 through November 28, 1994
<TABLE>
<CAPTION>
1991 1992 1993 1994
------ ------ ------ ------
<S> <C>
Revenue from hotel operations
Room revenue $6,272 $6,295 $6,627 $6,583
Marina rental revenue 338 312 306 209
Telephone revenue 121 157 191 177
Restaurant revenue 270 150 113 77
Other revenue 135 123 94 252
----- ----- ----- -----
Total revenue 7,136 7,037 7,331 7,298
----- ----- ----- -----
Expenses
Salaries and wages 1,744 1,730 1,768 1,733
Hotel operating expenses 571 554 470 341
General and administrative 297 254 266 360
Marketing and promotion 289 261 222 234
Utilities 512 546 525 548
Repairs and maintenance 226 118 337 249
Real estate, personal property taxes, and insurance 276 275 263 227
Interest expense 1,636 1,351 1,272 1,062
Franchise fees 320 314 351 379
Management and accounting fees 347 346 386 419
Depreciation and amortization 816 743 776 690
Other 2 11 15 23
------ ------ ------ -----
Total expenses 7,036 6,503 6,651 6,265
------ ------ ------ -----
NET INCOME $ 100 $ 534 $ 680 $1,033
====== ====== ====== =====
</TABLE>
See notes to combined financial statements
F-50
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
COMBINED STATEMENTS OF PARTNERS' DEFICIT
(in thousands)
Years ended December 31, 1991, 1992, and 1993 and the period
from January 1, 1994 through November 28, 1994
Balance, December 31, 1990 $(3,304)
Net income 100
Capital contributions 56
Cash distributions (347)
------
Balance, December 31, 1991 (3,495)
Net income 534
Capital contributions 105
Cash distributions (385)
------
Balance, December 31, 1992 (3,241)
Net income 680
Capital contributions 89
Cash distributions (865)
------
Balance, December 31, 1993 (3,337)
Net income 1,033
Capital contributions 69
Cash distributions (630)
------
Balance, November 28, 1994 $(2,865)
======
See notes to combined financial statements
F-51
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31, 1991, 1992, and 1993 and the period
from January 1, 1994 through November 28, 1994
<TABLE>
<CAPTION>
1991 1992 1993 1994
-------- -------- -------- ------
<S> <C>
Cash flows from operating activities
Net income $ 100 $ 534 $ 680 $1,033
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization expense 816 743 776 690
Gain (loss) on sale of assets - - - (40)
Changes in assets and liabilities
Decrease (increase) in accounts receivable 42 26 (5) (35)
Interest earned on bond sinking fund (1) (6) (7) (2)
Decrease (increase) in inventories, prepaid expenses and other
assets 49 (5) 21 (30)
(Decrease) increase in accounts payable, accrued expenses and
other liabilities (237) 27 38 82
----- ------ ------ -----
Net cash provided by operating activities 769 1,319 1,503 1,698
----- ------ ------ -----
Cash flows from investing activities
Improvements and additions to hotel properties (48) (151) (113) (367)
Deposits to bond sinking funds (396) (421) (386) (322)
Disbursements from bond sinking funds and escrows 422 376 448 287
Advances to/from affiliates (523) (1) 8 (18)
Repayment of advances to affiliates - 65 3 -
Proceeds from sale of assets - - - 47
----- ------ ------ -----
Net cash used in investing activities (545) (132) (40) (373)
----- ------ ------ -----
Cash flows from financing activities
Proceeds from mortgage notes and bonds payable 400 2,528 - -
Principal payments on mortgage notes and bonds payable (309) (3,037) (464) (499)
Principal payments on capital lease obligations (93) (72) (27) (15)
Increase in deferred costs (9) (17) (48) (121)
Advances from partners 208 186 131 246
Repayments of advances from partners (19) (87) (91) (35)
Capital contributions 56 105 89 69
Distributions paid (347) (385) (865) (630)
----- ------ ------ -----
Net cash used in financing activities (113) (779) (1,275) (985)
----- ------ ------ -----
NET INCREASE IN CASH 111 408 188 340
Cash, beginning of period 118 229 637 825
----- ------ ------ -----
Cash, end of period $ 229 $ 637 $ 825 $1,165
===== ====== ====== =====
Supplemental disclosures of cash flow information
Cash paid during the period for interest $1,500 $ 1,333 $ 1,287 $1,050
===== ====== ====== =====
Supplemental schedule of non-cash investing and financing activities
Acquisition of equipment by incurring a capital lease obligation $ - $ 11 $ 21 $ 23
===== ====== ====== =====
</TABLE>
See notes to combined financial statements
F-52
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 1. Organization, Proposed Initial Public Offering and Basis of
Presentation
Organization
Humphrey Hospitality Trust, Inc. (the Company) was established to own
initially seven existing hotels directly (the Partnerships) and a 99% general
partnership interest in Solomons Beacon Inn Limited Partnership (the Subsidiary
Partnership), which owns the remaining hotel (collectively the Initial Hotels)
and to continue the hotel acquisition and operating strategies of James I.
Humphrey, Jr., Chairman of the Board of Directors and President of the Company,
and Humphrey Hotels, Inc. (Humphrey Hotels). The Company qualifies as a real
estate investment trust (REIT) under the Internal Revenue Code of 1986, as
amended, (the Code). The Initial Hotels include seven Comfort Inn hotels and one
Best Western hotel with an aggregate of 557 rooms and are located in Maryland
(one hotel), Tennessee (one hotel), Virginia (four hotels), and West Virginia
(two hotels). Upon completion of the Formation Transactions, the Company will
own a 71.46% interest in Humphrey Hospital ity Limited Partnership, a Virginia
limited partnership (the Partnership). The Company will be the sole general
partner of the Partnership. The Partnership will own an equity interest in and
lease each Initial Hotel to Humphrey Hospitality Management, Inc. (Lessee) under
a Percentage Lease which provides for rent equal to the sum of (i) fixed base
rent, plus (ii) percentage rent based on the room revenue from the hotel.
As of November 28, 1994, the Selling Partnerships were owned as
follows:
<TABLE>
<CAPTION>
Partnership Interest
--------------------
General Limited
------- -------
Humphrey Third- Humphrey Third-
Selling Partnerships Affiliates Party Affiliates Party
-------------------- ---------- ----- ---------- -----
<S> <C>
Morgantown Lodging Associates Limited
Partnership 1.0% -% 21.60% 77.40%
Dublin Lodging Associates Limited Partnership 1.0 - 28.80 70.20
Wytheville Motor Inn Limited Partnership 2.0 - 55.42 42.58
Solomons Beacon Inn Limited Partnership 1.0 - 33.60 65.40
Elizabethton Lodging Associates Limited Partnership 1.0 - 62.25 36.75
Farmville Motor Inn Limited Partnership 1.0 - 31.25 67.75
Dahlgren Lodging Associates Limited Partnership 1.0 - 37.50 61.50
Princeton Inn Limited Partnership 2.0 - 33.20 64.80
</TABLE>
It is intended that the Partnership will purchase the Initial Hotels
from the Selling Partnerships for an aggregate purchase price of approximately
$22,875. The third-party partners of the Selling Partnerships have consented to
the sale of the respective hotels to the Partnership and will receive cash from
the Selling Partnerships as a result of the sale of the Hotels.
F-53
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 1. Organization, Proposed Initial Public Offering and Basis of
Presentation (Continued)
The Partnership will enter into percentage leases, each having a ten
(10) year term, with the Lessee. The percentage leases will provide for lease
payments equal to the sum of (i) minimum base rent in the aggregate of $1,552
annually plus (ii) percentage rent based upon specific percentages of room and
other revenue of each of the Initial Hotels.
The Lessee will enter into management agreements with Humphrey Hotels,
Inc. (the Operator) whereby the Operator will be required to perform all
management functions necessary to operate the Initial Hotels. Under the
management agreements, the Operator will be paid a fee equal to 3% of gross
revenue from the Initial Hotels.
Proposed Initial Public Offering
The Company expects to file a registration statement with the
Securities and Exchange Commission pursuant to which the Company expects to
offer 1,849,566 shares of its common stock, including approximately 527,866
units to be received by James I. Humphrey, Jr. and Humphrey Associates, Inc.
(the Humphrey Associates), to the public (the Offering). The Company expects to
qualify as a real estate investment trust under Sections 856-860 of the Internal
Revenue Code. Under the proposed structure, the Company will become the sole
general partner in the Partnership and the Humphrey Associates will be the
limited partners.
Upon completion of the Offering, the Company will contribute
substantially all of the net proceeds of the Offering to the Partnership in
exchange for 71.46% general partnership interest in the Partnership. The
Partnership will use the proceeds from the Company to acquire the Initial Hotels
from the Selling Partnerships, to repay certain outstanding indebtedness, and to
acquire the interest of certain existing limited partners. Rather than receiving
cash for their interests in the Selling Partnerships upon the sale of the
Initial Hotels, the Humphrey Associates have elected to receive limited
partnership interests in the Partnership aggregating 28.54%.
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 71.46% of the Partnership, (b) the Humphrey
Associates will own an aggregate of 28.54% of the Partnership, and (c) the
Partnership will own approximately 100% of the equity interest in all eight
Initial Hotels.
Basis of Presentation
The combined financial statements include the accounts of the Selling
Partnerships using their historical cost basis. Because the Company and the
Partnership began operations on November 29, 1994, there is no account activity
for inclusion in these combined financial statements. Additionally, no
adjustments have been reflected in these combined financial statements to give
effect to the purchase of the Initial Hotels by the Partnership.
F-54
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 1. Organization, Proposed Initial Public Offering and Basis of
Presentation (Continued)
Management believes that these combined financial statements result in
a more meaningful presentation of the businesses to be acquired and thus
appropriately reflect the historical financial position and results of
operations.
Note 2. Summary of Significant Accounting Policies
Investment in Hotel Properties
Investment in hotel properties is 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. For tax purposes, the accelerated cost recovery system (ACRS) and the
modified accelerated cost recovery system (MACRS) is used, in accordance with
the Internal Revenue Code, to depreciate buildings and improvements and
furniture and equipment.
The estimated lives used to depreciate the Initial Hotel properties are
as follows:
Years
-----
Building and improvements 25 to 31.5
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.
Inventories
Inventories are stated at the lower of cost (generally, first-in,
first-out) or market.
Deferred Expenses
Deferred expenses consist of franchise fees and deferred loan costs.
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.
F-55
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 2. Summary of Significant Accounting Policies (Continued)
Income Taxes
The Selling Partnerships 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 Selling Partnerships into consideration when
filing their respective tax returns. The cumulative difference between the book
basis and tax basis of the Selling Partnerships' assets and liabilities is
approximately $1,070 due primarily to depreciation and amortization expense on
the tax basis in excess of the book basis.
Revenue Recognition
Revenue is recognized as earned. The management of the Partnership
considers accounts receivable to be fully collectible; accordingly, no allowance
for doubtful accounts is required. If amounts become uncollectible, they will be
charged to operations when that determination is made.
Concentration of Credit Risk
The Selling Partnerships placed cash deposits with major banks. At
November 28, 1994, bank accounts exceeded the federal depository insurance
limits by $71.
Note 3. Bond Sinking Funds and Escrows
Bond sinking funds and escrows consist of amounts for taxes and
insurance remitted to the lenders which hold the mortgages on the hotel
facilities and sinking funds created to make principal payments.
Note 4. Mortgage Notes and Bonds Payable
Mortgage notes and bonds payable as of December 31, 1992 and 1993 and
November 28, 1994, consisted of the following:
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- ------
<S> <C>
Bonds payable; see (a) below for repayment terms, interest rates, and
maturity, collateralized by a first mortgage on a hotel facility with a
net book value of $1,652,000 at November 28, 1994, and secured by a
letter of credit issued by Crestar Bank in the amount of $2,556,507
expiring in April 1995. Twenty-five percent of the outstanding
principal and accrued interest are guaranteed by Humphrey Associates,
Inc., the general partner, and the personal guarantees of
various limited partners of the Selling Partnership. $ 2,415 $ 2,385 $ 2,350
F-56
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 4. Mortgage Notes and Bonds Payable (Continued)
</TABLE>
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- ------
<S> <C>
Note payable to a bank with principal payments in equal monthly
installments of $1,467 plus interest at prime plus 1% (7% at December
31, 1993) through April 1, 1995 with any remaining balance due at that
time; collateralized by a second mortgage on a hotel facility with a
net book value of $1,670,000 at December 31, 1993 and a guarantee of
25% of the balance by the general and
certain limited partners of the Selling Partnership. 42 25 -
Bonds payable; see (b) below for repayment terms, interest rates, and
maturity; collateralized by a first mortgage on a hotel facility with a
net book value of $1,808,000 at November 28, 1994. 2,528 2,495 2,460
Note payable to the general partner of the Selling Partnership with
principal payments in equal monthly installment of $1,666, plus
interest at the prime rate plus 2% (8% at December 31, 1993) with
the loan balance due and payable on demand and unsecured. 86 65 -
Bonds payable; see (c) below for repayment terms, interest rates, and
maturity; collateralized by a first mortgage on a hotel facility with a
net book value of $1,438,000 at November 28, 1994, and secured by a
letter of credit issued by Crestar Bank in the amount of $2,321,309
which expires November 1, 1997; outstanding principal and accrued
interest are guaranteed 100% by the general partner and 25% by a
limited partner of the Selling Partnership; the limited partner has
also assigned his 21.6% limited partnership interest in Morgantown
Lodging Associates Limited Partnership to Crestar as additional
collateral. 2,330 2,270 2,270
First mortgage note payable to a bank with principal payments, adjusted
annually ranging from $7,960 to $11,455, plus interest at 7.83% per
annum are due monthly with the remaining balance of $934,000 due on
October 20, 1996; collateralized by a first and third mortgage on a
hotel facility having a net book value of $2,770,000 at November 28,
1994, and the personal guarantees of certain limited
partners of the Selling Partnership in the amount of $1,100,000. 1,394 1,290 1,186
</TABLE>
F-57
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 4. Mortgage Notes and Bonds Payable (Continued)
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- ------
<S> <C>
Bonds payable with principal payments, adjusted annually, ranging from
$1,421 to $3,481 plus accrued interest at the prime rate plus 1% (9.5%
at November 28, 1994) payable monthly with the remaining balance of
$1,523,004 due on December 1, 1996; collateralized by a second mortgage
on a hotel facility having a net book value of $2,770,000 at November
28, 1994, and the personal guarantees of certain limited partners of
the Selling Partnership in the amount of
50% of the outstanding loan balance. 1,668 1,637 1,605
First mortgage note payable to a bank with monthly principal pay ments,
adjusted annually, ranging from $7,500 to $12,500, plus ac crued
interest at the prime rate plus 1% per annum (9.5% at November 28,
1994) with the remaining balance due in full on October 31, 1997;
collateralized by a first mortgage on a hotel facility with a net book
value of $1,009,000 and guaranteed in its entirety by the general and
certain limited partners of the Selling Partnership;
see (d) below. 1,235 1,134 1,022
First mortgage note payable to a bank with principal payments ad justed
annually, ranging from $1,542 to $9,224 plus accrued interest at 97.77%
of the prime rate, subject to a floor rate of 8%, payable monthly with
the remaining principal balance due on January 1, 2005; the outstanding
principal amount plus accrued interest is subject to mandatory
prepayment with ninety days written notice; col lateralized by a first
mortgage on a hotel facility with a net book value of $675,000 as of
November 28, 1994 and a partial guarantee from the general and certain
limited partners of the Selling Partnership. The bank has agreed to
forbear from exercising its right to mandatory prepayment through March 31,
1996. 825 789 752
First mortgage note payable, see (e) below for repayment terms,
interest rate, and maturity; collateralized by a mortgage on a hotel
facility with a net book value of $1,505,000 as of November 28, 1994,
and guaranteed by certain limited partners of the Selling Part-
nership in the amount of $1,000,000. 1,865 1,855 1,834
</TABLE>
F-58
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 4. Mortgage Notes and Bonds Payable (Continued)
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- ------
<S> <C>
First mortgage note payable, see (f) below for repayment terms,
interest rate, and maturity; collateralized by a mortgage on a Hotel
facility with a net book value of $654,000 as of November 28, 1994, and
guaranteed by the general partner of the Selling Partnership in an
an amount not to exceed $467,500. 859 843 826
Note payable to the general partner of the Selling Partnership with
principal payments of $420 plus accrued interest at the prime rate plus
2% per annum (8% at December 31, 1993) payable monthly with the
outstanding balance and accrued interest due on demand and
unsecured. 21 16 -
------ ------ ------
$15,268 $14,804 $14,305
====== ====== ======
</TABLE>
(a) The bonds are Monongalia County, West Virginia Commercial Development
Variable Rate Demand Refunding Revenue Bonds, Series 1988 issued
through Crestar Bank in the amount of $2,500,000. Interest is accrued
at the rate necessary to remarket the bonds at a price equal to 100% of
the outstanding principal balance. The rate is adjusted weekly and is
not to exceed 11.3636%. At November 28, 1994, the interest rate was
3.75%. In addition, letter of credit fees and financing fees increase
the effective rate on the bonds. The bonds may be redeemed at the
option of the Partnership in denominations greater than $25,000.
Mandatory redemptions are pursuant to a sinking fund redemption
beginning on April 1, 1989, in the amount of $15,000 increasing
annually until April 1, 2017, when the payment equals $140,000. The
Partnership is required to fund a principal reserve fund monthly equal
to one-twelfth of the mandatory sinking fund redemption. In addition,
the Partnership is required to fund an interest reserve fund. All
principal and interest payments will be automatically deducted by the
trustee. Any deficiencies will be drawn under the letter of credit.
(b) On October 14, 1992, $2,528,000 of Variable Rate First Mortgage
Refunding Revenue Bonds were issued by the Industrial Development
Authority of Pulaski County, Virginia. Crestar Bank is the trustee. The
outstanding principal balance bears interest at a rate equal to the
Wall Street Prime Rate of Interest adjusted upward or downward by a
factor that incorporates the maximum marginal federal corporate income
tax rate (7.633% at November 28, 1994). The agreement establishes a
sinking fund from which principal payments on the bonds will be made.
The bonds mature in varying amounts November 1, 1994 through November
1, 2005.
F-59
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 4. Mortgage Notes and Bonds Payable (Continued)
(c) The original $2,600,000 bond issue financing of 1984 was
refunded with $2,270,000, 1993 Series Industrial Development
Revenue Bonds on December 21, 1993. Crestar Bank is the lender
and bond trustee. Interest is accrued at the rate necessary to
remarket the bonds at a price equal to 100% of the outstanding
principal balance. The rate is adjusted weekly and is not to
exceed 15%. At November 28, 1994, the interest rate was 3.75%.
The bonds are subject to mandatory redemption at a redemption
price equal to the principal amount thereof plus all unpaid
accrued interest thereon, pursuant to the sinking fund
installments beginning on November 1, 1994, in the amount of
$65,000 increasing annually until November 1, 2009, when the
payment equals $300,000. The Partnership is required to fund a
principal reserve monthly equal to one-twelfth of the mandatory
sinking fund redemption. In addition, the Partnership is
required to fund an interest reserve fund. All principal and
interest payments will be automatically deducted by the
trustee. Any deficiencies will be drawn under the letter of
credit described above. The Partnership is also required to
establish an additional escrow account into which 50% of the
hotel's cash flow after debt service and capital expenditures
is to be deposited monthly. Additionally, 50% of the capital
distributions from Morgantown Lodging Associates limited
partnership to James I. Humphrey, Jr., a limited partner, are
required to be contributed to the Partnership and deposited
into an escrow account. All funds in the additional escrow
account revert to the Partnership when the bonds are
refinanced.
(d) Effective October 31, 1992, the Partnership executed a mortgage
modification agreement with the bank extending the maturity date to
October 31, 1997. The terms of the modification agreement provided for
a principal payment of $180,000 upon execution of the agreement.
(e) Interest is adjusted every five years to a rate equal to three hundred
twenty-five basis points over the weekly average gross yield on
five-year United States Treasury notes for the most recently available
month and is subject to a floor of 12.55%, the rate of closing. At
November 28, 1994, the interest rate was 12.55%. Principal and
interest are payable by the Partnership in monthly installments
sufficient to amortize the mortgage over a thirty-year term at the
current rate of interest. For the five-year period beginning January
1, 1989, the monthly installments are $20,243. The maturity date of
the mortgage is January 2019. Allied Capital Commercial Corporation at
its option may on January 1, 1999, and on every fifth anniversary date
thereafter, declare the entire unpaid balance of principal and interest
immediately due and payable upon giving at least ninety days advance
written notice.
(f) The mortgage is financed through a tax-exempt bond issue of Mercer
County, West Virginia Industrial Development Revenue Bonds, 1984
Series. Interest is accrued at prime plus 1.5% (10% at November 28,
1994). Principal payments as outlined in the bond document plus accrued
interest are payable monthly through January 1, 2011. The mortgage was
subject to mandatory redemption on November 1, 1994 with ninety days
notice.
F-60
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 4. Mortgage Notes and Bonds Payable (Continued)
Aggregate annual principal payments and payments to bond sinking funds
for the five years following November 28, 1994, and thereafter are as follows:
Year ending
December 31,
1995 $ 502
1996 2,995
1997 1,066
1998 301
1999 327
Thereafter 9,114
------
$14,305
======
Note 5. Capital Leases
Certain Initial Hotels lease equipment under noncancellable capital
leases expiring at various intervals through 1998. The leases provide for
bargain purchase options at the end of the respective terms. Future minimum
lease payments under the capital leases, together with the present value of the
net minimum lease payments for the five years following November 28, 1994, are
as follows:
Year ending December 31, 1995 $16
1996 16
1997 13
1998 11
1999 8
---
64
Less amount representing interest 11
--
Present value of net minimum lease payments $53
==
F-61
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 6. Related Party Transactions
Humphrey Hotels, Inc. (Operator) is wholly-owned by James I. Humphrey.
Mr. Humphrey is a limited partner in the Selling Partnerships and is sole
shareholder of Humphrey Associates, Inc., the general partner in the Selling
Partnerships.
The Initial Hotels have executed management agreements with the
Operator. The Initial Hotels are required to pay management fees equal to 5% of
net operating income (as defined) plus 2% of gross income. Fees incurred for the
years ended December 31, 1991, 1992, and 1993, and the period from January 1,
1994 through November 28, 1994 amounted to $256, $256, $277, and $312,
respectively.
The Operator provides accounting services to the Initial Hotels and is
paid fees equal to 1.5% of gross revenue (as defined). Fees incurred for the
years ended December 31, 1991, 1992, and 1993, and the period from January 1,
1994 through November 28, 1994, amounted to $91, $90, $109, and $107,
respectively. The Operator also provides all site employees for the Initial
Hotels and is reimbursed for the salaries and related payroll costs. For the
years ended December 31, 1991, 1992, and 1993, and the period from January 1,
1994 through November 28, 1994, such charges incurred amounted to $1,744,
$1,730, $1,768, and $1,733, respectively. As of December 31, 1992 and 1993, and
November 28, 1994, amounts due to Humphrey Hotels, Inc. for management fees,
accounting fees, and payroll and miscellaneous reimbursements totaled $54, $103,
and $29, respectively, which are included in accounts payable and accrued
expenses.
During 1993 and 1994, certain Initial Hotels contracted with Unit
Services, Inc., an affiliate of the general partner, to perform certain repairs
and maintenance to the properties amounting to $55 and $41, respectively.
As of December 31, 1992 and 1993, and November 28, 1994, $34 is payable
to the general partner as the developer of a hotel facility for construction
management and development fees, which has been included in due to affiliates on
the balance sheets.
Included in advances from partners are advances for construction costs
of $314, $314 and $314 and operating advances of $809, $849, and $1,060 as of
December 31, 1992 and 1993, and November 28, 1994, respectively. The advances
are unsecured, non-interest bearing and are repayable from operating cash flow
and the proceeds from a sale or refinancing of the Hotels.
The Operator maintains a central disbursement account from which all
operating disbursements of the Initial Hotels are made. As of December 31, 1992
and 1993, and November 28, 1994, $32, $24, and $42, respectively, is due from
the central disbursing account and is classified as due from affiliates on the
balance sheets.
F-62
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1992 and 1993 and November 28, 1994
Note 7. Commitments
Franchise Agreements
The Selling Partnerships have executed franchise agreements that have
indefinite lives but may be terminated by either party on certain anniversary
dates specified in the agreements. In addition to initial fees totalling $146,
which are being amortized over the estimated franchise lives of 20 years, 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 $320, $314, $351, and $379 during 1991, 1992, 1993,
and 1994, respectively. The Initial Hotels will continue to be operated under
the franchise agreements.
Restaurant Leases
Three of the eight Selling Partnerships have executed lease agreements
for the Hotel's restaurant facilities with varying expiration dates, including
renewal periods, through December 1, 2023. Monthly rent is payable during the
terms of the leases at 3% to 8% of the previous month's gross receipts.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Humphrey Hospitality Trust, Inc.
We have audited the accompanying Historical Summaries of Gross Revenue
and Direct Operating Expenses (the Historical Summaries) of the Days Inn -
Farmville (the Acquisition Hotel) for the years ended December 31, 1992 and 1993
and for the period from January 1, 1994 through October 31, 1994. The Historical
Summaries are the responsibility of the management of the Acquisition Hotel. Our
responsibility is to express an opinion on the Historical Summaries based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summaries are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the Historical Summaries. An audit also includes
assessing the accounting principles used and significant estimates make by
management, as well as evaluation the overall presentation of the Historical
Summaries. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Historical Summaries were prepared for the purpose of
complying with rules and regulations of the Securities and Exchange Commission
(for inclusion in the Form S-11, Registration Statement of Humphrey Hospitality
Trust, Inc.) as described in Note 1 to the Historical Summaries, and is not
intended to be a complete presentation of the Acquisition Hotel's expenses.
In our opinion, such Historical Summaries present fairly, in all
material respects, the gross revenue and direct operating expenses of the Days
Inn - Farmville for the years ended December 31, 1992 and 1993 and for the
period from January 1, 1994 through October 31, 1994, in conformity with
generally accepted accounting principles.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
April 26, 1995
F-64
<PAGE>
Days Inn - Farmville
HISTORICAL SUMMARIES OF GROSS REVENUE
AND DIRECT OPERATING EXPENSES
(in thousands)
Years ended December 31, 1992 and 1993 and for the
period from January 1, 1994 through October 31, 1994
<TABLE>
<CAPTION>
January 1, 1994
December 31, through
1992 1993 October 31, 1994
---- ---- ----------------
<S> <C>
Gross revenue $511 $563 $488
--- --- ---
Direct operating expenses
Hotel operations and maintenance 257 266 235
Real estate taxes and insurance 19 26 16
General and administrative 61 54 52
----- ----- -----
Total direct operating expenses 337 346 303
--- --- ---
EXCESS OF REVENUE OVER
EXPENSES $174 $217 $185
=== === ===
</TABLE>
See note to historical summaries
F-65
<PAGE>
Days Inn - Farmville
NOTE TO HISTORICAL SUMMARIES OF
GROSS REVENUE AND DIRECT OPERATING EXPENSES
December 31, 1992 and 1993 and
January 1, 1994 through October 31, 1994
Note 1. Basis of Presentation
The Historical Summaries of gross Revenue and Direct Operating Expenses
(the Historical Summaries) relate to the operation of Days Inn - Farmville (the
Acquisition Hotel) in Farmville, Virginia which was sold to Farmville Lodging
Associates LLC (LLC) by an unaffiliated party and is expected to be sold to
Humphrey Hospitality Limited Partnership (the Partnership), an affiliate of LLC.
The Historical Summaries have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for real estate operations
acquired or to be acquired. The Historical Summaries are not representative of
the actual operations for the year presented, as certain expenses which may not
be comparable to the expenses expected to be incurred by the Partnership in the
proposed operations of the Acquisition Hotel have been excluded. Expenses
excluded consist of interest, depreciation and amortization and other indirect
costs not directly related to the future operations of the Acquisition hotel.
Revenue is recognized as earned.
F-66
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
Farmville Lodging Associates, LLC
We have audited the accompanying balance sheets of Farmville Lodging
Associates, LLC as of December 31, 1994 and July 20, 1995, and the related
statements of operations, partners' equity and cash flows for the period
November 1, 1994 (date of inception) to December 31, 1994, and the period
January 1, 1995 to July 20, 1995 (date of sale). Our audits also included the
financial statement schedules included on pages F-75 through F-77. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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 Farmville Lodging
Associates, LLC as of December 31, 1994 and July 20, 1995, and the results of
its operations, changes in partners' equity and its cash flows for the period
November 1, 1994 (date of inception) to December 31, 1994, and the period
January 1, 1995 to July 20, 1995 (date of sale), in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 26, 1996
F-67
<PAGE>
Farmville Lodging Associates, LLC
BALANCE SHEETS
December 31, 1994 and July 20, 1995
ASSETS
1994 1995
---------- -------
CURRENT ASSETS
Cash $ 41,513 $ 29,845
Accounts receivable 5,460 10,580
--------- ---------
Total current assets 46,973 40,425
--------- ---------
PROPERTY AND EQUIPMENT
Land 289,400 289,400
Building 1,402,600 1,402,600
Personal property 108,000 108,000
Equipment under capital lease 28,253 28,253
--------- ---------
1,828,253 1,828,253
Less accumulated depreciation 6,259 28,107
--------- ---------
1,821,994 1,800,146
--------- ---------
OTHER ASSETS
Amortizable assets, less accumulated
amortization of $1,478 and $6,389 28,972 24,061
--------- ---------
$1,897,939 $1,864,632
========== ==========
LIABILITIES AND PARTNERS' EQUITY
1994 1995
---------- -------
CURRENT LIABILITIES
Current maturities of mortgage payable $ 43,200 $1,231,200
Current maturities of obligations
under capital lease 13,675 8,902
Amounts due to affiliates 4,742 -
Accounts payable and accrued expenses 39,159 38,779
Accrued interest payable 10,675 6,689
Advance deposits 9,342 -
--------- --------
Total current liabilities 120,793 1,285,570
--------- ---------
LONG-TERM OBLIGATIONS
Mortgage payable, less current
maturities 1,213,200 -
Obligation under capital lease,
less current maturities 12,700 11,164
--------- ---------
1,225,900 11,164
--------- ---------
COMMITMENT - -
PARTNERS' EQUITY 551,246 567,898
--------- ---------
$1,897,939 $1,864,632
========== ==========
See notes to financial statements
F-68
<PAGE>
Farmville Lodging Associates, LLC
STATEMENTS OF OPERATIONS
For the period November 1, 1994 (date
of inception) to December 31, 1994 and the
period January 1, 1995 through July 20, 1995 (date of sale)
November 1, January 1,
1994 through 1995 through
December July 20,
31, 1994 1995
(Unaudited)
Revenue
Room rentals $75,465 $314,638
Telephones 2,097 9,102
Miscellaneous 1,523 7,136
------- ---------
79,085 330,876
------ -------
Operating expenses
Salaries and wages 16,197 67,591
Payroll taxes 998 7,108
Employee benefits and worker's compensation 326 2,990
Room expenses 3,888 21,595
General and administrative 7,191 21,712
Marketing and sales 826 6,784
Franchise fees 2,692 23,613
Management fees 3,556 13,817
Utilities 5,385 24,018
Repairs and maintenance 2,855 12,662
------- --------
43,914 201,890
------ -------
Operating income 35,171 128,986
------ -------
Capital expenses
Real estate taxes 1,542 5,072
Business and occupation taxes 234 2,665
Other taxes 233 1,781
Insurance 905 3,203
Depreciation 6,259 21,848
Amortization 1,478 4,911
Interest 23,274 72,854
------ -------
33,925 112,334
------ -------
EXCESS OF REVENUE OVER EXPENSES $ 1,246 $ 16,652
====== =======
See notes to financial statements
F-69
<PAGE>
Farmville Lodging Associates, LLC
STATEMENTS OF PARTNERS' EQUITY
For the period November 1, 1994 (date
of inception) to December 31, 1994 and the
period January 1, 1995 through July 20, 1995 (date of sale)
Capital contributions $550,000
Excess of revenue over expenses 1,246
-------
Balance, December 31, 1994 551,246
Excess of revenue over expenses 16,652
-------
Balance, July 20, 1995 $567,898
=======
See notes to financial statements
F-70
<PAGE>
Farmville Lodging Associates, LLC
STATEMENTS OF CASH FLOWS
For the period November 1, 1994 (date
of inception) to December 31, 1994 and the
period January 1, 1995 through July 20, 1995 (date of sale)
<TABLE>
<CAPTION>
November
1, 1994 January
through 1, 1995
December through July
31, 1994 20, 1995
---------------- -----------
<S> <C>
Cash flows from operating activities
Excess of revenue over expenses $ 1,246 $ 16,652
Adjustments to reconcile excess of revenue
over expenses to net cash
provided by operating activities
Depreciation 6,259 21,848
Amortization 1,478 4,911
Changes in assets and liabilities
Increase in accounts receivable (5,460) (5,120)
Increase in prepaid expenses - -
Increase in mortgage escrows - -
Increase (decrease) in advance deposits 9,342 (9,342)
Increase in amounts due to affiliates 4,742 -
Increase (decrease) in accounts payable and accrued expenses 39,159 (5,122)
Increase in accrued interest payable 10,675 (3,986)
---------- -------
Net cash provided by operating activities 67,441 19,841
----------- -------
Cash flow from investing activities
Purchase of fixed assets (1,800,000) -
Payment of deferred fees (30,450) -
----------- -------
Net cash used in investing activities (1,830,450) -
----------- -------
Cash flows from financing activities
Proceeds from mortgage payable 1,260,000 -
Principal payments on obligations under capital lease (1,878) (6,309)
Principal payments on mortgage (3,600) (25,200)
Capital contributions from partners 550,000 -
----------- -------
Net cash provided by (used in) financing activities 1,804,522 (31,509)
----------- -------
NET INCREASE (DECREASE) IN CASH 41,513 (11,668)
Cash beginning - 41,513
---------- -------
Cash, ending $ 41,513 $ 29,845
=========== =======
Supplemental disclosure of cash flow information =========== =======
Cash paid during the period for interest $ 12,599 $ 72,854
Supplemental schedule of non-cash investing and financing activities
Additions to equipment under capital lease $ 28,253 $ -
=========== =======
</TABLE>
See notes to financial statements
F-71
<PAGE>
Farmville Lodging Associates, LLC
NOTES TO FINANCIAL STATEMENTS
November 1, 1994 through December 31, 1994 and the
period January 1, 1995 through July 20, 1995
Note 1. Organization and Summary of Significant Accounting Policies
Farmville Lodging Associates, LLC, a limited liability company (the
Company) formed on October 27, 1994, owns and operates a Days Inn Hotel in
Prince Edward County, Virginia (the Hotel), pursuant to a franchise agreement
with Days Inn of America, Inc. The Hotel began operations on November 1, 1994.
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,
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.
Accounts Receivable
The Partnership considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
Property and Equipment
Property and equipment are carried at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of the
assets to operations over their estimated service lives, on the straight-line
method.
Amortizable Assets
Costs of financing are being amortized over the term of the mortgage,
using the straight-line method.
Organization costs are being amortized on a straight-line basis over
five years.
Income Taxes
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reported by, the partners individually.
F-72
<PAGE>
Farmville Lodging Associates, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
November 1, 1994 through December 31, 1994 and the
period January 1, 1995 through July 20, 1995
Note 2. Mortgage Payable
The Company has a mortgage payable to Benchmark Community Bank in the
original amount of $1,260,000. The mortgage is secured by a first lien on the
property and equipment. Interest is adjusted every month to establish the rate
at 1.5% above the prime rate (10.0% and 10.25% at December 31, 1994 and July 20,
1995, respectively). Principal and interest are payable in monthly installments.
Principal payments are $3,600 per month for 35 consecutive months until November
1, 1997 when the full amount of principal and accrued interest are due.
Aggregate maturities of the mortgage payable for the period ending July
20, 1996, are as follows:
Period ending July 20, 1996 $1,231,200
=========
Note 3. Capital Lease
The Company leases telephone equipment, televisions, and laundry
equipment under a capital lease. Upon expiration of the lease and provided all
rentals have been paid in full, title will be transferred to the Company upon
payment of a nominal fee.
Future minimum lease payments under the capital leases together with
the present value of the net minimum lease payments were as follows at July 20,
1995:
Amount
------
Period ending July 20, 1996 $11,187
1997 10,358
1998 1,612
------
23,157
Less amount representing interest 3,091
------
$20,066
======
F-73
<PAGE>
Farmville Lodging Associates, LLC
NOTES TO FINANCIAL STATEMENTS - CONTINUED
November 1, 1994 through December 31, 1994 and the
period January 1, 1995 through July 20, 1995
Note 4. Related Party Transactions
The Company executed a management agreement with Humphrey Hotels, Inc.,
an affiliate. The Company is required to pay management fees equal to 5% of net
operating income (as defined) plus 2% of gross revenue. Fees incurred for the
period November 1, 1994 (date of inception) to December 31, 1994 and the period
January 1, 1995 to July 20, 1995 (date of sale) amounted to $3,556 and $13,817,
respectively. Humphrey Hotels, Inc. also provides accounting services to the
Company. Accounting fees equal 1.5% of gross revenue (as defined). For the
period November 1, 1994 (date of inception) to December 31, 1994 and the period
January 1, 1995 to July 20, 1995 (date of sale), accounting fees incurred
amounted to $1,186 and $4,963, respectively, and are included in general and
administrative expenses.
At December 31, 1994 and July 20, 1995, fees payable to Humphrey
Hotels, Inc. for management and accounting services were $4,742 and $2,381,
respectively.
Humphrey Hotels, Inc. provides all site employees for the Company and
is reimbursed for the salaries and related payroll costs. For the period
November 1, 1994 (date of inception) to December 31, 1994 and the period January
1, 1995 to July 20, 1995 (date of sale), the Company incurred charges of $17,195
and $77,698, respectively, for salaries and related payroll costs. At December
31, 1994 and July 20, 1995, no amounts were due.
Note 5. Commitment
The Company executed a franchise agreement (the Agreement) with Days
Inn of America, Inc. which permits the Company to use the Days Inn trademark and
to share a national reservations and marketing system maintained by Days Inn of
America, Inc. The Agreement has an indefinite life but may be terminated by
either party on certain anniversary dates specified in the Agreement. The
Agreement requires the Company to pay various annual fees which approximate 5%
of gross room revenue. Such fees and other incidental expenses aggregated $2,692
for the period November 1, 1994 to December 31, 1994 and $23,613 for the period
January 1, 1995 to July 20, 1995 (date of sale).
Note 6. Subsequent Event
On July 21, 1995, the Company sold the hotel property and equipment to
Humphrey Hospitality Limited Partnership, an affiliate, in exchange for 95,484
units of limited partnership interests valued at approximately $740,000 and the
assumption of approximately $1,231,000 of debt secured by the hotel property.
F-74
<PAGE>
FARMVILLE LODGING ASSOCIATES, LLC
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994
(in thousands)
<TABLE>
<CAPTION>
Cost Capitalized Gross Amounts at
Subsequent to Which Carried at
Initial Cost Acquisition Close of Period
-------------------- -------------------- -----------------------------
Buildings Buildings Buildings
and and and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------- ------------ ------ ------------ ------ ------------ ------ ------------ -------
<S> <C>
Days Inn
Farmville,
Virginia $1,256 $289 $1,403 $ - $ - $289 $1,403 $ -
===== === ===== ==== ==== === ===== ====
</TABLE>
(continued)
<PAGE>
FARMVILLE LODGING ASSOCIATES, LLC
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994
(in thousands)
Accumulated Net Life Upon Which
Deprecia- Book Value Depreciation in
tion Build- Build- Latest Income
ings and ings and Date of Statement is
Description Improvements Improvements Acquisition Computed
- ----------- ------------ ------------ ----------- -----------
Days Inn
Farmville,
Virginia $ 6 $1,397 1994 (d)
==== =====
(continued)
F-75
<PAGE>
FARMVILLE LODGING ASSOCIATES, LLC
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
July 20, 1995
(in thousands)
<TABLE>
<CAPTION>
Cost Capitalized Gross Amounts at
Subsequent to Which Carried at
Initial Cost Acquisition Close of Period
-------------------- -------------------- ------------------------------
Buildings Buildings Buildings
and and and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ----------- ------------ ------ ------------ ------ ------------ ------ ------------ -------
<S> <C>
Days Inn
Farmville,
Virginia $1,231 $289 $1,403 $ - $ - $289 $1,403 $ -
===== === ===== ==== ==== === ===== ====
</TABLE>
See notes to schedules
<PAGE>
FARMVILLE LODGING ASSOCIATES, LLC
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
July 20, 1995
(in thousands)
Accumulated Net Life Upon Which
Deprecia- Book Value Depreciation in
tion Build- Build- Latest Income
ings and ings and Date of Statement is
Description Improvements Improvements Acquisition Computed
- ----------- ------------ ------------ ----------- -----------
Days Inn
Farmville,
Virginia $ 25 $1,378 1994 (d)
==== =====
See notes to schedules
F-76
<PAGE>
FARMVILLE LODGING ASSOCIATES, LLC
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
(a) Reconciliation of real estate:
Balance at November 1, 1994 $ -
Additions during period 1,403
-------
Balance at December 31, 1994 1,403
Additions during period -
-------
Balance at July 20, 1995 $ 1,403
=======
(b) Reconciliation of accumulated depreciation
Balance at November 1, 1994 $ -
Depreciation for the period 6
-------
Balance at December 31, 1994 6
Depreciation for the period 19
-------
Balance at July 20, 1995 $ 25
=======
(c) The aggregate cost of land, building and furniture and equipment for
federal income tax purposes is approximately $1,800.
(d) Depreciation is computed based upon the following useful lives:
Buildings and improvements 40 years
Furniture and equipment 12 years
F-77
<PAGE>
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
in any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company or that information contained herein is correct as of any
time subsequent to the date hereof.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY............................. 1
RISK FACTORS................................... 14
THE COMPANY.................................... 25
GROWTH STRATEGY................................ 25
USE OF PROCEEDS................................ 28
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS.. 29
CAPITALIZATION................................. 31
DILUTION....................................... 32
SELECTED FINANCIAL INFORMATION................. 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................ 39
BUSINESS AND PROPERTIES........................ 45
POLICIES AND OBJECTIVES WITH RESPECT
TO CERTAIN ACTIVITIES........................ 59
MANAGEMENT..................................... 63
CERTAIN RELATIONSHIPS AND TRANSACTIONS......... 65
THE LESSEE..................................... 67
OWNERSHIP OF THE COMPANY'S COMMON STOCK........ 69
DESCRIPTION OF CAPITAL STOCK................... 70
CERTAIN PROVISIONS OF VIRGINIA LAW AND
OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS..................... 73
SHARES AVAILABLE FOR FUTURE SALE............... 75
PARTNERSHIP AGREEMENT.......................... 77
FEDERAL INCOME TAX CONSIDERATIONS.............. 79
UNDERWRITING................................... 97
EXPERTS........................................ 98
REPORTS TO SHAREHOLDERS........................ 98
LEGAL MATTERS.................................. 98
GLOSSARY....................................... 99
INDEX TO FINANCIAL STATEMENTS..................F-1
1,000,000 Shares
HUMPHREY HOSPITALITY
TRUST, INC.
Common Stock
--------------
PROSPECTUS
--------------
ANDERSON & STRUDWICK
INCORPORATED
December 6, 1996
