As filed with the Securities and Exchange Commission on November 12, 1996
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
HUMPHREY HOSPITALITY TRUST, INC.
(Exact name of registrant as specified in governing instruments)
12301 Old Columbia Pike
Silver Spring, Maryland 20904
(Address of principal executive offices)
James I. Humphrey, Jr.
12301 Old Columbia Pike
Silver Spring, Maryland 20904
(301) 680-4343
(Name and address of agent for service)
---------------
Copies to:
Thurston R. Moore, Esq. James J. Wheaton, Esq.
Hunton & Williams Willcox & Savage, P.C.
Riverfront Plaza 1800 NationsBank Center
951 East Byrd Street One Commercial Place
Richmond, Virginia 23219 Norfolk, Virginia 23510
(804) 788-8200 (804) 628-5619
Approximate date of commencement of the proposed sale of the securities
to the public: As soon as practicable after the effective date of this
Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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Title of Securities Amount Being Proposed Proposed Maximum Amount of
Being Registered Registered Offering Price Per Share (2) Aggregate Offering Price Registration Fee
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Common Stock 1,150,000(1) shares $8.75 $10,062,500 $3,050
($.01 par value)
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(1) Includes 150,000 shares that may be purchased pursuant to an overallotment
option granted to the Underwriters.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c), based upon the average of the high and low prices
of the Common Stock on The Nasdaq Stock Market on November 7, 1996.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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CROSS REFERENCE SHEET
Pursuant to Rule 501(a) of Regulation S-K
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Item Number and Caption Heading in Prospectus
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1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus................................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................... Inside Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges................................ Outside Front Cover Page; Prospectus Summary; Risk
Factors; Policies and Objectives With Respect to
Certain Activities; Shares Available for Future Sale
4. Determination of Offering Price.......................... Outside Front Cover Page; Underwriting
5. Dilution................................................. Dilution
6. Selling Security Holders................................. Not Applicable
7. Plan of Distribution..................................... Outside Front Cover Page; Underwriting
8. Use of Proceeds.......................................... Use of Proceeds
9. Selected Financial Data.................................. Selected Financial Information
10. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
11. General Information as to Registrant..................... Prospectus Summary; Management; Business and
Properties
12. Policy With Respect to Certain Activities................ Prospectus Summary; Risk Factors; Policies and Objectives
with Respect to Certain Activities; Certain Provisions of
Virginia Law and the Company's Articles of Incorporation
and Bylaws; Reports to Shareholders
13. Investment Policies of Registrant........................ Policies and Objectives with Respect to Certain Activities;
Prospectus Summary; Business and Properties
14. Description of Real Estate............................... Prospectus Summary; Business and Properties
15. Operating Data........................................... Business and Properties
16. Tax Treatment of Registrant and its Security Holders..... Prospectus Summary; Federal Income Tax Considerations
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Shareholder Matters............ Price Range of Common Stock and Distributions
18. Description of Registrant's Securities................... Description of Capital Stock
19. Legal Proceedings........................................ Business and Properties-- Legal Proceedings
20. Security Ownership of Certain Beneficial Owners
and Management........................................... Ownership of the Company's Common Stock
21. Directors and Executive Officers......................... Management
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22. Executive Compensation................................... Management
23. Certain Relationships and Related Transactions........... Prospectus Summary; Business and Properties; Management;
Certain Relationships and Transactions; The Lessee
24. Selection, Management and Custody of Registrant's
Investments.............................................. Outside Front Cover Page; Prospectus Summary; Business
and Properties; Management; Policies and Objectives with
Respect to Certain Transactions
25. Policies With Respect to Certain Transactions............ Risk Factors; Policies and Objectives with Respect to Certain
Transactions
26. Limitations of Liability................................. Management
27. Financial Statements and Information..................... Prospectus Summary; Selected Financial Information;
Financial Statements
28. Interests of Named Experts and Counsel................... Legal Matters; Experts
29. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities........... Management
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Subject to completion dated ______________________ 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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, $.01 par value per
share (the "Common Stock") offered hereby are being sold by the Company. The
Common Stock is traded on The Nasdaq Stock Market under the symbol "HUMP." 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".
Assuming an offering price of $8.25, the last reported bid price of the
Common Stock on The Nasdaq Stock Market, 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.
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Price to Selling Proceeds to
Public Commission(1) Company(2)
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Per Share $ $ $
Total(3) .................... $ $ $
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(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 $ , $ and $ , 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 , 1996.
-----------
ANDERSON & STRUDWICK
INCORPORATED
, 1996
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[COLOR PHOTOS AND ART WORK]
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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."
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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...................................................................................................... 10
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............................................................................... 16
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.................................................................................. 18
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........................................................ 20
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..................................................................................................... 57
Depreciation.................................................................................................... 58
Legal Proceedings............................................................................................... 58
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES........................................................ 59
Investment Policies............................................................................................. 59
Financing....................................................................................................... 59
Conflict of Interest Policies................................................................................... 60
Provisions of Virginia Law...................................................................................... 61
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.............................................................................................. 89
Taxation of Taxable U.S. Shareholders........................................................................... 90
Taxation of Shareholders on the Disposition of the Common Stock................................................. 90
Capital Gains and Losses........................................................................................ 90
Information Reporting Requirements and Backup Withholding....................................................... 91
Taxation of Tax-Exempt Shareholders............................................................................. 91
Taxation of Non-U.S. Shareholders............................................................................... 91
Other Tax Consequences.......................................................................................... 93
Tax Aspects of the Partnership and the Subsidiary Partnership................................................... 93
Sale of a Hotel Partnership's Property.......................................................................... 96
UNDERWRITING...................................................................................................... 96
EXPERTS........................................................................................................... 97
REPORTS TO SHAREHOLDERS........................................................................................... 98
LEGAL MATTERS..................................................................................................... 98
GLOSSARY.......................................................................................................... 99
INDEX TO FINANCIAL STATEMENTS.....................................................................................F-1
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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 that the offering price is $8.25 per share, the last
reported bid price of the Common Stock on The Nasdaq Stock Market. 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 $.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 limited partnership interest in the Partnership
("Units"). After the Closing, the Company will own a 84.24% partnership
interest, and Mr. Humphrey and his affiliates (collectively, the "Humphrey
Affiliates") will own a 15.76% 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"). 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
of Incorporation or Bylaws that limits the level of debt that
the Company may incur, and
<PAGE>
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.
2
<PAGE>
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.
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 payments
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
3
<PAGE>
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."
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 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 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
4
<PAGE>
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."
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
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
5
<PAGE>
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."
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 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.
6
<PAGE>
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.
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 it 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 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 when acquiring an existing operating hotel, the start-up
risks are less 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,
Comfort Suites 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, Comfort Suites and Days Inn hotels, in the
category designated as "Upper Economy."
7
<PAGE>
Following the Closing of the Offering, the structure and relationships
of the Company, the Partnership, the Hotels and the Lessee will be as follows:
<TABLE>
<S> <C>
-----------------
| Holders of |
| Common Stock |
-----------------
|
------------------------ -----------------
| Humphrey Hospitality | | Mr. Humphrey |
-------------------------| Trust, Inc. | | and |
| | The "Company" | | Affiliates |
| ------------------------ -----------------
| | |
1% 84.24% 15.76%
Limited Partnership Partnership Interest Partnership Interest
Interest and general partner and limited partners
| | |
| | |
| | ------------------------
| | |
- ---------------------- ------------------------ -------------------------
| Solomons | | Humphrey Hospitality | | Humphrey Hospitality |
| Beacon Inn Limited | 99% | Limited | Percentage | Management, Inc. |
| Partnership |-- General --| Partnership |-- Leases --| (solely owned by |
| The "Subsidiary | Partnership | The "Partnership" | | Mr. Humphrey) |
| Partnership" | Interest | | | 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 Company anticipates that the Closing Date will be 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.
1994
Fourth Quarter (from November 29)........................... .044(1)
1995
First Quarter............................................... .15
Second Quarter.............................................. .15
Third Quarter............................................... .181(2)
Fourth Quarter.............................................. .19
1996
First Quarter............................................... .19
Second Quarter.............................................. .19
Third Quarter............................................... .19
(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 $.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 $.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 $.76 annual distribution
per share, approximately 42% of the annual distribution to the Common
Shareholders 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."
9
<PAGE>
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."
The Offering
Common Shares offered by the Company............... 1,000,000
Shares of Common Stock to be outstanding
after the Offering.............................. 3,331,700
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
- ---------------
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>
Historical
Period from
November 29, 1994
(Date of IPO) Year Twelve Nine Nine
through Ended Months Ended Months Ended Months Ended
December 31, December 31, September 30, September 30, September 30,
1994 1995 1996 1995 1996
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited)
--------- --------- ----------- ----------- -----------
<S> <C>
Operating Data:
Percentage Lease revenue (2)..... $ 273 $ 3,750 $ 3,939 $ 2,753 $ 2,942
Other income (3)................. - 21 28 11 19
----- --------- --------- --------- ---------
Total revenue.................... 273 3,771 3,967 2,764 2,961
----- -------- -------- -------- --------
Expenses:
Depreciation and amortization.... 42 680 727 496 543
Interest expense................. 97 1,011 640 833 462
Real estate and personal
property taxes and insurance... 18 196 213 144 162
General and administrative....... 15 238 294 200 257
----- --------- --------- --------- ---------
Total expenses................. 172 2,125 1,874 1,673 1,424
----- -------- --------- -------- ---------
Income before
minority interest.............. 101 1,646 2,093 1,091 1,537
Minority interest (4)............ 29 396 441 279 324
----- --------- --------- --------- ---------
Net income applicable
to Common Shareholders......... $ 72 $ 1,250 $ 1,652 $ 812 $ 1,213
====== ======= ======== ======= =======
Earnings per common share (5).... $.05 $.71 $.71 $.51 $.52
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
Funds from operations (7)........ $ 143 $ 2,326 $ 2,820 $1,587 $ 2,080
Net cash provided by
operating activities (8)....... $170 $1,113 $2,043 $876 $ 2,304
Net cash used in
investing activities........... $(4,840) ($619) ($496) ($634) ($995)
Net cash provided by (used in)
financing activities........... $ 5,223 ($879) ($1,726) ($237) ($1,097)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
(Unaudited)
Year Twelve
Ended Months Ended
December 31, September 30,
1995 1996
---- ----
<S> <C>
Operating Data:
Percentage Lease revenue (2)..... $ 3,750 $3,939
Other income (3)................. 361 368
-------- --------
Total revenue.................... 4,111 4,307
-------- --------
Expenses:
Depreciation and amortization.... 680 727
Interest expense................. 1,011 640
Real estate and personal
property taxes and insurance... 196 213
General and administrative....... 238 294
-------- --------
Total expenses................. 2,125 1,874
-------- --------
Income before
minority interest.............. 1,986 2,433
Minority interest (4)............ 313 383
-------- --------
Net income applicable
to Common Shareholders......... $1,673 $2,050
====== ======
Earnings per common share (5).... $0.50 $0.62
Other Data:
Weighted average shares
outstanding and common share
equivalents outstanding (6).... 3,955,050 3,955,050
Funds from operations (7)........ $ 2,666 $3,160
Net cash provided by
operating activities (8)....... $1,453 $2,383
Net cash used in
investing activities........... ($619) ($496)
Net cash provided by (used in)
financing activities........... ($879) ($1,726)
</TABLE>
11
<PAGE>
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>
(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 common shares and common share equivalents, consisting of units,
outstanding for the period.
(6) Pro forma weighted average shares outstanding 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.
(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
12
<PAGE>
(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.
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 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.
(9) Represents marina revenue (for the Comfort Inn - Beacon Marina, Solomons,
Maryland only), telephone revenue, restaurant revenue and other revenue.
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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 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."
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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 of the Offering (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
15
<PAGE>
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."
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
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<PAGE>
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.
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
17
<PAGE>
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."
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
18
<PAGE>
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.
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
19
<PAGE>
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."
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
20
<PAGE>
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."
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
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<PAGE>
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 License without cause for the Comfort Inn-Dahlgren,
Virginia and the Comfort Inn-Elizabethton, Tennessee 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."
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."
22
<PAGE>
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.
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 and on the land on
which the New Development is being built prior to their acquisitions by the
Company. 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."
23
<PAGE>
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.
24
<PAGE>
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
25
<PAGE>
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."
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.
26
<PAGE>
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 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. 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 it 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 when acquiring
an existing operating hotel, the start-up risks are less 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 $34.74 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.
27
<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 ($8.6 million if the over-allotment option is fully
exercised). The Company will contribute all of the Net Proceeds to the
Partnership and after such contribution will own a 84.24% interest in the
Partnership (84.81% if the over-allotment option is fully exercised). The
Partnership will use the Net Proceeds of the Offering as follows:
Amount
(1) to repay certain amounts under the Credit Facility..............$ 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..................................................$7,458,000
=========
The Company currently has no agreement or understanding to invest in
any specific property other than the New Development. Until the Company
identifies hotel acquisition or development investments and until the New
Development is completed, the company will invest all of the Net Proceeds not
used to repay portions of the Credit Facility in an assortment of short-term
treasury bills, bank certificates of deposit and commercial paper obligations
with terms varying from one to three months.
The following describes the amounts under the Credit Facility to be
repaid with the Net Proceeds:
Amount Interest Rate Maturity Date
Amounts Payable to Mercantile
under the Credit Facility.........$ 660,000 8.50%(1) April 10, 1999
- ----------------------
(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 November 7, 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.
28
<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 $.044(1)
1995
First Quarter................................. $7.75 $6.25 $.15
Second Quarter................................ $7.75 $7.50 $.15
Third Quarter ................................ $8.75 $7.50 $.181(2)
Fourth Quarter................................ $8.375 $7.75 $.19
1996
First Quarter................................. $9.125 $8.00 $.19
Second Quarter................................ $9.375 $8.4375 $.19
Third Quarter................................. $9.25 $8.25 $.19
Fourth Quarter (through November 7)........... $8.25 $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 $.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 $.19 per share.
On November 7, 1996, the last reported bid price of the Common Stock on
The Nasdaq Stock Market was $8.25 per share. As of November 1, 1996, the Company
had approximately 80 shareholders of record, and as of November 5, 1996,
estimates that there were approximately 643 beneficial owners of the Common
Stock at that time.
The Company anticipates that the Closing Date will be 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."
29
<PAGE>
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.
30
<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, $.01 par value,
10,000,000 shares authorized,
no shares issued and outstanding .................... - -
Common Stock, $.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.
31
<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.
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
=====
- ---------------------
(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.
32
<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
unaudited 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.
33
<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 Nine
through Ended Months Ended Months Ended Months Ended
December 31, December 31, September 30, September 30, September 30,
1994 1995 1996 1995 1996
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited)
<S> <C>
Operating Data:
Percentage Lease revenue (2)..... $ 273 $ 3,750 $ 3,939 $ 2,753 $ 2,942
Other income(3).................. - 21 28 11 19
----- --------- --------- --------- ---------
Total revenue.................... 273 3,771 3,967 2,764 2,961
----- -------- -------- -------- --------
Expenses:
Depreciation and amortization.... 42 680 727 496 543
Interest expense................. 97 1,011 640 833 462
Real estate and personal
property taxes and insurance... 18 196 213 144 162
General and administrative....... 15 238 294 200 257
----- --------- --------- --------- ---------
Total expenses................. 172 2,125 1,874 1,673 1,424
----- -------- --------- -------- ---------
Income before
minority interest.............. 101 1,646 2,093 1,091 1,537
Minority interest (4)............ 29 396 441 279 324
----- --------- --------- --------- ---------
Net income applicable
to Common Shareholders......... $ 72 $ 1,250 $ 1,652 $ 812 $ 1,213
====== ======= ======== ======= =======
Earnings per common share(5)..... $.05 $.71 $.71 $.51 $.52
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
Funds from operations (7)........ $ 143 $ 2,326 $ 2,820 $1,587 $ 2,080
Net cash provided by
operating activities(8)........ $170 $1,113 $2,043 $876 $ 2,304
Net cash used in
investing activities........... $(4,840) ($619) ($496) ($634) ($995)
Net cash provided by (used in)
financing activities........... $ 5,223 ($879) ($1,726) ($237) ($1,097)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
(Unaudited)
Year Twelve Nine Nine
Ended Months Ended Months Ended Months Ended
December 31, September 30, September 30, September 30,
1995 1996 1995 1996
<S> <C>
Operating Data:
Percentage Lease revenue (2)..... $ 3,750 $3,939 $2,753 $2,942
Other income(3).................. 361 368 265 273
-------- -------- ------ ------
Total revenue.................... 4,111 4,307 3,018 3,215
-------- -------- ------ ------
Expenses:
Depreciation and amortization.... 680 727 496 543
Interest expense................. 1,011 640 833 462
Real estate and personal
property taxes and insurance... 196 213 144 162
General and administrative....... 238 294 200 257
-------- -------- ------ ------
Total expenses................. 2,125 1,874 1,673 1,424
-------- -------- ------ ------
Income before
minority interest.............. 1,986 2,443 1,345 1,791
Minority interest (4)............ 313 383 212 282
-------- -------- ------ ------
Net income applicable
to Common Shareholders......... $1,673 $2,050 $1,133 $1,509
====== ====== ====== ======
Earnings per common share(5)..... $0.50 $0.62 $ 0.34 $ 0.45
Other Data:
Weighted average shares
outstanding and common share
equivalents outstanding (6).... 3,955,050 3,955,050 3,955,050 3,955,050
Funds from operations (7)........ $ 2,666 $3,160 $1,841 $2,334
Net cash provided by
operating activities(8)........ $1,453 $2,383 $1,130 $2,558
Net cash used in
investing activities........... ($619) ($496) ($634) ($995)
Net cash provided by (used in)
financing activities........... ($879) ($1,726) ($237) ($1,097)
</TABLE>
34
<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 common shares and common share equivalents, consisting of units,
outstanding for the period.
(6) Pro forma weighted average shares outstanding 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.
(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 Nine
through Ended Months Ended Months Ended Months Ended
December 31, December 31, September 30, September 30, September 30,
1994 1995 1996 1995 1996
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited)
<S> <C>
Net income applicable to
common shareholders.............. $ 72 $1,250 $1,652 $ 812 $1,213
Add:
Minority interests............. 29 396 441 279 324
Depreciation and
amortization................. 42 680 727 496 543
------ ------- ------- -------- --------
Total............................ $ 143 $2,326 $2,820 $1,587 $2,080
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Pro (Unaudited) Forma
Year Twelve Nine Nine
Ended Months Ended Months Ended Months Ended
December 31, September 30, September 30, September 30,
1995 1996 1995 1996
<S> <C>
Net income applicable to
common shareholders............. $1,673 $2,050 $1,133 $1,509
Add:
Minority interests............ 313 383 212 282
Depreciation and
amortization................ 680 727 496 543
------- ------- ------- -------
Total........................... $2,666 $3,160 $1,841 $2,334
====== ====== ====== ======
</TABLE>
(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. The average daily rate 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
39
<PAGE>
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
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 Acquisition 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
Acquisition 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 lowers the average
occupancy for the Hotels. The average daily rate 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."
40
<PAGE>
The following table sets forth certain combined historical and pro
forma financial information for the Initial Hotels for the periods indicated.
<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.
(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. Revenue per available room (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.
41
<PAGE>
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
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 November 6, 1996, the
42
<PAGE>
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
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
43
<PAGE>
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.
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. upper
economy hotels has increased each year for the last three years. The upper
economy segment, as defined by Smith Travel Research, is comprised of 20 hotel
chains, including the Comfort Inn, Comfort Suites, 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, Comfort Suites 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.
45
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The Hotels
Set forth below is certain information regarding the Hotels for the
year ended December 31, 1995.
<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
46
<PAGE>
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.
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.
47
<PAGE>
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.
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
48
<PAGE>
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.
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
49
<PAGE>
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. The
occupancy of many of the Hotels decreased in the nine months ended September 30,
1996, as compared with comparable periods in 1995 due to the record snowfall in
the first quarter of 1996. Occupancy and REVPAR at the Comfort Inn-Morgantown,
West Virginia, declined in 1994 from 1993 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 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. 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.
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.
50
<PAGE>
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.
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. 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. The Company anticipates that all material terms of the Fixed
Leases except for the 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.
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.
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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
14.5% of quarterly room revenues,
Elizabethton, 96,950 plus 7.5% of semi-annual room Rooms - $630,766 $159,998 260,150
Tennessee revenues, plus 30% of annual room Other - $40,030 3,202
revenues in excess of $560,000, --------
plus 8% of monthly other revenues $163,200
--------
16.0% of quarterly room revenues,
Farmville, Virginia 132,432 plus 9.5% of semi-annual room Rooms - $667,062 $175,220 309,221
revenues, plus 30% of annual room Other - $19,610 1,569
revenues in excess of $650,000 plus --------
8% of monthly other revenues $176,789
--------
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
revenues, plus 25.1% of annual --------
Maryland 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
------ plus 9.5% of semi-annual room -------
Farmville, Virginia(1) 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
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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.
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
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<PAGE>
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;
(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
54
<PAGE>
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.
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
55
<PAGE>
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 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.
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
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<PAGE>
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." 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
and on the land on which the New Development is being constructed prior to their
acquisitions by the Company. 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
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
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<PAGE>
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
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
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<PAGE>
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 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."
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
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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).
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
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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 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,
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approved or ratified by the disinterested shareholders, or (iii) the transaction
is established to have been fair to the Company.
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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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.
<TABLE>
<CAPTION>
Name Age Position
<S> <C>
James I. Humphrey, Jr. 55 Chairman of the Board,
President and Secretary
Charles A. Mills, III 49 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
</TABLE>
- ------------------------
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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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.
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Executive Compensation
The Company does not pay its executives any salary above and beyond the
compensation that they receive as directors.
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.
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Revised Services Agreement
The Company amended the terms of the Services Agreement between it and
the Lessee to provide accounting and commission 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.
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
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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
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 served 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
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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. 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.
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, 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. An affiliate of the Lessee has 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 Lessee has 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. An affiliate of the Lessee 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.
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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.
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> Percent of
Class
Shares of Common Stock -----------------------------------
Name of Beneficial Owner Beneficially Owned 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 20,550(2) * *
Dr. Leah T. Robinson 84,800 2.9% 2.1%
George R. Whittemore 70,000 2.4% 1.8%
Jeffrey M. Zwerdling 53,510(3) 1.1% 1.3%
- ------------------------- --------- ---- ----
Total 946,010(4) 31.0%(5) 23.9%(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 1,850 shares of Common Stock held by Mills Management
Corporation, of which Mr. Mills is President, and 200 shares owned by Mr.
Mills' wife.
(3) 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.
(4) At the Closing, all officers and Directors will acquire a total of 20,200
Common Shares and thereafter, will own 946,010 Common Shares, assuming
that all Units held by Mr. Humphrey, Humphrey Associates and the Farmville
Lodging Associates, LLC after the closing of the acquisition of the
Acquisition Hotel are redeemed for shares of Common Stock.
(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 and the related transactions, 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
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its shareholders in the event of its liquidation, dissolution or winding-up
after payment of, or adequate provision 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 $.044 per share to the Common
Shareholders, which is the equivalent of a $.125 quarterly or a $.50 annual
distribution. For each of the quarters ended March 31, 1995, and June 30, 1995,
the Company made a distribution of $.15 per share, which is the equivalent of a
$.60 annual distribution. For the quarter ended September 30, 1995, the Company
made a distribution of $.181 per share, which represents a pro rata distribution
of $.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 $.19 per share, which is the equivalent of a $.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
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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
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
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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.
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
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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
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.
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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.
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
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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
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% interest in the Partnership, and the Limited
Partners will collectively own a 15.76% 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
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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.
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.
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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
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
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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 revoked its election to be taxed as a pass-through entity
under Subchapter S of the Code on the day prior to the closing of the IPO. The
Company elected to be taxed as a REIT under Sections 856 through 860 of the
Code, effective for its short taxable year beginning on the date of revocation
of its S election and ending on 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.
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
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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 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
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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 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. For purposes of this section entitled
"Federal Income Tax
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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.
In order for the Base Rent, the Percentage Rent, and the Additional
Charges 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 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 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.
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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.
In order for the Rents to constitute "rents from real property,"
several other requirements also must be satisfied. One requirement is that the
Rents 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 Rents
received under the Percentage Lease. The Rents 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 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 Rents 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 Rents 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
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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% of 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 Rents 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 Rents 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.
If the Rents do not qualify as "rents from real property" because the
rents attributable to personal property exceed 15% of the total Rents for a
taxable year, the portion of the Rents 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 Rents attributable to personal property, plus any other
income that is nonqualifying income for purposes of the 95% gross income test,
during a taxable year exceed 5% of the Company's gross income during the year,
the Company would lose its REIT status. If, however, the Rents do 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
Rents 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 Rents, 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 Rents 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
Rents 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
Rents or the Additional Charges (which will be qualifying gross income for the
95% test but not the 75% test). As described
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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
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
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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 share 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 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
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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, 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
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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 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.
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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 ordinary income for
individuals may be significant. In addition, the characterization of
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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
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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 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
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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 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
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(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 qualifies for the Private Placement
Exclusion. If a Hotel Partnership is considered to be a publicly traded
partnership under the PTP Regulations because it is deemed to have more than 100
partners, such Hotel Partnership should not be treated as a corporation because
it should be eligible for the 90% Passive-Type Income Exception.
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 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.
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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 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. Immediately after
the Offering, the Company will contribute the Net Proceeds to the Partnership in
exchange for an additional general partnership interest in 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
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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."
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 named below, and each of such
Underwriters, for whom Anderson & Strudwick Incorporated is acting as
representative, has agreed to purchase from the Company the respective number of
shares of Common Shares set forth opposite its name below:
Number
of Shares of
Underwriter Common Stock
Anderson & Strudwick Incorporated
Total 1,000,000
=========
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.
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The Underwriters propose to offer the shares of Common Shares in part
directly to the public at the initial public 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 $_____ 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 Underwriters 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.
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
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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.
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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 $.01 per share, of the
Company.
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"Company" means Humphrey Hospitality Trust, Inc., a Virginia
corporation.
"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 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.
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"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.
"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.
101
<PAGE>
"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.
"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 $.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.
102
<PAGE>
"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.
"Underwriter" means Anderson & Strudwick Incorporated.
"Units" means units of partnership interest in the Partnership.
103
<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>
<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.......................................................... 96
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
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 30. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the approximate amount of the fees
and expenses (other than sales commissions) payable by the Registrant in
connection with the issuance and distribution of the Common Shares.
Securities and Exchange Commission, registration fee.............. $ 3,050
NASD filing fee................................................... 1,507
Printing and mailing.............................................. 20,000
Accountant's fees and expenses.................................... 40,000
Nasdaq National Market listing fee................................ 17,554
Counsel fees and expenses......................................... 125,000
Miscellaneous..................................................... 17,889
--------
Total......................................................... $225,000
=======
Item 31. Sales to Special Parties
None.
Item 32. Recent Sales of Unregistered Securities
None.
Item 33. Indemnification of Directors and Officers
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 or she 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.
II-1
<PAGE>
The Company has not purchased director and officer liability insurance
for the purpose of providing a source of funds to pay any indemnification
described above.
The Underwriting Agreement contains certain provisions pursuant to
which certain officers, directors and controlling persons may be entitled to be
indemnified by the underwriter named therein.
Item 34. Treatment of Proceeds from Shares Being Registered
None.
Item 35. Financial Statements and Exhibits
INDEX TO FINANCIAL STATEMENTS
HUMPHREY HOSPITALITY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995 F-4
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 F-6
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS
OF SEPTEMBER 30, 1996 F-8
INDEPENDENT AUDITORS' REPORT F-11
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1995
AND SEPTEMBER 30, 1996 (UNAUDITED) F-12
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-13
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-14
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-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-18
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION F-32
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION F-34
II-2
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
INDEPENDENT AUDITORS' REPORT F-35
BALANCE SHEETS AS OF DECEMBER 31, 1994 AND 1995 AND SEPTEMBER
30, 1996 (UNAUDITED) F-36
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-37
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-38
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-39
NOTES TO FINANCIAL STATEMENTS F-40
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
INDEPENDENT AUDITORS' REPORT F-44
COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1992 AND 1993
AND NOVEMBER 28, 1994 F-45
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-46
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-47
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-48
NOTES TO COMBINED FINANCIAL STATEMENTS F-49
ACQUISITION HOTEL
DAYS INN - FARMVILLE
INDEPENDENT AUDITORS' REPORT F-60
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-61
II-3
<PAGE>
NOTE TO HISTORICAL SUMMARIES OF GROSS REVENUE AND
DIRECT OPERATING EXPENSES F-62
FARMVILLE LODGING ASSOCIATES, LLC
INDEPENDENT AUDITORS' REPORT F-63
BALANCE SHEETS AS OF DECEMBER 31, 1994 AND JULY 20, 1995
(DATE OF SALE) F-64
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-65
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-66
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-67
NOTES TO FINANCIAL STATEMENTS F-68
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION F-71
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION F-73
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibits
1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-11 (Registration No. 33-83658)).
*3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-11 (Registration No.
33-83658)).
*4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-11 (Registration
No. 33-83658)).
5.1 Form of Opinion of Hunton & Williams.
**8.1 Form of Opinion of Hunton & Williams as to Tax Matters.
*10.1 First Amended and Restated Agreement of Limited Partnership of
Humphrey Hospitality Limited Partnership (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-11
(Registration No. 33-93346)).
*10.2 Second Amended and Restated Agreement of Limited Partnership of
Solomons Beacon Inn Limited Partnership (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-11
(Registration No. 33-93346)).
*10.3 Agreement of Purchase and Sale dated November 29, 1994 between
Dahlgren Lodging Associates Limited Partnership and Humphrey
Hospitality Limited Partnership for the Comfort Inn - Dahlgren,
Virginia (incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.4 Agreement of Purchase and Sale dated November 29, 1994 between Dublin
Lodging Associates Limited Partnership and Humphrey Hospitality
Limited Partnership for the Comfort Inn - Dublin, Virginia
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.5 Agreement of Purchase and Sale dated November 29, 1994, between
Elizabethton Lodging Associates Limited Partnership and Humphrey
Hospitality Limited Partnership for the Comfort Inn - Elizabethton,
Tennessee (incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.6 Agreement of Purchase and Sale dated November 29, 1994 between
Farmville Motor Inn Limited Partnership and Humphrey Hospitality
Limited Partnership for the Comfort Inn - Farmville, Virginia
(incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.7 Agreement of Purchase and Sale dated November 29, 1994 between
Morgantown Lodging Associates Limited Partnership and Humphrey
Hospitality Limited Partnership for the Comfort Inn - Morgantown, West
Virginia (incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.8 Agreement of Purchase and Sale dated November 29, 1994 between
Princeton Inn Limited Partnership and Humphrey Hospitality Limited
Partnership for the Comfort Inn - Princeton, West Virginia
(incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.9 Agreement of Purchase and Sale dated November 29, 1994 between
Wytheville Motor Inn Limited Partnership and Humphrey Hospitality
Limited Partnership for the Best Western - Wytheville, Virginia
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.10 Agreement of Purchase and Sale dated June 8, 1995 between Farmville
Lodging Associates, LLC, and Humphrey Hospitality Limited Partnership
for the Days Inn - Farmville, Virginia (incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on Form S-11
(Registration No. 33- 93346)).
*10.11 Percentage Lease Agreement dated November 29, 1994 between Humphrey
Hospitality Limited Partnership and Humphrey Hospitality Management,
Inc. relating to the Comfort Inn - Dahlgren, Virginia
II-5
<PAGE>
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.12 Percentage Lease Agreement dated November 29, 1994 between Humphrey
Hospitality Limited Partnership and Humphrey Hospitality Management,
Inc. relating to the Comfort Inn - Dublin, Virginia (incorporated by
reference to Exhibit 10.12 to the Company's Registration Statement on
Form S-11 (Registration No. 33-93346)).
*10.13 Percentage Lease Agreement dated November 29, 1994 between Humphrey
Hospitality Limited Partnership and Humphrey Hospitality Management,
Inc. relating to the Comfort Inn - Elizabethton, Tennessee
(incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.14 Percentage Lease Agreement dated November 29, 1994 between Humphrey
Hospitality Limited Partnership and Humphrey Hospitality Management,
Inc. relating to the Comfort Inn - Farmville, Virginia (incorporated
by reference to Exhibit 10.14 to the Company's Registration Statement
on Form S-11 (Registration No. 33-93346)).
*10.15 Percentage Lease Agreement dated November 29, 1994 between Humphrey
Hospitality Limited Partnership and Humphrey Hospitality Management,
Inc. relating to the Comfort Inn - Morgantown, West Virginia
(incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.16 Percentage Lease Agreement dated November 29, 1994 between Humphrey
Hospitality Limited Partnership and Humphrey Hospitality Management,
Inc. relating to the Comfort Inn - Princeton, West Virginia
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.17 Percentage Lease Agreement dated November 29, 1994 between Humphrey
Hospitality Limited Partnership and Humphrey Hospitality Management,
Inc. relating to the Best Western - Wytheville, Virginia (incorporated
by reference to Exhibit 10.17 to the Company's Registration Statement
on Form S-11 (Registration No. 33-93346)).
*10.18 Form of Percentage Lease Agreement between Humphrey Hospitality
Limited Partnership and Humphrey Hospitality Management, Inc. relating
to the Days Inn - Farmville, Virginia (incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on Form S-11
(Registration No. 33-93346)).
*10.19 Percentage Lease Agreement dated November 29, 1994 between Solomons
Beacon Inn Limited Partnership and Humphrey Hospitality Management,
Inc. relating to the Comfort Inn - Beacon Marina, Solomons, Maryland
(incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
*10.20 Option Agreement (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-11 (Registration No.
33-83658)).
*10.21 Non-Competition Agreement (incorporated by reference to Exhibit 10.7
to the Company's Registration Statement on Form S-11 (Registration No.
33-83658))
10.22 Services Agreement, dated as of January 1, 1996, between the Company
and the Lessee.
10.23 First Amendment to Services Agreement, dated as of October 1, 1996,
between the Company and the Lessee.
10.24 Construction Loan Agreement dated April 1, 1996, by and among the
Partnership, and Mercantile.
10.25 Development Services Agreement, dated as of April 4, 1996, between the
Partnership and Humphrey Development.
10.26 First Amendment to Development Services Agreement dated November 6,
1996 between the Partnership and Humphrey Development.
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1).
23.2 Consent of Reznick Fedder & Silverman.
- --------------------
*Previously filed.
**To be filed by amendment.
II-6
<PAGE>
Item 36. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referred to in Item 33 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question as to whether such indemnification by it is against public policy
as expressed in the Act, and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Silver
Spring, State of Maryland, on the 11th day of November, 1996.
Humphrey Hospitality Trust, Inc.,
a Virginia corporation
(Registrant)
By /s/ James I. Humphrey, Jr.
James I. Humphrey, Jr.
Chairman of the Board and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 11th day
of November, 1996 in the capacities indicated. Each of the directors and/or
officers of Humphrey Hospitality Trust, Inc. whose signature appears below
hereby appoints James I. Humphrey, Jr., as his or her attorney-in-fact to sign
in his or her name and behalf, in any and all capacities stated below and to
file with the Commission, any and all amendments, including post-effective
amendments to this Registration Statement, making such changes in the
Registration Statement as appropriate, and generally to do all such things in
their behalf in their capacities as officers and directors to enable Humphrey
Hospitality Trust, Inc. to comply with the provisions of the Securities Act of
1933, and all requirements of the Securities and Exchange Commission.
Signature Title
/s/ James I. Humphrey, Jr. Chairman of the Board of Directors, President
James I. Humphrey, Jr and Director (Principal Executive Officer,
Financial and Accounting Officer)
/s/ Charles A Mills, III Treasurer, Vice President and Director
Charles A. Mills, III
/s/ Margaret Allen Director
Margaret Allen
/s/ Andrew A. Mayer Director
Andrew A. Mayer
/s/ Leah T. Robinson Director
Leah T. Robinson
/s/ George R. Whittemore Director
George R. Whittemore
/s/ Jeffrey M. Zwerdling Director
Jeffrey M. Zwerdling
II-8
EXHIBIT 1.1
HUMPHREY HOSPITALITY TRUST, INC.
(a Virginia corporation)
1,000,000 Shares of Common Stock
($8.25 per share)
UNDERWRITING AGREEMENT
____________, 1996
Anderson & Strudwick, Incorporated
1108 E. Main Street
Richmond, Virginia 23219
Ladies and Gentlemen:
The undersigned, Humphrey Hospitality Trust, Inc., a Virginia
corporation (the "Company") and Humphrey Hospitality Limited Partnership, a
Virginia limited partnership (the "Partnership"), hereby confirm their agreement
with you as follows:
1. Introduction. This Agreement sets forth the understandings and
agreements among the Company and you whereby, subject to the terms and
conditions herein contained, the Company will sell to you as provided in Section
3.(a), at a price of [$7.6828125] per share, 1,000,000 shares (the "Initial
Shares") of common stock, par value $0.01 (the "Common Stock"), to be issued by
the Company. In addition, as provided in Section 3.(b), the Company will give
you the option to purchase up to an additional 150,000 shares of Common Stock
(the "Option Shares", and together with the Initial Shares, the "Shares") at the
same price as the Initial Shares. Capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to them in the
Prospectus prepared by the Company and dated ___________, 1996 (the
"Prospectus"). It is understand that you intend to make a public offering of the
Shares (the "Offering") as soon as you deem it advisable to do so after the
Registration Statement has become effective. The Shares are to be initially
offered to the public at the initial public offering price set forth in the
Prospectus. You may from time to time thereafter change the public offering
price and other selling terms.
The Company is a real estate investment trust under the
Internal Revenue Code of 1986, as amended. The Company currently holds a 78.91%
partnership interest in the
1
<PAGE>
Partnership and acts as its sole general partner. The remaining 21.09%
partnership interest is owned by James I. Humphrey ("Mr. Humphrey"), Humphrey
Associates, Inc. ("Humphrey Associates") and Farmville Lodging Associates,
L.L.C. (the "LLC") (Mr. Humphrey, Humphrey Associates and the LLC together,
"Humphrey"). The Partnership owns eight hotels (the "Partnership Hotels") and a
99% interest in Solomons Beacon Inn Limited Partnership (the "Subsidiary
Partnership"), which owns a ninth hotel (the "Solomons Hotel" and collectively
with the eight Partnership Hotels and the "New Hotel" (as defined below), the
"Hotels"). The Partnership is also developing a tenth hotel to be located in
Dover, Delaware (the "New Hotel"). The other 1% interest in the Subsidiary
Partnership is owned by the Company. The Partnership and the Subsidiary
Partnership lease the Hotels to Humphrey Hospitality Management, Inc. (the
"Lessee") pursuant to leases (the "Leases").
On the Initial Closing Date (as hereinafter defined), the
Company will contribute all of the net proceeds from the Offering to the
Partnership in exchange for 1,000,000 units (the "Units") (assuming no exercise
of the Option Shares) of limited partnership in the Partnership. The Partnership
will use the net proceeds as follows: (i) to repay approximately $660,000 of
outstanding indebtedness secured by six of the Hotels and the New Hotel, (ii) to
pay the remaining costs associated with the development of the New Hotel, and
(iii) to establish a fund for future acquisition and development. As used
herein, the term "Transactions" shall mean the occurrence of all events
described in this paragraph and the other transactions described in the section
of the Prospectus captioned "USE OF PROCEEDS."
2. Representations and Warranties of the Company and the Partnership.
The Company and the Partnership jointly and severally
represent and warrant to and agree with you that:
(a) Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-11 (File No. 33-________) (as
defined below, the "Registration Statement") conforming to the requirements of
the Securities Act of 1933, as amended (the "1933 Act"), and the applicable
rules and regulations (the "Rules and Regulations") of the Commission. Such
amendments to such Registration Statement as may have been required prior to the
date hereof have been filed with the Commission, and such amendments have been
similarly prepared. Copies of the Registration Statement, any and all amendments
thereto prepared and filed with the Commission, and each related Preliminary
Prospectus, and the exhibits, financial statements and schedules, as finally
amended and revised, have been delivered to you for review.
The term "Registration Statement" as used in this Agreement
shall mean the Company's Registration Statement on Form S-11, including the
Prospectus, any documents
2
<PAGE>
incorporated by reference therein, and all financial schedules and exhibits
thereto, as amended on the date that the Registration Statement becomes
effective. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares in the form in which it was filed with the
Commission pursuant to Rule 424(b) of the 1933 Act or, if no filing pursuant to
Rule 424(b) of the 1993 Act is required, shall mean the form of the final
prospectus included in the Registration Statement when the Registration
Statement becomes effective. The term "Preliminary Prospectus" shall mean any
prospectus included in the Registration Statement before it becomes effective.
The terms "effective date" and "effective" refer to the date the Commission
declares the Registration Statement effective pursuant to Section 8 of the 1933
Act.
(b) Adequacy of Disclosure. Each Preliminary Prospectus, at
the time of filing thereof, conformed in all material respects to the
requirements of the 1933 Act and the Rules and Regulations, and did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any statements
or omissions made in reliance upon and in conformity with information furnished
in writing to the Company by you expressly for use in the Registration
Statement. When the Registration Statement shall become effective, when the
Prospectus is first filed pursuant to Rule 424(b) of the Rules and Regulations,
when any amendment to the Registration Statement becomes effective, and when any
supplement to the Prospectus is filed with the Commission and on each Closing
Date (as hereinafter defined), (i) the Registration Statement, the Prospectus
and any amendments thereof and supplements thereto will conform in all material
respects with the applicable requirements of the 1933 Act and the Rules and
Regulations, and (ii) neither the Registration Statement, the Prospectus nor any
amendment or supplement thereto will contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by you expressly for use in the Registration Statement.
(c) No Stop Order. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus with respect to
the Shares, and no proceedings for that purpose have been instituted or
threatened by the Commission or the state securities or blue sky authority of
any jurisdiction.
(d) Company: Organization and Qualification. The Company has
been duly incorporated and is validly existing in good standing as a corporation
under the laws of the Commonwealth of Virginia with all requisite corporate
power and authority to enter into this Agreement, to conduct its business as now
conducted and as proposed to be conducted, and to own, lease and operate its
properties, and the properties it proposes to own, lease and operate,
3
<PAGE>
as described in the Registration Statement and Prospectus, and is qualified to
do business and in good standing as a foreign corporation in each other
jurisdiction in which the failure so to qualify could have a material adverse
effect on the Company, the Partnership, the Subsidiary Partnership or any Hotel.
The Company is not in violation of any provision of its articles of
incorporation, bylaws or other governing documents and is not in default under
or in breach of, and does not know of the occurrence of any event that with the
giving of notice or the lapse of time or both would constitute a default under
or breach of, any term or condition of any material agreement or instrument to
which it is a party or by which any of its properties is bound, except as
disclosed in the Registration Statement and Prospectus. No consent, approval,
authorization, or order from any court, governmental agency or body is required
in connection with the execution and delivery of this Agreement by the Company,
the consummation by the Company of the transactions contemplated herein and in
the Registration Statement and Prospectus or the issuance and sale of the
Shares, except such as may be required by the 1933 Act, the Securities Exchange
Act of 1934, as amended (the "1934 Act"), or applicable state securities or blue
sky laws. Except for the Partnership and the Subsidiary Partnership, the Company
does not own or control, directly or indirectly, any corporation, association,
or other entity.
(e) Partnership: Organization and Qualification. The
Partnership has been duly formed and is validly existing as a limited
partnership under the laws of the Commonwealth of Virginia with all requisite
partnership power to conduct its business as now conducted and as proposed to be
conducted, and to own, lease and operate its properties and the properties it
proposes to own, lease and operate, as described in the Registration Statement
and Prospectus, and is qualified to do business and in good standing as a
foreign limited partnership in each other jurisdiction in which the failure so
to qualify could have a material adverse effect on the Company, the Partnership,
the Subsidiary Partnership or any Hotel. The Partnership is not in violation of
any provision of its partnership agreement or other governing documents and is
not in default under or in breach of, and does not know of the occurrence of any
event that with the giving of notice or the lapse of time or both would
constitute a default under or breach of, any term or condition of any material
agreement or instrument to which it is a party or by which any of its properties
is bound, except as disclosed in the Registration Statement and Prospectus. No
consent, approval, authorization or order from any court, governmental agency or
body is required in connection with the execution and delivery of this Agreement
by the Partnership, or the consummation by the Partnership of the transactions
contemplated herein and in the Registration Statement and Prospectus, except
such as may be required by the 1933 Act, the 1934 Act, or applicable state
securities or blue sky laws. The Company is and at each Closing Date will be the
sole general partner of the Partnership, and immediately subsequent to the
Initial Closing Date, will be the holder of ____________ Units, or approximately
84.24% of the Units in the Partnership.
(f) Subsidiary Partnership: Organization and Qualification.
The Subsidiary Partnership has been duly formed and is validly existing as a
limited partnership under the
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laws of the State of Maryland with all requisite partnership power to conduct
its business as now conducted and as proposed to be conducted, and to own, lease
and operate its properties, as described in the Registration Statement and
Prospectus. The Subsidiary Partnership is not in violation of any provision of
its partnership agreement or other governing documents and is not in default
under or in breach of, and does not know of the occurrence of any event that
with the giving of notice or the lapse of time or both would constitute a
default under or breach of, any term or condition of any material agreement or
instrument to which it is a party or by which any of its properties is bound,
except as disclosed in the Registration Statement and Prospectus. The Company is
the sole limited partner of the Subsidiary Partnership and the Partnership is
the sole general partner of the Subsidiary Partnership.
(g) Lessee: Organization and Qualification. The Lessee has
been duly incorporated and is validly existing in good standing as a corporation
under the laws of its state of incorporation with all requisite corporate power
and authority to enter into the Leases, and to conduct its business as now
conducted and as proposed to be conducted, and to own, lease and operate its
properties, as described in the Registration Statement and Prospectus, and is
qualified to do business and in good standing as a foreign corporation in each
other jurisdiction in which the failure so to qualify could have a material
adverse effect on the Lessee. The Lessee is not in violation of any provision of
its articles of incorporation, bylaws, or other governing documents, is not in
default or in breach of, or does not know of the occurrence of any event that
with the giving of notice or the lapse of time or both would constitute a
default under or breach of, any term or condition of any material agreement or
instrument to which it is a party or by which any of its properties is bound,
except as disclosed in the Registration Statement and Prospectus. No consent,
approval, authorization or order from any court, governmental agency or body is
required in connection with the consummation by the Lessee of the transactions
contemplated herein and in the Registration Statement and Prospectus, except
such as may be required by the 1933 Act, the 1934 Act, and applicable state
securities or blue sky laws.
(h) Validity of Shares. The Shares have been duly and validly
authorized by the Company, and upon issuance, will be validly issued, fully paid
and nonassessable, with no personal liability attaching to the ownership
thereof, and will conform to the description thereof contained in the
Prospectus. The preferences, rights and limitations of the Shares are set forth
in the Prospectus under the caption "Description of Capital Stock". There are no
preemptive rights with respect to any of the Shares. No person or entity holds a
right to require or participate in the registration under the 1933 Act of the
Shares pursuant to the Registration Statement; and, except as set forth in the
Prospectus, no person holds a right to require registration under the 1933 Act
of any Common Stock of the Company at any other time. No person or entity has a
right of participation or first refusal with respect to the sale of the Shares
by the Company. The form of certificates evidencing the Shares complies with all
applicable requirements of Virginia law.
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(i) Company Capitalization. The authorized, issued and
outstanding capital stock of the Company is as set forth in the Prospectus under
the caption "Description of Capital Stock". All of the issued and outstanding
shares of Common Stock of the Company have been duly authorized, validly issued,
fully paid and are non-assessable, and the holders of such shares have no
preemptive rights. Except as disclosed in the Prospectus, there is no
outstanding option, warrant or other right calling for the issuance of, and no
commitment, plan or arrangement to issue, any shares of capital stock of the
Company or any security convertible into or exchangeable for capital stock of
the Company.
(j) Validity of Units. The Units to be issued to the Company
in connection with the Transactions have been duly and validly authorized by the
Partnership, and upon issuance, will be validly issued. Immediately after the
Initial Closing Date, ________ Units will be issued and outstanding and held by
partners of the Partnership other than the Company. The Units have been and will
be issued, offered and sold at or prior to each Closing Date in compliance with
all applicable laws (including, without limitation, federal and state securities
laws).
(k) Full Power: Company. The Company has full legal right,
power, and authority to enter into this Agreement to issue and deliver the
Shares as provided herein and to consummate the transactions contemplated
herein.
(l) Disclosed Agreements. All agreements between or among the
Company, the Partnership, the Subsidiary Partnership and the Lessee,
respectively, and third parties expressly referenced in the Prospectus, are
legal, valid, and binding obligations of the Company, the Partnership, the
Subsidiary Partnership and the Lessee, respectively, enforceable in accordance
with their respective terms, except to the extent enforceability may be limited
by (i) bankruptcy, insolvency, moratorium, liquidation, reorganization, or
similar laws affecting creditors' rights generally, regardless of whether such
enforceability is considered in equity or at law, (ii) general equity principles
and (iii) limitations imposed by federal or state securities laws or the public
policy underlying such laws regarding the enforceability of indemnification or
contribution provisions.
(m) Consents. Each consent, approval, authorization, order,
license, certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares, the execution, delivery and performance of this
Agreement and the consummation by the Company and the Partnership of the
transactions contemplated hereby has been made or obtained and is in full force
and effect.
(n) Litigation. There is not pending or, to the knowledge of
the Company or the Partnership, threatened or contemplated, any action, suit,
proceeding, inquiry, or investigation before or by any court or any federal,
state, or local governmental authority or
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agency to which the Company, the Partnership, the Subsidiary Partnership or the
Lessee or any of their respective officers or directors are or may be a party,
or to which any of the properties or rights of any such entity or person may be
subject, that is not described in the Registration Statement and Prospectus and
(i) that might result in any material adverse change in the condition (financial
or otherwise) or business of the Company, the Partnership or the Lessee; or (ii)
that might materially adversely affect any of the material properties of any
such entity; or (iii) that might adversely affect the consummation of the
transactions contemplated by this Agreement, or any of the Transactions, nor, to
the knowledge of the Company or the Partnership, is there any meritorious basis
therefor.
(o) Financial Statements. The financial statements of the
Company and the Combined Selling Partnerships-Initial Hotels together with
related schedules and notes included in the Registration Statement and the
Prospectus present fairly the financial position of the Company and the Combined
Selling Partnerships-Initial Hotels, respectively, as of the dates indicated and
the results of operations and cash flows for the periods specified. Such
financial statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis during the periods involved.
The financial statement schedules included in the Registration Statement and the
amounts in the Prospectus under the captions "Prospectus Summary-Summary
Financial Data" and "Selected Financial Information" fairly present the
information shown therein and have been compiled on a basis consistent with the
financial statements included in the Registration Statement and the Prospectus.
No other financial statements or schedules are required by Form S-11 or
otherwise to be included in the Registration Statement, the Prospectus or any
Preliminary Prospectus. The unaudited pro forma combined financial information
(including the related notes) included in the Prospectus or any Preliminary
Prospectus complies as to form in all material respects to the applicable
accounting requirements of the 1933 Act and the Rules and Regulations, and
management of the Company believes that the assumptions underlying the pro forma
adjustments are reasonable. Such pro forma adjustments have been properly
applied to the historical amounts in the compilation of the information and such
information fairly presents with respect to the Company and the Combined Selling
Partnerships-Initial Hotels the financial position, results of operations and
other information purported to be shown therein at the respective dates and for
the respective periods specified.
(p) Independent Accountants. Reznick Fedder & Silverman, the
accountants that have expressed an opinion on the financial statements that are
included in the Registration Statement and Prospectus are, and were during the
period covered by their Reports included in the Registration Statements and
Prospectus, with respect to the Company, independent public accountants as
required by the 1933 Act and the Rules and Regulations.
(q) Disclosed Liabilities. None of the Company, the
Partnership, the Subsidiary Partnership or the Lessee has sustained, since
December 31, 1995 any material loss or interference with its business from fire,
explosion, flood, hurricane, accident, or other
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<PAGE>
calamity, whether or not covered by insurance, or from any labor dispute or
arbitrators' or court or governmental action, order, or decree, otherwise than
as set forth or contemplated in the Prospectus; and, since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, and except as otherwise stated in the Registration Statement and
Prospectus, there has not been (i) any material change in the capital stock or
partnership interests or membership interests, as applicable, long-term debt,
obligations under capital leases, or short-term borrowings of the Company, the
Partnership, the Subsidiary Partnership or the Lessee, (ii) any material adverse
change, or any development that could be reasonably be seen as involving a
prospective material adverse change in or affecting the business, prospects,
properties, assets, results of operations or condition (financial or other) of
the Company, the Partnership, the Subsidiary Partnership or the Lessee, (iii)
any liability or obligation, direct or contingent, incurred or undertaken by the
Company, the Partnership, the Subsidiary Partnership or the Lessee that is
material to the business or condition (financial or other) of such entity,
except for liabilities or obligations incurred in the ordinary course of
business, (iv) any declaration or payment of any dividend or distribution of any
kind on or with respect to the capital stock of the Company or the Lessee, or
with respect to the partnership interests of the Partnership or the Subsidiary
Partnership, respectively or (v) any transaction that is material to the
Company, the Partnership, the Subsidiary Partnership or the Lessee, except
transactions in the ordinary course of business or as otherwise disclosed in the
Registration Statement and the Prospectus.
(r) Hotels. The Partnership and the Subsidiary Partnership
have good and marketable title in fee simple to all real property owned by them,
including the Hotels, free and clear of all liens, encumbrances, claims,
security interests, restrictions, and defects except such as are described in
the Prospectus and the policies of title insurance previously provided to you.
The Company does not own or lease any real property. Except as disclosed in the
Prospectus, no person other than the Company has an option or right of first
refusal to purchase all or part of any Hotel or any interest therein. Each of
the Hotels complies with all applicable codes, laws, and regulations (including,
without limitation, building and zoning codes, laws and regulations, and laws
relating to access to Hotels), except if and to the extent disclosed in the
Prospectus and except for such failures to comply that would not individually or
in the aggregate have a material adverse impact on the condition (financial or
otherwise) or on the earnings, assets, business affairs, or business prospects
of such Hotel, the Partnership, the Subsidiary Partnership or the Company. None
of the Company, the Partnership or the Subsidiary Partnership has knowledge of
any pending or threatened condemnation proceedings, zoning change, or other
proceeding or action that will in any manner effect the size of, use of,
improvements on, construction on, or access to the Hotels, except such
proceedings or actions that would not have a material adverse effect on the
condition (financial or otherwise) or on the earnings, assets, business affairs,
or business prospects of or with respect to such Hotel, the Partnership, the
Subsidiary Partnership or the Company.
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<PAGE>
(s) Required Licenses and Permits. Except as disclosed in the
Prospectus, the Company, the Partnership, the Subsidiary Partnership or the
Lessee owns, possesses, has obtained or has commitments to obtain, and has made
available for your review, all material permits, licenses, franchises
(including, with respect to the Lessee, the franchises relating to the Hotels),
certificates, consents, orders, approvals, and other authorizations of
governmental or regulatory authorities as are necessary to own or lease, as the
case may be, and to operate their respective properties and to carry on their
respective businesses as presently conducted, or as contemplated in the
Prospectus to be conducted (the "Permits"), and none of the Company, the
Partnership, the Subsidiary Partnership or the Lessee has received any notice of
proceedings relating to revocation or modification of any such Permits.
(t) Trademarks, etc. Each of the Company, the Partnership, the
Subsidiary Partnership and the Lessee owns or possesses adequate licenses or
other rights to use all patents, trademarks, service marks, trade names,
copyrights, software and design licenses, trade secrets, manufacturing
processes, other intangible property rights and know-how (collectively
"Intangibles") necessary to entitle each of the Company, the Partnership, the
Subsidiary Partnership and the Lessee to conduct their respective businesses
now, and as proposed to be, conducted or operated as described in the
Prospectus, and none of the Company, the Partnership, the Subsidiary Partnership
and the Lessee has received notice of infringement or of conflict with (or knows
of such infringement of or conflict with) asserted rights of others with respect
to any intangible that could materially and adversely affect the business,
prospects, properties, assets, results of operation, or condition (financial or
otherwise) of the Company, the Partnership, the Subsidiary Partnership or the
Lessee.
(u) Internal Accounting Measures. To the knowledge of the
Company and the Partnership, the Company's, the Partnership's, the Subsidiary
Partnership's and the Lessee's system of internal accounting controls taken as a
whole is sufficient to meet the broad objectives of internal accounting control
insofar as those objectives pertain to the prevention or detection of errors or
irregularities in amounts that would be material in relation to the Company's,
the Partnership's, the Subsidiary Partnership's or the Lessee's financial
statements; and, to the knowledge of the Company and the Partnership, none of
the Company, the Partnership, the Subsidiary Partnership or the Lessee, or any
employee or agent thereof, has made any payment of funds of the Company, the
Partnership, the Subsidiary Partnership or the Lessee, as the case may be, or
received or retained any funds and no funds of the Company, the Partnership, the
Subsidiary Partnership or the Lessee, as the case may be, have been set aside to
be used for any payment, in each case in violation of any law, rule, or
regulation.
(v) Taxes. Each of the Company, the Partnership (to the extent
not consolidated with the Company), the Subsidiary Partnership and the Lessee
has timely filed all required federal and state tax returns, has paid all taxes
that have become due and have no tax deficiency asserted against any such
entity, nor does any such entity know of any tax
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deficiency that is likely to be asserted against any such entity that if
determined adversely to any such entity, would, either individually or in the
aggregate, have a material adverse effect on the business, prospects,
properties, assets, results of operations, or condition (financial or otherwise)
of any such entity, respectively. All tax liabilities are adequately provided
for on the respective books of such entities.
(w) Compliance with Instruments. The execution, delivery and
performance of this Agreement, the compliance with the terms and provisions
hereof and the consummation of the transactions contemplated herein and in the
Registration Statement and Prospectus by the Company, the Partnership, the
Subsidiary Partnership or the Lessee do not and will not violate or constitute a
breach of, or default under (i) the articles of incorporation, charter, bylaws,
certificate of limited partnership, partnership agreement, articles of
organization or operating agreement, as the case may be, of the Company, the
Partnership, the Subsidiary Partnership or the Lessee; (ii) any of the terms,
provisions, or conditions of any material instrument, agreement, or indenture to
which the Company, the Partnership, the Subsidiary Partnership or the Lessee is
a party or by which they are bound or by which their respective businesses,
assets, investments, properties, or any Hotel may be affected; or (iii) any
order, statute, rule, or regulation applicable to the Company, the Partnership,
the Subsidiary Partnership or the Lessee, or any of their respective businesses,
investments, assets, properties, or Hotel, of any court or any federal, state or
local governmental authority or agency having jurisdiction over the Company, the
Partnership, the Subsidiary Partnership or the Lessee or any of their respective
businesses, investments, properties, assets, or Hotels; and do not and will not
result in the creation or imposition of any lien, charge, claim, or encumbrance
upon any property or asset of any of the foregoing.
(x) Insurance. The Company, the Partnership, the Subsidiary
Partnership and the Lessee maintain insurance (issued by insurers of recognized
financial responsibility) of the types and in the amounts generally deemed
adequate for their respective businesses and, to the knowledge of the Company
and the Partnership, consistent with insurance coverage maintained by similar
companies and similar businesses, including, but not limited to, insurance
covering real and personal property owned or leased by the Company, the
Partnership, the Subsidiary Partnership and the Lessee against theft, damage,
destruction, acts of vandalism, and all other risks customarily insured against,
all of which insurance is in full force and effect.
(y) Work Force. To the knowledge of the Company and the
Partnership, no general labor problem exist or is imminent with the employees of
the Lessee.
(z) Stock Restriction. The Company has obtained the agreement
of the members of the Board of Directors of the Company that, for a period of
ninety (90) days from the date hereof, they will not, without your prior written
consent, directly or indirectly, sell, offer to sell, grant any option for the
sale of, or otherwise dispose of any shares of Common
10
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Stock or securities convertible into Common Stock held by such persons
(including, without limitation, shares of Common Stock deemed to be beneficially
owned by such person in accordance with the Rules and Regulations promulgated
under the 1934 Act).
(aa) Securities Matters. Each of the Company, the Partnership
and their officers, directors, or affiliates have not taken and will not take,
directly or indirectly, any action designed to, or that might reasonably be
expected to, cause or result in or constitute the stabilization or manipulation
of any security of the Company or to facilitate the sale or resale of the
Shares.
(bb) Stock Registration. The Common Stock is registered
pursuant to Section 12(g) of the 1934 Act and is quoted on the National Market
of the National Association of Securities Dealers Automated Quotation System
(the "Nasdaq National Market").
(cc) Environmental Status. Except as otherwise disclosed in
the Prospectus, none of the Company, the Partnership, the Subsidiary Partnership
or the Lessee has authorized or conducted or has knowledge of the generation,
transportation, storage, presence, use, treatment, disposal, release, or other
handling of any hazardous substance, hazardous waste, hazardous material,
hazardous constituent, toxic substance, pollutant, contaminant, asbestos, radon,
polychlorinated biphenyls ("PCBs"), petroleum product or waste (including crude
oil or any fraction thereof), natural gas, liquified gas, synthetic gas, or
other material defined, regulated, controlled, or potentially subject to any
remediation requirement under any environmental law (collectively, "Hazardous
Materials"), on, in, under, or affecting any real property currently leased or
owned by any means controlled by the Company, the Partnership or the Subsidiary
Partnership, including the Hotels (the "Real Property") except as in material
compliance with applicable laws; to the knowledge of the Company, the
Partnership or the Subsidiary Partnership, the Real Property and the Company's,
the Partnership's, the Subsidiary Partnership's and the Lessee's operations with
respect to the Real Property are in compliance with all federal, state, and
local laws, ordinances, rules, regulations, and other governmental requirements
relating to pollution, control of chemicals, management of waste, discharges of
materials into the environment, health, safety, natural resources, and the
environment (collectively, "Environmental Laws"), and the Company, the
Partnership, the Subsidiary Partnership and the Lessee have, and are in
compliance with, all licenses, permits, registrations, and government
authorizations necessary to operate under all applicable Environmental Laws.
Except as otherwise disclosed in the Prospectus, none of the Company, the
Partnership, the Subsidiary Partnership and the Lessee has received any written
or oral notice from any governmental entity or any other person and there is no
pending or threatened claim, litigation, or any administrative agency proceeding
that: alleges a violation of any Environmental Laws by the Company, the
Partnership, the Subsidiary Partnership or the Lessee; alleges that the Company,
the Partnership, the Subsidiary Partnership or the Lessee is a liable party or a
potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. ss.9601, et seq., or any state
superfund
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law; has resulted in or could result in the attachment of an environmental lien
on any of the Real Property; or alleges that the Company, the Partnership, the
Subsidiary Partnership or the Lessee is liable for any contamination of the
environment, contamination of the Real Property, damage to natural resources,
property damage, or personal injury based on their activities or the activities
of their predecessors or third parties (whether at the Real Property or
elsewhere) involving Hazardous Materials, whether arising under the
Environmental Laws, common law principles, or other legal standards.
(dd) Real Estate Investment Trust. The Company has been
organized in conformity with the requirements for qualification as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"), and the Company's method of operation (as presently conducted and
proposed to be conducted immediately after Closing) enables it to meet the
requirements for qualification and taxation as a real estate investment trust
under the Code. Each of the Partnership and the Subsidiary Partnership is and
immediately after Closing will be, treated as a partnership for federal income
tax purposes and not as a corporation or an association taxable as a
corporation.
(ee) Investment Company Act. None of the Company, the
Partnership, the Subsidiary Partnership or the Lessee will become as a result of
the consummation of the Transactions, or will conduct their respective
businesses in a manner in which any such entity would become, an "investment
company" or an entity that "controls" or is "controlled by" an "investment
company," as such terms are defined under the Investment Company Act of 1940, as
amended (the "1940 Act").
(ff) Receipt of Commissions and Fees. Except as stated in or
contemplated by the Prospectus, neither the Company nor any affiliate of the
Company has received or is entitled to receive, directly or indirectly, any
compensation or other benefit, including, but not limited to, any finder's fee,
acquisition fee, selection fee, nonrecurring management fee or other fee or
commission, relating to the investments of the Company.
(gg) Payment of Commissions and Fees. Except as stated in or
contemplated by the Prospectus, neither the Company nor any affiliate of the
Company has paid or awarded, nor will any such person pay or award, directly or
indirectly, any commission or other compensation to any person engaged to render
investment advice to a potential purchaser of Shares as an inducement to advise
the purchase of Shares.
3. Sales of Shares.
(a) Initial Shares. The Company hereby agrees to sell to you,
and on the basis of the representations and warranties herein contained but
subject to the terms and conditions herein set forth, you agree to purchase from
the Company, at a price per share of [$7.6828125], the Initial Shares. Until
______________, the Company will not sell or agree
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<PAGE>
to sell any shares of its capital stock otherwise than through you. Subject to
your commitment to purchase the Shares, nothing in this Agreement shall prevent
you from entering into an agency agreement, underwriting agreement, or other
similar agreement governing the offer and sale of securities with any other
issuer of securities, and nothing contained herein shall be construed in any way
as precluding or restricting your right to sell or offer for sale securities
issued by any other person, including securities similar to, or competing with,
the Shares.
(b) Option Shares. The Company hereby grants an option to you
to purchase the Option Shares at the price per share set forth in Section 3.(a).
The option granted hereby may be exercised in whole or in part at any time upon
written notice from you to the Company, given within thirty (30) days after the
effective date of the Registration Statement. Such notice will set forth the
number of Option Shares as to which you are exercising the option, the names and
denominations in which the Option Shares are to be registered and the time and
date at which such Option Shares are to be delivered. The time and date at which
certificates for Option Shares are to be delivered shall be determined by you
but shall not be earlier than two nor later than ten full business days after
the exercise of the option, nor in any event prior to the Initial Closing Date
(as defined in Section 3.(d) below) (the "Option Closing Date). The option with
respect to the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Shares by you. You may cancel such option at
any time prior to its expiration by giving written notices of such cancellation
to the Company.
(c) Obligation to Purchase Shares. Your obligation to purchase
any of the Shares is subject to receipt by you of written advice from the
Commission that the Registration Statement is effective, is subject to the
Shares being qualified for offering under applicable laws in the states as may
be reasonably designated by you, is subject to the absence of any prohibitory
action by any governmental body, agency, or official, and is subject to the
terms and conditions contained in this Agreement and in the Registration
Statement.
(d) Closing Date. As and when the closing of the purchase of
the Initial Shares is effected, on such date (the "Initial Closing Date" and
together with the Option Closing Date, each a "Closing Date") and at such time
and place as determined by you (which determination shall be subject to the
satisfaction on such date of the conditions contained herein), you shall pay to
the Company, by wire transfer of immediately available funds on the Initial
Closing Date, the purchase price for the Initial Shares. To the extent your
option to purchase the Option Shares is exercised as provided in Section 3.(b),
you shall pay to the Company on the Option Closing Date, by wire transfer of
immediately available funds, the purchase price for the Option Shares.
(e) Finder's Fees. Except as set forth in the Registration
Statement or Prospectus, neither you nor the Company, directly or indirectly,
shall pay or award any finder's fee, commission, or other compensation to any
person engaged by a potential
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purchaser for investment advice as an inducement to such advisor to advise the
purchase of Shares or for any other purpose.
(f) Delivery of Share Certificates. Delivery of certificates
in definitive form representing the Initial Shares shall be made at the offices
of Newbridge Securities, Inc. or at such other place as shall be agreed upon by
the Company and you, on ____________, 1996 (the "Initial Date of Delivery"). The
certificates representing the Initial Shares shall be in such denominations and
registered in such names as you may request in writing at least three full
business days before the Initial Date of Delivery. The certificates representing
the Initial Shares will be made available for examination and packaging at the
offices of Newbridge Securities, Inc. or at such other place as shall be agreed
upon by the Company and you, not later than at least two (2) full business days
prior to the Initial Date of Delivery. The certificates representing the Option
Shares shall be delivered in the same manner as with respect to the Initial
Shares, and the date of delivery for the certificates shall be ______ full
business days prior to the Option Closing Date.
4. Covenants.
(a) Covenants of the Company and the Partnership. The Company
and the Partnership covenant with you as follows:
(i) Notices. The Company and the Partnership
immediately will notify you, and confirm such notice in writing, (A) of any fact
that would make inaccurate any representation or warranty by the Company and the
Partnership, and (B) of any change in facts on which your obligation to perform
under this Agreement is dependent.
(ii) Effectiveness of Registration Statement. The
Company will use its best efforts to cause the Registration Statement to become
effective (if not yet effective at the date and time this Agreement is executed
and delivered by the parties hereto). If the Company elects to rely upon Rule
430A of the Rules and Regulations or the filing of the Prospectus is otherwise
required under Rule 424(b) of the Rules and Regulations, and subject to the
provisions of Section 4.(a)(iii) of this Agreement, the Company will comply with
the requirements of Rule 430A and will file the Prospectus, properly completed,
pursuant to the applicable provisions of Rule 424(b) within the time prescribed.
The Company will notify you immediately, and confirm the notice in writing, (i)
when the Registration Statement, or any post-effective amendment to the
Registration Statement, shall have become effective, or any supplement to the
Prospectus, or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission to
amend the Registration Statement or amend or supplement the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any Preliminary Prospectus or the suspension
of the qualification of the Shares for offering or
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<PAGE>
sale in any jurisdiction, or of the institution or threatening of any proceeding
for any such purposes. The Company will use all reasonable efforts to prevent
the issuance of any such stop order or of any order preventing or suspending
such use and, if any such order is issued, to obtain the withdrawal thereof at
the earliest possible moment.
(iii) Amendments to Registration Statement and
Prospectus. The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement (i) to the Prospectus, if
the Company has not elected to rely upon Rule 430A, or (ii) if the Company has
elected to rely upon Rule 430A, to either the Prospectus included in the
Registration Statement at the time it becomes effective or to the Prospectus
filed in accordance with Rule 424(b), in either case if you shall not have
previously been advised and furnished a copy thereof a reasonable time prior to
the proposed filing, or if you or your counsel shall object to such amendment or
supplement.
(iv) Delivery of Registration Statement. The Company
has delivered to you or will deliver to you, without expense to you, at such
locations as you shall request, as soon as the Registration Statement or any
amended Registration Statement is available, such number of signed copies of the
Registration Statement as originally filed and of amended Registration
Statements, if any, copies of all exhibits and documents filed therewith, and
signed copies of all consents and certificates of experts, as you may reasonably
request.
(v) Delivery of Prospectus. The Company will deliver
to you at its expense, from time to time, as many copies of each Preliminary
Prospectus as you may reasonably request, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
deliver to you at its expense, as soon as the Registration Statement shall have
become effective and thereafter from time to time as requested during the period
when the Prospectus is required to be delivered under the 1933 Act, such number
of copies of the Prospectus (as supplemented or amended) as you may reasonably
request. The Company will comply to the best of its ability with the 1933 Act
and the Rules and Regulations so as to permit the completion of the distribution
of the Shares as contemplated in this Agreement and in the prospectus. If the
delivery of a prospectus is required at any time prior to the expiration of nine
months after the time of issue of the Prospectus in connection with the offering
or sale of the Shares and if at such time any events shall have occurred as
result of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made when such Prospectus is delivered not misleading or, if for
any reason it shall be necessary during the same period to amend or supplement
the Prospectus in order to comply with the 1933 Act, the Company will notify you
and upon your request prepare and furnish without charge to you and to any
dealer in securities as many copies as you may from time to time reasonably
request of an amended Prospectus or a supplement to the Prospectus that will
correct such statement or omission or effect such compliance, and in case you
are required to
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deliver a prospectus in connection with sales of any of the Shares at any time
nine months or more after the time of issue of the Prospectus, upon your request
but at your expense, the Company will prepare and deliver to you as many copies
as you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the 1933 Act.
(vi) Blue Sky Qualification. The Company, in good
faith and in cooperation with you, will use its best efforts to qualify the
Shares for offering and sale under the applicable "blue sky" or securities laws
and real estate syndication laws of such jurisdictions as you from time to time
may reasonably designate and to maintain such qualifications in effect for as
long as may be necessary to complete the sale and distribution of the Shares;
provided, however, that the Company shall not be obligated to qualify as a
foreign corporation in any jurisdiction in which it is not so qualified or to
make any undertakings in respect of doing business in any jurisdiction in which
it is not otherwise so subject. The Company will file such statements and
reports as may be required by the laws of each jurisdiction in which the Shares
have been qualified as above provided.
(vii) Financial and Other Information.
A. Earnings Statement. The Company will
make generally available to its securityholders, in the manner specified in Rule
158(b) under the 1933 Act and deliver to you as soon as practicable and in any
event not later than 45 days after the end of its fiscal quarter in which the
first anniversary date of the effective date of the Registration Statement
occurs, an earnings statement meeting the requirements of Rule 158(a) under the
1933 Act covering a period of at least twelve consecutive months beginning after
the effective date of the Registration Statement.
B. Annual and Quarterly Reports. The
Company will furnish to its securityholders, as soon as practicable after the
end of each respective period, annual reports (including financial statements
audited by independent public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year. For a period
through and including November 29, 1999, the Company will furnish to you: (i)
concurrently with the date on which the same shall be sent to the
securityholders of the Company, if applicable, and in any event not later than
sixty (60) days after the end of each fiscal quarter of the Company, statements
of operations of the Company for each of the first three quarters in the form
furnished to the Company's securityholders; (ii) concurrently with the date on
which the same shall be sent to the securityholders of the Company, if
applicable, and in any event not later than one hundred twenty (120) days after
the end of each fiscal year of the Company, a balance sheet of the Company as of
the end of such fiscal year, together with statements of operations, of cash
flows, and of securityholders' equity of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent public
accountants; (iii) as soon as they are available, copies of all reports
(financial or otherwise) mailed to securityholders; and (iv) as soon as they are
available, copies of all
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reports and financial statements furnished to or filed with the Commission, any
securities exchange, or the National Association of Securities Dealers, Inc.
("NASD"). During the period through and including November 29, 1999, the
foregoing financial statements shall be made on a consolidated basis to the
extent that the accounts of the Company are consolidated with any subsidiaries,
and shall be accompanied by similar financial statements for any significant
subsidiary that is not so consolidated.
C. Press Releases. For a period through and
including November 29, 1999, the Company will furnish to you, concurrently with
the release thereof, two copies of every press release to be issued and every
material news item and article in respect of the Company or its affairs to be
released by the Company; and promptly, such additional documents and information
with respect to the Company and its affairs as you from time to time may
reasonably request.
D. Other Information. For a period through
and including November 29, 1999, the Company will furnish to you any additional
information of a public nature concerning the Company or its business that you
may reasonably request in writing.
(viii) Application of Net Proceeds. The Company and
the Partnership will apply the net proceeds received from the sale of the Shares
in all material respects as set forth in the Prospectus under the caption "Use
of Proceeds."
(ix) Solicitation of Purchasers.
A. Except as hereinafter specified, the
Company will not, and will not permit the Partnership or any of its other
affiliates or agents to, furnish the names of such purchasers or of other
potential investors obtained through you to any person other than as may be
required in connection with the normal and usual conduct by the Company of its
business or required by court order or law.
B. The Company agrees and understands that a
violation of the provisions of Section 4(a)(ix)(A) of this Agreement will cause
you irreparable harm and injury and that any money damages you receive will not
compensate you for any breach thereof. Accordingly, the Company agrees that, in
addition to monetary damages, you will be entitled to all such equitable relief
including, without limitation, injunctive relief, as a court of equity or proper
jurisdiction shall deem appropriate in the circumstances. Such relief shall not
be exclusive of any rights you may have at law or in equity. All of the rights
and remedies you have hereunder shall be cumulative and not alternative. The
provisions of this Section shall not limit your remedies upon the breach by the
Company of any other Section of this Agreement.
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(x) Cooperation with Your Due Diligence. At all
times prior to each Closing Date, the Company will cooperate with you in such
investigation as you may make or cause to be made of all the business and
operations (including all Hotels) of the Company, the Partnership, the
Subsidiary Partnership and the Lessee in connection with the sale of the Shares,
and will make available to you in connection therewith such information in its
possession as you may reasonably request.
(xi) Transfer Agent. The Company will maintain a
transfer agent and, if necessary under applicable jurisdictions, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(xii) Nasdaq. The Company will use its best efforts
to maintain the quotation of its shares of Common Stock on the Nasdaq National
Market.
(xiii) Compliance with Investment Company Act. The
Company and the Partnership are familiar with the Investment Company Act of
1940, as amended, as the rules and regulations thereunder, and have in the past
conducted their affairs, and will in the future conduct their affairs, in such a
manner so as to ensure that the Company and the Partnership were not and will
not be an "investment company" or an entity "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
(xiv) Actions of Company, Officers, Directors, and
Affiliates. The Company will not and will use its best efforts to cause its
officers, directors, and affiliates not to (i) take, directly or indirectly,
prior to termination of the offering contemplated by this Agreement, any action
designed to stabilize or manipulate the price of any security of the Company, or
that may cause or result in, or that might in the future reasonably be expected
to cause or result in, the stabilization or manipulation of the price of any
security of the Company, to facilitate the sale or resale of any of the Shares,
(ii) other than under this Agreement, sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company.
(xv) Obligations Under this Agreement. Subject to
the terms hereof, the Company and the Partnership will do and perform their
respective obligations under this Agreement to the extent required to consummate
the transactions contemplated hereby.
(xvi) Additional Issuances. For a period of ninety
(90) days from the Initial Closing Date, the Company will not, without your
prior written consent, directly or indirectly, sell, offer to sell, grant any
option for the sale of, or otherwise dispose of, any shares of Common Stock or
securities convertible into Common Stock, other than pursuant to
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this agreement and other than partnership interests or other securities
convertible into Common Stock issued in connection with the acquisition of a
hotel property.
(xvii) Additional Hotels. The Company will use the
net proceeds of the Offering to acquire or develop hotels only to the extent
that the Company would expect to receive rental income with respect to each such
hotel, net of insurance paid by the Company, reserves for furniture, fixtures
and capital expenditures and real estate taxes, in an amount greater than or
equal to twelve percent (12%) of the purchase price or development costs paid by
the Company for such hotel.
(b) Your Covenants. You covenant with the Company that you
have not provided and will not provide to the purchasers of Shares any written
or oral information regarding the business of the Company, including any
representations regarding the Company's financial condition or financial
prospects, other than such information as is contained in the Prospectus. You
further covenant that you will use your best efforts to comply in the offering
of the Shares with such purchaser suitability requirements as may be imposed by
state securities or blue sky requirements.
5. Payment of Expenses. Whether or not the transactions contemplated by
this Agreement are consummated or this Agreement is terminated, and subject to
the provisions of Section 9 of this Agreement, the Company hereby agrees that it
will pay all fees and expenses incident to the performance of its obligations
under this Agreement (excluding fees and expenses of counsel for you, except as
specifically set forth below), including (a) the preparation, printing and
filing of the Registration Statement (including financial statements and
exhibits), as originally filed and as amended, the Preliminary Prospectuses and
the Prospectus and any amendments or supplements thereto, and the cost of
furnishing copies thereof to you, (b) the preparation, printing, and
distribution of this Agreement, any Selected Dealer Agreement, the certificates
representing the Shares, the Blue Sky Memoranda, and any instruments relating to
any of the foregoing, (c) the issuance and delivery of the Shares, including any
transfer taxes payable thereon, (d) the fees and disbursements of the Company's
counsel and accountants, (e) the qualification of the Shares under applicable
securities and real estate syndication laws in accordance with Section 4.(a) of
this Agreement and any filing fee paid in connection with the review of the
offering by the NASD, including filing fees and fees and disbursements made in
connection therewith and in connection with the Blue Sky Memoranda supplied to
you by counsel for the Company, (f) all costs, fees, and expenses in connection
with the application for qualifying the Shares for quotation on the Nasdaq
National Market, (g) the transfer agent's and registrar's fees and all
miscellaneous expenses referred to in Item 30 of the Registration Statement, (h)
costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by you to be necessary or
desirable to effect the sale of the Shares to the public, (i) other expenses
incurred for required title insurance and environmental assessments, and (j) all
other costs and expenses incident to the performance of
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the Company's obligations hereunder that are not otherwise specifically provided
for in this Section.
6. Conditions of Your Obligations. Your obligations hereunder shall be
subject to, in your discretion, the following terms and conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement shall have become effective not later than 5:30 p.m. on the date of
this Agreement or, at such later time or on such later date as you may agree to
in writing; and as of each Closing Date no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act and no proceedings for that purpose shall have been instituted or shall
be pending or, to your knowledge or the knowledge of the Company, shall be
contemplated by the Commission, and any request on the part of the Commission
for additional information shall have been complied with to the satisfaction of
your counsel.
(b) Closing Date Matters. On each Closing Date, (i) the
Registration Statement and the Prospectus, as they may then be amended or
supplemented, shall contain all statements that are required to be stated
therein under the 1933 Act and the Rules and Regulations and in all material
respects shall conform to the requirements of the 1933 Act and the Rules and
Regulations; the Company shall have complied in all material respects with Rule
430A (if it shall have elected to rely thereon) and neither the Registration
Statement nor the Prospectus, as they may then be amended or supplemented, shall
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, (ii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement, any material adverse
change in the business, prospects, properties, assets, results of operations or
condition (financial or otherwise) of the Company, the Partnership, the
Subsidiary Partnership or the Lessee, whether or not arising in the ordinary
course of business, (iii) no action, suit or proceeding at law or in equity
shall be pending or, to the Company's knowledge, threatened against the Company,
the Partnership or the Subsidiary Partnership that would be required to be set
forth in the Prospectus other than as set forth therein and no proceedings shall
be pending or, to the knowledge of the Company, threatened against the Company,
the Partnership or the Subsidiary Partnership before or by any federal, state or
other commission, board or administrative agency wherein an unfavorable
decision, ruling or finding could materially adversely affect the business,
prospects, assets, results of operations or condition (financial or otherwise)
of the Company, the Partnership or the Subsidiary Partnership other than as set
forth in the Prospectus, (iv) the Company and the Partnership shall have
complied with all agreements and satisfied all conditions on their part to be
performed or satisfied on or prior to each Closing Date, and (v) the
representations and warranties of the Company and the Partnership set forth in
Section 2 of this Agreement shall be accurate as though expressly made at and as
of each Closing Date. On each Closing Date, you shall have received a
certificate executed by the President of the Company and the general partner of
the Partnership, dated as
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of each Closing Date, to such effect and with respect to the following
additional matters: (A) the Registration Statement has become effective under
the 1933 Act and no stop order suspending the effectiveness of the Registration
Statement or preventing or suspending the use of the Prospectus has been issued,
and no proceedings for that purpose have been instituted or are pending or, to
their knowledge, threatened under the 1933 Act; and (B) they have reviewed the
Registration Statement and the Prospectus and, when the Registration Statement
became effective and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus and any amendments or
supplements thereto contained all statements and information required to be
included therein or necessary to make the statements therein not misleading and
neither the Registration Statement nor the Prospectus nor any amendment or
supplement thereto contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading, and, since the effective date of the
Registration Statement, there has occurred no event required to be set forth in
an amended or supplemented Prospectus that has not been so set forth.
(c) Opinions of Hunton & Williams. At each Closing Date, you
shall receive the opinions of Hunton & Williams, counsel for the Company and the
Partnership, in form and substance satisfactory to you and your counsel, to the
effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the Commonwealth of Virginia, with the corporate power
and authority to execute, deliver and perform this Agreement
and to conduct its business as described in the Prospectus,
and is qualified to do business or registered to transact
business as a foreign corporation and is in good standing as a
foreign corporation in Maryland, West Virginia and Tennessee.
No consent, approval, authorization or order from any court,
governmental agency or body is required in connection with the
execution and delivery by the Company of this Agreement, or
the consummation by the Company of the transactions
contemplated hereby, except such as has been obtained or as
may be required by applicable state securities, blue sky or
real estate syndication laws or required by the NASD, as to
which such counsel need express no opinion. Such counsel also
need not express an opinion on local laws relating to the
leasing or operation of real estate.
(ii) The Partnership was duly formed and is validly
existing as a limited partnership under the Virginia Revised
Uniform Limited Partnership Act with the partnership power and
authority to execute, deliver and perform this Agreement and
to conduct its business as described in the Prospectus, and is
qualified to do business or is registered to transact business
as a foreign limited partnership and is in good standing as a
foreign limited partnership in Maryland, West Virginia and
Tennessee. No consent, approval, authorization
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or order from any court, governmental agency or body is
required in connection with the execution and delivery by the
Partnership of this Agreement, or the consummation by the
Partnership of the transactions contemplated hereby, except
such as has been obtained or as may be required by applicable
state securities, blue sky or real estate syndication laws or
required by the NASD, as to which such counsel need express no
opinion. Such counsel also need not express an opinion on
local laws relating to the leasing or operation of real
estate. The Company is the sole general partner of the
Partnership.
(iii) The Company has the corporate power and
authority to execute, deliver and perform this Agreement, to
issue, sell and deliver the Shares as provided herein and to
consummate the transactions contemplated herein. This
Agreement has been duly authorized, executed, and delivered by
the Company and the Agreement constitutes a valid and binding
agreement of the Company, enforceable in accordance with its
terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, moratorium, liquidation,
reorganization, or similar laws affecting creditors' rights
generally, (b) general equity principles, regardless of
whether such enforceability is considered in equity or at law,
and (c) limitations imposed by federal or state securities
laws or the public policy underlying such laws regarding the
enforceability of indemnification provisions.
(iv) The Partnership has the partnership power and
authority to execute, deliver and perform this Agreement and
to consummate the transactions contemplated herein. This
Agreement has been duly authorized, executed, and delivered by
the Partnership and the Agreement constitutes a valid and
binding agreement of the Partnership, enforceable in
accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, moratorium,
liquidation, reorganization, or similar laws affecting
creditors' rights generally, (b) general equity principles,
regardless of whether such enforceability is considered in
equity or at law, and (c) limitations imposed by federal or
state securities laws or the public policy underlying such
laws regarding the enforceability of indemnification
provisions.
(v) The statements set forth in the Prospectus under
the caption "Description of Capital Stock," insofar as they
purport to constitute a summary of the terms of the Common
Stock and laws related thereto, fairly summarize such terms
and applicable law, and present the information called for by
the 1933 Act and the Rules and Regulations. The Common Stock
conforms in all material respects as to legal matters to the
description thereof contained in the Registration Statement
and the Prospectus.
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(vi) The Shares have been duly and validly authorized
by the Company, and, when issued and delivered against payment
as provided in this Agreement, will be validly issued, fully
paid, and nonassessable. No person or entity holds preemptive
rights with respect to any of the Shares. The form of the
certificates evidencing the Shares comply with all applicable
requirements of Virginia law.
(vii) The Units to be issued to the Company in
connection with the Transactions have been duly and validly
authorized by the Partnership. The offer and sale of the Units
by the Partnership will constitute an exempted transaction
pursuant to Section 4(2) of the 1933 Act and will not require
registration of the Units under Section 5 of the 1933 Act.
(viii) The execution, delivery, and performance of
this Agreement, the compliance with the terms and provisions
hereof and the consummation of the transactions contemplated
herein and in the Registration Statement and Prospectus, by
the Company and/or the Partnership do not and will not:
A. violate the articles of
incorporation, bylaws, certificate of limited
partnership or partnership agreement, as the case may
be, of the Company or the Partnership;
B. result in a breach of, or constitute
a default under, any contract that was filed, or the
form of which was filed, as an exhibit to the
Registration Statement;
C. to such counsel's knowledge, violate
any applicable statute, rule or regulation, order of
any court or any federal, state, or local
governmental authority or agency binding on the
Company or the Partnership, or any of their
respective businesses, investments, properties,
assets or Hotels;
D. to such counsel's knowledge, result
in the creation or imposition of any lien, charge,
claim, or encumbrance upon any property or asset of
any of the foregoing.
(ix) The Common Stock, including the Shares, has
been approved for quotation on the Nasdaq National Market.
(x) The Company is organized in conformity with the
requirements for qualification as a real estate investment
trust under the Code, and the Company's method of operation
(as presently conducted and proposed to be
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conducted immediately after Closing) enables it to meet the
requirements for qualification and taxation as a real estate
investment trust under the Code. The descriptions of the law
and the legal conclusions contained in the Prospectus under
the caption "Federal Income Tax Consequences" are correct in
all material respects, and the discussion thereunder fairly
summarizes the federal tax considerations that are material to
a holder of the Common Stock.
(xi) The Registration Statement has become effective
under the 1933 Act and, to the knowledge of such counsel, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceeding for that purpose
has been instituted or is pending or contemplated under the
1933 Act. Other than financial statements and other financial
and operating data and schedules contained therein, as to
which counsel need express no opinion, the Registration
Statement, when it became effective, the Prospectus, as of its
date and as of the date hereof, comply as to form in all
material respects with the requirements of the 1933 Act and
the Rules and Regulations.
(xii) Nothing has come to such counsel's attention
that leads it to believe that the Registration Statement, or
any further amendment thereto made prior to the Closing Date,
on its effective date, contained or contains any untrue
statement of a material fact or omitted or omits to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the
Prospectus or any amendment or supplement thereto made prior
to the Closing Date, as of its date and as of the Closing
Date, contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading
(provided that such counsel need express no belief regarding
the financial statements and related schedules and other
financial data contained in the Registration Statement, any
amendment thereto, or the Prospectus, or any amendment or
supplement thereto).
(xiii) Neither the Company nor the Partnership is, or
solely as a result of the consummation of the Transactions
will become, an "investment company," or an entity that
controls or is "controlled by" an "investment company," as
such terms are defined under the 1940 Act.
(xiv) The information in the Prospectus under the
captions "Certain Provisions of Virginia Law and of the
Company's Articles of Incorporation and Bylaws," "Shares
Available for Future Sale," and "Federal Income Tax
Considerations," to the extent that it constitutes matters of
law or legal conclusions, has been reviewed by such counsel,
is correct, and presents fairly
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the information required to be disclosed therein under the
1933 Act and the Rules and Regulations.
(xv) To such counsel's knowledge, except as described
in the Prospectus, there is not pending or threatened, any
action, suit, proceeding, inquiry or investigation before or
by any court or any federal, state or local governmental
authority or agency to which the Company, the Partnership or
any of their respective officers or directors are or may be a
party, or to which any of the properties, assets or rights of
any such entity or person may be subject, which, if determined
adversely to either the Company or the Partnership would
individually or in the aggregate (A) have a material adverse
effect on the financial position, results of operations,
business or material assets of any of the Company or the
Partnership, or (B) that might adversely affect the
consummation of the transactions contemplated by this
Agreement.
In rendering the opinions set forth above, Hunton & Williams, with your
consent as to matters of form and substance, may adopt forms of opinion that are
consistent with the Legal Opinion Accord of the ABA Section of Business Law
(1991) (the "Accord").
(d) Other Legal Opinion. At each Closing Date, you shall have
received a favorable opinion of Gallagher, Evelius & Jones, counsel for the
Lessee and the Subsidiary Partnership, dated as of that Closing Date, in form
and substance satisfactory to your counsel to the effect that:
(i) The Lessee has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Maryland with all requisite corporate
power and authority to conduct its business as described in
the Prospectus, and is qualified to do business and in good
standing as a foreign corporation in Virginia, Tennessee and
West Virginia. The Lessee is in violation of any provision of
its articles of incorporation, bylaws or other governing
documents. To the knowledge of such counsel, the Lessee is not
in default under or in breach of, or subject to any event that
with the giving of notice or the lapse of time or both would
constitute a default under or breach of, any term or condition
of any material agreement or instrument of which such counsel
has knowledge to which the Lessee is a party or by which any
of its properties is bound, except as disclosed in the
Prospectus. No consent, approval, authorization or order from
any court, governmental agency or body is required in
connection with the consummation by the Lessee of the
transactions contemplated in this Agreement and in the
Prospectus, except such as may be required by applicable state
securities, blue sky or real estate syndication laws or
required by the NASD, as to which such counsel need express no
opinion.
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(ii) The Subsidiary Partnership has been duly formed
and is validly existing as a limited partnership under the
laws of the State of Maryland, with all requisite partnership
power and authority to conduct its business and to own its
properties, as described in the Prospectus.
(iii) The Subsidiary Partnership is not in violation
of any provisions of its partnership agreement or other
governing documents. To the knowledge of such counsel, the
Subsidiary Partnership is not in default under or in breach
of, or subject to any event that with the giving of notice or
the lapse of time or both would constitute a default under or
breach of, any term or condition of any material agreement or
instrument to which it is a party or by which any of its
properties is bound, except as disclosed in the Prospectus.
The Company is the sole limited partner of the Subsidiary
Partnership and the Partnership will be the sole general
partner of the Subsidiary Partnership.
(iv) The Lessee owns, possesses or has obtained such
Permits as are necessary to own or lease its properties and to
carry on its businesses in the manner described in the
Prospectus; to such counsel's knowledge, the Lessee has
fulfilled and performed all of its obligations with respect to
all such Permits, and no event has occurred that allows, or
after notice or lapse of time or both would allow, revocation
or modification thereof or would result in any other
impairment of the rights of the holder of any such Permit.
(v) To the knowledge of such counsel, neither the
Lessee nor the Subsidiary Partnership is in violation of, or
in default with respect to, any statute, rule, regulations,
order, judgment, or decree, except as may be properly
described in the Prospectus or such as in the aggregate do not
now have and will not in the future have a materially adverse
effect on the financial position, results of operations, or
business or each of such entity, respectively.
(vi) To such counsel's knowledge, except as described
in the Prospectus, there is not pending, threatened or
contemplated, any action, suit, proceeding, inquiry or
investigation before or by any court or any federal, state or
local governmental authority or agency to which the Lessee or
the Subsidiary Partnership or any of their respective officers
or directors are or may be a party, or to which any of the
properties, investments, assets or rights of any such entity
or person may be subject, (A) that might result in any
material adverse change in the condition (financial or
otherwise) or business of the Lessee or the Subsidiary
Partnership or (B) that might materially adversely affect any
of the material properties, investments or assets of any such
entity, or (C) that might adversely affect the consummation of
the transactions contemplated by this Agreement or any of the
other Transactions.
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In rendering the opinion set forth above, Gallagher, Evelius & Jones
may, with your consent as to matters of form and substance, adopt a form of
opinion that is consistent with the Legal Opinion Accord of the ABA Section of
Business Law (1991) (the "Accord").
(e) Opinion of Your Counsel. At each Closing Date, you shall
receive the favorable opinion of Willcox & Savage, P.C., your counsel, with
respect to such matters as you may reasonably require, and the Company shall
have furnished to such counsel such documents as they may reasonably request for
the purpose of enabling them to pass on such matters.
(f) Independent Public Accountants. At the time that this
Agreement is executed by the Company, you shall have received from Reznick
Fedder & Silverman a letter, dated the date hereof, in form and substance
satisfactory to you, confirming that they are independent public accountants
with respect to the Company within the meanings of the 1933 Act and the Rules
and Regulations, and stating in effect that:
(i) in their opinion, the financial statements and
any supplementary financial information and schedule included
in the Registration Statement and covered by their opinion
therein comply as to form and in all material respects with
the applicable accounting requirements of the 1933 Act and the
Rules and Regulations;
(ii) on the basis of limited procedures (set forth in
detail in such letter and made in accordance with such
procedures as may be specified by you) not constituting an
audit in accordance with generally accepted auditing
standards, consisting of (but not limited to) a reading of the
latest available internal unaudited financial statements of
the Company, a reading of the minute books of the Company,
inquiries of officials of the Company responsible for
financial and accounting matters, and such other inquiries and
procedures as may be specified in such letter, nothing came to
their attention to cause them to believe that:
A. the unaudited financial statements and
supporting schedule and other unaudited financial
data of the Company included in the Registration
Statement do not comply as to form in all material
respects with the applicable accounting requirements
of the 1933 Act and the Rules and Regulations or are
not presented in conformity with generally accepted
accounting principles applied on a basis
substantially consistent with that of the audited
financial statements included in the Registration
Statement;
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B. any other unaudited income statement data
and balance sheet items included in the Prospectus do
not agree with the corresponding items in the
unaudited financial statements from which such data
and items were derived, and any such unaudited data
and items were not determined on a basis
substantially consistent with the basis for the
corresponding amounts in the audited financial
statements included in the Prospectus;
C. any unaudited pro forma financial
information included in the Prospectus does not
comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act
and the Rules and Regulations or the pro forma
adjustments have not been properly applied to
historical amounts in the compilation of that
information;
D. at a specified date not more than five
(5) days prior to the date of such letter, there was
any change in the capital stock or long-term debt or
obligations of the Company or there were any
decreases in net current assets or net assets,
shareholders' equity, or other items specified by you
from that set forth in the Company's balance sheet at
September 30, 1996, except as described in such
letter; and
E. for the period from September 30, 1996 to
a specified date not more than five (5) days prior to
the date of delivery of such letter, there were any
decreases in room revenues, food revenues, beverage
revenues, or operating income before interest,
depreciation and amortization for the Company, in
each case as compared with the corresponding period
of the preceding year, except in each case for
decreases that the Prospectus discloses have occurred
or may occur or that are described in such letter;
and
(iii) in addition to the procedures referred to in
clause (ii) above and the examination referred to in their
Reports including in the Registration Statement, they have
carried out certain specified procedures, not constituting an
audit in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages, and
financial information specified by you that are derived from
the general accounting records of the Company, that appear in
the Registration Statement or the exhibits or schedules
thereto and are specified by you, and have compared such
amounts, percentages, and financial information with the
accounting records of the Company and with material derived
from such records and have found them to be in agreement.
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<PAGE>
(g) Updated Comfort Letter. At each Closing Date, you shall
have received from Reznick Fedder & Silverman a letter, in form and substance
satisfactory to you and dated as of that Closing Date, to the effect that they
reaffirm the statements made in the letter furnished pursuant to Section 6.(f)
above, except that the specified date referred to shall be a date not more than
five (5) days prior to that Closing Date.
(h) Post-Financial Developments. In the event that either of
the letters to be delivered pursuant to Sections 6.(f) and 6.(g) above sets
forth any changes, decreases or increases, it shall be a further condition to
your obligations that you shall have reasonably determined, after discussions
with officers of the Company responsible for financial and accounting matters
and with Reznick Fedder & Silverman, that such changes, decreases or increases
as are set forth in such letter do not reflect a material adverse change in the
capital stock, long-term debt, obligations under capital leases, total assets,
net current assets, or shareholders' equity of the Company as compared with the
amounts shown in the latest consolidated pro forma balance sheet of the Company,
or a material adverse change in the room revenues, food revenues, beverage
revenues, or operating income before interest, depreciation and amortization for
the Hotels in each case as compared with the corresponding period of the prior
year.
(i) Additional Information. On each Closing Date, your counsel
shall have been furnished with all such documents, certificates and opinions as
they may request for the purpose of enabling them to pass upon the issuance and
sale of the Shares as contemplated in this Agreement and the matters referred to
in Section 6.(b) and in order to evidence the accuracy and completeness of any
of the representations, warranties or statements of the Company or the
Partnership, the performance of any of the covenants of the Company or the
Partnership, or the fulfillment of any of the conditions herein contained; and
all proceedings taken by the Company at or prior to that Closing Date in
connection with the authorization, issuance and sale of the Shares as
contemplated in this Agreement, shall be satisfactory in form and substance to
you and to your counsel. The Company and the Partnership will furnish you with
such number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request. Any certificate signed by any
officer, partner, or other official of the Company or the Partnership and
delivered to you or your counsel shall be deemed a representation and warranty
by the Company and the Partnership to you as to the statements made therein.
(j) Adverse Events. Subsequent to the date hereof, there shall
not have occurred any of the following: (i) a suspension or material limitation
in trading in securities generally on the New York Stock Exchange or American
Stock Exchange or the Nasdaq National Market, (ii) a general moratorium on
commercial banking activities in Virginia or New York declared by either federal
or state authorities, as the case may be, (iii) the outbreak or escalation of
hostilities involving the United States or the declaration by the United States
of a national emergency or war if the effect of any such event specified in this
clause (iii) in your
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<PAGE>
reasonable judgment makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares on the terms and in the manner
contemplated in the Prospectus, or (iv) such a material adverse change in
general economic, political, financial or international conditions affecting
financial markets in the United States having a material adverse impact on
trading prices of securities in general, as, in your reasonable judgment, makes
it impracticable or inadvisable to proceed with the public offering of the
Shares or the delivery of the Shares on the terms and in the manner contemplated
in the Prospectus.
(k) Stock Restrictions. As described in Section 2.(z) hereof,
Humphrey shall have agreed in writing as to the matters set forth in such
section.
(l) NASD Review. The NASD, upon review of the terms of the
public offering of the Shares, shall not have objected to such offering, the
terms of the offering or your participation in the offering.
(m) Nasdaq Quotation. The Shares are quoted on the Nasdaq
National Market.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement to be fulfilled, this
Agreement may be terminated by you on notice to the Company at any time at or
prior to the Initial Closing Date, and such termination shall be without
liability of any party to any other party, except as provided in Sections 5 and
9. Notwithstanding any such termination, the provisions of Section 7 shall
remain in effect.
7. Indemnification and Contribution.
(a) Indemnification by the Company and Partnership. The
Company and the Partnership, jointly and severally, will indemnify and hold you
harmless against any losses, claims, damages, or liabilities, joint or several,
to which you may become subject under the 1933 Act, the 1934 Act or otherwise,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any breach of any warranty or covenant
of the Company or the Partnership herein contained or any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement, or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or arise out of or are
based upon the Transactions, and will reimburse you for any legal or other
expenses reasonably incurred by you in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the Company or the Partnership shall not be liable in any such case to the
extent that any such loss, claim, damage, or liability arises out of or is based
upon an untrue statement or alleged
30
<PAGE>
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement, or the Prospectus, or any such amendment
or supplement, in reliance upon and in conformity with written information
furnished to the Company by you expressly for use therein; provided further,
that the indemnity agreement contained in Section 7.(a) with respect to any
Preliminary Prospectus shall not inure to your benefit if you failed to send or
give a copy of the Prospectus to such person at or prior to the written
confirmation of the sale of such Shares to such person in any case where such
delivery is required by the 1933 Act or the Rules and Regulations and if the
Prospectus would have cured any untrue statement or alleged untrue statement or
omission or alleged omission giving rise to such loss, claim, damage, or
liability. In addition to its other obligations under this Section 7.(a), the
Company and the Partnership agree that, as an interim measure during the
pendency of any such claim, action, investigation, inquiry, or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 7.(a), they will reimburse you on a
monthly basis for all reasonable legal and other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry,
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's and the Partnership's
obligation to reimburse you for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to you
within thirty (30) days of a request for reimbursement shall bear interest at
the prime rate (or reference rate or other commercial lending rate for borrowers
of the highest credit standing) published from time to time by The Wall Street
Journal (the "Prime Rate") from the date of such request. This indemnity
agreement shall be in addition to any liabilities that the Company and the
Partnership may otherwise have. For purposes of this Section 7, the information
set forth in the last paragraph on the front cover page (insofar as such
information relates to you) and under "Selling Arrangements" in any Preliminary
Prospectus and in the Prospectus constitutes the only information furnished by
you to the Company for inclusion in any Preliminary Prospectus, the Prospectus,
or the Registration Statement. Neither the Company nor the Partnership will,
without your prior written consent, settle or compromise or consent to the entry
of any judgment in any pending or threatened action or claim or related cause of
action or portion of such cause of action in respect of which indemnification
may be sought hereunder (whether or not you are a party to such action or
claim), unless such settlement, compromise, or consent includes an unconditional
release of you from all liability arising out of such action or claim (or
related cause of action or portion thereof).
The indemnity agreement in this Section 7.(a) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each person, if any, who controls you within the meaning of the 1933 Act or the
1934 Act to the same extent as such agreement applies to you.
(b) Indemnification by You. You will indemnify and hold
harmless the Company and the Partnership against any losses, claims, damages, or
liabilities to which the
31
<PAGE>
Company or the Partnership may become subject, under the 1933 Act, the 1934 Act,
or otherwise, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon any breach of any
warranty or covenant by you herein contained or any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement, or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement, or the Prospectus or any such amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company or the Partnership by you expressly for use therein; and will reimburse
the Company or the Partnership for any legal or other expenses reasonably
incurred by the Company or the Partnership in connection with investigating or
defending any such loss, claim, damage, liability, or action. In addition to its
other obligations under this Section 7.(b), you agree that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry,
or other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 7.(b), they will
reimburse the Company or the Partnership on a monthly basis for all reasonable
legal and other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry, or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of their obligation to reimburse the Company or the Partnership
for such expenses and the possibility that such payments might later been held
to have been improper by a court of competent jurisdiction. Any such interim
reimbursement payments that are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement shall be in addition to any
liabilities that you may otherwise have.
The indemnity agreement in this Section 7.(b) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each officer and director of the Company and the Partnership and each person, if
any, who controls the Company or the Partnership within the meaning of the 1933
Act or the 1934 Act to the same extent as such agreement applies to the Company
or the Partnership.
(c) Notices of Claims; Employment of Counsel. Any party that
proposes to assert the right to be indemnified under this Section 7 promptly
shall notify in writing each party against which a claim is to be made under
this Section 7 of the institution of such action but the omission so to notify
such indemnifying party of any such action shall not relieve it from any
liability it may have to any indemnified party except (i) to the extent that the
omission to notify shall have caused or increased the indemnifying party's
liability, and (ii) that the indemnifying party shall be relieved of its
indemnity obligation for expenses of the indemnified party incurred before the
indemnifying party is notified. Such indemnifying party
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<PAGE>
or parties shall assume the defense of such action, including the employment of
counsel (satisfactory to the indemnified party) and payment of fees and
expenses. An indemnified party shall have the right to employ its own counsel in
any such case, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless the employment of such counsel shall have been
authorized in writing by the indemnifying party or parties in connection with
the defense of such action or the indemnifying party or parties shall not have
employed counsel to have charge of the defense of such action or such
indemnified party or parties reasonably shall have concluded that there may be
defenses available to it or them that are different from or additional to those
available to such indemnifying party or parties (in which case such indemnifying
party or parties shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties), in any of which events such fees
and expenses shall be borne by such indemnifying party or parties. Anything in
this paragraph to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any such claim or action effected without its
written consent.
(d) Arbitration. It is agreed that any controversy arising out
of the operation of the interim reimbursement arrangements set forth in Sections
7.(a) and 7.(b) hereof, including the amounts of any requested reimbursement
payments, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the indemnifying parties, shall be settled by
arbitration conducted pursuant to the Code of Arbitration Procedure of the NASD.
Any such arbitration must be commenced by service of a written demand for
arbitration or a written notice of intention to arbitrate, therein electing the
arbitration tribunal. In the event the party demanding arbitration does not make
such designation of an arbitration tribunal in such demand or notice, then the
party responding to said demand or notice is authorized to do so. Any such
arbitration will be limited to the operation of the interim reimbursement
provisions contained in Sections 7.(a) and 7.(b) hereof and will not resolve the
ultimate propriety or enforceability of the obligation to indemnify for expenses
that is created by the provisions of Sections 7.(a) and 7.(b).
(e) Contribution. If the indemnification provided for in
Section 7.(a) or 7.(b) is unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, or liabilities (or
actions in respect thereof) referred to therein, then the Company and the
Partnership on the one hand and you on the other shall contribute to the amount
paid or payable as a result of such losses, claims, damages, or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Partnership on the one hand
and you on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then the Company and the Partnership and you shall contribute to
such amount paid or payable in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company and the
Partnership on the one hand and you on the other in connection with the
statements or omissions that resulted in such
33
<PAGE>
losses, claims, damages, or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Partnership on the one hand and you on the other shall be
deemed to be in the same proportion as the total net proceeds from the Offering
(before deducting expenses) received by the Company and the Partnership bear to
the total selling commissions received by you in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or allegedly
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Partnership on the one hand or to information with respect to you and furnished
by you respectively, in writing specifically for inclusion in the Prospectus on
the other and the parties' relative intent, knowledge, access to information,
and opportunity to correct or prevent such statement or omission. The Company
and the Partnership and you agree that it would not be just and equitable if
contribution pursuant to this Section 7.(e) were determined by pro rata
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to above in this Section 7.(e). The amount
paid or payable as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this Section 7.(e) shall be
deemed to include any legal or other expenses reasonably incurred by any such
party in connection with investigating or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) with respect to the transactions giving rise to the
right of contribution provided in this Section 7.(e) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The obligations in this Section 7.(e) for you to contribute
are several in proportion to your respective underwriting obligations and not
joint. For purposes of this Section 7.(e), each person, if any, who controls you
within the meaning of Section 15 of the 1933 Act shall have the same rights to
contribution as you, and each director of the Company or the Partnership who
signed the Registration Statement, and each person, if any, who controls the
Company or the Partnership within the meaning of Section 15 of the 1933 Act
shall have the same rights to contribution as the Company or the Partnership.
8. Representations and Agreements to Survive. Except as the context
otherwise requires, all representations, warranties, covenants and agreements
contained in this Agreement shall remain operative and in full force and effect
regardless of any investigation made by you, or on your behalf, or by any
controlling person, or by or on behalf of the Company or the Partnership, and
shall survive until the fifth anniversary of the date of this Agreement.
9. Termination of Agreement.
(a) Termination of Agreement. You shall have the right to
terminate this Agreement at any time prior to the Initial Closing Date (i) if
any representation or warranty of the Company or the Partnership hereunder shall
be found to have been incorrect or misleading
34
<PAGE>
when made or the Company or the Partnership shall fail, refuse, or be unable to
perform any of their respective agreements hereunder or to fulfill any condition
of your obligations hereunder, (ii) if there shall have been since the
respective dates as of which information is given in the Registration Statement,
a material adverse change, or any development involving a prospective material
adverse change, in or affecting the business, prospects, management, properties,
assets, results of operations, or condition (financial or otherwise) of the
Company, the Partnership, or any Hotel, whether or not arising in the ordinary
course of business, (iii) if trading on any national securities exchange shall
have been suspended (other than for reasons unrelated to the securities
markets), or minimum or maximum prices for trading generally shall have been
fixed or maximum ranges for prices for all securities shall have been required
on any such exchange by such exchange or by order of the Commission or any other
governmental authority having jurisdiction, (iv) if there has occurred or
accelerated any outbreak of hostilities or other national or international
calamity or crisis or change in economic or political conditions the effect of
which on the financial markets of the United States is such as to make it, in
your sole judgment, impracticable to market the Shares or enforce contracts for
the sale of the Shares, (v) if a banking moratorium has been declared by
Virginia, New York or federal authorities, (vi) any federal or state statute,
regulation, rule, or order of any court or other governmental authority has been
enacted, published, decreed, or otherwise promulgated that in your sole judgment
materially adversely affects or will materially adversely affect the business or
operations of the Company, the Partnership, or (vii) any action has been taken
by any federal, state, or local government or agency in respect of its monetary
or fiscal affairs that in your reasonable opinion has a material adverse effect
on the securities markets in the United States. You shall have no liability to
the Company or the Partnership pursuant to this Agreement or otherwise as a
result of any such termination.
(b) Result of Termination.
(i) If the sale of the Shares provided for
herein is not consummated (A) because of any termination of this Agreement
pursuant to Section 9.(a)(i), (B) because of any refusal, inability or failure
on the part of the Company or the Partnership to perform any agreement herein or
comply with any provision hereof other than by reason of your default, (C) by
March 15, 1997 due to reasons within the control of the Company, the Partnership
or any of their affiliates, or (D) because the Company abandons this Offering
and obtains financing from other sources and you are not retained as a senior
investment banker in connection with such financing, then in addition to its
obligations with respect to expenses as set forth in Section 5, the Company will
reimburse you on demand for all your reasonable out-of-pocket expenses
(including the fees and expenses of your counsel), including disbursements
reasonably incurred by you in reviewing the Registration Statement and the
Prospectus, and in investigating and making preparations for the marketing of
the Shares.
(ii) If the sale of the Shares provided for
herein is not consummated for any other reason, the Company and the Partnership
shall pay expenses as required by
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<PAGE>
Section 5, and the Company and the Partnership shall have no additional
liability to you except for such liabilities, if any, as may exist or thereafter
arise under Section 7.
10. Notices.
(a) Method and Location of Notices. All communications
hereunder, except as herein otherwise specifically provided, shall be in writing
and shall be sent by overnight courier, hand-delivered or telecopied and
confirmed as follows:
To the Company:
Humphrey Hospitality Trust, Inc.
12301 Old Columbia Pike
Silver Spring, Maryland 20904
Attention: Mr. James I. Humphrey
Telecopier No.: (301) 680-4342
with a copy to:
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
Attention: Thurston R. Moore, Esq.
Telecopier No.: (804) 788-8218
To You:
Anderson & Strudwick, Incorporated
1108 E. Main Street
Richmond, Virginia 23219
Attention: Mr. L. McCarthy Downs, III
Telecopier No.: (804) 648-3404
with a copy to:
Willcox & Savage, P.C.
1800 NationsBank Center
Norfolk, Virginia 23510
Attention: James J. Wheaton, Esq.
Telecopier No.: (804) 628-5566
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<PAGE>
(b) Time of Notices. Notice shall be deemed to be given by you
to the Company or the Partnership or by the Company or the Partnership to you
when it is sent by overnight courier, hand-delivered or telecopied as provided
in Section 10.(a).
11. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon you, the Company, and the Partnership and the controlling
persons referred to in Section 7, and their respective successors, legal
representatives and assigns, and no other person shall have or be construed to
have a legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained.
12. Governing Law, Construction, and Time. This Agreement shall be
governed by and construed in accordance with the laws of the Commonwealth of
Virginia. Specified time of day refers to United States Eastern Time. Time
shall be of the essence of this Agreement.
13. Description Headings. The descriptive headings of the several
sections and paragraphs of this Agreement are inserted for convenience only and
do not constitute a part of this Agreement.
14. Counterparts. This Agreement may be executed in one or more
counterparts, and if executed in more than one counterpart, the executed
counterparts shall together constitute a single instrument.
If the foregoing correctly sets forth the understanding between you,
the Company, and the Partnership, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
between us.
Very truly yours,
HUMPHREY HOSPITALITY TRUST, INC.
By:
James I. Humphrey, Jr.
President
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<PAGE>
HUMPHREY HOSPITALITY LIMITED
PARTNERSHIP
By Humphrey Hospitality Trust, Inc.,
General Partner
By:
James I. Humphrey, Jr.
President
Confirmed and accepted as of the date first above written:
ANDERSON & STRUDWICK, INCORPORATED
By:
L. McCarthy Downs, III
Senior Vice President
38
[Hunton & Williams Letterhead]
EXHIBIT 5.1
November 11, 1996
Board of Directors
Humphrey Hospitality Trust, Inc.
12301 Old Columbia Pike
Silver Spring, Maryland 20904
Humphrey Hospitality Trust, Inc.
Registration Statement on Form S-11
Ladies and Gentlemen:
We have acted as counsel to Humphrey Hospitality Trust, Inc., a
Virginia corporation (the "Company"), in connection with its Registration
Statement on Form S-11, as filed on November 12, 1996 with the Securities and
Exchange Commission (the "Registration Statement"), with respect to shares of
the Company's Common Stock, $.01 par value (the "Common Stock"), which are
proposed to be offered and sold as described in the Registration Statement.
In rendering this opinion, we have relied upon, among other
things, our examination of such records of the Company and certificates
of its officers and of public officials as we have deemed necessary.
Based upon the foregoing and having regard for such legal
considerations as we have deemed relevant, we are of the opinion that the
issuance of the Shares as described in the Registration Statement has ben
validly authorized and, when issued and sold as described in the Registration
Statement, the Common Shares will be legally issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion with the
Securities and Exchange Commission as an exhibit to the Registration
Statement and to the statement made in reference to this firm under the
caption "Legal Matters" in the Registration Statement.
Very truly yours,
/s/Hunton & Williams
EXHIBIT 10.22
SERVICES AGREEMENT
THIS SERVICES AGREEMENT is made effective as of the 1st day of
January, 1996 by and between Humphrey Hospitality Trust, Inc., a
Virginia corporation (the "Company"), and Humphrey Hospitality
Management, Inc., a Maryland corporation (the "Provider").
RECITALS
A. The Company is a publicly traded real estate
investment trust.
B. As a publicly traded company, the Company needs
certain accounting and administrative services to be performed in order
to comply with the various federal regulatory requirements.
C. The Company desires that the Provider provide certain
services with respect to the Company's accounting and administrative
requirements.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties
agree as follows:
1. Appointment and Term. The Company hereby appoints
the Provider to render accounting and administrative services for the
Company as herein contemplated. The term of this Agreement shall begin
on the date hereof and shall continue until terminated by either party
by thirty (30) days written notice.
2. Obligations. The Provider shall have the obligation to:
(i) provide accounting services,
including the preparation and submittal of all reports required
by the United States Securities and Exchange Commission and
NASDAQ;
(ii) prepare and tally proxy
statements;
(iii) prepare the Company's
monthly income statements;
(iv) prepare and disclose all
obligations, bills and checks of the Company;
(v) provide administrative
services, including preparing and announcing press releases and
handling investor relation services, such as meetings with
analysts and reporters; and
<PAGE>
(vi) Negotiate with financial
institutions for financial services and other items such as
debt terms and treasury duties.
3. Fee. For services to be performed under this Agreement,
the Company shall pay the Provider a fee in the amount of Eighty Thousand
Dollars ($80,000) per year which shall be payable monthly in equal installments
by the tenth day following the month in which such services are performed.
4. Burden and Benefit. The covenants and agreements contained
herein shall be binding upon and inure to the benefit of the successors and
assigns of the respective parties hereto. Neither party may assign this
Agreement without the consent of the other party.
5. Severability of Provisions. Each provision of this
Agreement shall be considered severable, and if for any reason any provision
that is not essential to the effectuation of the basic purposes of the Agreement
is determined to be invalid and contrary to any existing or future law, such
invalidity shall not impair the operation of or affect those provisions of this
Agreement that are valid.
6. No Continuing Waiver. The waiver of either party of any
breach of this Agreement shall not operate or be construed to be a waiver of any
subsequent breach.
7. Applicable Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of Maryland, without regard to
principles of conflicts of laws.
8. Binding Agreement. This Agreement shall be binding on the
parties hereto, and their heirs, executors, personal representatives, successors
and assigns.
9. Headings. All section headings in this Agreement are for
convenience of reference only and are not intended to qualify the meaning of any
section.
10. Terminology. All personal pronouns used in this
Agreement, whether used in the masculine, feminine and neuter gender, shall
include all other genders, the singular shall include the plural, and vice versa
as the context may require.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first written above.
WITNESS: COMPANY:
HUMPHREY HOSPITALITY TRUST, INC.
/s/ Bethany H. Hooper By: /s/ James Humphrey
- ----------------------------- ---------------------------
Bethany H. Hooper Name: James Humphrey
---------------------------
Title: President
---------------------------
PROVIDER:
HUMPHREY HOSPITALITY MANAGEMENT, INC.
/s/ Bethany H. Hooper By: /s/ Randy P. Smith
- ---------------------------- ----------------------------------
Bethany H. Hooper Name: Randy P. Smith
-----------------------------
Title: President
----------------------------
3
EXHIBIT 10.23
FIRST AMENDMENT
TO
SERVICES AGREEMENT
AGREEMENT made as of October 1, 1996 by and between Humphrey
Hospitality Trust, Inc., a Virginia corporation (the "Company") and Humphrey
Hospitality Management, Inc., a Maryland corporation (the "Provider").
WHEREAS, the Company is a publicly traded real estate
investment trust;
WHEREAS, as a publicly traded company, the Company needs certain
accounting and administrative services to be performed in order to comply with
the various federal and state regulatory requirements;
WHEREAS, the Company desires that the Provider provide certain services
with respect to the Company's accounting and administrative requirements;
WHEREAS, the Company and the Provider wish to correct the
amount of the fee set forth in Section 3 of the Services Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Section 3 is hereby amended and replaced with the
following:
For Services to be performed under this
Agreement, the Company shall pay the Provider
a fee in the amount of Thirty Thousand Dollars
($30,000) per year which shall be payable monthly
in installments by the tenth day following the
month in which the services are performed. The
fee shall increase by Ten Thousand Dollars
($10,000) per year for each additional hotel
acquired by the Company (not including Dover) to
be earned and payable in the first year of the
hotel's existence pro rata based on when the hotel
is purchased; provided, however, that the total
fee shall not exceed One Hundred Thousand Dollars
($100,000).
2. In all other respects, the Services Agreement remains in
full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
WITNESS: COMPANY:
HUMPHREY HOSPITALITY TRUST, INC.
/s/ Bethany H. Hooper By: /s/ James Humphrey
- --------------------- --------------------
Bethany H. Hooper Name: James Humphrey
Title: President
PROVIDER:
HUMPHREY HOSPITALITY MANAGEMENT, INC.
/s/ Bethany H. Hooper By: /s/ Randy P. Smith
- --------------------- -------------------
Bethany H. Hooper Name: Randy P. Smith
Title: President
2
EXHIBIT 10.24
CONSTRUCTION LOAN AGREEMENT
THIS CONSTRUCTION LOAN AGREEMENT made and entered into this 10th day of
April, 1996, by and between HUMPHREY HOSPITALITY LIMITED PARTNERSHIP, a Virginia
limited partnership, (the "Borrower"), and MERCANTILE-SAFE DEPOSIT & TRUST
COMPANY, a Maryland banking corporation (the "Bank").
WITNESSETH:
WHEREAS, Borrower is the owner of all that parcel of land located in
Pulaski County, Virginia (the "Dublin Property") more particularly described in
Exhibit A-1 attached hereto and by this reference made a part hereof;
WHEREAS, Borrower is the owner of all that parcel of land located in
Dover, Kent County, Delaware (the "Dover Property" and together with the Dublin
Property, the "Property"), more particularly described in Exhibit A-2 attached
hereto and by this reference made a part hereof;
WHEREAS, the Borrower has applied to the Bank for a loan in a total
principal amount not to exceed Six Million Five Hundred Thousand Dollars
($6,500,000) (the "Loan"), a portion of the proceeds of which shall be used to
finance the Project (as hereinafter defined); and
WHEREAS, Bank has agreed to make the Loan on the terms and conditions set
forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and for Ten Dollars
($10.00) and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Borrower, Grantor and Bank agree as follows:
ARTICLE I
TERMS AND DEFINITIONS
In addition to the other terms herein defined, the following terms shall
have the meanings set forth in this Article I whenever used in this Agreement
unless the context clearly indicates a contrary meaning:
1.01. Act of Bankruptcy: The filing of a petition in bankruptcy under the
United States Bankruptcy Code, 11 U.S.C. 101 et seq. (and all future acts
supplemental thereto or amendatory thereof) or the commencement of a proceeding
under any other applicable law concerning insolvency, reorganization or
bankruptcy by or against the Borrower or any other guarantor, as debtor.
1.02. Borrower's Amended Deed of Trust: Collectively, (i) that certain
Second Amended and Restated Deed of Trust and Security Agreement of Borrower of
even date herewith granting and conveying to Bank a lien and security interest
on certain real, personal and miscellaneous property of Borrower, as more fully
described therein, located in Carter County, Tennessee, and (ii) those certain
Amended and Restated Deeds of Trust and Security Agreements dated of even date
herewith executed by Borrower granting and conveying to Bank a lien and security
interest on certain real, personal and miscellaneous property of Borrower, as
more fully described in each Deed of Trust, located in (a) King George County,
Virginia, (b) Prince Edward County, Virginia, and (c) Mercer County, West
Virginia.
<PAGE>
1.03. Building: Collectively, (i) that certain fifty (50) room hotel to be
constructed on the Dublin property (individually the "Hampton Inn"), and (ii)
that certain sixty-four (64) room hotel to be constructed on the Dover Property
(individually, the "Comfort Inn").
1.04. Business Day: Any day on which Bank is open for business of the
nature required by this Agreement.
1.05. Closing Date: The date of this Agreement.
1.06. Completion Date: The date on which the Project is required to be
substantially completed in accordance with the Plans and Specifications, being
October 1, 1997.
1.07. Construction Contract: Collectively, (i) the construction contract
between Borrower and the Dublin General Contractor pertaining to the
construction of the Dublin Improvements; and (ii) the construction contract
between the Borrower and the Dover General Contractor, pertaining to the
construction of the Dover Improvements.
1.08. Deed of Trust: Collectively, (i) the Borrower's Amended Deed of
Trust; (ii) the Dublin Deed of Trust; (iii) the Dover Mortgage; and (iv) the
IDOT.
1.09. Dover Mortgage: That certain Mortgage and Security Agreement dated
of even date herewith executed by the Borrower granting and conveying to Bank a
lien and security interest on the Dover Land and certain personal and
miscellaneous property of the Borrower, as more fully described therein.
1.10. Dublin Deed of Trust: That certain Deed of Trust and Security
Agreement dated of even date herewith executed by the Borrower granting and
conveying to Bank a lien and security interest on the Dublin Land and certain
personal and miscellaneous property of the Borrower, as more fully described
therein.
1.11. Event of Default: Any one or more of the events described in Section
7.1 hereof.
1.12. Guarantor: Collectively, Solomons Beacon Inn Limited Partnership,
Humphrey Hospitality Trust, Inc. and James I. Humphrey.
1.13. Guaranty: Collectively, those certain guaranty agreements
dated of even date herewith executed by the Guarantor.
1.14. General Contractor: Best & Wright, Inc. with respect to the Dublin
Property (the "Dublin General Contractor") and Humphrey Construction, Inc. with
respect to the Dover Property (the "Dover General Contractor").
1.15. IDOT: That certain Indemnity Deed of Trust and Security Agreement
dated of even date herewith executed by Solomons Beacon Inn Limited Partnership
granting and conveying to Bank a lien and security interest on certain real,
personal and miscellaneous property of Solomons Beacon Inn Limited Partnership
located in Calvert County, Maryland, as more fully described therein.
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<PAGE>
1.16. Improvements: The Building and all other structures or buildings now
or hereafter erected or placed on the Property, together with any and all
alterations, additions, accessions and replacements thereof. The Improvements
include those improvements on or to be on the Dublin Property (the "Dublin
Improvements") and those improvements on or to be on the Dover Property (the
"Dover Improvements").
1.17. Interest Payment Date: The periodic dates described in the Note on
which payments of accrued interest on all advances from time to time outstanding
under the Loan shall be due and payable, being on the first calendar day of each
month.
1.18. Interest Rate: The fluctuating annual rate of interest payable from
time to time on the Loan, in accordance with the Note.
1.19. Land: Collectively, all of that real property (i) located in Pulaski
County, Virginia consisting of 5.53 acres (the "Dublin Land"), and (ii) located
in Kent County, Delaware, consisting of 1.323 acres (the "Dover Land"), all as
more particularly described in Exhibits A-1 and A-2 attached hereto.
1.20. Leases: Any and all leases and subleases which may have been
heretofore executed or which may be hereafter executed in connection with, or
for, the use and occupancy of the Project or the Property (or any part thereof),
together with all extensions, renewals, modifications, amendments, supplements
and substitutions thereto.
1.21. Loan: the loan made by Bank to Borrower in the amount of Six Million
Five Hundred Thousand Dollars ($6,500,000).
1.22. Loan Documents: Collectively, this Agreement, the Note, the Deed of
Trust, the Guaranty, one or more Financing Statements, and all other documents
executed and delivered by Borrower, Guarantor or any other third party to
evidence or secure the Loan.
1.23. Major Subcontractor or Supplier: A contractor or supplier for the
Project, performing services or providing supplies in the aggregate of more than
$50,000.
1.24. Note: That certain Second Amended and Restated Deed of Trust Note
dated of even date herewith from the Borrower to the Bank evidencing the Loan.
1.25. Other Leases: Any and all leases and subleases which may have been
heretofore executed or which may be hereafter executed in connection with, or
for, the use and occupancy of the Other Property (or any part thereof), together
with all extensions, renewals, modifications, amendments, supplements and
substitutions thereto.
1.26. Other Property: Collectively, the property encumbered by the
Borrower's Amended Deed of Trust and the IDOT.
1.27. Plans and Specifications: Those certain plans and specifications
approved or to be approved by the Bank for the Improvements.
1.28. Prime Rate: The annual percentage rate periodically chosen and
recorded by the Bank as an index, at, above and below which interest rates are
established.
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<PAGE>
1.29. Project: Collectively, (i) the refinancing of certain indebtedness
of Borrower, and (ii) the Improvements to be constructed on the Dublin Land (the
"Dublin Project") and the Improvements to be constructed on the Dover Land (the
"Dover Project"), which together shall consist of the construction of the
Building and parking areas, together with appurtenant development activities.
1.30. Property: Collectively, the property encumbered by the Dover
Mortgage (the "Dover Property") and the Dublin Deed of Trust (the "Dublin
Property").
1.31. State: The State of Maryland.
1.32. Supplements: Any and all extensions, renewals, modifications,
amendments, supplements and substitutions.
1.33. Title Company: Stewart Title Guaranty Company.
ARTICLE II
THE LOAN
2.1 Loan:
(a) Commitment--Subject to Borrower's satisfaction of the
requirements and conditions set forth in this Agreement, Bank agrees to make
Loan advances under the Note to Borrower from time to time prior to the
Completion Date in an aggregate principal amount not to exceed $6,500,000.
(b) Borrowing Procedure--Borrower shall give Bank at least 7 days
prior notice of the amount of any proposed borrowing, and at least 2 days prior
notice of the additional information with respect to such borrowing by sending a
requisition request in the form specified in Section 4.1. Bank may act on any
request or instruction believed by it in good faith to be genuine and authentic,
and shall incur no liability to Borrower as a result thereof.
(c) Interest--Accrued interest on the aggregate amount of advances
outstanding under the Loan shall be paid on each Interest Payment Date and at
maturity in accordance with the Note.
2.2. Due Date Extension: If any payment of principal of, or interest on,
the Loan falls due on a Saturday, Sunday or other day which is not a Business
Day, then such due date shall be extended to the next following Business Day,
and additional interest shall accrue and be payable for the period of such
extension.
2.3. Making of Payments: All payments (including prepayments) of principal
of, or interest on, the Loan, shall be made in U.S. Dollars and in immediately
available funds at the principal office of Bank in Baltimore, Maryland or at
Banks affiliate, Citizens National Bank, in Burtonsville, Maryland. All such
payments shall be made without any set-off or counterclaim, and free and clear
of any restrictions or conditions, and free and clear of and without deduction
for or on account of, any present or future taxes, levies, imposts, duties,
charges, fees, deductions or
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<PAGE>
withholdings of any nature now or hereafter imposed by any governmental or other
authority.
2.4. Use of Loan Proceeds: Upon compliance with and subject to all of the
terms and conditions of this Agreement, Lender will advance the Loan to or for
the account of Borrower. Lender shall disburse the proceeds of the Loan so long
as no Event of Default (defined herein) has occurred and is continuing, for the
following purposes, and for no other purposes:
(a) The (i) payment of the fees for filing and recording any
documents, financing statements and any other curative documents that Lender may
deem necessary to file for record in order to perfect or protect the liens and
security interest created hereby or by any of the other Loan Documents, (ii)
payment to NationsBank, for purchase of a Promissory Note of Borrower in an
amount not to exceed $1,705,200, (iii) payment for labor, services, materials
and supplies used or furnished in site improvement for, and in the construction
of, the Project, as limited by the last two sentences of this subsection, (iv)
payment for the cost of the construction, acquisition, and installation of
utility services or other facilities and all real and personal property deemed
necessary in connection with the Project, as limited by the last two sentences
of this subsection, and (v) payment for the miscellaneous expenses incidental to
any of the foregoing items, including, loan fees, legal fees, costs incurred by
or on behalf of Lender and the premium on any surety bond. The loan proceeds to
be advanced hereunder in connection with the Dublin Improvements shall not
exceed $2,043,890, except as allowed pursuant to subsection (d) below: The Loan
proceeds to be advanced hereunder in connection with the Dover Improvements
shall not exceed $2,750,910 except as allowed pursuant to subsection (d) below:
(b) Payment of any sums required to reimburse Borrower for advances
made by Borrower or Grantor for any of the above items or for any other costs
incurred for work done or caused to be done by it which are properly chargeable
to the Project.
(c) The cost breakdown and loan budget submitted by Borrower shall
describe in sufficient detail to Lender, the application of loan proceeds for
construction of the Project and such amounts of other expenses attributable to
the Project. The cost breakdown and loan budget are attached hereto as Exhibit
B.
(d) Prior to beginning construction on the earlier of the Dublin
Improvements or the Dover Improvements, Borrower may submit a revised budget
amending the amount of funds required for one or both of the Dublin and Dover
Improvements, so long as the total amount of all loan proceeds anticipated for
all purposes does not exceed Six Million Five Hundred Thousand Dollars
($6,500,000). After construction has begun, in the event of a cost overrun on
either the Dublin Improvements or the Dover Improvements, and a surplus of funds
on the other Improvements, Borrower may submit documentation to Bank showing
both the cost overrun and surplus. With Bank's prior consent, which shall not be
unreasonably denied, Borrower may apply the surplus funds to offset the cost
overrun, notwithstanding anything to the contrary in this Agreement.
ARTICLE III
CONDITIONS AND REQUIREMENTS FOR INITIAL LOAN ADVANCE
The obligation of Bank to make the initial advance of Loan proceeds is
subject to Borrower's satisfaction of the requirements and conditions and
conditions set forth below with
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<PAGE>
respect to either the Dublin Project or the Dover Project unless waived in
writing by Bank. For purposes of the following, the Dublin Project shall be
considered separate and distinct from the Dover Project unless explicitly stated
otherwise:
3.1. Delivery of Documents Prior to Advance: Bank shall have received the
following documents, in form and substance satisfactory to it, and to its
counsel, prior to such initial Loan advance with respect to either the Dublin or
Dover Project, as the case may be;
(a) ALTA mortgagee's title insurance policy issued on behalf of the
Title Company on the Property and Improvements and on the Other Property,
without exception as to survey or mechanic's or materialman's liens,
guaranteeing to Bank as mortgagee a first lien on the good and marketable fee
simple title thereto, subject to no other liens, and with only such other title
exceptions set forth in those Commitments for Title Insurance issued by the
Title Company or as Bank may approve in writing.
(b) A current survey of the Land and the Other Property, with a
metes and bounds description, certified as to accuracy, showing the location of
existing and proposed easements, rights-of-way and improvements, and showing the
perimeter boundaries of the Land and other Property;
(c) Copies of the demolition, building and grading permits
pretaining to the Project, public works agreements, if any, and evidence that
the Project, as proposed, meets all zoning requirements for its intended use and
is properly sub-divided;
(d) Evidence that the Other Property is properly zoned and
subdivided and certificates of occupancy and other operating licenses related to
Other Property;
(e) Certificates evidencing coverage for the Improvements under All
Risk Builders Risk Insurance, including extended coverage, fire, collapse, flood
(or evidence Property is not in a floor hazard area), vandalism and malicious
mischief, naming Bank as loss payee under the mortgagee clause, in an amount
acceptable to Bank, and a copy of General Contractor's public liability
insurance for the Project;
(f) Certificate of public liability insurance and Property and
Casualty Insurance, where applicable, insuring Borrower's interest in the Land
and Other Property as the case may be, naming Bank as loss payee or mortgagee,
in amounts and with insurance companies acceptable to Bank;
(g) Certificate of worker's compensation insurance for Borrower
(unless Borrower has no employees) and General Contractor in amounts and with an
insurance company acceptable to Bank for the Project;
(h) Evidence as to the availability of adequate sewer, water and
other utilities to the Project and all necessary permits therefor:
(i) Soil test, exploratory report or other information necessary for
satisfactory evidence of soil conditions with regard to the Land and the
Improvements to be constructed for the Project;
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<PAGE>
(j) One set of the final Plans and Specifications, final project
cost budget, and two copies of the site plans for the Project, all as approved
by the Bank;
(k) A fully executed copy of the Construction Contract and all
contracts with architects, engineers, construction managers, Major
Subcontractors and Major Suppliers then under contract for the Project;
(l) Cost breakdown of all Project costs setting forth in such
categories as reasonably required by Bank, the utilization of all proceeds of
the Loan, and any additional funds available or necessary for completion of the
Project, as well as as projected draw/progress schedule;
(m) All governmental approvals and certifications required for
commencement of construction of the Project;
(n) Copies of all executed Leases and Other Leases and subordination
agreements from any and all tenants;
(o) Environmental screening report, satisfactory to Bank that the
Project is free from any type of environmental hazard, hazardous substance or
other similar conditions and satisfactory review by Bank of existing
environmental reports on the Other Property;
(p) An appraisal report covering the Property and updated appraisal
letters covering the Other Property in form and content satisfactory to the
Bank; and
(q) Such other documents as Bank or its counsel reasonably may have
requested, or as Bank may have required in the Bank's Commitment, in connection
with the Loan or the Improvements.
3.2. Delivery of Loan Documents and Fees: Borrower shall have executed and
delivered to Bank at closing the Loan Documents to be executed by them, and all
other documents and instruments required from Borrower in connection with the
Loan. In addition, Borrower shall have paid at closing $32,500 representing the
Loan fee due to Bank, together with all title insurance fees, legal fees and the
fees of Bank's consulting engineer due to that date.
3.3. Agreements with Engineer and General Contractor: Borrower's General
Contractor and Engineer shall have executed and delivered to Bank at closing
their agreements, pursuant to which each agrees (i) to continue performance of
its contract in accordance with the terms of the contract on Bank's behalf on
the occurrence of an Event of Default, if so requested by Bank, provided that
Bank gives it notice of its intention to require continued performance and of
Bank's intention to pay in accordance with the terms of the contract, and (ii)
not to permit or execute any change order materially increasing or decreasing
the cost or scope of the Project without the prior written consent of Bank,
which shall not be unreasonably withheld. A "material" increase or decrease
shall include any change which would result in a cost increase (or decrease)
which, together with all prior unapproved changes, results in an aggregate cost
increase (or decrease) of $25,000 or more.
3.4. Legal Opinions: Bank shall have received from counsel for the
Borrower, and Guarantor, legal opinions in form and substance reasonably
satisfactory to Bank with respect to such matters incident to the Loan as Bank
may require.
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<PAGE>
3.5 Representation and Warranties: The representations and warranties set
forth in Article V hereof shall be true and correct in all material respects on
and as of the Closing Date, and no Event of Default shall then exist under this
Agreement.
3.6. Recordation: The Deed of Trust and the related UCC financing
statements and all other Loan Documents requiring filing or recordation shall
have been filed or recorded in the appropriate public records as may be
necessary and appropriate to evidence and perfect the liens and security
interests thereby created.
3.7. Title Insurance Policy: Bank shall have received the title insurance
policy issued by the Title Company pursuant to the binder described in Section
3.1(a) hereof, in form and substance satisfactory to Bank, dated as of the
Closing Date, insuring the lien of the Deed of Trust as a valid first mortgage
lien, and subject only to such title exceptions as Bank has theretofore approved
in writing.
ARTICLE IV
REQUIREMENTS AND CONDITION
FOR ALL LOAN ADVANCES
The obligation of Bank to make any Loan advance for construction of the
Dublin Improvements or the Dover Improvements (which Improvements shall be
independent of each other for purposes of this Article IV, unless explicitly
stated otherwise) is subject to the Borrower's satisfaction of the following
requirements and conditions:
4.1. Submission of Disbursement Requests: Disbursements by Bank shall be
made upon receipt by Bank of a requisition which (a) includes an AIA approved
progress payment form which shall be signed by the General Contractor and
approved by the Bank's consulting engineer, (b) prepared in trade breakdown
form, and in such detail as may be reasonably required by Bank, and (c) subject
to Section 4.2 hereof, shall be for no more than ninety percent (90%) of the
value of the work performed and material in place in accordance with the Plans
and Specifications for the appropriate Project as approved by the Bank's
Inspector. Each requisition shall indicate the percentage of completion and the
amounts expended or costs incurred for work done and necessary material
delivered to the appropriate Project. Each requisition shall contain such
details concerning the appropriate Project as Lender shall reasonably require
and the certification by the Borrower that (i) none of the items for which funds
are being requisitioned has formed the basis for any advance theretofore made
from the proceeds of the Loan, (ii) each item for which funds are being
requisitioned is a proper item to be paid from the proceeds of the Loan and is
necessary in connection with the appropriate Project, (iii) no notice of any
lien, right to lien or attachment upon or claim affecting the right to receive
payment of, any of the monies payable under such requisition to any of the
persons named therein has been received, or if any notice of any such lien,
attachment or claim has been released or discharged or will be released or
discharged upon payment of the requisition, (iv) such requisition contains no
items representing payment on account of any retained percentages that are
entitled to be retained at the date of the requisition, (v) with respect to each
item for payment for labor, or materials and equipment, that the labor was
actually performed or that the materials and equipment were actually furnished
to the appropriate Project, (vi) such materials and equipment are not subject to
any lien or security interest or the funds requisitioned are to be used to
satisfy any such lien or security interest, (vii) when added to the total of
prior
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<PAGE>
requisitions for construction costs, subject to Section 4.2 hereof, does not in
amount exceed ninety percent (90%) of the amount of the Loan multiplied by the
percentage of the appropriate Project performed and material in place, (viii)
all inspections required to be made by any public authority have been made and
the appropriate Project approved, and (ix) the balance of the proceeds of the
Loan not yet advanced and the Borrower's other funds deposited with Lender, if
any, are sufficient to complete the appropriate Project within the Completion
Date and in accordance with the Plans and Specifications.
4.2. Retainage: Loan advances for construction costs shall be subject to
the following retainage requirements: an amount equal to ten percent (10%) of
each requisition shall be held back as retainage, until such time as the
Improvements are ninety percent (90%) completed, as certified by Bank and Bank's
consulting engineer for the Project whereupon half of the retainage will be
released thereby reducing the retainage to five percent (5%). The remaining
retainage shall be released upon satisfaction of the conditions specified in
Section 4.4 herein.
4.3. Conditions to Disbursements: The obligation of Bank to make any
disbursements hereunder shall be subject to satisfaction of the following
requirements and conditions with respect to the particular Project:
(a) The Borrower shall have submitted a complete and fully executed
disbursement request, duly approved and certified as provided in Section 4.1
hereof, at least 7 days prior to the date funding is being requested;
(b) In the opinion of the Bank's consulting engineer, the Project
can be completed in accordance with the Plans and Specifications on or prior to
the Completion Date for an amount not greater than the undisbursed portion of
the Loan, as such may be modified pursuant to the conditions of Section 2.4
hereof. In the event the Borrower requests any changes in the Plans and
Specifications from those approved by Bank, prior to any disbursement of loan
proceeds, such changes shall be approved by Bank, and the Bank's consulting
engineer;
(c) Bank shall have received copies of all reports, as available,
required to satisfy requirements of all applicable governmental agencies having
jurisdiction over the Project;
(d) No Event of Default, nor any event or state of facts which with
notice or passage of time or both would constitute an Event of Default, shall
then exist under the Loan Documents or under any Lease;
(e) Bank shall receive, upon request to the Borrower, a
bring-to-date title search which indicates no intervening liens or encumbrances
and no other title exceptions other than those approved by Bank;
(f) Bank shall have received waivers of liens from the General
Contractor and each Major Subcontractor and Supplier for all work performed or
materials included in the last previous requisition within thirty (30) days from
the date of funding of said requisition or prior to the next requisition,
whichever shall first occur;
(g) As soon as footings and foundations for the Building are in,
furnish Bank a location survey prepared by a registered surveyor showing the
actual location of the Improvements on the Land with relation to the boundary
lines thereof, and indicating that such
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location is in compliance with all setback and other applicable restrictions and
all easement requirements; and
(h) Bank shall not be required to disburse more than the maximum
principal amount, as such maximum principal amount may be limited pursuant to
Section 2.4 hereof; and
(i) Bank shall not be required to disburse more frequently than once
each month per Project.
4.4. Additional Conditions for Final Advance: In addition to all other
conditions set forth in this Article IV, the obligation of Bank to make the
final advance under the Loan on account of the Dublin Improvements or the Dover
Improvements, including release of all retainage to such date with respect to
such Improvements shall be subject to Bank's receipt of the following:
(a) Final waivers of liens from the General Contractor and all Major
Subcontractors and Suppliers;
(b) Certificates of completion, in form and substance reasonably
satisfactory to Bank from the General Contractor;
(c) Copy of the certificate of use and occupancy (or such other
certificate or permit as may be necessary to entitle Borrower to the full use
and occupancy of the Improvements) issued for the appropriate Improvements;
(d) Copies of such additional permits and licenses for operation of
the appropriate Improvements as may be necessary or required by governmental
authorities having jurisdiction over the appropriate Improvements;
(e) An as-built survey acceptable to Bank;
(f) Copies of the approved, as-built Plans and Specifications;
(g) Permanent fire and extended coverage insurance and business
interruption insurance in amount and form acceptable to Bank;
(h) Final approval of the appropriate Improvements by any tenant
under any then existing Lease, if such tenant's obligations under the Lease are
contingent upon the tenant approving all or a portion of the Project.
4.5. Insufficiency of Loan Proceeds: If at any time during the term of
this Agreement, the Bank determines, after reasonable consultation with the
Project architect and the Bank's consulting engineer that the remaining
undisbursed portion of the Loan proceeds (as limited by Section 2.4 hereof) are
insufficient for any reason to complete either the Dublin Improvements or the
Dover Improvements or any part of the Improvements substantially in accordance
with the Plans and Specifications, the Borrower shall, within ten (10) days
after receipt of written notice thereof (including a statement of the basis for
such insufficiency) from Bank, deposit with Bank or its designee such sums of
money in cash (from sources other than the Loan) as reasonably may be required
to eliminate such insufficiency. Any amount so deposited by the Borrower shall
stand as additional security for Borrower's obligations under this Agreement,
and may be disbursed at
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Bank's option before any further Loan advances are made hereunder.
Notwithstanding the introductory clause of this Article IV, in the event the
Bank determines, after reasonable consultation with the Project architect and
the Bank's consulting engineer there are insufficient funds to complete for
either the Dublin or the Dover Improvements, the Bank shall not be required to
make any additional advances on either Project until the deficiency is remedied.
4.6. Authorized Disbursements: Notwithstanding any other provision of this
Article IV, the Borrower and Grantor hereby irrevocably authorizes Bank, at the
option of Bank, to make disbursements of Loan proceeds (i) jointly to Borrower
and to any contractor or materialmen furnishing labor, services or materials in
the construction of the Project for any amounts due them in connection
therewith, or (ii) directly to Bank for interest, fees and any other amounts
required to be paid to Bank under the Note or the other Loan Documents. No
further authorization from Borrower shall be necessary for Bank to make such
direct disbursements, and all such disbursements shall satisfy pro tanto the
obligation of Bank hereunder and shall be secured by the Deed of Trust.
4.7. Disbursements Do Not Constitute Waiver: No disbursement of any Loan
proceeds by Bank shall constitute a waiver of any of the conditions for
disbursement contained in this Agreement nor shall such disbursement constitute
an obligation of Bank to make further disbursements or, in the event the
Borrower or Grantor is unable to satisfy any such condition, shall any such
disbursement have the effect of precluding Bank from thereafter declaring such
inability to be an Event of Default.
4.8. Additional Advance: In the event that the aggregate amount of all
advances under this Agreement, upon completion of the entire Project (including
the Dublin Improvements and the Dover Improvements taken together) as required
hereunder and after satisfaction of all of the conditions for the final advance,
shall have been less than $6,500,000, Borrower may request and Bank shall
disburse up to the lesser of (i) Five Hundred Thousand Dollars ($500,000) or
(ii) the remaining undisbursed Loan proceeds to Borrower for payment of a
developer's fee. Any remaining undisbursed Loan proceeds shall be deemed
advanced and simultaneously be applied to prepay the Loan in the manner set
forth in the Note for prepayments.
4.9. Stored Materials. No disbursements will be made for materials which
are not physically incorporated into the Improvements, other than for materials
actually delivered to the site or off-site, and stored in a place, secured and
insured against theft, vandalism and other damage, all in a manner satisfactory
to the Bank.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to Bank as of the date hereof, and is
deemed to represent and warrant as of the date it submits any disbursement
request to Bank hereunder, that:
5.1. Certificate and Status: The Borrower is a limited partnership in good
standing in the Commonwealth of Virginia, the State of Maryland, the State of
Tennessee, the State of West Virginia and the State of Delaware and all
representations and warranties made by Borrower in this Agreement and in the
other Loan Documents are true, complete and correct.
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5.2. Authority: The Borrower has power and authority to enter into and
execute and deliver this Agreement and each of the other Loan Documents executed
and delivered by it and to incur and perform the obligations provided for herein
and therein (including the borrowing of the Loan), all of which have been duly
authorized by all proper and necessary action and all material governmental
licenses, authorizations, consents and approvals required. No consent or
approval of any other person or public authority or regulatory body is required
as a condition to the validity or enforceability of this Agreement or any of
such other Loan Documents, or if required the same has been duly obtained.
5.3. Binding Obligations: This Agreement and each of the other Loan
Documents executed and delivered by the Borrower have been properly executed by
the Borrower, constitute valid and legally binding obligations of the Borrower,
and are enforceable against the Borrower, in accordance with their respective
terms.
5.4. Litigation: There is no litigation or proceeding pending or, so far
as the Borrower knows, threatened before any court or administrative agency
which will materially adversely affect the financial condition or operations of
the Borrower or the authority of the Borrower to enter into, or the validity or
enforceability of, this Agreement or any of the other Loan Documents executed
and delivered by the Borrower.
5.5. No Conflicting Agreements: There is (i) no provision of any existing
mortgage, pledge, lien, security interest, charge, encumbrance, contract or
agreement binding on the Borrower or affecting its property nor any judgment,
decree, or order of court binding on Borrower, and (ii) to the best knowledge of
the Borrower, no law, statute, rule or regulation binding upon the Borrower or
affecting any of its property, which would conflict with or in any way prevent
the execution, delivery or performance of the terms of this Agreement or of any
of the other Loan Documents executed and delivered by the Borrower, or which
would be in default or violated as a result of such execution, delivery or
performance.
5.6. Financial Information: All financial information heretofore furnished
to the Bank and to the other parties to this transaction concerning the Borrower
are complete and correct in all material respect, and fairly presents the
financial position of the Borrower. There are no material liabilities, direct or
indirect, fixed or contingent, of which the Borrower is aware except as
reflected therein. There has been no material adverse change in the financial
condition or operations of the Borrower since the dates of such financial
information (and to the Borrower's knowledge no such material adverse change is
pending or threatened), and the Borrower has not guaranteed the obligations of
or made any investment in or advances to, any person except as disclosed in such
information. The Borrower has good and marketable title to all of its properties
and assets, and all of such properties and assets are free and clear of
encumbrances (other than as permitted by the Bank), except as reflected in such
information.
5.7. Tax Returns: The Borrower has filed or caused to be filed all
required federal, state and local tax returns and has paid all taxes shown on
such returns as such taxes have become due. No claims have been assessed and are
unpaid with respect to such taxes, except as shown in the financial information
referred to in subsection 5.6 above.
5.8. Liens on Property: There exist no mortgage, pledge, lien, security
interest, charge or other encumbrances (except as permitted by Bank) on or with
respect to the Property or Other Property.
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5.9. Place of Business: The Borrower has its principal place of business
in the State.
5.10. Utilities: All utility services necessary for the construction and
operation of the Improvements for their intended purposes are or will be
available at the boundaries of the Land, including water supply of sufficient
quantity and pressure, storm and sanitary sewer facilities of adequate
capacities, gas, electric and telephone facilities. The Borrower has procured,
or hereby agrees to use its best efforts to procure, from the appropriate State,
county, municipal, and other authorities and corporations, connection and
discharge arrangements for the supply of water, gas, electricity and other
utilities and sewage and industrial waste disposal for the operation of the
Project.
5.11. Roads: All roads necessary for the full utilization of the Project
for their intended purposes have either been completed or the necessary rights
of way therefor have either been acquired by the Borrower or the appropriate
governmental authority or have been dedicated to public use and accepted by such
governmental authority or will be so acquired or dedicated within a period of
time satisfactory to Bank, and all necessary steps have been taken by the
Borrower and such governmental authority to assure the complete construction and
installation thereof in accordance with law and all applicable governmental or
quasi-governmental requirements.
5.12. Zoning, etc. The Improvements, and the use of the Project for its
intended use will not violate any zoning or other ordinance, regulation or law,
restrictive covenant or agreement (either now in existence or known by the
Borrower to be proposed) applicable to the Property or its use, and all
requirements for such use have been satisfied. The Borrower shall not initiate,
join in, or consent to any change in any restrictive covenant, easement, zoning
ordinance or other public or private restriction further limiting, or
restricting the uses which may be made of the Property or any part thereof.
5.13. Cost Breakdown: The cost breakdown (in trade breakdown form) for the
Project supplied to Lender is complete and accurate as of the date hereof based
on all information now available to the Borrower, and the Borrower has no
knowledge of any material change in the amount shown thereon which is likely to
occur.
5.14. Inspection: The Borrower will permit the Bank, its agents and the
Bank's inspector to enter upon the Property at all reasonable times and as often
as may be reasonably requested, to inspect the Improvements and all materials to
be used in connection with the construction thereof, and to examine all detailed
plans and drawings which are or may be kept at the construction site.
5.15. Maintenance and Repair of the Property; Compliance with Laws; etc.
Following completion of construction of the Project, the Borrower will, at its
sole cost and expense:
(a) Maintenance and Repair. Keep and maintain the Project and each
part thereof in good condition, working order and repair, and make all necessary
or appropriate repairs, replacements and renewals thereto so that each part
thereof shall at all times be in good condition, fit and proper for the
respective purposes for which it was originally intended, erected, or installed
and to insure that the security for the Loan shall not be impaired.
(b) Obstructions. Use its best efforts to keep and maintain all
portions of the Project and the sidewalks, curbs and passageways adjoining the
same in a clean and orderly condition, free of dirt, rubbish, snow, ice and
unlawful obstructions.
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<PAGE>
(c) Permits, Licenses, Etc. Procure or cause to be procured, any and
all necessary permits, certificates, licenses or other authorizations required
for the use of the Project, and observe and comply with all conditions and
requirements necessary to preserve and extend any and all rights, licenses,
permits, privileges, franchises and concessions which are now applicable to the
Project or which may be applicable in the future.
(d) Structural Injury, Nuisance, Waste and Other Prohibited Uses.
Not use or occupy the Project or permit the same to be used or occupied in any
manner which would cause structural injury to the Improvements or which would
cause the value or the usefulness of the Project or any part thereof to diminish
(ordinary wear and tear excepted), or which would constitute a public or private
nuisance, or waste.
(e) Compliance with Laws. Not use or occupy the Project or knowingly
permit the same to be used or occupied contrary to any uniformly applicable laws
affecting the Project and the occupancy, operation or use thereof, whether or
not any such laws which may be hereafter enacted involve a change of policy on
the part of the governmental body enacting the same; provided, however, that if
such laws prohibit the use of the Property for the use of the Project
contemplated hereunder, the Borrower may use the Project for any lawful purpose
that is approved by the Bank; provided further that the Borrower may, at its
sole cost and expense, in good faith and by appropriate and diligent
proceedings, contest the validity or applicability of any such law.
5.16. Management Agreements. There are no management agreements in effect
with respect to any portion of the Property or Other Property. No management
agreement shall be entered into with respect to the Property or Other Property
or any portion thereof, unless such management agreement is subordinate to the
lien of the Deed of Trust and approved by the Bank in writing, which approval
shall not be unreasonably withheld.
ARTICLE VI
COVENANTS
The Borrower covenants and agrees that, so long as any portion of the Loan
remains unpaid, the Borrower will:
6.1. Construction of Improvements: Cause the Improvements to be completed
substantially in accordance with the final Plans and Specifications on or before
the Completion Date, free and clear of all liens other than the Deed of Trust.
The Borrower shall not permit any material changes in the Plans and
Specifications without the prior written consent of the Bank's consulting
engineer and all governmental authorities to whom such Plans and Specifications
are required to be submitted.
6.2 Maintenance of Property; Insurance: Keep the Improvements and all of
the Property useful or necessary in the operation of the Project in good working
order and condition, to insure that the security for the Loan shall not be
impaired. The Borrower will obtain or cause to be obtained and maintain in full
force and effect all insurance required hereby and by the Deed of Trust. Upon
completion of the Project or the occupancy thereof, whichever shall first occur,
the Borrower shall obtain and deliver to Bank, and thereafter maintain, policies
of fire and extended coverage insurance in form and with companies satisfactory
to Bank in an amount not less than the full insurable value of the Project (and
in any event not less than amounts sufficient to prevent any co-insurance
liability of the Borrower, or Bank) with loss payable to Bank.
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<PAGE>
6.3. Availability of Funds: Upon request by Bank, furnish Bank
satisfactory evidence that the funds necessary to complete the Project in excess
of the proceeds of the Loan have been advanced by or are available to the
Borrower.
6.4. Certifications, Licenses, Permits, etc.: Obtain or cause to be
obtained prior to the final advance all certifications, licenses, permits and
governmental approvals as may be necessary or required to operate the Project.
6.5. Taxes and Claims: Pay and discharge all taxes prior to the date on
which penalties attach thereto, and all lawful claims which, in unpaid, might
become an encumbrance upon any of their properties, subject to the right of the
Borrower to contest the same in accordance with the approval of Bank. If the
Borrower fails to pay any of such taxes at the time or in the manner provided in
this Section, Bank may, at its option, pay such taxes and Borrower shall pay to
Bank the amount of any sum so paid, with interest thereon as provided in Article
VIII hereof.
6.6. Compliance With Laws: Comply with all applicable laws.
6.7. Books and Records: Keep and require by contract the General
Contractor to keep, adequate records and books of account with respect to the
Property, the Improvements, and its business in accordance with generally
accepted accounting principles; and permit the Bank, by its agents, accountants,
and attorneys, to visit and inspect the Property and the Improvements, to
examine such records and books of account and to discuss the affairs, finances
and accounts pertaining thereto with agents of the Borrower at its offices
during normal business hours and at such other reasonable times as may be
requested by the Bank.
6.8. Inspection: Permit the Bank, its agents and the Bank's inspector to
enter upon the Property at all reasonable times and as often as may be
reasonably requested, to inspect the Improvements and all materials to be used
in connection with the construction thereof, and to examine all detailed plans
and drawings which are or may be kept at the construction site.
6.9. Prohibition on Sale, Lease, etc.: Not hereafter mortgage, assign,
convey, sell, lease (except under tenant leases which have first been approved
in writing by Bank prior to becoming effective) or otherwise dispose of or
encumber its interest in the Property, or any part thereof, or the income stream
therefrom, or permit any such action to be taken, or permit any change in any
controlling interest of the Borrower except as permitted pursuant to the terms
of the Deed of Trust.
6.10. Notices: Promptly give written notice to Bank (i) all litigation
affecting the Borrower, the Property, the Other Property, or any portion of the
Project, and (ii) all complaints and charges made by any governmental authority
having jurisdiction over the Project which may materially delay or require
material changes in the construction of the Improvements or otherwise impair the
security of Bank.
6.11. Payment of Obligations: Pay and discharge at or before maturity all
its material obligations and liabilities, including (without limitation) tax
liabilities, the costs and expenses of constructing and equipping the
Improvements, and claims for labor, materials, and supplies that, if unpaid,
might become liens on the Borrower's property, except such as are being
contested in good faith by appropriate proceedings. The Borrower will maintain
in accordance with generally accepted accounting principles appropriate reserves
for the accrual of any such obligations and liabilities.
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<PAGE>
6.12. Further Assurances: Upon request by Bank, do any act or execute any
additional documents (including, but not limited to, security agreements and
financing statements on any personalty owned by the Borrower and included or to
be included in the Project) as may be reasonably required by Bank to confirm the
lien and security interest of the Deed of Trust, or any other collateral
document.
6.13. Alterations, Additions and Improvements: Not, except for the
Project, construct any additional improvements on the Property without the prior
written consent of the Bank, and no portion of the Improvements, or any other
improvements or equipment now or hereafter covered by the lien and security
interest of this Agreement or the Deed of Trust, shall be removed, demolished or
materially altered, without the prior written consent of the Bank. The Borrower
will complete and pay for, within a reasonable time, any permitted structure at
any time in the process of construction on the Property, and will:
(a) Compliance With Restrictions. Construct, erect and complete any
permitted improvements on any part of the Property (i) in good and workmanlike
manner and substantially in accordance with all applicable laws and in
accordance with the orders, rules and regulations of the National Board of Fire
Underwriters, or any other body hereafter constituted exercising similar
functions, (ii) entirely on lots or parcels of Property, (iii) so as not to
encroach upon any easement or right of way or upon the land of others, (iv)
wholly within the building restriction lines however established, and (v) so as
not to violate use and other restrictions contained in prior conveyances, zoning
ordinances or restrictions;
(b) Insurance. Furnish, in connection with any such work, general
public liability insurance for the benefit of the Bank, as its interest may
appear, in the limits required by the Bank;
(c) Payment. Promptly pay for all such improvements; and
(d) Liens. Discharge or bond (to the reasonable satisfaction of
Bank) any and all liens filed against the Property, and upon the request of the
Bank, deposit with the Bank or court having jurisdiction a surety bond or other
security satisfactory to the Bank to assure the payment for and completion of
any such changes, additions, alterations, substitutions, replacements, removals
or improvements.
All such changes, additions, alterations, substitutions, replacements,
removals and improvements shall become a part of the Project and subject to the
lien and security interest of the Deed of Trust.
6.16. Fees of Bank's Inspector and Engineer: Pay the reasonable fees, if
any, of the Bank's inspector, attorneys, appraiser and engineer in connection
with the Loan.
6.17. Performance of Other Agreements. The Borrower shall duly and timely
perform and observe all of the covenants, agreements and conditions on its part
to be performed or observed pursuant to the Loan Documents in all material
respects.
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ARTICLE VII
DEFAULT: REMEDIES
7.1. Defaults. An Event of Default shall be deemed to have occurred under
this Agreement on the occurrence of any one or more of the following events:
(a) Any representation or warranty made herein or any statement or
representation made in any certificate, report or opinion (including legal
opinions), financial statement or other instrument furnished in connection with
this Agreement (including requisitions), or any of the other Loan Documents,
proves to have been incorrect in any material respect when made; or
(b) (i) Borrower fails to pay within fifteen (15) days of when due
and payable any payments or any other charges or sums on or under the Note
(whether upon maturity, on any installment date, after acceleration, after
notice of prepayment, or otherwise), or (ii) the Borrower fails to pay when due
(subject to applicable grace period, if any) any other payment required by this
Agreement or any of the other Loan Documents to be paid by the Borrower; or,
(c) The Borrower fails to duly and promptly perform, comply with or
observe any of the terms, covenants, conditions or agreements contained herein,
other than pertaining to insurance requirements herein for which there shall be
no such cure period, which default shall remain unremedied for thirty (30) days
(or such other cure period as may be specified herein) after notice to the
Borrower thereof; provided, however, that if such default be such that it cannot
be corrected within thirty (30) days (or such other cure period as may be
specified herein), it shall not be an Event of Default if, in the opinion of the
Bank reasonably exercised, the Borrower is taking appropriate corrective action
to cure the default and if such default will not, in the sole judgment of the
Bank, impair the security for the Loan; or
(d) An Event of Default occurs under the Deed of Trust or under any
of the other Loan Documents; or
(e) The Borrower fails to complete the construction of the Project
on or before the Completion Date; or
(f) The Bank's consulting engineer reasonably determines that there
is not sufficient time to complete the construction of the Project on or before
the Completion Date; or
(g) Subject to conditions beyond the control of the Borrower, work
on the Project (i) does not commence, with respect to the Dover Project, within
sixty (60) days of the Closing Date, or with respect to the Dublin Project,
within ninety (90) days of the Closing Date, or (ii) stops for a period of
fifteen (15) consecutive days or (iii) is not proceeding in a manner reasonably
satisfactory to the Bank; or
(h) Any interlocutory mechanics' liens are established against the
Project and are not caused to be discharged or bonded against by the Borrower
within thirty (30) days after it receives notice of the establishment thereof;
or
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(i) The Bank and its agents, including the Bank's consulting
engineer, are not permitted, at all reasonable times, to enter upon the
Property, to inspect the Project and all materials, fixtures and articles used
or to be used in the construction or renovation of the Improvements, and to
examine all detailed plans, show drawings and specifications which relate to the
Improvements or the appurtenances thereto or to be used in the operation
thereof; or the construction or renovation is not substantially in accordance
with the Plans and Specifications, and the Borrower fails promptly upon notice
thereof from the Bank to commence and diligently proceed to correct the same
(the Bank to determine in its reasonable discretion whether the Borrower is
acting promptly and diligently); or
(j) The Borrower does not disclose to the Bank upon demand, the
names of all Major Subcontractors and material Suppliers with whom the borrower
has contracted for the construction of the Improvements or for the furnishing of
labor or materials therefor; or
(k) The Borrower is unable to satisfy any condition of its right to
receive disbursement from the Bank for a period in excess of thirty (30) days
from the date the requisition therefor is received by the Bank; or
(l) Any survey required by the Bank during the period of
construction shows any matters not approved by the Bank and such matters are not
removed within thirty (30) days after notice thereof to the Borrower; or
(m) The Borrower fails to comply with any requirement of any
governmental authority having jurisdiction within thirty (30) days after notice
in writing from such authority of such requirement shall have been given to the
Borrower; or if any proceeding is commenced or action taken to enforce any
remedy for a violation of any requirement of a governmental authority or any
restrictive covenant affecting the Property or any part thereof.
7.2. Remedies of Bank on Default: Whenever any Event of Default referred
to in Section 7.1 hereof shall have occurred, the Bank may refuse or refrain
from making any advance of Loan proceeds hereunder, and take such other actions
against the Borrower, or Property as it may deem to be appropriate, as permitted
by law. In addition, the Bank, in its sole discretion, may take any one or more
of the following remedial steps:
(a) Acceleration. Declare the unpaid principal of the Note and all
interest accrued thereon, together with all other moneys payable hereunder, to
be immediately due and payable, by notice in writing to that effect delivered to
the Borrower, and upon such declarations, all such moneys shall become
immediately due and payable, without protest, presentment, further notice or
demand, all of which are expressly waived by the Borrower, at the place of
payment provided in such notice, anything in this Agreement or in the Note to
the contrary notwithstanding.
(b) Legal Action.
(i) by mandamus or other suit, action or proceeding at law
or in equity, enforce all rights of the Bank, and require the Borrower to carry
out any agreement with or for the benefit of the Bank, and to perform its or
their duties under this Agreement, the Deed of Trust, and the other Loan
Documents;
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(ii) bring suit upon the Note;
(iii) by action or suit in equity enjoin any acts or things
which may be unlawful or in violation of the rights of the Bank; or
(iv) take whatever action at law or in equity as may appear
necessary or desirable to collect the payments and other amounts then due and
thereafter to become due or to enforce performance and observance of any
obligation, agreement or covenant of the Borrower or any other party under this
Agreement or under any of the other Loan Documents.
(c) Books and Records. Have access to and inspect, examine and make
copies of the books and records and any and all accounts and similar data of the
Borrower.
(d) Protection of Property. Without resort to judicial process, take
such steps as they deem appropriate to protect the Project from depredation or
injury, including (without limitation) employment of watchmen or other
protective services, and any expenses incurred by the Bank in taking such steps
shall be paid by the Borrower as provided in Article VIII hereof.
(e) Completion of Project. Lender shall have no obligation to
advance any portion of the undisbursed proceeds of the Loan to Borrower. Lender
may enter upon the Property for the purpose of causing the continuation or
completion of the Project and causing the Borrower's obligations hereunder to be
fulfilled, and for such purposes the Borrower each hereby appoints the Bank as
its lawful attorney-in-fact, with full power of delegation and substitution, to
act for such purpose in the Borrower's name, to:
(i) continue the completion of the Project,
(ii) avail itself and procure performance of all contracts
theretofore made by the Borrower,
(iii) modify such contracts, or to enter into new contracts
with the same or other contractors, architects, suppliers or agents, as may be
reasonably necessary to complete the Project,
(iv) make such corrections or changes in the Plans and
Specifications as may be reasonably necessary to complete the Project,
(v) pay, settle or compromise any bills, claims or liens
incurred in connection with the completion of the Project,
(vi) prosecute or defend any action or proceeding in
connection therewith, to execute such applications and certificates as may be
required by governmental authority or any agreement by the Borrower,
(vii) perform any other act and execute and deliver all
documents and instruments as may be appropriate for such purposes, and
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(viii) use any funds not yet advanced hereunder or otherwise
allocated or made available therefor to pay the cost thereof, it being
specifically agreed that this power of attorney is a power coupled with an
interest which cannot be revoked.
Any disbursement of funds for such purposes shall be deemed disbursements
pursuant to this Agreement and secured by this Agreement and the Deed of Trust.
In addition, if it shall be reasonably necessary for the Bank to disburse any
amounts in order to accomplish such purposes, the Borrower agrees to reimburse
the Bank for the amount of such excess, together with interest thereon as
provided in Article VIII hereof, and authorizes the Bank to apply funds received
from the sale or rental of any portions of the Project to the repayment of such
excess before the same are applied for any other purpose. Any action taken by
the Bank hereunder may, in the sole discretion of the Bank, be thereafter
terminated or changed, and this Agreement or any action taken hereunder shall in
no way be construed as imposing any obligation upon the Bank to act or continue
to act on the Borrower's behalf or otherwise to complete the Project or fulfill
any obligation of the Borrower in connection with the Project.
(f) Possession of Project. Take possession of the Project and have,
hold, manage, lease and operate the same on such terms and for such period of
time as the Bank may deem proper; and collect and receive all rents, income and
profits of the property, with or without taking possession of the Project, with
full power to make from time to time all alterations, renovations, repairs or
replacements thereto as may seem proper to the Bank, and to apply such rents,
income and profits to the payment of:
(i) the reasonable cost of such alterations, renovations,
repairs and replacements and expenses incident to the taking and retaining
possession of the Project and the management and operation thereof and keeping
the same properly insured, and
(ii) all taxes and any other encumbrances which may be prior
in lien or payment to the Borrower obligations hereunder, and
(iii) the Borrower's obligations hereunder, together with
all costs and reasonable attorney's fees, in such order of priority as to any of
such items as the Bank in its sole discretion may determine, any law, custom or
use to the contrary notwithstanding.
(g) Repossession of Collateral. Proceed under the Uniform Commercial
Code as to all or any part of the collateral, and in conjunction therewith
exercise all of the rights, remedies and powers of a secured party under the
applicable Uniform Commercial Code, including, without limitation, taking
possession of the collateral pursuant to Section 9-503 of the Uniform Commercial
Code without resort to judicial process. Upon the occurrence of any Event of
Default hereunder, the Borrower shall assemble all of the collateral, and make
the same available at the Property. Any notification required by Section 9-504
of the Uniform Commercial Code shall be deemed reasonably and properly given if
given in the manner specified for other notices under this Agreement, at least
15 days before any sale or other disposition of the collateral. Disposition of
the collateral shall be deemed commercially reasonable if made pursuant to a
public offering advertised at least twice in a newspaper of general circulation
in the community where the collateral is located.
(h) Foreclosure. Exercise its rights under the Guaranty or any other
guarantor of the Loan and its rights of foreclosure and other remedies available
under the Deed of Trust.
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<PAGE>
7.3 No Remedy Exclusive; Delays or Omissions; Waiver of Breach: No
action taken pursuant to this Article VII shall relieve the Borrower or any
other person from its obligations hereunder or under any of the other Loan
Documents, all of which shall survive any such action, and the Bank (to the
extent provided above) may take whatever action at law or in equity as may
appear necessary and desirable to collect the payments and other amounts then
due and thereafter to become due and/or to enforce the performance and
observance of any obligation, agreement or covenant of the Borrower hereunder or
of any other person under any of the Loan Documents.
No remedy herein conferred upon or reserved to the Bank is intended to
be exclusive of any other available remedy or remedies, but each and every such
remedy shall be cumulative and shall be in addition to every other remedy given
under this Agreement or under the other Loan Documents or now or hereafter
existing at law or in equity or by statute. Should any right or remedy granted
herein be held to be unlawful, the Bank shall be entitled to every other right
and remedy provided in this Agreement and by law or in equity. No delay or
omission to exercise any right or power accruing Upon any default, omission or
failure of performance hereunder or under the Loan Documents shall impair any
such right or power or be construed to be a waiver thereof, but any such right
and power may be exercised from time to time and as often as may be deemed
expedient. In the event any agreement contained in this Agreement should be
breached by the Borrower and is thereafter waived by the Bank, such waiver shall
be limited to the particular breach so waived and shall not be deemed to waive
any other breach. No waiver, amendment, release or modification of this
Agreement shall be established by conduct, custom or course of dealing, but
solely by an instrument in writing duly executed by the Bank. In order to
entitle the Bank to exercise any remedy reserved to it in this Article, it shall
not be necessary to give any notice, other than such notice as may be herein
expressly required.
ARTICLE VIII
MISCELLANEOUS
8.1. Reimbursement of Advances Made or Other Costs Incurred by Bank: If
the Borrower fails to make any payment or to perform any other of the Borrower's
obligations hereunder, the Bank, after notice to and demand upon the Borrower,
without waiving any default or releasing the Borrower from any of its
obligations hereunder, and without being under any obligation to do so, may make
such payment or perform any of the Borrower's obligations. All amounts so paid
by the Bank, and all costs, fees and expenses reasonably incurred by the Bank,
whether in connection with such payment or such performance or otherwise in
connection with their respective duties and responsibilities under this
Agreement and the other Loan Documents, shall be immediately due and payable by
the Borrower upon demand therefor, as additional payments hereunder, together
with interest thereon as provided in Section 8.2 below. In addition,
notwithstanding anything in this Agreement to the contrary, in the event that
the Borrower should default under any of the provisions of this Agreement, and
the Bank should employ attorneys or incur other expenses for the collection of
amounts due hereunder or the enforcement of performance or observance of any
obligation or agreement on the part of the Borrower herein contained, the
Borrower agrees that it will on demand therefore pay to the Bank the reasonable
fees of such attorneys and such other reasonable expenses so incurred.
-21-
<PAGE>
8.2. Interest on Additional Payments and Reimbursements: Without
limiting any other provisions for the payment of interest, additional interest,
late charges, premiums or like charges under any of the Loan Documents, in any
instance in which any sum other than principal, premium (if any), and interest
is due from the Borrower to the Bank as a direct payment, reimbursement or
otherwise, and no specific provision is made with respect to the payment of
interest thereon or the rate of interest thereon is not otherwise specified,
such sum shall bear interest from the date on which it becomes due until paid in
full at the Interest Rate plus 2% per annum.
8.3. Indemnification of Bank
(a) Claims in Connection with the Project. Except where same
results from the fraud, willful misconduct or negligence of Bank, (1) the
Borrower shall protect, indemnify, and save harmless the Bank and its agents
against and from any and all claims incurred by, or asserted or imposed against,
any of them, and any loss or expense (including all attorneys' fees) in
connection therewith, by reason of the Bank's participation in the financing of
the construction of the Improvements, any accident, injury (including death) or
damage to any person or property, however caused, resulting from, connected with
or growing out of any act of commission or omission of the Borrower or any
agents, assignees, contractors or subcontractors of the Borrower or any use,
nonuse, possession, occupation, condition, operation, service, design,
construction, acquisition, maintenance or management of, or on, or in connection
with, the Project, or any part thereof, until the date this Agreement is
terminated, regardless of whether such claims are against or are suffered or
sustained by the Bank or its agents, (2) the Bank shall not be liable for any
damage or injury occurring during the Loan term to persons or property of the
Borrower or any of its agents or any other person who or which may be upon the
Property, and the Borrower hereby releases the Bank from, and agrees that it
shall not be liable for, and the Borrower shall hold it harmless from, any such
liability, and (3) the Borrower may, and if so requested by the Bank, shall
undertake to defend, at its sole cost and expense, any and all claims brought
against the Bank or any of its agents in connection with any of the matters
mentioned in this Section, provided that the Bank shall give the Borrower timely
notice of and forward to the Borrower every demand, notice, summons or other
process received with respect to any claim within the purview hereof.
(b) Approvals of Project. Neither the approval by the Bank of the
Plans and Specifications, nor any subsequent inspections or approvals of the
Project during or after construction shall constitute a warranty or
representation by the Bank or any of its agents as to the technical sufficiency,
adequacy or safety or any structure or any of its component parts, including
without limitation, any fixtures, equipment or furnishings, nor shall such
approvals or inspections constitute such a warranty or representation as to the
subsoil conditions or any other physical condition or feature pertaining to the
Project. All acts, including any failure to act, relating to the Project by any
agent, representative or designee of the Bank are performed solely for the
benefit of the Bank to assure repayment of the Loan and are not for the benefit
of the Borrower or the benefit of any other person.
8.4. Nonassignability: Neither the Loan nor any advance thereunder may
be assigned by Borrower without the prior written consent of Bank. Neither the
Loan nor any advances hereunder shall be subject to the process of any court
upon legal action by or against Borrower, its stockholders, its partners, or by
or against anyone claiming under or through Borrowers or its stockholders or
partners. For the purposes of this Agreement, the Loan shall remain in the
custody of Bank until Borrower complies with each and all of the provisions
hereof; provided, however, that nothing herein contained shall be considered as
in any way modifying, affecting or subordinating the obligations heretofore
given or to be given by Borrower as security for the Loan and the same shall be
and remain in full force and effect, this Agreement being intended only as
additional security and protection for the Loan and to assure its use for the
purposes intended by Bank and Borrower.
-22-
<PAGE>
8.5. Liability of Bank: All conditions of the obligations of Bank
hereunder, including any obligation to make disbursements under the Loan, are
imposed solely and exclusively for the benefit of Bank and its successors and
assigns, and no other person or entity shall have standing to require
satisfaction of such conditions in accordance with their terms or be entitled to
assume that Bank will refuse to disburse sums under the Loan in the absence of
strict compliance with any and all thereof. No other person or entity shall,
under any circumstances, be deemed to be a beneficiary of such conditions, any
and all of which may be freely waived in whole or in part by Bank at any time if
in its discretion it deems it desirable to do so.
8.6. No Partnership, Joint Venture, Agency: Borrower and Bank
acknowledge that the relationship between them created hereby and by the other
Loan Documents is that of debtor and creditor and is not intended to be and
shall not in any way be construed to be that of a partnership, joint venture, or
principal and agent; and that the activities of Bank in connection with the
construction and equipment of the Improvements and disbursement of the Loan
shall not be deemed to make Bank a partner, joint venturer, or principal or
agent of Borrower, but rather shall be deemed solely for the purpose of
protecting Bank's security for the Loan.
8.7. Notices: All notices, requests and demands upon the respective
parties hereto shall be deemed to have been given or made when delivered against
hand receipt or by nationally recognized overnight delivery or forty-eight (48)
hours after being deposited in the United States mail, postage prepaid and
certified, and addressed as follows:
(1) If to Bank:
MERCANTILE-SAFE DEPOSIT & TRUST COMPANY
2 Hopkins Plaza - Fifth Floor
Baltimore, Maryland 21201
ATTN: Stephen A. Hall, Vice President
With copies to:
Barry C. Greenberg, Esquire
Rosenberg Proutt Funk & Greenberg, LLP
2115 First Maryland Building
25 South Charles Street
Baltimore, Maryland 21201
(2) If to Borrower:
Mr. James I. Humphrey
The Humphrey Companies
12301 Old Columbia Pike
Silver Spring, Maryland 20904
-23-
<PAGE>
With copies to:
Stephen A. Goldberg, Esquire
Gallagher, Evelius & Jones
Park Charles, Suite 400
218 North Charles Street
Baltimore, Maryland 21201
or to such other address with respect of any party as such party shall notify
the others in writing.
8.8. Amendment; No Implied Waiver: This Agreement may be amended, and
Borrower may take any action herein prohibited, or omit to perform any act
required to be performed by it, only if Borrower shall first obtain the prior
written consent of Bank to such amendment, action or omission to act. No failure
of Bank to exercise and no delay in exercising any right, power or privilege
under this Agreement or the other Loan Documents shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
8.9. Survival of Agreements: All agreements, covenants, representations
and warranties of Borrower made in this Agreement shall survive the execution
and delivery of this Agreement and the other Loan Documents, and the making of
all disbursements hereunder, regardless of any investigation made by or on
behalf of Bank.
8.10. Entire Agreement; Successors and Assigns; Time of the Essence:
This Agreement and the other Loan Documents contain the entire terms of the
agreement with respect to the Loan, and no representations, inducements,
promises or agreements between Borrower and Bank not set forth herein or in the
other Loan Documents shall be of any force or effect. This Agreement shall be
binding upon and shall inure to the benefit of Borrower and Bank and their
respective successors and the Bank's assigns, whether so expressed or not. Time
is of the essence under this Agreement.
8.11. Severability: In case any one or more provisions contained in this
Agreement or the other Loan Documents should be deemed invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein or therein shall in no way be affected or
impaired thereby and shall be enforceable to the maximum extent permitted by
law.
8.12. Descriptive Headings: The headings of the articles, sections and
paragraphs of this Agreement are for the convenience of reference only, and are
not considered to be a part hereof and shall not limit or otherwise affect any
of the terms hereof.
8.13. Governing Law: This Agreement is made, executed and delivered in
the State of Maryland, and Maryland law shall govern its interpretation,
performance and enforcement.
[SIGNATURES FOLLOW ON NEXT PAGE]
-24-
<PAGE>
IN WITNESS WHEREOF, the Borrower and Bank have caused this Agreement to
be executed and delivered as of the day and year first above written.
WITNESS: MERCANTILE-SAFE DEPOSIT & TRUST
COMPANY
/S/ [ILLEGIBLE SIGNATURE] By: /s/ Stephen A. Hall (SEAL)
--------------------- ----------------------------------
Stephen A. Hall, Vice President
HUMPHREY HOSPITALITY LIMITED
PARTNERSHIP
/s/ [ILLEGIBLE SIGNATURE] By: /S/ James I. Humphrey (SEAL)
--------------------- -----------------------------------
James I. Humphrey, President
-25-
<PAGE>
DEVELOPMENT SERVICES AGREEMENT
THIS DEVELOPMENT SERVICES AGREEMENT is made effective as of the 4th day
of April, 1996 by and between HUMPHREY HOSPITALITY LIMITED PARTNERSHIP, a
Virginia limited partnership (the "Partnership"), and HUMPHREY DEVELOPMENT, INC.
(the "Developer").
RECITALS
A. The Partnership was formed for the purpose of acquiring,
constructing, owning and leasing hotels.
B. The Partnership desires to develop a Comfort Suites hotel with 64
rooms in Dover, Delaware (the "Project")
C. The Partnership desires that the Developer provide certain services
with respect to the development of the Project.
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Appointment and Term. The Partnership hereby appoints the Developer
to render services in overseeing the development of the Project for the
partnership as herein contemplated. The term of this Agreement shall begin on
the date hereof and shall end on December 31, 1997.
2. Authority and Obligations. The Developer shall have the authority
and obligation to:
(i) identify and engage, with the partnership's approval, on
behalf of the Partnership an architect and a general
contractor and such professionals as may be necessary for
the construction of the Project;
(ii) oversee, monitor and direct the general contractor with
respect to the construction of the project in accordance
with the terms and conditions of the construction
contract;
(iii) act on behalf of the Partnership in its relation with
federal, state and local government authorities with
respect to the construction of the Project;
(iv) act on behalf of the Partnership with respect to zoning,
building codes, occupancy permits and all other local
government matters concerning the Project,
(v) subject to the partnership's approval of any contracts,
negotiate a hotel franchise agreement with Choice Hotels,
Inc.;
(vi) subject to the Partnership's final approval, negotiate
financing for the Project; and
(vii) prepare or cause to be prepared such environmental and
neighborhood impact studies or reports, engineering
surveys, preliminary plans and specifications as may be
required in connection with the construction of the
Project.
3. Development Fee. The Partnership shall pay to the Developer from loan
proceeds a development fee, payable upon completion of the Project, including
punch list items, in an amount equal to any savings in the development budget
of the Project (attached hereto as Exhibit A, the "Development Budget")
resulting in a total development cost of less than $2,750,910.
To the extent that the development costs of the Project exceed the
$2,750,910 Development Budget (such excess constituting a "Cost Overrun"),
the Developer shall be responsible for such Cost Overrun. The Developer shall
immediately make a non-refundable advance in the amount of any Cost Overrun
which is not covered by financing to the Partnership.
4. Burden and Benefit. The covenants and agreements contained herein
shall be binding upon and inure to the benefit of the successors and assigns
of the respective parties hereto. Neither party may assign this Agreement
without the consent of the other party.
5. Severability of Provisions. Each provision of this Agreement shall
be considered severable, and if for any reason any provision that is not
essential to the effectuation of the basic purposes of the Agreement is
determined to be invalid and contrary to any existing or future law, such
invalidity shall not impair the operation of or affect those provisions of this
Agreement that are valid.
6. No Continuing Waiver. The waiver of either party of any breach of
this Agreement shall not operate or be construed to be a waiver of any
subsequent breach.
7. Defined Terms. Except as expressly provided herein, terms used in
this Agreement with initial capital letters shall have the meanings set
forth in the Partnership Agreement.
8. Applicable Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Maryland, without regard to
principles of conflicts of laws.
9. Binding Agreement. This Agreement shall be binding on the parties
hereto, and their heirs, executors, personal representatives, successors and
assigns.
10. Headings. All section headings in this Agreement are for convenience
of reference only and are not intended to qualify the meaning of any section.
11. Terminology. All personal pronouns used in this Agreement, whether
used in the masculine, feminine an neuter gender, shall include all other
genders, the singular shall include the plural, and vice versa as the
context may require.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
WITNESS: PARTNERSHIP:
HUMPHREY HOSPITALITY LIMITED PARTNERSHIP
By: Humphrey Hospitality Trust, Inc.,
a Virginia corporation General Partner
/s/ Timothy P. Barila By: /s/ James Humphries
- --------------------- ---------------------------------
Name: James Humphries
Title: President of General Partnership
DEVELOPER:
HUMPHREY DEVELOPMENT, INC.
/s/ Randy P. Smith By: /s/ Timothy P. Barila
- --------------------- --------------------------------
Name: Timothy P. Barila
Title: Vice President
EXHIBIT 10.26
FIRST AMENDMENT TO
DEVELOPMENT SERVICES AGREEMENT
AGREEMENT made as of November 7, 1996 by and between Humphrey
Hospitality Limited Partnership, a Virginia limited partnership (the
"Partnership") and Humphrey Development, Inc., a Maryland
corporation (the "Developer").
WHEREAS, the Partnership was formed to acquire, construct, develop,
improve, maintain, own, operate and lease a hotel located in Dover, Delaware
(the "Project");
WHEREAS, the Developer has provided and will continue to provide
certain services with respect to the Project during the development and
construction thereof in accordance with the provisions of the Development
Services Agreement dated as of April 4, 1996 between the Partnership and the
Developer (the "Original Development Agreement");
WHEREAS, in consideration of such services, the Partnership
has agreed to grant to the Developer an option to repurchase the
Project; and
WHEREAS, the Partnership and the Developer wish to add Section
12 to the Original Development Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Section 12 as set forth below is hereby added to the
Original Development Agreement:
(i) The Partnership offers to sell and convey
to the Developer and hereby grants to the Developer the
exclusive and irrevocable option to purchase the Project,
together with the improvements thereon, and all the rights,
ways, alleys, privileges, and appurtenances belonging or in
anywise appertaining thereto, subject to the terms and
conditions set forth below.
(ii) The Developer's option to purchase the
Project must be exercised by the Developer within ninety (90)
days before the sixth anniversary of date of the Project's
final certificate of occupancy (or equivalent local government
document evidencing the
<PAGE>
completion of the Project) (the "Option Period"). If the
option to purchase is not exercised on or before the final day
of the Option Period, this option to purchase shall
automatically cease and terminate, neither party shall have
any further rights hereunder, at law or in equity, and this
option shall be null and void, all without further action or
documentation by either party. The purchase price for the
Project shall be $2,795,910. The Developer's option to
purchase shall be exercised by the timely delivery to the
Partnership at the Partnership's address set forth below of
two copies of a contract of sale duly executed by the
Developer, together with any earnest money deposit required by
the contract of sale. The form of contract of sale shall be
agreed upon by the parties within ninety (90) days of the
execution of this Agreement (the "Contract of Sale"). Promptly
upon receiving the Contract of Sale the Partnership shall
execute both copies of the Contract of Sale and return one
fully executed copy to the Developer. The failure of the
Partnership to execute and return a fully executed copy of the
Contract of Sale to the Developer shall not affect its
enforceability and the Contract of Sale shall be binding upon
and enforceable against the Partnership in the same manner as
if it had been executed by the Partnership and returned to the
Developer.
(iii) In the event that Developer exercises the
option to purchase within the time and in the manner
hereinbefore provided, then thereafter their rights and
obligations with respect to the Project shall be governed by
the terms and conditions contained in the Contract of Sale.
(iv) The address of the Seller is as
follows:
Humphrey Hospitality Limited
Partnership
12301 Old Columbia Pike
Suite 300
Silver Spring, Maryland 20904
2
<PAGE>
(v) Time shall be of the essence of
this option.
2. In all other respects, the Original Development Agreement
remains in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
WITNESS: PARTNERSHIP:
HUMPHREY HOSPITALITY LIMITED
PARTNERSHIP
By: Humphrey Hospitality Trust,
Inc., its general partner
/s/ Randy P. Smith By: /s/ James Humphrey
- ---------------------- -----------------------
Randy P. Smith Name: James Humphrey
Title: President
DEVELOPER:
HUMPHREY DEVELOPMENT, INC.
/s/ Randy P. Smith By: /s/ Bethany H. Hooper
- ---------------------- ----------------------------
Randy P. Smith Name: Bethany H. Hooper
Title: President
3
[REZNICK FEDDER & SILVERMAN LETTERHEAD]
November 11, 1996
Humphrey Hospitality Trust, Inc.
Silver Spring, Maryland
Anderson & Strudwick, Incorporated
Richmond, Virginia
Ladies & Gentlemen:
We hereby consent to the inclusion of our reports on the consolidated
balance sheets of Humphrey Hospitality Trust, Inc. as of December 31, 1994
and 1995 and the related consolidated statements of income, shareholders'
equity, and cash flows for the period from August 23, 1994 (date of
incorporation) through December 31, 1994 and the year ended December 31, 1995;
the balance sheets of Humphrey Hospitality Management, Inc. as of December 31,
1994 and 1995, and the related statements of operations, shareholders' equity
(deficit), and cash flows for the period from August 18, 1994 (date of
incorporation) through December 31, 1994 and the year ended December 31,
1995; and the combined balance sheets of the Combined Selling Partnerships-
Initial Hotels as of December 31, 1992 and 1993, 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; the Historical Summaries
of Gross Revenue and Direct Operating Expenses of the Days Inn-Farmville for
the two years ended December 31, 1993 and for the period from January 1, 1994
through October 31, 1994 and the 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 from November 1,
1994 (date of inception) through December 31, 1994 and the period January 1,
1995 through July 20, 1995, in the Form S-11, Registration Statement under the
Securities Act of 1933, dated November 11, 1996 relating to the issuance of
1,000,000 shares of common stock of Humphrey Hospitality Trust, Inc.
REZNICK FEDDER & SILVERMAN
By: /s/ SIGNATURE ILLEGIBLE
