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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended
December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For this transition period from
____________ to _____________
Commission File Number: 0-25060
HUMPHREY HOSPITALITY TRUST, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1889548
(State of Incorporation) (I.R.S. employer
identification no.)
12301 Old Columbia Pike, Silver Spring MD 20904 (301) 680-4343
(Address of principal executive offices) (Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
(Title of Class)
NASDAQ NATIONAL MARKET
(Name of Market)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by referenced in Part III of this Form 10-K or any amendment to
this Form 10K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $35,469,800 based on the last sale price in the
NASDAQ National Market for such stock on March 21, 1997.
The number of the Registrant's common stock outstanding was 3,481,700 as of
March 21, 1997.
Documents Incorporated by Reference
Certain of the exhibits to the Company's Registration Statement on Form S-11
(SEC File No. 33-83658) are incorporated by reference into Part IV.
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TABLE OF CONTENTS
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Form 10-K
Report
Item No. Page
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PART I
1. Business......................................................................................3
2. Properties...................................................................................10
3. Legal Proceedings............................................................................16
4. Submission of Matters to a Vote of Security Holders..........................................16
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters......................................................................16
6. Selected Financial Data......................................................................18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................23
8. Financial Statements and Supplementary Data..................................................28
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................................................28
PART III
10. Directors and Executive Officers of the Registrant...........................................28
11. Executive Compensation.......................................................................30
12. Security Ownership of Certain Beneficial Owners and Management...............................31
13. Certain Relationships and Related Transactions...............................................32
PART IV
14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................35
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PART I
Item 1. Business
(a) General Development of Business
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 underwriters discount
and offering expenses, the Company received 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") (such interests, collectively, the "Initial Hotels") and to retire
certain indebtedness relating to 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 ("Units") which are
redeemable, subject to certain limitations, for an aggregate of 527,866 Common
Shares, with a value of approximately $3.2 million based on the IPO offering
price, and (iii) the assumption of approximately $15.5 million of indebtedness.
James I. Humphrey, Jr., the Chairman and President of the Company, and Humphrey
Associates, Inc. received Units aggregating a 28.54% equity interest in the
Partnership. The Partnership owns a 99% general partnership interest and the
Company owns a 1% limited partnership interest in the Subsidiary Partnership.
Hotel properties are carried at the lower of cost or net realizable value. The
Company began operations on November 29, 1994.
On July 21, 1995, the Company completed a second public offering (the
"Second Stock 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. Net of
underwriters' discount and offering expenses, the Company received proceeds of
approximately $6,957,000. The Company used the proceeds to repay certain
indebtedness and through the Partnership, acquired the Days Inn Hotel in
Farmville, Virginia (the "Days Inn Hotel"), which has 60 rooms and was built in
1989. The Partnership acquired the Days Inn Hotel from Farmville Lodging
Associates, LLC (the "LLC"), a Maryland limited liability company in which Mr.
Humphrey owns a 98% equity interest. The Partnership acquired the Days Inn Hotel
in exchange for (i) 95,484 Units, which are redeemable, subject to certain
limitations, for an aggregate of 95,484 shares of common stock and (ii)
assumption of approximately $1.23 million of debt secured by the Days Inn Hotel,
which was repaid immediately with proceeds of the Second Stock Offering. The
95,484 Units issued to the LLC in connection with the purchase of the Days Inn
Hotel have a value of approximately $740,000 based on the offering price of the
Second Stock Offering. The acquisition of the Days Inn Hotel has been recorded
by the Company at the affiliate's historical cost which is less than net
realizable value. The equity of the Days Inn Hotel, net of the portion allocated
to the minority interest, has been recorded as an increase in paid-in capital.
Upon completion of the Second Stock Offering, the Company owned a 78.91%
partnership interest, and Mr. Humphrey, Humphrey Associates, Inc. and the LLC
(the "Humphrey Affiliates") collectively owned a 21.09% interest in the
Partnership.
On February 9, 1996, the Company's Lessee, Humphrey Hospitality
Management, Inc., (the "Lessee") announced the termination of its operating
agreements with the Humphrey Hotels, Inc., (the "Operator") effective January 1,
1996. The Lessee immediately began operating all of the hotels that it leases
from the Company. All personnel from the Operator were immediately hired in
identical capacities by the Lessee. The Lessee intends to operate the hotels
throughout the lease term.
In April, 1996, the Company established a secured credit facility in the
amount of $6.5 million with Mercantile Safe Deposit and Trust Company (the
"Credit Facility") to refinance certain existing debt (approximately $1.7
million) and pay the development cost of a Comfort Suites hotel in Dover,
Delaware (the "New Development"). The term of the Credit Facility is for three
years with two one-year extensions at the option of the bank. The Credit
Facility bears interest at the prime rate plus 25 basis points, presently 8.5%,
and is cross-collateralized by liens on the Company hotels located in Dahlgren,
Virginia; Farmville, Virginia (both Hotels); Elizabethton, Tennessee; Princeton,
West Virginia; and Solomons, Maryland.
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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, to develop a
64-unit Comfort Suites hotel. The Company 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. The hotel commenced operations on January 22, 1997.
On October 4, 1996 Joseph T. Howell resigned from the Company's Board of
Directors, citing lack of time to devote to the Company. On 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.
On October 30, 1996, the Common Stock began to trade on The Nasdaq
National Market. Prior to that date, the Common Stock was traded on The Nasdaq
SmallCap Market. The Company believes that by trading on The Nasdaq National
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.
On December 6, 1996, the Company completed a third public offering (the
"Third Stock Offering") of 1,150,000 shares of common stock. The gross proceeds
were $9,487,500 based on the offering price of $8.25 per share. Net of
underwriters' discount and offering expenses, the Company received proceeds of
approximately $8,645,000. The Company used the proceeds (i) to repay
approximately $660,000 of outstanding debt on the Credit Facility secured by six
of the hotels and the New Development, (ii) to repay the costs associated with
the development of the New Development which were approximately $1.6 million at
December 31, 1996; and (iii) to establish a fund for future acquisitions and
development. Upon completion of the Third Stock Offering, the Company owns an
84.82% partnership interest, and the Humphrey Affiliates collectively own a
15.18% interest in the Partnership.
On January 22, 1997, the Company's New Development, the Comfort Suites
hotel located in Dover, Delaware, opened for business. The hotel is leased by
the Lessee for a fixed lease payment of $378,840 a year, payable in equal
monthly installments and prorated for any partial month.
On February 26, 1997, the Company closed on the purchase of the Comfort
Inn hotel located in Culpeper, Virginia. The Company assumed approximately
$1,220,000 in taxable and tax exempt bond financing and utilized approximately
$680,000 in cash for the purchase. The hotel is leased by the Lessee pursuant to
a Percentage Lease which provides for rent based, in part, on the room revenues
from the hotel.
On March 17, 1997, the Company closed on the purchase of the Comfort Inn
hotel located in New Castle, Pennsylvania. The Company paid $3 million in cash
for the site. The hotel is leased by the Lessee pursuant to a Percentage Lease
which provides for rent based, in part, on the room revenues from the hotel.
In March, 1997, the Company contracted to purchase three hotels, the 63
room Best Western Hotel in Harlan, Kentucky, the 62 room Holiday Inn Express in
Danville, Kentucky and the 56 room Comfort Inn in Murphy, North Carolina. The
total price of the hotels is $7.325 million and will be purchased utilizing
proceeds from the Third Stock Offering and borrowings from the Credit Facility.
(b) Financial Information About Industry Segment
The Company is in the business of acquiring equity interests in existing
hotel properties. See the Consolidated Financial Statements and notes thereto
included in Item 14 of this Annual Report on Form 10-K for certain financial
information required in Item 1.
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(c) Narrative Description of Business
General. At December 31, 1996, the Company owned, through the Partnership
and the Subsidiary Partnership, the Initial Hotels and the Days Inn Hotel
(collectively "the Hotels"), containing 617 rooms located in Virginia (5), West
Virginia (2), Maryland (1), and Tennessee (1). The Hotels are leased to Humphrey
Hospitality Management, Inc. The Company's primary objective is to increase
amounts distributable to shareholders and enhance shareholder value by
participating in increased revenue from the Hotels through leases which provide
for rent payments based on the revenue from the Hotels (the "Percentage
Leases"), by acquiring equity interests in additional existing hotels that meet
the Company's investment criteria and by developing new nationally franchised
hotels.
Internal Growth Strategy. The Company's use of Percentage Leases allows
the Company to participate in increased revenue from the Hotels. 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 is
comprised of (i) a set percentage of quarterly and semi-annual room revenue,
which is payable quarterly and semi-annually, respectively, (ii) a set
percentage of annual room revenue in excess of a threshold amount ("Threshold"),
which is payable annually, and (iii) 8% of monthly revenue other than room
revenue (including, but not limited to, telephone charges, movie rental fees
and, in the case of the Comfort Inn - Beacon Marina, Solomons, Maryland, rental
payments under the third party leases of its restaurant and yacht yard as well
as marina revenue), which is payable monthly. The portion of Percentage Rent
that is based on annual room revenue does not apply to amounts under the
Threshold and is designed to allow the Company to participate in any future
increases in room revenue. The Base Rent and Percentage Rents are hereinafter
referred to collectively as "Rent". Under the Percentage Leases, the principal
determinant of Percentage Rent is room revenue.
The Company intends to limit consolidated indebtedness to less than 50%
of the aggregate purchase price paid by the Company for any hotels in which it
has invested. As of December 31, 1996, the Company's consolidated indebtedness
was equal to approximately 30.2% of the aggregate purchase prices paid by the
Company for the Hotels of $25.5 million and cost incurred for the New
Development of $1.6 million as of December 31, 1996. In addition to limiting the
amount of leverage, the Company's strategy for internal growth includes:
o Professional Management and Sales Programs. Effective January 1, 1996,
the Lessee manages the Hotels, prior to that the Operator managed the
hotels. The Operator and the Lessee, as its successor, have been in the
business of managing hotel properties since 1989 and currently operate 9
hotels with 617 rooms in 4 states. The Operator managed each Initial
Hotel for more than five years and the Days Inn Hotel since 1994.
o Licensed Properties. Because it believes it may benefit from access to
national reservation systems and advertising and marketing programs
provided by franchisors, the Company intends to cause substantially all
of its hotel properties to be operated as franchises of national hotel
systems. Seven of the Hotels are licensed to operate as Comfort Inns, one
as a Best Western Hotel, and one as a Days Inn Hotel.
Acquisition Strategy. The Company intends to acquire equity interests in
hotel properties that meet the Company's investment criteria described below.
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 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 grade the Company believes is
more appropriate for the location and clientele.
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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 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 Sites that have an aging hotel presence currently in place.
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.
In January, 1997, the Company completed the development of the Comfort
Suites Hotel, located in Dover, Delaware. The Comfort Suites contains 64 units,
each with a refrigerator and microwave. Other amenities include an outdoor pool,
meeting room, and deluxe continental breakfast.
The Company's investment and acquisition policies may be changed by the
Board of Directors without shareholder approval.
Operating Practices. The Lessee utilizes a centralized accounting and
data processing system which facilitates financial statements and budget
preparations, payroll management, internal auditing and other support functions
for the on-site hotel management team. The Lessee provides centralized control
over purchasing and project management (which can create economies of scale in
purchasing) while emphasizing local discretion within specific guidelines.
The Lessee develops a written marketing plan annually for each property
with a strong emphasis on room revenue, market segmentation and yield
management.
Each hotel property managed by the Lessee employs a general manager who
is responsible for the overall operations of the hotel. General managers report
to regional managers, who generally have responsibility for two to four hotels.
Daily operations are managed with a centralized approach through regional
operations managers who report to the Lessee's central office as applicable. The
Lessee's strategy is to encourage decision-making by those people closest to the
hotel operation at the lowest administrative cost.
Property Management. In order for the Company to qualify as a REIT,
neither the Company, the Partnership nor the Subsidiary Partnership can operate
hotels. Therefore, each of the Hotels is leased to the Lessee, who prior to
February 1996 contracted the management of the hotels to the Operator under
separate Operating Agreements with the Lessee. Pursuant to the Operating
Agreement, the Operator received a fee equal to 3% of total revenue of each
Hotel, plus reimbursement of out of pocket expenses. Payments to the Operator
from the Lessee were subordinate in all respects to the Lessee's obligations to
the Partnership and the Subsidiary Partnership. Mr. Humphrey, Chairman of the
Board and President of the Company, was and is the sole shareholder of both the
Lessee and the Operator, respectively. The Percentage Leases obligate the
Partnership or the Subsidiary Partnership, as applicable, to make available to
the Lessee an amount equal to 4% of room revenue per quarter, on a cumulative
basis, for upgrading and maintaining the Hotels ("Replacement Reserve
Deposits").
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On February 9, 1996, the Company's Lessee, Humphrey Hospitality
Management, Inc., announced the termination of its operating agreements with the
Operator, Humphrey Hotels, Inc., effective January 1, 1996. The Lessee
immediately began operating all of the hotels that it leases from the Company.
All personnel from the Operator were hired at identical capacities by the
Lessee. The Lessee intends to operate the hotels throughout the lease term. The
Company does not expect there will be any significant changes in the management
and operating policies and procedures described below.
The Operator had managed the Initial Hotels since 1989 and the Days Inn
Hotel since 1994. The Operator provided all employees and performed all
marketing, accounting and management functions necessary to operate the Hotels
pursuant to the Operating Agreements. The Operator had in-house programs for
accounting and the management and marketing of the Hotels. The Operator utilized
its sales management program to coordinate, direct and manage the sales
activities of personnel located at the hotels. The Lessee now provides these
services and functions.
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
Operator in 1994. He has been appointed to the Comfort Inn Advisory Council, the
International Operators Council for Choice Hotels ("IOC") National Marketing
Committee, the IOC National Operations and Standards Committee, the IOC National
Awards Committee, the Region 4 (Virginia) Regional Advisory Board for Choice
Hotels and numerous boards for the IOC. Mr. Smith received an M.B.A. Degree from
Loyola College in 1995.
The Lessee's Vice President, Bethany H. Hooper, joined Humphrey
Associates, Inc. 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, Inc. and the
Operator. Ms. Hooper continues to work for both the Lessee and Humphrey
Associates, Inc.. 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 and Coakley & Williams, Inc., a hotel management company,
primarily as a credit investigator and Controller . She joined the Operator in
1989 and served as Internal Auditor until she was appointed Controller in 1992.
Competition. Each of the Hotels is located in a developed area that
includes other hotel properties. The number of competitive hotel properties in a
particular area could have a material adverse effect on occupancy and average
daily room rate ("ADR") of the Hotels or at hotel properties acquired in the
future.
The Company may be competing for investment opportunities with entities
which have substantially greater financial resources than the Company. These
entities generally may be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator of the geographic proximity of its investments. Competition in
general may reduce the number of suitable investment opportunities offered to
the Company and increase the bargaining power of property owners seeking to
sell. Further, the Company believes that competition from entities organized for
purposes substantially similar to the Company's objectives could increase
significantly.
Employees. The Company has an agreement between it and the Lessee ("the
"Services Agreement") to provide accounting and securities reporting services
for the Company. The initial Services Agreement stated that these services would
be provided to the Company for a fixed fee of $80,000 per year, notwithstanding
the size of the Company's portfolio. On November 6, 1996, the Company amended
the Services Agreement to provide for such services for an initial annual fee of
$30,000 per year for as 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. The Lessee
employs approximately 225 people in operating the Hotels. The Lessee has advised
the Company that its relationship with its employees is good.
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Business Risks. The Hotels are subject to all operating risks common to
the hotel industry. These risks include, among other things, competition from
other hotels; recent over-building in the hotel industry which has adversely
affected occupancy and room rates; increases in operating costs due to inflation
and other factors, which increases have not in recent years been, and may not
necessarily in the future be, offset by increased room rates; significant
dependence on business and commercial travelers and tourism; increases in energy
costs and other expenses of travel; and adverse effect of general and local
economic conditions. These factors could adversely affect the Lessee's ability
to make lease payments and therefore the Company's ability to make expected
distributions to shareholders. Further, decreases in room revenue of the Hotels
will result in decreased revenue to the Partnership and the Subsidiary
Partnership, as applicable, under the Percentage Leases.
The Company must rely on the Lessee to generate sufficient cash flow from
the operations of the Hotels to enable the Lessee to meet the rent obligations
under the Percentage Leases. The obligations of the Lessee are unsecured. The
Lessee has only nominal assets, primarily working capital.
The Company's investments are subject to varying degrees of risk
generally incident to the ownership of real property. The underlying value of
the Company's real estate investments and the Company's income and ability to
make distributions to its shareholders is dependent upon the ability of the
Lessee to operate the Hotels in a manner sufficient to maintain or increase
revenue and to generate sufficient income in excess of operating expenses to
make rent payments under the Percentage Leases. Income from the Hotels 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 hotel
properties, 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 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 and the
Lessee.
Environmental Risks. Under various federal, state, and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances, on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the owner's ability to
borrow using such real property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances may also be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common law principles
could be used to impose liability for release of asbestos-containing materials
("ACMs") into the air and third parties may seek recovery from owners or
operators of real properties for personal injury associated with exposure to
released ACMs. In connection with the ownership of the Hotels, the Company, the
Partnership or the Subsidiary Partnership may be potentially liable for any such
costs.
Phase I environmental site assessments were obtained on all of the Hotels
prior to their acquisition by the Company. A Phase I environmental site
assessment was conducted in February 1995, on the land on which the New
Development is built. A Phase 1 environmental screening and a Phase 1
environmental assessment were conducted in February 1997, on the Company's
acquisitions of the hotels located in Culpeper, Virginia and New Castle,
Pennsylvania, respectively. 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 site assessments have not revealed any environmental
liability that the Company believes would have a material adverse effect on the
Company's business, assets, results of operations or liquidity, nor is the
Company aware of any such liability. Nevertheless, it is possible that the Phase
I site assessments do not reveal environmental liabilities or that there are
material environmental liabilities of which the Company is unaware. Moreover, no
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 and the Hotels will not be affected by the condition of
other properties in the vicinity of the Hotels
8
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(such as the presence of leaking underground storage tanks) or by third parties
unrelated to the Company, the Partnership, the Subsidiary 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 or 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 the Days Inn Hotel or any of
the former owners of the hotels have been notified by any governmental authority
of any material noncompliance, liability or claim relating to hazardous or toxic
substances or other environmental matters in connection with any of the Hotels.
No assurance can be given that the Phase I site assessments identified
all significant environmental problems or that no additional liabilities exist.
Tax Status. The Company has made an election to be taxed as a REIT under
Section 856 through 860 of the Internal Revenue Code ("Code"), commencing with
its taxable year ending December 31, 1994. As long as the Company qualifies for
taxation as a REIT, it generally will not be subject to Federal income tax to
the extent it distributes at least 95% of its REIT taxable income to its
shareholders. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to Federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate tax rates.
Even if the Company qualifies for taxation as a REIT, the Company may be subject
to certain state and local taxes on its income and property and to Federal
income and excise taxes on its undistributed income.
9
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Item 2. Properties
The following table sets forth certain historical information with
respect to the Hotels for the year ended December 31, 1996.
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
Number Percentage
of Room Other Lease Avg
Rooms Revenue Revenue Payment Occpy ADR REVPAR (1)
------ ------- ------- ---------- ------ --- ------
<S> <C>
Comfort Inns
Dahlgren, VA 59 $ 712,994 $ 22,898 $ 303,490 76.38% $43.23 $33.02
Dublin, VA 98 1,368,818 37,234 660,899 72.95% 52.32 38.16
Elizabethton, TN 58 569,464 26,576 227,198 60.36% 44.44 26.83
Farmville, VA 51 732,147 20,585 345,420 80.99% 48.43 39.22
Morgantown, WV 80 1,193,327 66,312 588,930 77.71% 52.44 40.76
Princeton, WV 51 904,400 27,352 465,593 88.52% 54.73 48.45
Beacon Marina,
Solomons, MD 60 969,714 290,257 742,215 75.42% 58.55 44.16
Best Western
Wytheville, VA 100 799,827 10,937 318,852 44.73% 48.85 21.85
Days Inn
Farmville, VA 60 691,184 39,708 304,804 69.13% 45.53 31.47
--- ---------- -------- ---------- ------ ------ ------
Totals 617 $7,941,875 $541,859 $3,957,401 69.96% $50.27 $35.17
=== ========== ======== ========== ====== ====== ======
</TABLE>
- ------------
(1) "REVPAR" is defined as room revenue per available room and is determined
by dividing room revenue by available rooms for the applicable period.
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, interior corridor, 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.
10
<PAGE>
Comfort Inn-Dublin, Virginia
Description. The Comfort Inn-Dublin, Virginia is located at the
intersection of Interstate 81 and Virginia Route 100. The hotel, which opened in
1986, is a 98-room, two-story, limited service hotel with meeting and banquet
rooms. Amenities include an outdoor pool, hot tub, interior corridor, and
complimentary continental breakfast. A free-standing restaurant, which the
Company leases to an unrelated operator, is located on the property.
Guest Profile and Local Competition. Approximately 35% of the hotel's
business is related to commercial activity from local businesses. The hotel's
group business, which accounts for approximately 20% of its business, is
generated from area institutions, local weddings and local social and sporting
events. The remainder of the hotel's business consists of transient guests,
visitors to area residents and demand generated by the hotel's proximity to
Virginia Polytechnic Institute and State University and Radford University. The
Company considers its primary competition here to be the Best Western hotel in
Radford, Virginia and the Hampton Inn in Christiansburg, Virginia.
Comfort Inn-Elizabethton, Tennessee
Description. The Comfort Inn-Elizabethton, Tennessee is located off of
joint U.S. Route 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, The Comfort 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. 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 Days Inn
Hotel, and the Super 8 Motel 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 and amenities
include a swimming pool, indoor hot tub, interior corridor, and exercise center.
A free-standing restaurant which is leased 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 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.
11
<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 Hampton Inn, Sleep Inn and the
Days 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, interior corridor, complimentary
continental breakfast and a 187-slip marina. A free-standing waterfront
restaurant and yacht yard, which are each leased to unrelated third parties, are
located on the property.
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, Hampton Inn, and the Ramada Inn in Wytheville,
Virginia.
Days Inn-Farmville, Virginia
Description. The Days Inn-Farmville is located at the intersection of
U.S. Routes 15 and 460 between Hampden-Sydney College and Longwood College,
adjacent to the Comfort Inn - Farmville, Virginia. The hotel, which opened in
1989, is a 60-room, two-story, limited service hotel with no restaurant or
lounge, although a complimentary continental breakfast is available for guests.
Amenities include an outdoor pool and interior and exterior corridor rooms.
Guest Profile and Local Competition. Approximately 75% of the hotel's
business is related to commercial activities from local businesses. The
remainder of the hotel's business consists of overnight travelers and general
demand generated by the hotel's proximity to Hampden-Sydney College and Longwood
College. The Company considers its primary competition here to be the Comfort
Inn-Farmville, Virginia, an Initial Hotel, and the Super 8 Motel in Farmville,
Virginia.
12
<PAGE>
The following tables sets forth certain information with respect to each
Hotel:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C>
Comfort Inn - Dahlgren, Virginia
Occupancy 70.7% 74.4% 70.5% 76.2% 76.4%
ADR $42.30 $42.66 $43.55 $42.89 $43.23
REVPAR $29.99 $31.76 $30.70 $32.68 $33.02
Comfort Inn - Dublin, Virginia
Occupancy 68.8% 74.6% 80.7% 80.1% 72.9%
ADR $44.04 $42.80 $45.97 $49.51 $52.32
REVPAR $30.10 $31.94 $37.08 $39.65 $38.16
Comfort Inn - Elizabethton, Tennessee
Occupancy 63.8% 74.6% 68.8% 74.2% 60.4%
ADR $39.32 $39.43 $39.98 $40.17 $44.44
REVPAR $25.07 $26.82 $27.52 $29.80 $26.83
Comfort Inn - Farmville, Virginia
Occupancy 72.8% 80.7% 84.3% 75.9% 81.0%
ADR $41.40 $40.10 $41.81 $47.22 $48.43
REVPAR $30.13 $32.38 $35.24 $35.83 $39.22
Comfort Inn - Morgantown, West Virginia
Occupancy 77.9% 81.9% 81.8% 77.3% 77.7%
ADR $44.87 $46.28 $49.00 $50.78 $52.44
REVPAR $34.71 $37.88 $40.10 $39.26 $40.76
Comfort Inn - Princeton, West Virginia
Occupancy 93.5% 93.9% 95.9% 95.5% 88.5%
ADR $46.88 $48.08 $50.37 $53.78 $54.73
REVPAR $43.66 $45.16 $48.31 $51.35 $48.45
Comfort Inn - Beacon Marina
Solomons, Maryland
Occupancy 72.1% 72.5% 78.6% 67.1% 75.4%
ADR $49.92 $53.49 $55.37 $58.86 $58.55
REVPAR $35.91 $38.79 $43.50 $39.48 $44.16
Best Western - Wytheville, Virginia
Occupancy 63.8% 61.4% 48.9% 47.9% 44.7%
ADR $37.48 $38.08 $45.12 $47.23 $48.85
REVPAR $23.91 $23.39 $22.07 $22.64 $21.85
Days Inn - Farmville, Virginia
Occupancy 58.7% 64.2% 58.0% 62.7% 69.1%
ADR $38.61 $38.10 $42.55 $44.27 $45.53
REVPAR $22.66 $24.48 $24.68 $27.78 $31.47
</TABLE>
Occupancy and REVPAR for the Best Western - Wytheville, Virginia
declined from 1993 to 1994. Management of the Company believes that such 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 had bid a lower room rate. Management of the Company believes
that the effects
13
<PAGE>
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 Initial Hotel to the historical
levels achieved prior to the termination of the contract. Occupancy and REVPAR
for the Comfort Inns at Dublin, Virginia and Elizabethton, Tennessee declined
from 1995 to 1996. Management believes that such decline is attributable to
a slowdown of construction related business that the Hotels received in 1995.
At the Company hotel located in Princeton, West Virginia two new hotels were
opened in the proximity of the Comfort Inn during the summer of 1996. The
Company anticipates a significant impact on occupancy and average daily rate
at the hotel for the foreseeable future.
The Percentage Leases
Each Hotel is separately leased by the Partnership to the Lessee under a
Percentage Lease. The Lessee is wholly owned by Mr. Humphrey. Other than working
capital sufficient to operate the Hotels, the Lessee has only nominal assets in
addition to its right and benefits under the Percentage Leases. Each Percentage
Lease contains the provisions described below, and the Company intends that
future leases with respect to its hotel property investments will contain
substantially similar provisions, although the Company's Board of Directors, may
in its discretion, alter any of these provisions with respect to any particular
lease, depending on the purchase price paid, economic conditions and other
factors deemed relevant at the time.
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.
Amounts Payable under the Percentage Leases. During the term of each
Percentage Lease, the Lessee will be obligated to pay (i) the Base Rent and
Percentage Rents, and (ii) interest accrued on any late payments or 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 revenue, which is payable quarterly and semi-annually, respectively, (ii) a
set percentage of annual room revenue in excess of a specified Threshold for
each Percentage Lease, which is payable annually, and (iii) 8% of monthly
revenue other than room revenue (including, but not limited to, telephone
charges, movie rental fees and, in the case of the Comfort Inn-Beacon Marina,
Solomons, Maryland, rental payments under the third party leases of its
restaurant and yacht yard as well as marina revenue), 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 revenue is designed to
allow the Company to participate in any future increases in room revenue.
The following table sets forth (i) the annual Base Rent, (ii) the
Percentage Rent formulas and (iii) the rent that was paid for each Hotel
pursuant to the terms of the Percentage Leases based on historical revenues for
the year ended December 31, 1996.
14
<PAGE>
Humphrey Hospitality Trust, Inc.
Actual Results for the Year Ended
December 31, 1996
<TABLE>
<CAPTION>
Aggregate
Aggregate Percentage
Annual Percentage Hotel Percentage Rent Plus
Base Rent Rent Formula Revenue Rent Base Rent
--------- ------------ ------- --------- ---------
<S> <C>
Comfort Inns
Dahlgren, VA $153,096 14.0% of quarterly room revenues, Rooms - $712,994 $148,562 $303,490
plus 6.5 % of semi-annual room Other - $22,898 1,832
revenues, plus 30% of annual room --------
revenues in excess of $705,000, $150,394
plus 8% of monthly other revenues --------
Dublin, VA 253,350 17.5% of quarterly room revenues, Rooms -$1,368,818 $404,570 660,899
plus 10.0 % of semi-annual room Other - $37,234 2,979
revenues, plus 30% of annual room --------
revenues in excess of $1,275,000, $407,549
plus 8% of monthly other revenues --------
Elizabethton, TN 96,950 14.5% of quarterly room revenues, Rooms - $569,464 $128,122 227,198
plus 7.5% of semi-annual room Other - $26,576 2,126
revenues, plus 30% of annual room --------
revenues in excess of $560,000, $130,248
plus 8% of monthly other revenues --------
Farmville, VA 132,432 16.0% of quarterly room revenues, Rooms- $732,147 $211,341 345,420
plus 9.5% of semi-annual room Other - $20,585 1,647
revenues, plus 30% of annual room --------
revenues in excess of $650,000, plus $212,988
8% of monthly other revenues --------
Morgantown, WV 210,136 6.1% of quarterly room revenues, Rooms -$1,193,327 $373,489 588,930
plus 24.0% of semi-annual room Other - $66,312 5,305
revenues, plus 33% of annual room --------
revenues in excess of $1,150,000, $378,794
plus 8% of monthly other revenues --------
Princeton, WV 208,610 11.1% of quarterly room revenues, Rooms - $904,400 $254,795 465,593
plus 16.0 of semi-annual room Other - $27,352 2,188
revenues, plus 33% of annual room --------
revenues in excess of $875,000, $256,983
plus 8% of monthly other revenues --------
Beacon Marina,
Solomons, MD 288,397 17.6% of quarterly room revenues, Rooms - $969,714 $430,597 742,215
plus 25.0% of semi-annual room Other - $290,257 23,221
revenues, plus 25.1% of annual --------
room revenues in excess of $453,818
$900,000, plus 8% of monthly other --------
revenues
15
<PAGE>
Best Western
Wytheville, VA 210,000 6.5% of quarterly room revenues, Rooms - $799,827 $107,977 318,852
plus 7.0% of semi-annual room Other - $10,937 875
revenues, plus 30.0% of annual --------
room revenues in excess of $108,852
$815,000, plus 8% of monthly --------
other revenues
Days Inn
Farmville, VA 125,376 16% of quarterly room revenues Rooms - $691,184 $176,251 304,804
---------- plus 9.5% of semi-annual room Other - $39,708 3,177 ----------
revenues, plus 30.0% of annual --------
room revenues in excess of $760,000, $179,428
plus 8% of monthly other revenues --------
Total $1,678,347 $2,279,054 $3,957,401
========== ========== ==========
</TABLE>
Item 3. Legal Proceedings
The Company is not presently involved in any material litigation, nor to
its knowledge, is any material litigation threatened against the Company or its
properties other than routine litigation arising in the ordinary course of
business and which is expected to be covered by the Company's liability
insurance.
Item 4. Submission of Matters to a Vote of Security Holders
On May 23, 1996 shareholders of record as of April 1, 1996, voted to
approve one year terms for the Board of Directors. By a plurality of the votes,
all seven nominated Board Members were elected to the Board for a term of one
year. There were no other matters submitted to a vote of security holders.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters.
(a) Market Information
The Company completed its IPO on November 29, 1994. Shares of the
Company's common stock were sold for cash in connection with the IPO at the
initial offering price of $6 per share. The shares were approved for listing on
the Nasdaq Small Cap Market ("Small Cap"). The Company completed a Second Stock
Offering on July 21, 1995 for cash at the offering price of $7.75 per share. On
October 30, 1996 the Company's common stock was approved for listing and began
trading on the Nasdaq National Market System ("NASDAQ"). The Company completed a
Third Stock Offering on December 6, 1996. Shares were sold for cash in
connection with the Third Stock Offering at the offering price of $8.25 per
share. The high and low sales prices for the shares on NASDAQ during the period
January 1, 1996 to December 31, 1996 were $9.50 and $8.00 per share,
respectively. The closing sales price for the shares on NASDAQ as of March 21,
1997 was $10.1875 per share. The table below sets forth the cash dividends per
share and the high and low market price range for the fiscal quarters of 1994,
1995, 1996 and 1997.
16
<PAGE>
MARKET PRICE RANGE
Cash ------------------
Dividends
Per Share Low High
--------- --- ----
1994
Fourth Quarter $.044 6.25 6.375
1995
First Quarter $.150 6.25 8.25
Second Quarter .150 7.50 8.125
Third Quarter .181 7.50 8.75
Fourth Quarter .190 7.75 8.75
1996
First Quarter $.19 8.00 9.125
Second Quarter .19 8.4375 9.375
Third Quarter .19 8.25 9.25
Fourth Quarter .19 8.125 9.50
1997
First Quarter (through
March 21, 1997) $.19 8.00 10.875
(b) Holders
The approximate number of holders of record of the shares was 116 and
the approximate number of beneficial owners was 1241 as of March 15, 1997.
(c) Dividend
The Company intends to make regular quarterly distributions to its
shareholders. For the year ended December 31, 1996, the Company declared
quarterly distributions as follows:
Shareholders of Record as of Distributions per Share
---------------------------- -----------------------
March 25, 1996 $.19
June 24, 1996 .19
September 30, 1996 .19
December 1, 1996 .19
----
$.76
====
On March 10, 1997, the Company announced a quarterly dividend of $.19 per
share for each shareholder of record of March 24, 1997. The dividend will be
paid May 5, 1997.
None of such distribution represented a return of capital based upon
earnings per share determined in accordance with generally accepted accounting
principles.
The Company believes that the assumptions underlying its estimate of cash
flow that will be available for distributions constituted a reasonable basis for
setting its initial distribution, and the Company expects to maintain its
distribution rate for 1997 unless actual results of operations, economic
conditions or other factors differ from the assumptions used in its estimates.
The actual cash flow that the Company will realize will be affected by a number
of factors including the revenue received from Percentage Leases and
unanticipated capital expenditures. No assurance can be given that the Company's
estimate will prove accurate.
17
<PAGE>
Future distributions paid by the Company will be at the discretion of the
Board of Directors of the Company and will depend on the actual cash flow of the
Company, its financial condition, capital requirements, the annual distribution
requirements under the REIT, provisions of the Internal Revenue Code and such
other factors as the Directors of the Company deem relevant.
Item 6. Selected Financial Data
The following tables set forth (i) selected revenue and expenses and
financial data on a historical basis for the Company and the Lessee for the
period from November 29, 1994 (inception of operations) through December 31,
1994, and for the years ended December 31, 1995 and 1996 (ii) pro forma revenue
and expenses and financial data for the Company and the Lessee for the years
ended December 31, 1994 and 1995 (iii) historical balance sheet data for the
Company as of December 31, 1995 and 1996 (iv) selected historical operating and
financial data for the Initial Hotels for each of the years in the three-year
period ended December 31, 1994 and, (v) selected proforma operating and
financial data for the Initial Hotels for the year ended December 31, 1994. The
historical balance sheet data has been derived from the balance sheets of the
Company as of December 31, 1995 and 1996, audited by Reznick Fedder & Silverman,
independent accountants. The historical operating data for the Company and the
Lessee for the period November 29, 1994 (date Company began operations) through
December 31, 1994 and the years ended December 31, 1995 and 1996 are derived
from the financial statements of the Company and the Lessee for the period ended
December 31, 1994 and the years ended December 31, 1995 and 1996 all audited by
Reznick Fedder & Silverman, independent accountants. The selected combined
historical financial data for the Initial Hotels for the two years ended
December 31, 1993 and the period from January 1, 1994 through November 28, 1994,
have been derived from the historical combined financial statements of the
Selling Partnerships - Initial Hotels, all audited by Reznick Fedder &
Silverman, independent accountants. The pro forma information of the Company is
presented as if the IPO had occurred on January 1, 1994. The combined pro forma
financial information of the Initial Hotels for the year ended December 31,
1994, has been derived from the financial statements of the partnerships
formerly owning the Initial Hotels and the financial statements of the Lessee,
all audited by Reznick Fedder & Silverman, independent accountants.
Operating income before interest, depreciation, and amortization should
not be considered as an alternative to net income as an indicator of the Hotels'
performance or to cash flow as to a measure of liquidity.
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 Annual Report.
18
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
SELECTED HISTORICAL AND PRO FORMA OPERATING
AND FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical
Period from
November 29,
1994 (Inception) Historical Historical Pro Forma Pro Forma
through Year Ended Year Ended Year Ended Year Ended
December December December December December
31, 1994 31, 1995 31, 1996 31, 1994 (1) 31, 1995 (1)
-------- -------- -------- -------- --------
<S> <C>
Operating data
Percentage lease revenue (2) $273 $3,750 $3,958 $3,560 $3,901
Other revenue - 21 47 - 21
---- ------ ------ ------ ------
Total revenue 273 3,771 4,005 3,560 3,922
Depreciation and amortization 42 680 736 504 704
Interest expense 97 1,011 493 1,050 710 (3)
Real estate and personal pro-
perty taxes and property insurance 18 196 252 217 174
General and administrative 15 238 411 168 (4) 268
---- ------ ------ ------ ------
Total Expenses 172 2,125 1,892 1,939 1,856
--- ----- ----- ----- -----
Estimated income before minority
interest 101 1,646 2,113 1,621 2,066
Minority interest(s) 29 396 435 463 (5) 436 (5)
---- ------ ------ ------ ------
Net income applicable to
common shareholders $ 72 $1,250 $1,678 $1,158 $1,630
==== ====== ====== ====== ======
Earnings per common share $.05 $.71 $.70 $.88 $.89
==== ==== ==== ==== ====
</TABLE>
December 31, December 31,
1995 1996
------------ ------------
Balance Sheet Data (6):
Net investment in hotel properties..... $19,709 $21,405
Minority interest in Partnership....... $2,589 $3,247
Shareholders' equity................... $10,290 $18,145
Total assets........................... $21,898 $30,221
Total debt............................. $8,383 $8,185
19
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
SELECTED HISTORICAL AND PRO FORMA OPERATING
AND FINANCIAL DATA - Continued
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical
Period from
November 29,
1994 (Inception) Historical Historical Pro Forma Pro Forma
through Year Ended Year Ended Year Ended Year Ended
December December December December December
31, 1994 31, 1995 31, 1996 31, 1994 (1) 31, 1995 (1)
-------- -------- -------- -------- --------
<S> <C>
Other Data
Funds from operations (7) $143 $2,326 $2,849 $2,125 $2,770
==== ====== ====== ====== ======
Total distributions declared
per share/unit $.044 $.671 $.76
===== ===== ====
Weighted avg. shs. outstanding 1,849,666 2,310,184 3,033,602 1,849,666 2,331,700
Net cash provided by (used in)
operating activities (8) $170 $1,334 $2,751 $2,125 $2,770
==== ====== ====== ====== ======
Net cash provided by (used in)
investing activities (9) $(4,840) $ (619) $(1,967) $(282) $ (619)
======== ======- ======== ===== -------
Net cash provided by (used in)
financing activities (10) $ 5,223 $ (1,100) $6,148 $(1,836) $ (879)
======== ======== ====== ======= =======
</TABLE>
(Notes on page 21)
HUMPHREY HOSPITALITY MANAGEMENT, INC.
SELECTED HISTORICAL AND PRO FORMA OPERATING
AND FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical
Period from
November 29,
1994 (Inception) Historical Historical Pro Forma Pro Forma
through Year Ended Year Ended Year Ended Year Ended
December December December December December
31, 1994 31, 1995 31,1996 31, 1994 (1) 31, 1995 (1)
-------- -------- ------- -------- --------
<S> <C>
Room revenue $459 $7,499 $7,942 $7,042 $7,814
Other revenue 38 556 637 644 (11) 572
---- ------ ------ ------ -------
Total revenue 497 8,055 8,579 7,686 8,386
Hotel operating expenses 314 4,166 4,591 4,235 (11) 4,330
Percentage lease payments (2) 273 3,750 3,957 3,560 3,901
----- ----- ----- ----- -----
Net (loss) income $(90) $139 $31 $(109) $155
==== ==== === ===== ====
</TABLE>
20
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
SELECTED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
(In thousands, except operating data)
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------- HISTO- PRO
HISTORICAL RICAL FORMA
---------------------------------- ----- -----
1992 1993 1994 (12) 1994 (12)
------ ------ ---- -----
<S> <C>
Financial Data
Room revenue $6,295 $6,627 $6,583 $7,042
Other revenue 742 704 715 752 (11)
----- ----- ------ -----
Total revenue 7,037 7,331 7,298 7,794
Operating expenses 4,409 4,603 4,513 4,827 (11)
----- ----- ----- -----
Operating income before interest,
depreciation, and amortization 2,628 2,728 2,785 2,967
Interest 1,351 1,272 1,062 1,159
Depreciation and amortization 743 776 690 732
----- ----- ----- -----
Net income (loss) $ 534 $ 680 $1,033 $1,076
====== ====== ====== ======
Other Data
Net cash provided by operating activities $1,319 $1,503 $1,698 $1,896
====== ====== ====== ======
Net cash used in investing activities $(132) $ (40) $ (373) $ (373)
====== ======= ======= =======
Net cash used in financing activities $(779) $(1,275) $ (985) $ (984)
====== ======== ======= =======
Operating Data
Total available room nights 203,142 202,608 203,062
======= ======= =======
Average daily rate $43.21 $43.79 $46.68
====== ====== ======
Average occupancy 71.7% 74.7% 74.3%
==== ==== =====
REVPAR $30.99 $32.71 $34.68
====== ====== ======
</TABLE>
- ------------
(1) The pro forma information does not purport to represent what the
Company's, the Lessee's or the Initial Hotels' results of operations
would actually have been if consummation of the IPO or the Secondary
Offering had, in fact, occurred at the beginning of the periods
indicated, or to project the Company's or the Lessee's results of
operations for any future period. The pro forma information for the
year ended December 31, 1994 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. The pro forma information for the year ended December
31, 1995 is presented as if the consummation of the Secondary Offering
and the acquisition and operation of the Days Inn Hotel had occurred
and/or commenced on January 1, 1995. The pro forma information for the
year ended December 31, 1994 is not presented as if the consummation of
the Secondary Offering and the operation of the Days Inn Hotel had
occurred and/or commenced on January 1, 1994.
21
<PAGE>
(2) 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 Hotels for the periods indicated.
(3) Represents interest computed on approximately $8.4 million of debt
remaining after the use of proceeds from the Secondary Offering to
retire existing debt.
(4) 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.
(5) Calculated as 28.54% and 21.09% of estimated income before minority
interest of the Limited Partners for 1994 and 1995, respectively.
(6) Represents consolidated historical balance sheet data for the Company.
(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 REIT's 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), 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 amortization, and after
adjustments for unconsolidated partnerships and joint ventures. For the
periods presented, 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 improvements or debt service with respect to the hotel
properties.
The computation of historical and pro-forma Funds from Operations is as
follows:
<TABLE>
<CAPTION>
Historical
Period from Historical Historical Proforma Proforma
November 29, 1994 Year Ended Year Ended Year Ended Year Ended
through December December December December
December 31,1994 31, 1995 31, 1996 31, 1994 31, 1995
---------------- ---------- ---------- ---------- ----------
<S> <C>
Net income applicable to
holders of common shares $ 72 $1,250 $1,678 $1,158 $1,630
Add:
Minority interests 29 396 435 463 436
Depreciation and
amortization 42 680 736 504 704
---- ------ ------ ------ ------
$143 $2,326 $2,849 $2,125 $2,770
==== ====== ====== ====== ======
</TABLE>
(8) Pro forma cash flows from operating activities for 1994 and 1995
represent net income plus income allocable to minority interests,
depreciation of hotel properties, and amortization of deferred expenses
for the period indicated.
(9) Pro forma cash flow from investing activities for 1994 represents
improvements and additions to the Hotels based on 4.0% of room revenues
to be made available to the Lessee. Pro forma cash flow from investing
activities for 1995 is based upon historical amounts.
22
<PAGE>
(10) Pro forma cash flows from financing activities for 1994 represents
estimated distributions to be paid based on the pro forma annual
distribution rate of $.72 per share and 1,321,800 shares of common
stock and 527,866 units outstanding plus the pro forma principal
payments for the period indicated ($504). Pro forma cash flow from
financing activities for 1995 is based upon historical amounts.
(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 and pro forma 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.
(12) The Historical 1994 operating data of the Initial Hotels is for the
period January 1, 1994 through November 28, 1994. The Proforma 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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
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.
Results of Operations
Comparison of year ended December 31, 1996 to year ended December 31, 1995
The Company
The Company's total revenues for the twelve month period ended December
31, 1996, substantially consisted of Percentage Lease revenue recognized
pursuant to the Percentage Leases. The Company's revenue was approximately
$4,005,000, up 6.2% as compared to revenue of $3,771,000 for the period ended
December 31, 1995. Net income for the period was approximately $1,678,000,
improving 34.2% as compared to net income of $1,250,000 for the period ended
December 31, 1995. The improvement in revenue is attributed to the addition of
the Days Inn Hotel, which substantially strengthened the Company's market
position for the hotels located in Farmville, Virginia. The improvement in net
income is attributed to the additional revenue from the Days Inn Hotel and the
refinancing and/or retirement of Company debt on the hotels located in Solomons,
Maryland, Dahlgren, Virginia, Elizabethton, Tennessee, Princeton, West Virginia,
and Farmville, Virginia in connection with the acquisition of the Credit
Facility.
The Lessee
The Lessee's net income for the period ended December 31, 1996 was
approsimately $31,000. The Lessee's revenues increased by approximately
$524,000, or 6.5%, to $8,579,000 for the twelve months ended December 31, 1996,
as compared to $8,055,000 of revenue for the same period of 1995. Occupancy for
the Hotels decreased from 71.6% for the year ended 1995, to 70% for the year
ended 1996. The decrease in occupancy is attributed to business activity at the
Hotels located in Dublin, Virginia and Elizabethton, Tennessee and to record
snowfall in the first quarter of 1996. In 1995, the Company's hotels in Dublin,
Virginia and Elizabethton, Tennessee received business from nearby industrial
construction projects. The construction projects were substantially completed
during 1995. The Days Inn Hotel has an annual occupancy below the average for
the Company; accordingly, its inclusion for 1996's occupancy lowers the average
occupancy for all
23
<PAGE>
the hotels. The average daily rate at the Hotels increased to $50.27 for the
year ended December 31, 1996, or 3.6%, as compared to $48.53 for the same
period of 1995. Revenue per available room (REVPAR) increased to $35.17 for
1996, from $34.74 for the same period in 1995. Lessee operating expenses
increased by approximately $424,000, or 10.2%, for the twelve months ended
December 31, 1996 as compared to operating expenses for the same period last
year. Operating expenses increased due to the consolidation of the Lessee and
the Operator, and the addition of management personnel. Additional management
personnel were hired to accommodate anticipated additional hotel acquisitions.
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 Percentage Lease revenue recognized
pursuant to the Percentage Leases. The Company's revenue was approximately
$3,771,000, up 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, improving 7.9% as compared to net income of $1,158,000 for the pro
forma period ended December 31, 1994. On a pro forma basis for the period ended
December 31, 1995, revenue was $3,922,000, up 10.2% as compared to $3,560,000
for the same pro forma period of 1994. Net income for the pro forma period ended
December 31, 1995, was $1,630,000, up 40.7%, from $1,158,000 for the pro forma
period ended December 31, 1994. The improvement in revenue is attributed to the
addition of the Days Inn Hotel, which substantially strengthened the Company's
market position for the hotels located in Farmville, Virginia. The improvement
in net income is attributed to the additional revenue from the Days Inn Hotel
and the refinancing and/or retirement of Company debt on the hotels located in
Solomons, Maryland, Dahlgren, Virginia, Elizabethton, Tennessee, Princeton, West
Virginia, Farmville, Virginia - Comfort Inn, and Dublin, Virginia.
The Lessee
The Lessee's net income for the period ended December 31, 1995 was
$139,000. On a pro forma basis the Lessee's revenues increased by approximately
$700,000, or 9.1%, to $8,386,000 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 71.6%
for the year ended 1995. The decrease in occupancy is attributed to business
activity at the Hotels located in Solomons, Maryland, and the Farmville Comfort
Inn. 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 Farmville Comfort
Inn, 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 Farmville Days Inn has an annual occupancy below the average for
the Company; accordingly, its inclusion for 1995's occupancy lowers the average
occupancy for the entire group of Company hotels. The average daily rate at the
Hotels increased to $48.53 for the year ended December 31, 1995, or 4.2%, as
compared to $46.68 for the same period of 1994. Revenue per available room
(REVPAR) increased to $34.74 for 1995, from $34.68 for the same period in 1994.
Lessee pro forma operating expenses increased by approximately $93,000, or 2.2%,
for the twelve months ended December 31, 1995 as compared to pro forma operating
expenses for the same period last year.
24
<PAGE>
The following table sets forth certain combined historical financial
information for the Initial Hotels for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------ HISTO- PRO
HISTORICAL RICAL FORMA
------------------------------ ----- -----
1992 1993 1994 (2) 1994 (2)
---- ---- ---- ----
<S> <C>
Room revenue 6,295 6,627 6,583 7,042
Other revenue 742 704 715 752
------ ------ ------ ------
Total revenue 7,037 7,331 7,298 7,794
Operating expenses 4,409 4,603 4,513 4,827
----- ----- ----- -----
Operating income before interest,
depreciation, and amortization(1) 2,628 2,728 2,785 2,967
Interest 1,351 1,272 1,062 1,159
Depreciation and amortization 743 776 690 732
------ ------ ------ ------
Net income (loss) $ 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. Such
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 Proforma 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 pro-forma 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 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.
25
<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 27.3% to approximately $680,000 from
approximately $534,000. The improvement in net income is attributed to lower
interest payments due to the curtailment of debt.
Liquidity and Capital Resources
The Company -
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 Company's Funds from Operations (net income plus minority interests,
depreciation and amortization) for the year ended December 31, 1996, were
approximately $2,849,000, or $.94 per common share. 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
performance. In accordance with the resolution adopted by the Board of Governors
of the National Association of Real Estate Investment Trusts, Inc. (NAREIT),
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 amortization, and
after adjustments for unconsolidated partnerships and joint ventures. For the
period presented, depreciation and amortization and minority interest were the
only non-cash adjustments. Funds from Operations should not be considered as and
alternative to net income or other measurements under generally accepted
accounting principles as an indicator of operating performance or to cash flows
form operating, investing or financing activities as a measure of liquidity.
Funds from Operations does not reflect working capital changes, cash
expenditures for capital improvements or debt service with respect to the hotel
properties.
As of December 31, 1996 the remaining cash balance from the Third Stock
Offering was approximately $7.013 million. The proceeds were applied as follows:
Gross proceeds $9,487,500
Underwriting fees (652,266)
Offering expenses (190,237)
----------
Net Proceeds 8,644,997
Repay outstanding debt on Credit Facility and
additional costs associated with the New Development (1,649,930)
Interest earned through December 31, 1996 17,920
----------
$7,012,987
==========
The balance of $7,012,987 was invested in a variety of 7 day certificates of
deposit, and 31 day and 59 day commercial paper investments with interest rates
ranging from 5.15% to 5.37%. The remaining balance will be used for future
acquisitions.
Debt
The Company's indebtedness consists of only long term debt. The Company's
long term debt had an outstanding principal balance of approximately $8.2
million and is secured by the Hotels as follows:
Approximately $1.7 million from the Credit Facility which is secured
by and cross-collateralized by the hotels located in Dahlgren and
Farmville, VA, Elizabethton, TN, Princeton, WV, Solomons, MD, 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.
26
<PAGE>
Approximately $4.1 million, secured by a first deed of trust and
cross-collateralized by the hotels located in Wytheville, Virginia
and Morgantown, West Virginia. Interest is accrued at the rate
necessary to remarket bonds at a price equal to 100% of the
outstanding principal balance. The rate is adjusted weekly and is not
to exceed 15% and 11.3636% for Wytheville and Morgantown,
respectively. At December 31, 1996, the interest rate was 4.0% for
both Morgantown and Wytheville. In addition, letter of credit fees
and financing fees increase the effective rate on the bonds. The
letters of credit expire in November 1999 and April 2000 for
Wytheville and Morgantown, respectively.
Approximately $2.4 million, secured by a first deed of trust on the
hotel located in Dublin, Virginia. The outstanding principal bears
interest at a fixed annual rate of 8%. The debt matures in November
2005. The debt is non-recourse.
The approximate aggregate annual principal payments and payments to bond
sinking funds for the three years following December 31, 1996 are as follows:
1997 $180,000
1998 $195,000
1999 $1,911,000
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
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates during the second and third quarter. This
seasonality can be expected to cause fluctuations in the Partnership's
quarterly, semi-annual and annual lease revenue to the extent that it receives
Percentage Rent.
Other Information
On January 22, 1997, the Company's New Development, the Comfort Suites
hotel located in Dover, Delaware, opened for business. The hotel is leased by
the Lessee for a fixed lease payment of $378,840 a year, payable in equal
monthly installments and prorated for any partial month. The hotel has 64 units,
each with a refrigerator and microwave. Amenities include an outdoor pool,
meeting room and several rooms that contain spa bathtubs.
On February 26, 1997, the Company closed on the purchase of the Comfort
Inn hotel located in Culpeper, Virginia. The Company assumed approximately
$1,220,000 in taxable and tax exempt bond financing and utilized approximately
$680,000 in cash for the purchase. The hotel is leased by the Lessee pursuant to
a Percentage Lease which provides for rent based, in part, on the room revenues
from the hotel. The hotel has 49 rooms and amenities include an outdoor pool and
continental breakfast.
On March 17, 1997, the Company closed on the purchase of the Comfort Inn
hotel located in New Castle, Pennsylvania. The Company paid $3 million in cash
for the site. The hotel is leased by the Lessee pursuant to a Percentage Lease
which provides for rent based, in part, on the room revenues from the hotel. The
hotel has 79 rooms, amenities include a meeting room and a fitness room with
sauna and locker facilities.
27
<PAGE>
The following table sets forth (i) the annual Base Rent, and (ii) the
annual Percentage Rent formula for the hotels acquired from January 1, 1997
through March 17, 1997:
<TABLE>
<CAPTION>
Acquired Hotel Base Rent Percentage Rent Formula
- -------------- --------- -----------------------
<S> <C>
Comfort Suites $378,740 Not Applicable
Dover, Delaware
Comfort Inn $147,936 11% of quarterly room revenues up to room
Culpeper, Virginia revenues of $675,000 per annum, plus 11%
semi-annual room revenues up to room
revenues of $675,000 per annum, plus 35%
of room revenues in excess of $675,000 of
room revenues per annum, plus 8% of
monthly other revenues.
Comfort Inn $216,996 7.5% of quarterly room revenues up to room
New Castle, Pennsylvania revenues of $1,000,000 per annum, plus 15%
of semi-annual room revenues up to room
revenues of $1,000,000 per annum, plus 35%
of room revenues in excess of $1,000,000 of
room revenues per annum, plus 8% of
monthly other revenues.
</TABLE>
In March, 1997, the Company contracted to purchase three hotels, the 63
room Best Western Hotel in Harlan, Kentucky, the 62 room Holiday Inn Express in
Danville, Kentucky and the 56 room Comfort Inn in Murphy, North Carolina. The
total price of the hotels is approximately $7.325 million and will be purchased
utilizing proceeds from the Third Stock Offering and borrowings from the Credit
Facility.
Item 8. Financial Statements and Supplementary Data
The response to this Item 8 is included as a separate section of this
annual report on Form 10-K. See Item 14.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
All of the current directors, except Mr. Zwerdling, were elected at
the Company's annual meeting on May 23, 1996. Mr. Zwerdling was appointed
to the Board of Directors to serve out the unexpired term of former board
member, Mr. Joseph Howell. Mr. Howell resigned his position on the Board
of Directors to devote more time to his other business interests.
The Board of Directors consist of seven members, all of which serve one
year terms. Certain information regarding the directors and executive officers
of the Company is set forth below.
28
<PAGE>
Mr. James I. Humphrey, Jr., Member of the Acquisition Committee,
Chairman of the Board, President and Secretary. Mr. Humphrey, age 55, is
President and sole shareholder of Humphrey Associates, Inc., and has held
that position since 1978. 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 and has 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. Charles A. Mills, III, Director, Vice President and
Treasurer. Mr. Mills, age 49, is a Senior Vice President and the Chairman
of Anderson & Strudwick, Incorporated, which served as the Underwriter of
the Common Shares for the Company's three public stock offerings and has
served as Chairman since July 1994. Mr. Mills also served as Chairman of
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. 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.
Ms. Margaret Allen, Director and member of the Audit and Acquisition
Committees. Ms. Allen, age 50, is 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
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.
Mr. Jeffrey M. Zwerdling, Esq., Director and member of the Audit
Committee. Mr. Zwerdling, age 53, 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.
Mr. George R. Whittemore, Director and member of the Acquisition
Committee Mr. Whittemore, age 46, is President of Mills Value Advisor, Inc. a
registered investment advisor and is Senior Vice President of Anderson &
Strudwick Incorporated, which served as underwriter for the Company's three
public stock offerings. He served as a director and the 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.
Dr. Leah T. Robinson, Director. Dr. Robinson, age 65, 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., Director and member of the Audit Committee.
Dr. Mayer, age 62, 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.
29
<PAGE>
Director Meetings
The business of the Company is under the general management of its
Board of Directors as provided by the Company's Bylaws and the laws of
Commonwealth of Virginia, the Company's state of incorporation. The Company's
Bylaws provide that a majority of members of the Board of Directors must be
independent directors. There are presently seven directors, including four
independent directors. The Board of Directors held five meetings in 1996.
The Company has an Acquisition Committee and an Audit Committee of its
Board of Directors. The Company may, from time to time, form other committees as
circumstances warrant. Such committees have authority and responsibility as
delegated by the Board of Directors.
Audit Committee
The Audit Committee consists of three Independent Directors, Ms. Allen
and Messrs. Zwerdling and Mayer. The Audit Committee will make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the plans and results of the audit engagement,
approve professional services provided by the independent public accountants,
review the independence of the independent public accountants, consider the
range of audit and non-audit fees and review 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
Securities Exchange Act of 1934, as amended, and such other laws and regulations
applicable to the Company. The Audit Committee met twice in 1996.
Acquisition Committee
The Board of Directors has established an Acquisition Committee, which
currently consists of Ms. Allen and Messrs. Whittemore and Humphrey. The
Acquisition Committee will review potential hotel acquisitions, visit the sites
of proposed hotel acquisitions, review the terms of proposed Percentage Leases
for proposed hotel acquisitions and make recommendations to the Board of
Directors with respect to proposed acquisitions. The Acquisition Committee met
twice in 1996.
Compensation of Trustees
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. In addition, the Company will reimburse all Directors for reasonable
out-of-pocket expenses incurred in connection with their services on the Board
of Directors.
Compliance with Section 16(A) of the Securities and Exchange Act
The Company's directors, executive officers and owners of more than 10%
of the common shares are required under the Securities and Exchange Act of 1934
to file reports of ownership with the SEC. Copies of these reports must also be
furnished to the Company.
Based solely on review of the copies of such reports furnished to the
Company through the date hereof, or written representations that no reports were
required; the Company believes that during 1996, all filing requirements
applicable to its officers, directors, and 10% shareholders were met.
Item 11. Executive Compensation
The Company does not pay its executives any salary above or beyond the
compensation that they receive as directors.
30
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following tables sets forth certain information regarding the
beneficial ownership of shares of stock by (i) each person known to the Company
to be the beneficial owner of more than five percent (5%) of its capital stock
(ii) each director of the Company, (iii) each executive officer of the Company,
and (iv) by all Directors and executive officers of the Company as a group
through March 21, 1997. Unless otherwise indicated, all shares are owned
directly and the indicated person has sole voting and investment power. The
number of shares represents the number of shares of stock the person holds plus
the number of shares of stock into which Units that are held may be redeemed in
certain circumstances.
Security ownership of beneficial owners of more than five percent (5%) of
capital stock:
<TABLE>
<CAPTION>
Amount and Nature
Name & Address of Beneficial of Beneficial Percent of
Owner Ownership Class (1)
- --------------------------- ------------------ ----------
<S> <C>
Alliance Capital Management L.P. 350,000 (2) 10.1%
787 Seventh Avenue
New York, NY 10019
Mr. James T. Martin 224,000 (3) 6.4%
Odyssey Capital Req.
6 Front Street
Hamilton, HM11 BERMUDA
Smith Barney Mutual Funds Management, Inc. 191,300 (4) 5.5%
388 Greenwich Street
New York, NY 10013
</TABLE>
(1) Based on shares of common stock outstanding of March 21, 1997
(2) Based upon information contained in Schedule 13G dated January 10, 1997, and
filed with the SEC on January 10, 1997.
(3) Based upon information contained in Schedule 13D dated March 14, 1996 and
filed with the SEC on March 14, 1996.
(4) Based upon information contained in Schedule 13G dated February 5, 1997 and
filed with the SEC on February 5, 1997.
31
<PAGE>
Security Ownership by Management:
<TABLE>
<CAPTION>
Amount and Nature
Name & Address of Beneficial of Beneficial Percent of
Owner Ownership Class (1)
- ---------------------------- ------------------ ----------
<S> <C>
James I. Humphrey, Jr. 623,350 (2) 15.2% (2)
The Humphrey Companies
12301 Old Columbia Pike
Suite 300
Silver Spring, MD 20904
Charles A. Mills, III 20,625 - (3)
Margaret Allen 2,800 - (3)
Jeffrey M. Zwerdling 53,510 1.3%
George R. Whittemore 89,800 2.2%
Dr. Leah T. Robinson 84,800 2.1%
Andrew A. Mayer, M.D. 91,000 2.2%
-------- ----
All directors and executive officers as a group
(7 persons) 965,885 23.5%
</TABLE>
- ---------------
(1) Assumes that all outstanding units of limited partnership interest in
the Partnership held by the person are redeemed for shares of stock.
The total number of shares outstanding used in calculating the
percentage assumes that none of the Units held by other persons are
redeemed for shares of stock. All units currently outstanding are
redeemable by the applicable holders after January 21, 1996 on a
one-for-one basis for shares of stock, or if the redeeming party would
be deemed to own in excess of 9.9% of the outstanding shares of stock,
or otherwise at the election of the Company, cash in an equivalent
value (the "Redemption Rights").
(2) Represents 522,587 shares issuable to Mr. Humphrey directly upon
redemption of his Units, 5,279 shares issuable to Humphrey
Associates, Inc. upon redemption of its Units and 95,484 shares
issuable to Farmville Lodging Associates, LLC upon redemption of its
Units. Mr. Humphrey is the sole shareholder of Humphrey Associates,
Inc. and the majority member of Farmville Lodging Associates, LLC.
The redemption rights are exercisable at any time one year after the
Closing of the Offering subject to certain conditions.
(3) Represents less than one percent of the outstanding shares of stock.
Item 13. Certain Relationships and Related 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,
Chairman of the Board of Directors and the President of the Company, is the sole
shareholder of the Lessee.
32
<PAGE>
Acquisition of Hotels from Affiliates of Mr. Humphrey
The Initial Hotels were acquired, directly and indirectly, by the
Partnership from limited partnerships in which Mr. Humphrey was a limited
partner and Humphrey Associates, Inc. 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 Humphrey Associates, Inc. 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 Humphrey Associates, Inc., (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 Hotel in exchange for (i) 95,484
Units, which are 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 Days Inn Hotel, which was repaid
immediately with proceeds of the Second Stock Offering.
The Humphrey Affiliates own 623,350 Units with a value of approximately
$5.14 million based on the offering price of the stock in the Third Stock
Offering. Upon exercise of the Redemption Rights, which are currently all
exercisable, all of such Units are redeemable on a one-for-one basis for shares
of stock or for an equivalent cash value 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
At December 31, 1996, Mr. Humphrey guaranteed the payment of interest
and principal on approximately $5.8 million of the Company's outstanding
long-term debt. The debt is secured by the hotels located at Solomons, Maryland;
Dahlgren, Virginia; Farmville, Virginia; Elizabethton, Tennessee; Princeton,
West Virginia; Wytheville, Virginia; and Morgantown, West Virginia.
Percentage Leases
During 1996, the Partnership and the Lessee were parties to Percentage
Leases with respect to each hotel property owned by the Partnership. 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. Pursuant to the terms of the percentage leases, the Lessee is
required to pay Base Rent and Percentage Rent on the revenue of the hotels 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 constituted all of the
Partnership's and the Company's revenue. For the period January 1, 1996 through
December 31, 1996, the Lessee incurred an aggregate of $3,957,401 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 1996, the Lessee paid franchise fees in the aggregate amount
of approximately $420,809.
Non-Competition Agreement and Option Agreement
Pursuant to the Non-Competition Agreement among Mr. Humphrey, Humphrey
Associates, Inc., and the Company, while Mr. Humphrey is an officer or director
of the Company or owns any ownership interest in the Company, and for five years
thereafter, neither Mr. Humphrey nor any affiliate of Mr. Humphrey, will
acquire, develop, own, operate, manage or have any interest in any hotel that is
within 20 miles of a hotel in which the Company or the Partnership has invested.
The
33
<PAGE>
Board of Directors, including a majority of the Independent Directors, have
agreed to waive the provisions of the Non-Competition Agreement as they apply to
Humphrey Development's right to purchase the New Development. The 20 mile
prohibition may be waived by the Company's 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 in
which the Company has invested. 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.
Pursuant to the Option Agreement among Mr. Humphrey, Humphrey Associates,
Inc. and the Company, the Company will have 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). The
Company currently anticipates that any such acquired or developed hotel will
have achieved stabilized operating revenue before the Company would consider
purchasing such hotel from Mr. Humphrey or any of his affiliates. All
transactions to acquire additional properties and any and all transactions
between the Company, the Partnership or the Subsidiary Partnership and Mr.
Humphrey or his affiliates must be approved by a majority of the Company's
directors, including a majority of its 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
limited partnership interest in the Partnership.
Other
Mr. Mills, who is the Vice President, Treasurer, and a director of the
Company, is Senior Vice President and Chairman of Anderson & Strudwick,
Incorporated. Mr. Whittemore, who is a director of the Company, is Senior Vice
President of the underwriter. Anderson & Strudwick was the underwriter of the
Company's previous three underwritings, received approximately $1,755,000 in
investment banking fees in connection with the three underwritings. Anderson &
Strudwick also served as underwriter for $2,460,000 in 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; VA, and receives an ongoing fee equal to 0.25% of the
outstanding principal of those bonds.
The Company executed an amended development services agreement (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.
The Company has an agreement with the Lessee to provide accounting and
securities reporting services for the Company. The initial Services Agreement
provided that these services would be provided to the Company for a fixed fee of
$80,000 per year, notwithstanding the size of the Company's portfolio. On
November 6, 1996, the Company amended the Services Agreement to provide for such
services for an initial annual fee of $30,000 per year for as 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.
34
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
<TABLE>
<S> <C>
(a) Financial Statements
Humphrey Hospitality Trust, Inc.
Independent Auditors' Report 39
Consolidated Balance Sheets as of December 31, 1995 and 1996 40
Consolidated Statements of Income for the Period from August 23, 1994 (date of Incorporation)
through December 31, 1994 and the Years Ended December 31, 1995 and 1996 41
Consolidated Statements of Shareholders' Equity for the Period from August 23, 1994 (date of
incorporation) through December 31, 1994 and the Years Ended December 31, 1995 and 1996 42
Consolidated Statements of Cash Flows for the Period from August 23, 1994 (date of
incorporation) through December 31, 1994 and the Years Ended December 31, 1995 and 1996 43
Notes to Consolidated Financial Statements 46
Schedule III - Real Estate and Accumulated Depreciation 57
Notes to Schedule III - Real Estate and Accumulated Depreciation 58
Humphrey Hospitality Management, Inc.
Independent Auditors' Report 59
Balance Sheets as of December 31, 1995 and 1996 60
Statements of Operations for the Period from August 18, 1994 (date of incorporation) through
December 31, 1994 and the Years Ended December 31, 1995 and 1996 61
Statements of Shareholders' Equity (Deficit) for the Period from August 18, 1994 (date of
incorporation) through December 31, 1994 and the Years Ended December 31, 1995 and 1996 62
Statements of Cash Flows for the Period from August 18, 1994 (date of incorporation) through
December 31, 1994 and the Years Ended December 31, 1995 and 1996 63
Notes to Financial Statements 64
Combined Selling Partnerships - Initial Hotels
Independent Auditors' Report 68
Combined Balance Sheets as of December 31, 1993 and November 28, 1994 69
Combined Statements of Operations for the Years Ended December 31, 1992,
1993 and the Period January 1, 1994 through November 28, 1994 70
Combined Statements of Partners' Deficit for the Years Ended December 31,
1992, 1993 and the Period January 1, 1994 through November 28, 1994 71
Combined Statements of Cash Flows for the Years Ended December 31, 1992,
1993 and the Period January 1, 1994 through November 28, 1994 72
Notes to Combined Financial Statements 73
</TABLE>
All other schedules have been omitted since the required information is not
applicable, or because the information required is included in the financial
statements, including the notes thereto
(b) Reports on Form 8-K
The Registrant filed an 8-K on February 9, 1996.
The Registrant filed an 8-K on March 12, 1997.
35
<PAGE>
(c) Exhibits
Exhibit
Number Exhibit
------- -------
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 Share Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-11 (Registration No. 33-83658))
5.1 Opinion of Hunton & Williams
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 10.3 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))
36
<PAGE>
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 (incorporated by
reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-11 (Registration No. 33-93346))
10.22 Non-Competition Agreement (incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement
on Form S-11 (Registration No. 33-83658))
10.23 Amended Promissory Note from Humphrey Hospitality Limited
Partnership to James I. Humphrey, Jr. (incorporated by
reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-11 (Registration No.
33-93346))
10.24 Amended Loan Agreement between Humphrey Hospitality
Limited Partnership and James I. Humphrey, Jr.
(incorporated by reference to Exhibit 10.24 to the
Company's Registration Statement on Form S-11 (Registration
No. 33-93346))
21.1 List of Subsidiaries
23.1 Consent of Reznick, Fedder & Silverman
37
EXHIBIT 21.1
List of Subsidiaries of Humphrey Hospitality Trust, Inc.
1. Humphrey Hospitality Limited Partnership, a Virginia limited partnership
2. Solomons Beacon Inn Limited Partnership, a Maryland limited partnership
38
<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, 1995 and
1996, 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 years ended December 31, 1995 and 1996. Our
audits also included the financial statement schedule included on pages 57
through 58. These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and the 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Humphrey
Hospitality Trust, Inc. and Subsidiaries as of December 31, 1995 and 1996, and
the results of their operations and their cash flows for the period from August
23, 1994 (date of incorporation) through December 31, 1994 and the years ended
December 31, 1995 and 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
March 3, 1997, except for the third and fourth
paragraphs of Note 7, as to which the dates
are March 17, 1997 and March 21, 1997, respectively
39
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<S> <C>
ASSETS
Investment in hotel properties, net of accumulated depreciation
of $524 and $1,134 $ 19,709 $ 21,405
Cash and cash equivalents 169 7,101
Accounts receivable from lessee 1,025 1,067
Reserve for replacements 407 68
Deferred expenses, net of accumulated amortization
of $76 and $61 445 373
Other assets 143 207
------------ ------------
Total assets $ 21,898 $ 30,221
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgages and bonds payable $ 8,327 $ 8,151
Obligations under capital leases 56 34
Dividends payable 561 561
Accounts payable and accrued expenses 75 83
------------ ------------
Total liabilities 9,019 8,829
------------ ------------
MINORITY INTEREST 2,589 3,247
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
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 and 3,481,700 shares issued and outstanding 23 35
Additional paid-in capital 10,265 18,202
Undistributed earnings (deficit) 2 (92)
------------ ------------
10,290 18,145
------------ ------------
Total liabilities and shareholders' equity $ 21,898 $ 30,221
============ ============
</TABLE>
See notes to consolidated financial statements
40
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Period August 23, 1994 (date of incorporation) through
December 31, 1994 and years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------- -------------
<S> <C>
Revenue
Percentage lease revenue $ 273 $ 3,750 $ 3,958
Other revenue - 21 47
------------- ------------ ------------
Total revenue 273 3,771 4,005
------------- ------------ ------------
Expenses
Interest 97 1,011 493
Real estate and personal property taxes and
property insurance 18 196 252
General and administrative 15 238 411
Depreciation and amortization 42 680 736
------------- ------------ ------------
Total expenses 172 2,125 1,892
------------- ------------ ------------
Income before allocation to minority
interest 101 1,646 2,113
Income allocated to minority interest 29 396 435
------------- ------------ ------------
NET INCOME $ 72 $ 1,250 $ 1,678
============= ============ ============
Earnings per common share and common share
equivalents outstanding $ .05 $ .71 $ .70
============= ============ ============
Weighted average common shares and common
share equivalents outstanding 1,849,666 2,310,184 3,033,602
============= ============ ============
</TABLE>
See notes to consolidated financial statements
41
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
Period August 23, 1994 (date of incorporation) through
December 31, 1994 and years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
Undis-
Common Stock Additional tributed
--------------------------------- 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
secondary 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
Issuance of shares, net of offering
expenses 1,150,000 12 8,633 - 8,645
Net decrease to record the minority
interest in the proceeds from the
common stock offering - - (696) - (696)
Dividends declared - - - (1,772) (1,772)
Net income - - - 1,678 1,678
------------ -------------- ------------ ------------ ---------------
Balance at December 31, 1996 3,481,700 $ 35 $ 18,202 $ (92) $ 18,145
============ ============== ============ ============ ===============
</TABLE>
See notes to consolidated financial statements
42
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Period August 23, 1994 (date of incorporation) through
December 31, 1994 and years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------ ------------
<S> <C>
Cash flows from operating activities
Net income $ 72 $ 1,250 $ 1,678
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 42 680 736
Income allocated to minority interests 29 396 435
Changes in assets and liabilities
Increase in accounts receivable (144) (881) (42)
Decrease (increase) in other assets 105 (43) (64)
Increase (decrease) in accounts payable and accrued expenses 66 (68) 8
----------- ----------- -----------
Net cash provided by operating activities 170 1,334 2,751
----------- ----------- -----------
Cash flows from investing activities
Investment in hotel properties (4,840) (212) (2,306)
Deposits to reserve for replacements - (407) -
Withdrawals from reserve for replacements - - 339
----------- ----------- -----------
Net cash used in investing activities (4,840) (619) (1,967)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from sale of stock 6,950 6,957 8,645
Proceeds from mortgages payable - 1,283 -
Principal payments on mortgages and bonds payable (562) (7,930) (3,175)
Proceeds from line of credit - 600 2,999
Repayment of line of credit - (600) -
Financing costs paid - (221) (53)
Dividends paid - (1,172) (2,246)
Principal payments on capital leases (1) (16) (22)
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 (1,100) 6,148
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 553 (385) 6,932
Cash and cash equivalents, beginning 1 554 169
----------- ----------- -----------
Cash and cash equivalents, ending $ 554 $ 169 $ 7,101
=========== =========== ===========
</TABLE>
(continued)
43
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
Period August 23, 1994 (date of incorporation) through
December 31, 1994 and years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ------------ -------------
<S> <C>
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 24 $ 1,074 $ 495
=========== =========== ============
</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 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:
<TABLE>
<S> <C>
Investment in hotel properties $ 18,221
Deferred expenses 398
Bond sinking funds and escrows 205
Mortgages and bonds payable (14,305)
Obligations under capital leases (53)
Amounts payable to affiliates and partners (1,164)
Accrued interest (72)
Minority interest (990)
Net decrease in additional paid-in capital resulting from acquisition
of Humphrey Hospitality Limited Partnership 2,600
-----------
Net cash provided by operating activities $ 4,840
===========
</TABLE>
See notes to consolidated financial statements
44
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
(In thousands)
Period August 23, 1994 (date of incorporation) through
December 31, 1994 and years ended December 31, 1995 and 1996
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:
<TABLE>
<S> <C>
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)
----------
$ -
==========
</TABLE>
Dividends declared on December 15, 1994 and December 12, 1995 and December 1,
1996 of $81, $561 and $561, respectively, are payable as of December 31, 1994,
1995 and 1996, respectively. Dividends declared during 1994, 1995 and 1996,
included $23, $390 and $474, respectively, to the minority interest which has
been deducted from the minority interest on the balance sheets as of December
31, 1994, 1995 and 1996, respectively.
See notes to consolidated financial statements
45
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
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 underwriters discount
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 underwriters' discount 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 has 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 Days Inn Hotel has been recorded by the Company at the affiliates
historical cost which is 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, the
Company owns a 78.91% interest, and Mr. Humphrey, Humphrey Associates and the
LLC collectively own a 21.09% interest in the Partnership.
46
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994, 1995 and 1996
Note 1. Organization and Summary of Significant Accounting Policies - Continued
On December 6, 1996, the Company completed a public offering (the
"Third Offering") of 1,150,000 shares of common stock. The gross proceeds were
$9,487,500 based on the offering price of $8.25 per share (the Offering Price).
Net of underwriters' discount and offering expenses, the Company received
proceeds of $8,644,997 which were contributed to the Partnership in exchange for
units of Partnership interest. The Company, through the Partnership, used the
proceeds to repay approximately $660,000 of outstanding debt, pay development
costs associated with a 64-unit Comfort Suites Hotel in Dover, Delaware (the New
Development), which were approximately $1,620,000 as of December 31, 1996, and
to establish reserves for future acquisitions and development. As of December
31, 1996, the Company owns an 84.82% interest, and Mr. Humphrey, Humphrey
Associates and the LLC collectively owned 15.18% 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 15
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 (IRC). 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, a repurchase agreement, a
certificate of deposit, and an investment in commercial paper, all with original
maturities of three months or less when acquired, carried at cost which
approximates fair value.
47
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994, 1995 and 1996
Note 1. Organization and Summary of Significant Accounting Policies - Continued
Deferred Expenses
Deferred expenses consist of deferred loan costs. Amortization is
computed using the straight-line method over the terms of the loan agreements.
The unamortized balance of loan costs associated with retired debt is expensed
upon repayment of the related debt.
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 intends to continue to qualify 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.
48
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994, 1995 and 1996
Note 1. Organization and Summary of Significant Accounting Policies - Continued
Concentration of Credit Risk
The Company maintains its deposits, including its repurchase agreements
and investment in commercial paper, with three major banks. At December 31,
1996, the balances reported by the banks, exceeded the federal depository
insurance limits, however, management believes that no significant concentration
of credit risk exists with respect to these cash balances.
Note 2. Investment in Hotel Properties
Hotel properties consist of the following at December 31, 1995 and
1996:
1995 1996
------------- -------------
(in thousands)
----------------------------
Land $ 3,048 $ 3,048
Buildings and improvements 15,809 16,140
Furniture and equipment 1,276 1,631
Leased equipment 100 100
Construction-in-progress - 1,620
---------- ----------
Less accumulated depreciation 20,233 22,539
524 1,134
---------- ----------
$ 19,709 $ 21,405
========== ==========
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, $486,000 and $610,000 for the period
ended December 31, 1994 and the years ended 1995 and 1996, respectively.
Note 3. Dividends Payable
On December 15, 1994, the Company declared a $.044 dividend on each
share of common stock and on each unit of interest outstanding on December 31,
1994. The dividend (including the distribution to minority interests) was paid
on February 6, 1995.
49
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994, 1995 and 1996
Note 3. Dividends Payable (Continued)
On December 12, 1995, the Company declared a $.19 dividend on each
share of common stock and on each unit of interest outstanding on December 31,
1995. The dividend (including the distribution to minority interests) was paid
on January 29, 1996.
On December 1, 1996, the Company declared a $.19 dividend on each share
of common stock and on each unit of interest outstanding on December 1, 1996.
The dividend (including the distribution to minority interests) was paid on
January 31, 1997.
Note 4. Mortgages and Bonds Payable
Mortgages and bonds payable at December 31, 1995 and 1996, consisted of
the following:
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
(in thousands)
-----------------------------------
<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 $2,954,828 and $3,064,725
at December 31, 1995 and 1996, respectively, and
secured by a letter of credit issued by Crestar Bank
in the amount of $2,406,507 expiring in April 2000.
The outstanding principal and interest are guaranteed
jointly and severally by the Company and James I. Humphrey, Jr. $ 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
$2,852,770 and $2,920,557 at December 31, 1995 and 1996,
respectively. 2,420 2,375
Best Western - Wyethville, 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
$2,024,362 and $2,133,880 at December 31, 1995 and 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. The outstanding principal and accrued
interest are guaranteed jointly and severally by the Company
and James I. Humphrey, Jr. 1,870 1,795
</TABLE>
50
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994, 1995 and 1996
Note 4. Mortgages and Bonds Payable - Continued
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<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 required monthly principal in-
stallments of $5,600 plus interest at 8.64% per annum. The
remaining outstanding balance plus any accrued interest was
payable in full on January 11, 1998. The mortgage was
collateralized by hotel facilities and equipment having a
combined net book value of $6,567,156 at December 31, 1995,
and was guaranteed jointly and severally by the Company and the
Humphrey Affiliates. The outstanding balance of the mortgage
was paid in full in April 1996. 1,722 -
In April 1996, mortgages and notes payable collateralized by six
of the hotel properties were consolidated and refinanced with a
line of credit from Mercantile Safe Deposit and Trust Company
in the original amount of $1,705,609. The terms of the line of
credit require monthly installments of interest only at prime plus
.25% (8.5% per annum as of December 31, 1996.) The
outstanding balance plus any accrued interest are payable in full
in April 1999. The mortgage is collateralized by hotel facilities
and equipment having a combined net book value of $11,127,000
at December 31, 1996 and is guaranteed jointly and severally by
the Company and James I. Humphrey, Jr. - 1,706
------------ ------------
$ 8,327 $ 8,151
============ ============
</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 December 31, 1995 and 1996, the
interest rate was 4.9% and 4.0%, 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
51
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994, 1995 and 1996
Note 4. Mortgages and Bonds Payable - Continued
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. 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, 1995 and 1996, the interest
rate was 4.85% and 4.0%, 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.
Aggregate annual principal payments and payments to bond sinking funds
for the five years following December 31, 1996, and thereafter are as follows:
(in thousands)
-------------------
December 31, 1997 $ 180
1998 195
1999 1,911
2000 225
2001 245
Thereafter 5,395
---------
$ 8,151
=========
52
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994, 1995 and 1996
Note 4. Mortgages and Bonds Payable - Continued
Bond sinking funds and escrows for taxes and insurance in the amount of
approximately $99,000 and $113,622 and are included in other assets at December
31, 1995 and 1996, respectively.
The Company's outstanding debt at December 31, 1996, consists of
variable rate bonds, and fixed rate bonds and mortgages. Management believes
that the carrying amounts of the Company's mortgages and bonds payable
approximate fair value at December 31, 1996, as there were no significant
changes in the market rate of interest between that date and the dates of the
respective mortgages and bonds.
Note 5. Obligations Under Capital Lease
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:
(in thousands)
----------------------
Years ended December 31, 1997 $26
1998 11
1999 1
---
38
Less amount representing interest 4
---
Present value of net minimum lease payments $34
===
Note 6. Commitments and Contingencies
Pursuant to the Humphrey Hospitality Limited Partnership Agreement (the
Partnership Agreement), the Humphrey Affiliates 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 the Humphrey
Affiliates at any time after one year following the closing of the Offering. The
number of shares of common stock initially issuable to the Humphrey Affiliates
upon exercise of the redemption rights is 527,866, which was determined based on
the cash value of their interests in the selling partnerships divided by the
initial offering price of $6 per share. In addition, the Humphrey Affiliates
received redemption rights in connection with the second offering which may be
exercised for a total of 95,484 shares of common stock. 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 or the shareholders of the Company.
53
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994, 1995 and 1996
Note 6. Commitments and Contingencies - Continued
The Company acts as the general partner in the Partnership, which acts
as a general partner in the Solomons Beacon Inn Limited Partnership (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.
The Company has entered into percentage leases relating to each of the
Initial 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 Initial 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. As of December 31, 1995 and 1996, the Company has segregated
$407,000 and $68,000, respectively, into a reserve for replacements to be made
available to the Lessee. The Company has future lease commitments from the
Lessee through November 2004. Minimum future rental income under these
noncancellable operating leases at December 31, 1996 are as follows:
Years (in thousands)
--------------- -------------------
1997 $ 1,678
1998 1,678
1999 1,679
2000 1,679
2001 1,679
4,978
----------
$ 13,371
==========
The Company earned base rents of $140,404, $1,608,976 and $1,678,347
and percentage rents of $132,413, $2,141,480 and $2,279,054 for the period from
November 29, 1994 (inception of operations) through December 31, 1994, and the
years ended December 31, 1995 and 1996, respectively. As of December 31, 1995
and 1996, approximately $1, 024,848, and $1,066,996, respectively, of lease
revenue was due from the Lessee. The percentage rents are based on a percentage
of gross room and other revenue.
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. 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. As of December 31, 1996, $67,503 has been
charged to operations.
54
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994, 1995 and 1996
Note 6. Commitments and Contingencies - Continued
The Company has executed a Development Agreement with Humphrey
Development, Inc., a Humphrey Affiliate, pursuant to which Humphrey Development,
Inc. provides construction supervision services 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.
The hotel properties are operated under franchise agreements assumed by
the Lessee, that have indefinite lives but may be terminated by either party on
certain anniversary dates specified in the agreements. The agreements require
annual payments for franchise royalties, reservation, and advertising services
which are based upon percentages of gross room revenue. These fees are paid by
the Lessee.
The Company obtained a $600,000 unsecured revolving line of credit for
working capital from James I. Humphrey, Jr., Chairman of the Board and
President. The Company has no outstanding borrowings under the credit line as of
December 31, 1995 and 1996. The line bears interest at 10%. During 1995, the
Company paid $18,445 of interest expense on the line of credit. The line expired
on December 31, 1996 and was not renewed.
Note 7. Subsequent Events
On January 22, 1997, the Company's New Development, the Comfort Suites
Hotel located in Dover, Delaware, opened for business. The hotel is leased for a
period of ten years by the Lessee for a fixed lease payment of $378,840 a year,
payable in equal monthly installments and prorated for any partial month.
On February 26, 1997, the Company closed on the purchase of the Comfort
Inn Hotel located in Culpeper, Virginia. The Company assumed approximately
$1,220,000 in tax exempt bond financing and utilized approximately $680,000 in
cash for the purchase. The hotel is leased for a period of ten years by the
Lessee pursuant to a percentage lease which provides for rent, based in part, on
the room revenue from the hotel.
On March 17, 1997, the Company closed on the purchase of the Comfort
Inn Hotel located in New Castle, Pennsylvania. The Company paid $3 million in
cash for the site. The hotel is leased for a period of ten years by the Lessee
pursuant to a percentage lease which provides for rent, based in part, on the
room revenue from the hotel.
On March 21, 1997, the Company contracted to purchase three hotels, the
63 room Best Western in Harlan, Kentucky, the 62 room Holiday Inn Express in
Danville, Kentucky and the 56 room Comfort Inn in Murphy, North Carolina. The
total price of the hotels is $7,325,000 and will be purchased utilizing cash and
borrowings from the Credit Facility.
55
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1994, 1995 and 1996
Note 8. Pro Forma Financial Information (Unaudited)
Unaudited pro forma condensed statements of operations of the Company
for the years ended December 31, 1994 and 1995, are presented as if the
acquisition of the Initial Hotels and the Acquisition Hotel (see Note 1) 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.
<TABLE>
<CAPTION>
Pro Forma
-------------------------------
(in thousands)
-------------------------------
1994 1995
---------- ----------
<S><C>
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
========== ==========
</TABLE>
56
<PAGE>
Humphrey Hospitality Trust, Inc.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Costs Capitalized Gross Amounts at which
Initial Costs Subsequent to Acquisition Carried at Close of Period
---------------------- ------------------------- --------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements Land Improvement Total
----------- ------------ ---- ------------- ---- ------------- ---- ------------- -----
<S><C>
Comfort Inn Hotel
Morgantown, West
Virginia $2,275 $ 277 $2,574 $ - $110 $ 277 $2,684 $2,961
Comfort Inn Hotel
Dublin, Virginia 2,375 118 2,611 - 41 118 2,652 2,770
Best Western Hotel
Wyethville, Virginia 1,795 137 1,737 - 12 137 1,749 1,886
Solomons Beacon Inn
Solomons Island,
Maryland (e) 1,345 2,012 - 113 1,354 2,125 3,479
Comfort Inn Hotel
Elizabethan,
Tennessee (e) 156 1,040 - 47 156 1,087 1,243
Comfort Inn Hotel
Farmville, Virginia (e) 148 1,201 - 3 148 1,204 1,352
Comfort Inn Hotel
Dahlgren, Virginia (e) 205 1,546 - 41 205 1,587 1,792
Comfort Inn Hotel
Princeton, West
Virginia (e) 363 1,600 - 34 363 1,634 1,997
Days Inn Hotel
Farmville, Virginia 290 1,389 - 29 290 1,418 1,708
----- ----- ----- --- --- ----- ----- -----
$6,445 $3,039 $ $ - $ $ $ $
===== ===== ===== === === ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Life Upon which
Accumulated Net Book Depreciation in
Depreciation, Value, Latest Income
Buildings and Buildings and Date of Statement
Improvements Improvements Acquisition Is Computed
------------- ------------- ----------- ---------------
<S><C>
Comfort Inn Hotel
Morgantown, West
Virginia $137 $2,824 1994 (d)
Comfort Inn Hotel
Dublin, Virginia 137 2,633 1994 (d)
Best Western Hotel
Wyethville, Virginia 93 1,793 1994 (d)
Solomons Beacon Inn
Solomons Island,
Maryland 110 3,369 1994 (d)
Comfort Inn Hotel
Elizabethan,
Tennessee 55 1,188 1994 (d)
Comfort Inn Hotel
Farmville, Virginia 63 1,289 1994 (d)
Comfort Inn Hotel
Dahlgren, Virginia 82 1,710 1994 (d)
Comfort Inn Hotel
Princeton, West
Virginia 83 1,914 1994 (d)
Days Inn Hotel
Farmville, Virginia 51 1,657 1995 (d)
--- -----
$ $
=== =====
</TABLE>
57
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994, 1995 and 1996
(in thousands)
(a) Reconciliation of real estate:
Balance at December 31, 1995 $ 15,809
Additions during period building and improvements 331
--------
Balance at December 31, 1996 $ 16,140
========
(b) Reconciliation of accumulated depreciation:
Balance at December 31, 1995 $ 406
Depreciation for the period ended December 31, 1996 405
--------
Balance at December 31, 1996 $ 811
========
(c) The aggregate cost of land, buildings, furniture and equipment for federal
income tax purposes is approximately $24,952
(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 six of the hotels. The outstanding balance at December 31, 1996 was
$1,706.
58
<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, 1995 and 1996, and the related statements of
operations, shareholder's equity and cash flows for the period August 18, 1994
(date of incorporation) through December 31, 1994 and the years ended December
31, 1995 and 1996. 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, 1995 and 1996, and the results of its
operations, changes in shareholder's equity and its cash flows for the period
August 18, 1994 (date of incorporation) through December 31, 1994 and the years
ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 28, 1997, except for the third
paragraph of Note 5, as to which the
date is March 17, 1997
59
<PAGE>
Humphrey Hospitality Management, Inc.
BALANCE SHEETS
December 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,253,229 $ 1,127,573
Accounts receivable 78,585 89,060
Prepaid expenses 17,976 36,282
Other assets - 818
Accounts receivable - shareholder - 51,250
------------ ------------
Total current assets $ 1,349,790 $ 1,304,983
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 170,455 $ 107,845
Accrued expenses - 67,328
Advanced deposit - 1,730
Prepaid slip rentals - Marina 38,065 31,203
Due to affiliates 1,092,473 1,066,996
------------ ------------
Total current liabilities 1,300,993 1,275,102
------------ ------------
COMMITMENTS - -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 1,000 shares authorized, 100
shares issued and outstanding 1 1
Retained earnings 48,796 29,880
------------ ------------
Total shareholder's equity 48,797 29,881
------------ ------------
Total liabilities and shareholder's equity $ 1,349,790 $ 1,304,983
============ ============
</TABLE>
See notes to financial statements
60
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF OPERATIONS
Period August 18, 1994 (date of incorporation) through
December 31, 1994 and years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------------- --------------- ---------------
<S> <C>
Revenue from hotel operations
Room revenue $ 459,353 $ 7,499,245 $ 7,941,875
Telephone revenue 12,612 168,385 173,743
Slip revenue 18,412 262,113 243,725
Other revenue 6,472 104,137 192,147
Interest revenue - 20,972 27,422
------------ ------------ ------------
Total revenue 496,849 8,054,852 8,578,912
------------ ------------ ------------
Expenses
Salaries and wages 119,556 1,737,805 2,062,594
Room expense 31,614 407,335 433,870
Telephone 11,436 145,777 182,735
Marina expense 3,235 33,822 42,925
General and administrative 31,899 299,591 386,670
Marketing and promotion 17,425 240,438 254,205
Utilities 31,986 390,894 429,608
Repairs and maintenance 14,516 150,932 227,200
Taxes and insurance 9,098 130,544 149,811
Management fees 14,904 241,010 -
Franchise fees 27,962 387,853 420,809
Lease payments 272,817 3,750,456 3,957,401
------------ ------------ ------------
Total expenses 586,448 7,916,457 8,547,828
------------ ------------ ------------
NET (LOSS) INCOME $ (89,599) $ 138,395 $ 31,084
============ ============ ============
</TABLE>
See notes to financial statements
61
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
Period August 18, 1994 (date of incorporation) through
December 31, 1994 and years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
Common Stock Retained
--------------------- Earnings
Shares Amount (Deficit) Total
------- ---------- ------------- ----------------
<S> <C>
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
Distributions - - (50,000) (50,000)
Net income - - 31,084 31,084
------- ------- ---------- ------------
Balance, December 31, 1996 100 $ 1 $ 29,880 $ 29,881
======= ======= ========== ============
</TABLE>
See notes to financial statements
62
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF CASH FLOWS
Period August 18, 1994 (date of incorporation) through
December 31, 1994 and years ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------------- --------------- ----------------
<S> <C>
Cash flow from operating activities
Net (loss) income $ (89,599) $ 138,395 $ 31,084
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities
Changes in assets and liabilities
(Increase) decrease in accounts receivable (87,556) 8,971 (10,475)
Increase in prepaid expenses (17,608) (368) (18,306)
Increase in other assets - - (818)
Increase (decrease) in accounts payable 140,457 29,998 (62,610)
Decrease (increase) in prepaid slip rentals -
Marina 48,596 (10,531) (6,862)
Increase (decrease) in due to affiliates 203,307 889,166 (25,477)
Increase in accrued expenses - - 67,328
Increase in advanced deposits - - 1,730
----------- ------------ -------------
Net cash provided by (used in)
operating activities 197,597 1,055,631 (24,406)
----------- ------------ -------------
Cash flows from financing activities
Distributions paid 1 - (50,000)
Advances to shareholder - - (51,250)
----------- ------------ -------------
Net cash provided by (used in)
financing activities 1 - (101,250)
----------- ------------ -------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 197,598 1,055,631 (125,656)
Cash and cash equivalents, beginning of year - 197,598 1,253,229
----------- ------------ -------------
Cash and cash equivalents, end of year $ 197,598 $ 1,253,229 $ 1,127,573
=========== ============ =============
</TABLE>
See notes to financial statements
63
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1996
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.
Concentration of Credit Risk
The Company places cash deposits with major banks. At December 31,
1996, the balances reported by one bank exceeded the federal depository
insurance limit by $580,321. Management believes that no significant
concentration of credit risk exists with respect to these cash balances.
64
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1996
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 provides all site employees for the Lessee and is
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, 1995, the amount due the Operator for management
fees and payroll reimbursements was $67,625, which is included in due to
affiliates on the 1995 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.
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, 1996 are as follows:
Year Amount
---- ------
1997 $ 1,678,334
1998 1,678,334
1999 1,678,334
2000 1,678,334
2001 1,678,334
Thereafter 4,978,725
------------
$ 13,370,395
============
65
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1996
Note 2. Related Party Transactions (Continued)
The Lessee has incurred base rents of $140,404, $1,608,976 and
$1,678,347 and percentage rents of $132,413, $2,141,480 and $2,279,054 for the
period from November 29, 1994 through December 31, 1994 and the years ended
December 31, 1995 and 1996, respectively. As of December 31, 1995 and 1996, the
amount due Humphrey Hospitality Limited Partnership and Solomons Beacon Inn
Limited Partnership for lease payments totalled $1,024,848 and $1,066,996,
respectively, and is included in due to affiliates on the balance sheets.
During 1996, the Lessee made a loan to its shareholder in the amount of
$51,250, which is unsecured and non-interest bearing. The amount was repaid in
January 1997.
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. 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. As of December 31, 1996, the Lessee received $67,503 for
the services, provided in accordance with the Agreement, which is included in
other revenue.
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 and the years
ended December 31, 1995 and 1996, $27,962, $387,853 and $420,809, respectively,
of franchise fees were paid.
Restaurant Leases
Three of the eight Initial 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 at 3% to 8% of the previous month's gross receipts.
66
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1996
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. Subsequent Events
On January 22, 1997, the Lessee entered into a lease with the
Partnership for the Comfort Suites Hotel located in Dover, Delaware. The lease
provides for a fixed lease payment of $378,840 a year.
On February 26, 1997, the Lessee entered into a percentage lease with
the Partnership for the Comfort Inn Hotel located in Culpeper, Virginia. The
lease provides for rent, based in part, on the room and other revenues from the
hotel.
On March 17, 1997, the Lessee entered into a percentage lease with the
Partnership for the Comfort Inn Hotel located in New Castle, Pennsylvania. The
lease provides for rent, based in part, on the room and other revenues from the
hotel.
67
<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, 1993 and
November 28, 1994, and the related combined statements of opera tions, partners'
deficit and cash flows for each of the two 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 financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Combined Selling Partnerships - Initial Hotels as of December 31, 1993, and
November 28, 1994, and the combined results of their operations, changes in
partners' deficit and their cash flows for each of the two 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
68
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
COMBINED BALANCE SHEETS
(in thousands)
December 31, 1993 and November 28, 1994
<TABLE>
<CAPTION>
December November
31, 1993 28, 1994
-------- --------
ASSETS
<S> <C>
Investment in hotel properties
Land $ 2,401 $ 2,401
Buildings and improvements 12,565 12,561
Furniture and equipment 2,454 2,844
Equipment under capital lease 122 60
-------- ---------
17,542 17,866
Less accumulated depreciation 5,829 6,356
------ -------
Net investment in hotel properties 11,713 11,510
Cash 825 1,165
Accounts receivable 101 136
Bond sinking funds and escrows 167 204
Inventories 4 -
Deferred expenses, net 382 399
Prepaid expenses and other assets 50 84
Due from affiliates 24 42
--------- ---------
$13,266 $13,540
========= =========
LIABILITIES AND PARTNERS' DEFICIT
Mortgage notes and bonds payable $14,804 $14,305
Obligations under capital leases 45 53
Accounts payable 253 336
Accrued expenses and other liabilities 304 303
Due to affiliates 34 34
Advances from partners 1,163 1,374
-------- --------
16,603 16,405
Commitments - -
Partners' deficit (3,337) (2,865)
-------- -------
$13,266 $13,540
====== ======
</TABLE>
See notes to combined financial statements
69
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
Years ended December 31, 1992 and 1993 and the period
from January 1, 1994 through November 28, 1994
<TABLE>
<CAPTION>
1992 1993 1994
-------- ------- -------
<S> <C>
Revenue from hotel operations
Room revenue $6,295 $6,627 $6,583
Marina rental revenue 312 306 209
Telephone revenue 157 191 177
Restaurant revenue 150 113 77
Other revenue 123 94 252
------ ------- ------
Total revenue 7,037 7,331 7,298
----- ----- -----
Expenses
Salaries and wages 1,730 1,768 1,733
Hotel operating expenses 554 470 341
General and administrative 254 266 360
Marketing and promotion 261 222 234
Utilities 546 525 548
Repairs and maintenance 118 337 249
Real estate, personal property taxes, and insurance 275 263 227
Interest expense 1,351 1,272 1,062
Franchise fees 314 351 379
Management and accounting fees 346 386 419
Depreciation and amortization 743 776 690
Other 11 15 23
-------- ------- -------
Total expenses 6,503 6,651 6,265
----- ----- -----
NET INCOME $ 534 $ 680 $1,033
====== ====== =====
</TABLE>
See notes to combined financial statements
70
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
COMBINED STATEMENTS OF PARTNERS' DEFICIT
(in thousands)
Years ended December 31, 1992 and 1993 and the period
from January 1, 1994 through November 28, 1994
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
71
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31, 1992 and 1993 and the period
from January 1, 1994 through November 28, 1994
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- -------
<S> <C>
Cash flows from operating activities
Net income $ 534 $ 680 $1,033
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization expense 743 776 690
Gain (loss) on sale of assets - - (40)
Changes in assets and liabilities
Decrease (increase) in accounts receivable 26 (5) (35)
Interest earned on bond sinking fund (6) (7) (2)
Decrease (increase) in inventories, prepaid expenses and other
assets (5) 21 (30)
(Decrease) increase in accounts payable, accrued expenses and
other liabilities 27 38 82
------ ------ -------
Net cash provided by operating activities 1,319 1,503 1,698
------ ------ -----
Cash flows from investing activities
Improvements and additions to hotel properties (151) (113) (367)
Deposits to bond sinking funds (421) (386) (322)
Disbursements from bond sinking funds and escrows 376 448 287
Advances to/from affiliates (1) 8 (18)
Repayment of advances to affiliates 65 3 -
Proceeds from sale of assets - - 47
----------- --------- --------
Net cash used in investing activities (132) (40) (373)
-------- ------- ------
Cash flows from financing activities
Proceeds from mortgage notes and bonds payable 2,528 - -
Principal payments on mortgage notes and bonds payable (3,037) (464) (499)
Principal payments on capital lease obligations (72) (27) (15)
Increase in deferred costs (17) (48) (121)
Advances from partners 186 131 246
Repayments of advances from partners (87) (91) (35)
Capital contributions 105 89 69
Distributions paid (385) (865) (630)
------- ------- ------
Net cash used in financing activities (779) (1,275) (985)
------- ------ ------
NET INCREASE IN CASH 408 188 340
Cash, beginning of period 229 637 825
-------- ------- -------
Cash, end of period $ 637 $ 825 $1,165
======== ======= =====
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 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
72
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
December 31, 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.
73
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 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.
74
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 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.
75
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 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 limit
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, 1993 and November
28, 1994, consisted of the following:
<TABLE>
<CAPTION>
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. $ 2,385 $ 2,350
</TABLE>
76
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1993 and November 28, 1994
Note 4. Mortgage Notes and Bonds Payable - Continued
<TABLE>
<CAPTION>
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. 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. 2,495 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. 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 percent limited partnership interest in
Morgantown Lodging Associates Limited Partnership to Crestar as
additional
collateral. 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. 1,290 1,186
</TABLE>
77
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1993 and November 28, 1994
Note 4. Mortgage Notes and Bonds Payable - Continued
<TABLE>
<CAPTION>
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. 1,637 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. 1,134 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. 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. 1,855 1,834
78
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 1993 and November 28, 1994
Note 4. Mortgage Notes and Bonds Payable - Continued
</TABLE>
<TABLE>
<CAPTION>
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. 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. 16 -
------- -------
$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.
79
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 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.
80
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 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
==
81
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 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, 1992, 1993, and the period from January 1, 1994 through
November 28, 1994 amounted to $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, 1992, 1993, and the period from January 1, 1994 through
November 28, 1994, amounted to $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, 1992,
1993, and the period from January 1, 1994 through November 28, 1994, such
charges incurred amounted to $1,730, $1,768, and $1,733, respectively. As of
December 31, 1993, and November 28, 1994, amounts due to Humphrey Hotels, Inc.
for management fees, accounting fees, and payroll and miscellaneous
reimbursements totaled $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, 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 and $314 and operating advances of $849 and $1,060 as of December 31,
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, 1993
and November 28, 1994, $24 and $42, respectively, is due from the central
disbursing account and is classified as due from affiliates on the balance
sheets.
82
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Dollars in thousands)
December 31, 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 $314, $351, and $379 during 1992, 1993, and 1994,
respectively. The Initial Hotels will continue to be operated under the
franchise agreements.
Restaurant Leases
Three of the eight Selling Partnerships have executed lease agreements
for the Hotel's restaurant facilities with varying expiration dates, including
renewal periods, through December 1, 2023. Monthly rent is payable during the
terms of the leases at 3% to 8% of the previous month's gross receipts.
83
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HUMPHREY HOSPITALITY TRUST, INC.
By: _____________________________________
James I. Humphrey, Jr.
Chairman of the Board,
President and Secretary
Date:_____________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C>
_________________________________ Chairman of the Board, _______________________
James I. Humphrey, Jr. President and Secretary
_________________________________ Vice President and _______________________
Charles A. Mills, III Treasurer
_________________________________ Director _______________________
Margaret Allen
_________________________________ Director _______________________
Jeffrey M. Zwerdling
_________________________________ Director _______________________
George R. Whittemore
______________________________ Director ________________________
Leah T. Robinson
______________________________ Director ________________________
Andrew Mayer
84
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 7,101,000
<SECURITIES> 0
<RECEIVABLES> 1,067,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 648,000
<PP&E> 22,539,000
<DEPRECIATION> 1,134,000
<TOTAL-ASSETS> 30,221,000
<CURRENT-LIABILITIES> 678,000
<BONDS> 8,151,000
0
0
<COMMON> 35,000
<OTHER-SE> 18,110,000
<TOTAL-LIABILITY-AND-EQUITY> 26,974,000
<SALES> 0
<TOTAL-REVENUES> 4,005,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,399,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 493,000
<INCOME-PRETAX> 1,678,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,678,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,678,000
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
