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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
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 $39,169,125 based on the last sale price in the
NASDAQ National Market for such stock on March 24, 1998.
The number of the Registrant's common stock outstanding was 3,481,700 as of
March 24, 1998.
Documents Incorporated by Reference
Certain of the exhibits to the Company's Registration Statement on Form S-11
(SEC File No. 333-48583) are incorporated by reference into Part IV.
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TABLE OF CONTENTS
Form 10-K
Report
Item No. Page
PART I
1. Description of Business................................................3
2. Properties............................................................10
3. Legal Proceedings.....................................................17
4. Submission of Matters to a Vote of Security Holders...................17
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters...............................................17
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...........................26
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................26
PART III
10. Directors and Executive Officers of the Registrant....................26
11. Executive Compensation................................................28
12. Security Ownership of Certain Beneficial Owners and Management........28
13. Certain Relationships and Related Transactions........................30
PART IV
14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.....33
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) General Development of Business
Humphrey Hospitality Trust, Inc. (the "Company") was incorporated on
August 23, 1994. The Company is a self-administered real estate investment trust
("REIT") for federal income tax purposes. Humphrey Hospitality Trust, Inc.,
through its wholly-owned subsidiary, Humphrey Hospitality REIT Trust
(collectively, the Company), owns a controlling partnership interest in Humphrey
Hospitality Limited Partnership (the "Partnership") and through the Partnership
owns interests in twenty existing limited service Hotels as of December 31, 1997
(including ten hotels acquired during 1997). The Partnership owns a 99% general
partnership interest and the Company a 1% limited partnership interest in
Solomons Beacon Inn Limited Partnership (the Subsidiary "Partnership"). As of
December 31, 1997, the Company owns an 84.12% interest in the Partnership. The
Company began operations on November 29, 1994.
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
"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 in exchange for a 71.46% general partnership
interest in the Partnership. The Partnership used the proceeds from the Company
to acquire 100% of the equity interests 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 shares of Common Stock, 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. Hotel properties
are carried at the lower of cost or net realizable value.
Subsequent to the IPO, the Company completed two additional public
offerings totaling 2,160,000 shares of Common Stock at a price of $7.75 per
share for 1,010,000 shares and $8.25 for the remaining 1,150,000 shares. The
Company contributed substantially all of the net proceeds of the offerings to
the Partnership for additional general partnership interests. The Partnership
used the net proceeds to repay existing indebtedness and to purchase additional
Hotels for cash. Additionally, during 1995 the Partnership acquired the Days Inn
Hotel in Farmville, VA, in exchange for units from Farmville Lodging Associates,
LLC (the "LLC"), a Maryland limited liability company in which Mr. Humphrey owns
a 98% equity interest, which are redeemable for an aggregate of 95,484 common
shares of the Company, and the assumption of approximately $1,231,000 of
indebtedness. During 1997, in connection with the acquisition of the Best
Western Hotel in Key Largo, Florida, the Partnership issued Units to
Humphrey-Key Largo Associates, L.P., a partnership substantially owned by Mr.
Humphrey, which are redeemable for an aggregate of 34,023 shares of common stock
of the Company. As of December 31, 1997, the Company owned an 84.12% partnership
interest and the Mr. Humphrey, Humphrey Associates, Inc. and the LLC and
Humphrey-Key Largo Associates, L.P. ("Humphrey Affiliates") collectively own a
15.88% interest in the Partnership.
In April 1996, the Company established a secured credit facility (the
"Credit Facility") in the initial amount of $6.5 million with Mercantile Safe
Deposit and Trust Company ("Mercantile"). Available borrowings under the credit
facility have been increased several times and are currently at $25.5 million.
The term of the Credit Facility is for three years with two one-year extensions
at the option of Mercantile. The Credit Facility bears interest at the prime
rate plus 25 basis points, presently 8.75%, and is cross-collateralized by liens
on 17 the Company's hotels.
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, the shareholder base
of the Company may expand geographically and structurally with the potential for
the Common Stock to be held by residents of almost every state and by
institutional investors.
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As of May 22, 1997, the Company's Board of Directors adopted a resolution
increasing the Company's limit on consolidated indebtedness from 50% to 55% of
the aggregate purchase price of the hotels in which it has invested. The
aggregate purchase price paid by the Company for the Hotels as of December 31,
1997 was approximately $58 million. As of December 31, 1997, the Company's total
outstanding indebtedness represented approximately 54.8% of the aggregate
purchase price of the Hotels.
On March 25, 1998, the Company filed a Registration Statement on Form
S-11 (File No. 333-48583) ("Registration Statement") relating to the
registration of 1,000,000 shares (1,150,000 shares if the over-allotment option
is exercised) of Common Stock with the Securities and Exchange Commission
("SEC"). It is anticipated that net proceeds will be approximately $ 9,965,000
($11,470,000 if the over-allotment is exercised).
The following table shows Hotels that have been acquired (or opened)
during 1997 by the Company. Each Hotel, with the exception of the Comfort
Suites-Dover, Delaware Hotel, is leased pursuant to a Percentage Lease. The
Comfort Suites-Dover, Delaware Hotel is leased pursuant to a Fixed Lease.
<TABLE>
<CAPTION>
CONTRACT
DATE NUMBER OF PURCHASE
ACQUIRED ROOMS PRICE
<S><C>
COMFORT INNS:
Chambersburg, PA May 29, 1997 65 $ 2,600,000
Culpeper, VA February 26, 1997 49 1,900,000
Gettysburg, PA(1) May 23, 1997 81 4,325,000
Murphy, NC April, 25, 1997 56 1,975,000
New Castle, PA March 17, 1997 79 3,000,000
COMFORT SUITES:
Dover, DE January 22, 1997(3) 64 2,795,210
BEST WESTERN AND BEST WESTERN SUITES:
Harlan, KY (1) April 17, 1997 63 2,625,000
Key Largo, FL September 2, 1997 40 2,960,000(2)
HOLIDAY INN EXPRESS:
Allentown, PA June 10, 1997 83 3,750,000
Danville, VA April, 23, 1997 62 2,716,000
Gettysburg, PA May 23, 1997 51 2,725,000
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Totals 693 $31,371,210
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</TABLE>
(1) The Company is the lessee under land leases on the parcels underlying the
Comfort Inn-Gettysburg, PA and the Best Western-Harlan, KY Hotels that
expire in 2096 and 2091, respectively. The rent on the Gettysburg lease is
$35,000 per year, payable in equal monthly installments, and the rent on
the Harlan lease is $2,000 per month or 5% of room sales, whichever is
greater.
(2) Purchased at a contract price of $2,590,000 from an unaffiliated seller
pursuant to a purchase agreement that was assigned to the Partnership by
Humphrey-Key Largo Associates, L.P. ("Humphrey-Key Largo"), a partnership
substantially owned by Mr. Humphrey. Pursuant to the assignment of the
purchase agreement, Humphrey-Key Largo received as compensation 34,023
Units of limited partnership interest in the Partnership, valued at
$370,000 based on an average price of $10.875 per share of Common Stock
for the ten trading days prior to September 2, 1997. The acquisition of
the Hotel has been recorded by the Company at the contract purchase price
of $2,590,000, which excludes the value of the Units issued to
Humphrey-Key Largo.
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(3) Hotel opened on January 22, 1997.
Effective March 17, 1998, Charles A. Mills, III, resigned from his position
as Vice President, Treasurer and Director of the Company to devote more time to
his other business interests. Mr. Mills is the Senior Vice President and largest
shareholder of Anderson & Strudwick, Incorporated ("A & S"), the underwriter on
all of the Company's stock offerings. Mr. Mills has served on the Company's
Board of Directors since its IPO on November 29, 1994. Simultaneously with the
offering registered with the SEC on March 25, 1998, the Company will enter into
a Capital Consulting Agreement with Mr. Mills, who will continue to provide the
Company with advice as to future equity offerings and access to capital markets
generally. Under the terms of the Capital Consulting Agreement which has a one
year term, the Company will pay Mr. Mills $20,000 plus .25% of the net proceeds
from public equity offerings over the next twelve months.
(b) Financial Information About Industry Segment
The Company is engaged solely in the business of acquiring equity
interests in existing hotel properties, therefore, presentation of information
about industry segments is not applicable. 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.
(c) Narrative Description of Business
General. At December 31, 1997, the Company owned, through the Partnership
and the Subsidiary Partnership, 20 Hotels containing 1,312 rooms located in
Virginia (6), West Virginia (2), Maryland (1), Pennsylvania (5); North Carolina
(1); Kentucky (2); Delaware (1); Florida (1); and Tennessee (1). The Hotels are
leased to Humphrey Hospitality Management, Inc. The Company's primary objectives
are 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"). The Company also seeks to increase amounts distributable to
shareholders 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 principal 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, Dublin,
Virginia and Morgantown, West Virginia Hotels, rental payments under third party
leases of its restaurant and in the case of the Comfort Inn-Beacon Marina,
Solomons, Maryland and Best Western Suites-Key Largo, Florida Hotels, 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.
Acquisition Strategy. The Board of Directors has adopted a policy that
will govern the Company's investment in hotel properties (the "Investment
Policy"), including the acquisition and development of hotels. Under the
Investment Policy, the Company will make no investment in a hotel property
unless the Company can demonstrate that it can reasonably expect an annual
return on its investment (net of insurance, real estate and personal property
taxes and reserves for furniture, fixtures and equipment of 4% of room revenues
("FFE Reserves")), that is equal to or greater than 12% of the total purchase
price to be paid by the company for such property. Under the Bylaws, the
approval of a majority of the Board of Directors, including a majority of the
Independent Directors, is required for the company to acquire any property. In
addition, the Investment Policy will be applied to a hotel property prior to its
acquisition by the Company. There can be no assurances that increases in
insurance rates, real estate or personal property taxes or FFE Reserves, which
are based on room revenues, will not decrease the Company's annual return on its
investment in any hotel property to a level below that
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set out in the Investment Policy. 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, relatively low supply of competing hotels and significant barriers
to entry into the hotel business, such as a scarcity of suitable hotel
sites or zoning restrictions;
o poorly managed hotels, which the Company believes could benefit from new
management, new marketing strategy and association with a national
franchisor;
o hotels in a deteriorated physical condition, which the Company
believes 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.
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 150 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.
Because a development project has no prior revenues on which the
Company's Investment Policy can be tested, the Company intends to invest only in
developments where it reasonably believes it will receive an annual return on
its investment that is consistent with the Investment Policy.
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 currently have an aging hotel presence.
These criteria describe the basic characteristics that the Company looks
for prior to committing to the development of a new hotel. Sites that are
selected may have some or all of the market characteristics as described above,
as well as characteristics that are not specifically described herein. It is not
anticipated that all sites selected by the Company will possess all of the
characteristics described herein.
The Company's Investment Policy 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.
Each Hotel 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 three to eight Hotels.
Daily operations are managed with a centralized approach through regional
operations managers who report to the Lessee's
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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 under Leases. Mr.
Humphrey, Chairman of the Board and President of the Company, was and is the
sole shareholder of the Lessee. 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"). Although
the Company believes that 4% of room revenue is generally an appropriate capital
reserve to maintain the condition and viability of its Hotels, the Company will
increase its capital reserves set-aside from 4% to 6% of room revenue upon the
completion of its current offering of Common Stock. The additional 2% of room
revenue will be held in a special reserve fund (the "Additional Reserve Fund"),
which will be deployed at the Hotels primarily to enhance their competitive
position. To ensure that the Company receives additional annual income that is
at least equal to 12% of the amount of funds invested by the Company from the
Additional Reserve Fund, the Company and the Lessee have agreed to amend the
Leases for the Hotels that receive capital from the Additional Reserve Fund to
provide that each such Hotel will increase its annual Base Rent by 7% per annum
of the capital received from the Additional Reserve Fund. The Company expects
that it will receive additional amounts under the terms of the Percentage Leases
equal to at least 5% per annum of the amount invested from the Additional
Reserve Fund through its participation in increased room revenue resulting from
such additional investments.
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 Chief Financial Officer, William F. Goodrick, joined
Humphrey Hospitality Management, Inc. in January 1998. Mr. Goodrick has over
thirty years experience in the public and private sector of the accounting and
financial field. He joined the Lessee from NHP, Inc., the nation's second
largest manager of multi-family housing where he was a Vice Preseident of Asset
Management. Prior to that he owned his own business providing accounting and
financial services to the private sector of the business community, including
two medium sized hotel management and development companies. Prior to that he
was Senior Vice President of Finance for C.R.I., Inc., a multi-billion dollar
real estate syndication firm. He is a Virginia certified public accountant and
received his B.S.B.A. from Georgetown University.
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.
The Lessee's Senior Director of Operations, David Yakes, has been
employed in the hotel business since 1985. He has an extensive background in
hotel operations and joined Humphrey Hospitality Management in 1995. Prior to
his current position, Mr. Yakes was a regional Director of Operations as well as
the General Manager of the Comfort Inn-Beacon Marina, Solomons, Maryland. Before
joining the Lessee, Mr. Yakes worked several years for Winegardner and Hammons,
Inc., a Cincinnati, Ohio based hotel management company. He received a B.S.
degree in Hospitality and Tourism Management from Grand Valley State University
in 1991.
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Competition. The hotel industry is highly competitive. 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 revenues, occupancy and the 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
that have substantially greater financial resources than the Company. These
entities generally may be able to accept more risk than the Company can
prudently manage. 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 Initial
Hotels and the Comfort Suites-Dover, DE Hotel. 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. Under the terms of the amended Services Agreement, the services fee
cannot exceed $100,000 in any year. The Lessee employs approximately 400 people
in operating the Hotels. The Lessee has advised the Company that its
relationship with its employees is good.
Business Risks. The Hotels are subject to all operating risks common to
the hotel industry. These risks include, among other things, competition from
other hotels; recent over-building in the hotel industry which has adversely
affected occupancy and room rates; increases in operating costs due to inflation
and other factors, which increases have not in recent years been, and may not
necessarily in the future be, offset by increased room rates; significant
dependence on business and commercial travelers and tourism; increases in energy
costs and other expenses of travel; and adverse effects of general and local
economic conditions. These factors could adversely affect the Lessee's ability
to make lease payments and therefore the Company's ability to make expected
distributions to shareholders. Further, decreases in room revenue at the Hotels
will result in decreased revenue to the Partnership and the Subsidiary
Partnership, as applicable, under the Percentage Leases.
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 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, as well as 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 Leases. Income from the Hotels may be
adversely affected by changes in national economic conditions, changes in local
market conditions, changes in general or local economic conditions, changes in
neighborhood characteristics, competition from other hotel properties, changes
in present or future environmental legislation and laws, changes in the ongoing
need for capital improvements, changes in real estate tax rates and other
operating expenses, 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, changes in zoning laws and other
factors that 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
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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 hotel in
Dover, DE is built. 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
assurance can be given that (i) future laws, ordinances or regulations will not
impose any material environmental liability, or (ii) the current environmental
condition of the Hotels will not be affected by the condition of other
properties in the vicinity of the Hotels (such as the presence of leaking
underground storage tanks) or by third parties unrelated to the Company, the
Partnership, the Subsidiary 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 LLC or the LLC's predecessor
in interest 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.
Earnings and profits, which will determine the taxibility 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. No distributions made in 1997
are considered to be a return of capital.
Year 2000. In response to the year 2000 issue, the Company modified its
existing information systems in order to make them year 2000 compliant. The
Company believes that it has made all necessary modifications to its existing
systems and does not expect that additional costs associated with year 2000
compliance, if any, will be material to the Company's future results of
operations or financial position.
9
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth certain historical information with
respect to the Hotels for the year (or period of ownership, if less) ended
December 31, 1997.
<TABLE>
<CAPTION>
Number Percentage
Of Room Other Lease Avg.
Rooms Revenue Revenue Payment Occpy ADR REVPAR (1)
<S><C>
COMFORT INNS
Culpeper, VA (3) 49 $643,124 $15,401 $254,646 83.8% $50.71 $42.48
Chambersburg, PA (2) 65 $529,983 $10,470 $228,806 68.0% $55.24 $37.57
Dahlgren, VA 59 $879,714 $27,406 $388,044 82.5% $49.53 $40.85
Dover, DE (4) 64 $945,723 $14,156 $357,649 67.8% $64.42 $43.68
Dublin, VA 100 $1,418,609 $39,257 $689,691 73.4% $52.95 $38.87
Elizabethton, TN 58 $549,938 $16,709 $219,273 57.8% $44.94 $25.98
Farmville, VA 51 $736,511 $18,570 $347,681 79.5% $49.80 $39.57
Gettysburg, PA (5) 81 $995,498 $15,625 $424,239 74.1% $74.37 $55.11
Morgantown, WV 80 $1,280,380 $68,673 $644,049 79.6% $55.12 $43.85
Murphy, NC (6) 56 $585,372 $13,006 $219,165 73.7% $56.10 $41.32
New Castle, PA (7) 79 $926,194 $21,902 $381,810 71.9% $56.40 $40.57
Princeton, WV 51 $745,468 $16,872 $411,982 80.0% $50.06 $40.05
Beacon Marina,
Solomons, MD 60 $1,129,361 $299,947 $851,070 79.3% $65.07 $51.57
BEST WESTERN
Harlan, KY (8) 63 $604,703 $29,947 $304,284 72.5% $51.93 $37.66
Key Largo, FL (9) 40 $302,690 $14,846 $147,017 71.4% $88.30 $63.06
RODEWAY INN
Wytheville, VA 100 $577,813 $6,750 $288,544 32.8% $48.23 $15.83
DAYS INN
Farmville, VA 60 $651,155 $18,184 $292,875 62.5% $47.55 $29.73
HOLIDAY INN EXPRESS
Allentown, PA (10) 83 $723,662 $14,113 $311,753 65.5% $65.13 $42.68
Danville, KY (11) 62 $713,659 $31,285 $295,851 80.1% $55.89 $44.77
Gettysburg, PA (5) 51 $641,741 $12,255 $267,764 73.3% $77.01 $56.43
-- -------- ------- --------
TOTALS 1,312 $15,581,298 $705,374 $7,326,193
===== =========== ======== ==========
</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.
(2) Acquired May 29, 1997.
(3) Acquired February 26, 1997.
(4) Opened January 22, 1997.
(5) Acquired May 23, 1997.
(6) Acquired April 25, 1997.
(7) Acquired March 17, 1997.
(8) Acquired April 17, 1997.
(9) Acquired September 2, 1997.
(10) Acquired April 23, 1997.
10
<PAGE>
The following table sets forth certain information with respect to
each Hotel for the twelve months ended December 31:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S><C>
Comfort Inn - Culpeper, Virginia
Occupancy 73.1% 80.3% 80.4% 80.1% 80.6%
ADR $44.01 $45.37 $46.44 $47.51 $50.24
REVPAR $32.18 $36.42 $37.34 $38.07 $40.52
Comfort Inn - Chambersburg, Pennsylvania
Occupancy N/A N/A 80.9% 75.5% 65.8%
ADR $54.28 $54.61 $54.62
REVPAR $43.92 $40.13 $35.94
Comfort Inn - Dahlgren, Virginia
Occupancy 74.4% 70.3% 76.2% 76.4% 82.5%
ADR $42.66 $43.55 $42.89 $43.23 $49.53
REVPAR $31.76 $30.70 $32.68 $33.02 $40.85
Comfort Suites - Dover, Delaware
Occupancy N/A N/A N/A N/A 67.8%
ADR $64.42
REVPAR $43.68
Comfort Inn - Dublin, Virginia
Occupancy 74.6% 80.7% 80.1% 72.9% 73.4%
ADR $42.80 $45.97 $49.51 $52.32 $52.95
REVPAR $31.94 $37.08 $39.65 $38.16 $38.87
Comfort Inn - Elizabethton, Tennessee
Occupancy 74.6% 68.8% 74.2% 60.4% 57.8%
ADR $39.43 $39.98 $40.17 $44.44 $44.94
REVPAR $26.82 $27.52 $29.80 $26.83 $25.98
Comfort Inn - Farmville, Virginia
Occupancy 80.7% 84.3% 75.9% 81.0% 79.5%
ADR $40.10 $41.81 $47.22 $48.43 $49.80
REVPAR $32.38 $35.24 $35.83 $39.22 $39.57
Comfort Inn - Gettysburg, Pennsylvania
Occupancy N/A N/A 72.9% 69.2% 65.0
ADR $64.69 $66.66 $69.37
REVPAR $47.18 $46.12 $45.07
Comfort Inn - Morgantown, West Virginia
Occupancy 81.9% 81.8% 77.3% 77.7% 79.6%
ADR $46.28 $49.00 $50.78 $52.44 $55.12
REVPAR $37.88 $40.10 $39.26 $40.76 $43.85
Comfort Inn - Murphy, North Carolina
Occupancy 71.1% 71.4% 74.7% 66.6% 68.1%
ADR $45.43 $46.21 $46.22 $53.51 $53.87
REVPAR $32.29 $32.98 $34.51 $35.61 $36.70
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S><C>
Comfort Inn - New Castle, Pennsylvania
Occupancy N/A 64.4% 66.4% 66.8% 67.0%
ADR $47.90 $48.70 $53.09 $55.59
REVPAR $30.84 $32.32 $35.46 $37.29
Comfort Inn - Princeton, West Virginia
Occupancy 93.9% 95.8% 95.5% 88.5% 80.0%
ADR $48.08 $50.37 $53.78 $54.73 $50.06
REVPAR $45.16 $48.31 $51.35 $48.45 $40.05
Comfort Inn - Beacon Marina
Solomons, Maryland
Occupancy 72.5% 78.6% 67.1% 75.4% 79.3%
ADR $53.49 $55.37 $58.86 $58.55 $65.07
REVPAR $38.79 $43.50 $39.48 $44.16 $51.57
Best Western - Harlan, Kentucky
Occupancy N/A 72.0% 74.8% 70.4% 68.0%
ADR $44.45 $47.10 $48.97 $51.50
REVPAR $32.00 $35.20 $34.47 $35.00
Best Western Suites- Key Largo, Florida
Occupancy 80.8% 73.3% 79.7% 84.2% 79.9%
ADR $102.56 $93.59 $93.91 $96.68 $101.78
REVPAR $82.82 $68.55 $74.85 $81.39 $81.31
Rodeway Inn - Wytheville, Virginia
Occupancy 61.4% 48.8% 47.9% 44.7% 32.8%
ADR $38.08 $45.12 $47.23 $48.85 $48.23
REVPAR $23.39 $22.07 $22.64 $21.85 $15.83
Days Inn - Farmville, Virginia
Occupancy 64.2% 58.0% 62.7% 69.1% 62.5%
ADR $38.10 $42.55 $44.27 $45.53 $47.55
REVPAR $24.48 $24.68 $27.78 $31.47 $29.73
Holiday Inn Express - Allentown, Pennsylvania
Occupancy N/A N/A 60.3% 67.0% 65.2%
ADR $59.61 $62.05 $65.59
REVPAR $35.96 $41.54 $41.43
Holiday Inn Express - Danville, Kentucky
Occupancy N/A 69.5% 72.2% 72.0% 75.3%
ADR $49.17 $49.74 $52.04 $55.23
REVPAR $34.16 $35.92 $37.47 $41.62
Holiday Inn Express - Gettysburg, Pennsylvania
Occupancy N/A N/A 72.1% 66.6% 65.1%
ADR $69.76 $72.24 $70.69
REVPAR $50.29 $48.13 $45.99
</TABLE>
12
<PAGE>
Occupancy and REVPAR for the Rodeway Inn - Wytheville, Virginia
(previously a Best Western) 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 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. The decrease in occupancy in 1994 compared to 1993 at the
Comfort Inn-Dahlgren, VA was primarily due to a higher than normal occupancy in
1993 that was attributable to an increase in construction at the adjacent Naval
Surface Warfare Center during that year. The occupancy of many Hotels decreased
in 1996 as compared to 1995 due to the record snowfall in the first quarter of
1996. Occupancy and REVPAR at the Comfort Inn-Morgantown, WV, declined in 1994
from 1993 due to the bankruptcy of the lessee of the restaurant at that hotel.
The Company executed a new lease for this restaurant in early 1996. The decrease
in occupancy and REVPAR at the Comfort Inn-Beacon Marina, Solomons, Maryland,
was primarily attributable to the fact that in 1995 a nearby nuclear power
station dramatically curtailed the amount of specialized maintenance work it
historically had performed in the first quarter of each year. During 1996, the
unusual weather was great enough to negatively impact REVPAR at the Comfort
Inn-Dahlgren, VA and the Rodeway Inn-Wytheville, VA. In addition, the Comfort
Inn-Dublin, VA and the Comfort Inn-Elizabethton, TN both experienced a slowdown
in construction-related business in 1996 which had a negative impact on
occupancy and REVPAR. The Comfort Inn-Chambersburg, PA and Comfort
Inn-Gettysburg, PA Hotels experienced a drop in occupancy in each of 1996 and
1997 due to increased competition in their respective markets. The Company took
into account the new competition in these markets prior to their purchase and
adjusted the purchase price to accommodate the anticipated impact of the
competition. The Comfort Inn-Princeton, WV and the Rodeway Inn-Wytheville, VA
Hotels both experienced new competition in 1997 with the addition of two new
hotels in each respective market. During 1996, the Comfort Inn-Farmville, VA and
Days Inn-Farmville, VA Hotels' market area experienced an unusual level of
occupancy due to significant construction activity in the area. During 1997, the
construction activity abated significantly, which resulted in a reduction in
occupancy.
THE PERCENTAGE LEASES
With the exception of the Comfort Suites in Dover, DE, each Hotel is
separately leased by the Partnership to the Lessee under a Percentage Lease. The
lease on the Comfort Suites in Dover requires a fixed monthly payment. 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 rights
and benefits under the Percentage Leases. Each Percentage Lease contains the
provisions described below. The Company intends that future leases with respect
to its hotel property investments will contain substantially similar provisions.
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.
Lease Terms. Each 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, rental payments under the third party leases of
restaurants in the hotels located in Solomons, MD, Dublin, VA and Morgantown, WV
and, yacht yard revenue in Solomons as well as marina revenue in Solomons and
Key Largo, FL) 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.
13
<PAGE>
THE FIXED LEASE
The lease for the Comfort Suites-Dover, DE Hotel is a Fixed Lease
pursuant to which the lessee leases the Hotel for a fixed rent payment, which is
payable in equal monthly installments. As long as the Investment Policy remains
in effect, the Company intends to enter into similar Fixed Leases on any new
hotel developments because the Company believes that this type of lease
mitigates the risks associated with the initial startup of a hotel. All material
terms of the Fixed Leases, except for the payment terms, are substantially
similar to the terms of the Percentage Leases described above.
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 Leases based on historical revenues for the year
ended December 31, 1997. With respect to the Hotels acquired in 1997, the
information presented relates to the period from the date of acquisition to
December 31, 1997.
<TABLE>
<CAPTION>
Aggregate
Aggregate Percentage
Annual Percentage Hotel Percentage Rent Plus
Base Rent Rent Formula Revenue Rent Base Rent
--------- ------------ ------- ---------- ----------
<S><C>
Comfort Inns
Culpeper, VA $111,926 11% of quarterly room revenue up Rooms - $643,124 $141,487 $254,646
to $675,000 per year, plus 11% of Other - $ 15,401 1,233
semi-annual revenues up to $675,000 -----
per year, plus 35% of annual revenues 142,720
in excess of $675,000, plus 8% of -------
monthly other revenues
Chambersburg, PA $107,663 14.2% of quarterly room revenues up Rooms - $529,983 $120,306 $228,806
to $960,000 per year, plus 8.5% of semi- Other - $ 10,470 837
annual room revenues up to $960,000 ---
per year plus 35% of annual revenues 121,143
in excess of $960,000, plus 8% of -------
monthly other revenue
Dahlgren, VA $153,096 14.0% of quarterly room revenues, Rooms - $879,714 $232,756 $388,044
plus 6.5 % of semi-annual room Other - $ 27,406 2,192
revenues, plus 30% of annual room -----
revenues in excess of $705,000, 234,948
plus 8% of monthly other revenues -------
Dublin, VA $253,350 17.5% of quarterly room revenues, Rooms $1,418,609 $433,200 $689,691
plus 10.0 % of semi-annual room Other - $39,257 3,141
revenues, plus 30% of annual room --------
revenues in excess of $1,275,000, $436,341
plus 8% of monthly other revenues --------
Elizabethton, TN $ 96,950 14.5% of quarterly room revenues, Rooms $549,938 $120,986 $219,273
plus 7.5% of semi-annual room Other $16,709 1,337
revenues, plus 30% of annual room --------
revenues in excess of $560,000, $122,323
plus 8% of monthly other revenues --------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Percentage
Annual Percentage Hotel Percentage Rent Plus
Base Rent Rent Formula Revenue Rent Base Rent
--------- ------------ ------- ---------- ----------
<S><C>
Farmville, VA $132,432 16.0% of quarterly room revenues, Rooms- $736,511 $213,763 $347,681
plus 9.5% of semi-annual room Other - $18,750 1,486
revenues, plus 30% of annual room --------
revenues in excess of $650,000, plus $215,249
8% of monthly other revenues --------
Gettysburg, PA $184,069 14.5% of quarterly room revenues up Rooms - $995,498 $238,920 $424,239
to $1,400,000 per year, plus 9.5% of Other - $ 15,625 1,250
semi-annual room revenues up to -----
$1,400,000 per year, plus 35% of room 240,170
revenues in excess of $1,400,000, plus -------
8% of total other revenues
Morgantown, WV $210,136 6.1% of quarterly room revenues, Rooms -$1,280,380 $428,420 $644,049
plus 24.0% of semi-annual room Other -$ 68,673 5,493
revenues, plus 33% of annual room --------
revenues in excess of $1,150,000, $433,913
plus 8% of monthly other revenues --------
Murphy, NC $ 95,197 11% of quarterly room revenues up, Rooms - $585,372 $122,928 $219,165
to $740,000 per year plus 10% of Other - $ 13,006 1,040
semi annual room revenues up to -----
$740,000 per year, plus 35% of annual 123,968
revenues in excess of $740,000, -------
plus 8% of monthly other revenues
New Castle, PA $171,665 7.5% of quarterly room revenues up Rooms - $926,194 $208,394 $381,810
to $1,000,000 per year, plus 15% of Other - $ 21,902 1,751
semi-annual room revenues up to -----
$1,000,000 per year, plus 35% of 210,145
annual room revenues in excess of -------
$1,000,000, plus 8% of monthly other
revenues
Princeton, WV $208,610 11.1% of quarterly room revenues, Rooms - $745,468 $202,022 $411,982
plus 16.0 of semi-annual room Other - $16,872 1,350
revenues, plus 33% of annual room --------
revenues in excess of $875,000, $203,372
plus 8% of monthly other revenues --------
Beacon Marina,
Solomons, MD $288,397 17.6% of quarterly room revenues, Rooms-$1,129,361 $538,677 $851,070
plus 25.0% of semi-annual room Other - $299,947 23,996
revenues, plus 25.1% of annual --------
room revenues in excess of $562,673
$900,000, plus 8% of monthly other --------
revenues
Comfort Suites
Dover, DE $357,649 Fixed lease - $31,570 per month $357,649
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Percentage
Annual Percentage Hotel Percentage Rent Plus
Base Rent Rent Formula Revenue Rent Base Rent
--------- ------------ ------- ---------- ----------
<S><C>
Rodeway Inns
Wytheville, VA $210,000 6.5% of quarterly room revenues, Rooms - $577,813 $ 78,004 $288,544
plus 7.0% of semi-annual room Other - $6,750 540
revenues, plus 30.0% of annual --------
room revenues in excess of $ 78,544
$815,000, plus 8% of monthly --------
other revenues
Days Inn
Farmville, VA $125,376 16% of quarterly room revenues Rooms - $651,155 $166,044 $292,875
plus 9.5% of semi-annual room Other - $18,184 1,455
revenues, plus 30.0% of annual --------
room revenues in excess of $760,000, $167,499
plus 8% of monthly other revenues --------
Best Westerns
Harlan, KY $129,548 14.5% of quarterly room revenues Rooms - $604,703 $172,340 $304,284
up to $800,000 per year, plus 14% of Other - $ 29,947 2,396
semi-annual room revenues up to $800,000 -----
per year, plus 35% of room revenues in 174,736
excess of $800,000, plus 8% of monthly -------
other revenues
Best Western Suites -
Key Largo, FL $ 73,184 14% of quarterly room revenues up Rooms - $302,690 $ 72,646 $147,017
to $1,225,000 per year, plus 10% of Other - $ 14,846 1,187
semi-annual room revenues up to -----
$1,225,000 per year, plus 35% of annual 73,833
room revenues in excess of $1,225,000, ------
plus 8% of monthly other revenues
Holiday Inn Express
Allentown, PA $146,353 14.2% of quarterly room revenues up Rooms - $723,662 $164,271 $311,753
to $1,250,000 per year, plus 8.5% of Other - $ 14,113 1,129
semi-annual room revenues up to -----
$1,250,000 per year, plus 35% of annual room 165,400
revenues in excess of $1,250,000, plus 8% of -------
monthly other revenues
Danville, KY $131,347 14.2% of quarterly room revenues up Rooms - $713,659 $162,001 $295,851
to $900,000 per year, plus 8.5% of Other - $ 31,285 2,503
semi-annual room revenues up to -----
$900,000 per year, plus 35% of annual 164,504
room revenues in excess of $900,000, -------
plus 8% of monthly other revenues
Gettysburg, PA $115,974 14.5% of quarterly room revenues Rooms - $641,741 $150,809 $267,764
up to $940,000 per year, plus 9% of Other - $122,551 981
semi-annual room revenues up to ---
$940,000 per year, plus 35% of annual 151,790
room revenues in excessof $940,000, -------
plus 8% of monthly other revenues
Total $3,302,922 $4,023,271 $7,326,193
========== ========== ==========
</TABLE>
16
<PAGE>
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
None.
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 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
SmallCap 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 Common stock was approved for listing and began trading on The Nasdaq
National Market ("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, 1997 to December 31, 1997
were $13.00 and $8.00 per share, respectively. The closing sales price for the
shares on NASDAQ as of March 24, 1998 was $11.25 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 1995, 1996 and 1997.
MARKET PRICE RANGE
-----------------------------
Low High
--- ------
1996
First Quarter 8.00 9.125
Second Quarter 8.4375 9.375
Third Quarter 8.25 9.25
Fourth Quarter 8.25 8.25
1997
First Quarter 8.00 10.50
Second Quarter 8.75 11.125
Third Quarter 10.50 11.875
Fourth Quarter 10.4375 13.00
(b) Holders
As of March 4, 1998, the approximate number of holders of record of the
shares was 110 and the approximate number of beneficial owners was 1097.
17
<PAGE>
(c) Dividends
The Company paid quarterly dividends from the first quarter of the fiscal
year ended December 31, 1995 through the end of the third quarter of 1997. At
that time, the Company began paying monthly dividends and intends to continue to
pay regular monthly dividends to its shareholders.
The Company announced a monthly dividend of $.0675 per share for each
shareholder of record as of January 30, 1998, February 27, 1998 and March 30,
1998, payable on March 12, 1998, April 10, 1998 and May 8, 1998, respectively.
None of the dividends paid during the year ended December 31, 1997
represented a return of capital based upon earnings per share determined for
income tax purposes.
The Company expects to maintain its current dividend rate for 1998 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 Leases and unanticipated capital expenditures. No assurance can be
given that the Company's estimate will prove accurate.
Future dividends paid by the Company will be at the discretion of the
Board of Directors of the Company. The dividends will depend on the actual cash
flow of the Company, its financial condition, capital requirements, the annual
dividend 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) audited historical revenue and
expenses and financial data for the Company and the Lessee for the period from
November 29, 1994 (date of IPO) through December 31, 1994, and for each of the
years in the three period ended December 31, 1997, (ii) audited selected
historical balance sheet data for the Company as of December 31, 1996 and 1997,
and (iii) selected combined historical operating and financial data for the
Combined Selling Partnerships-Initial Hotels purchased in connection with the
Company's IPO for the year ended December 31, 1993 and the eleven month period
ended November 29, 1994, and pro forma operating and financial data for the year
ended December 31, 1994. The selected historical balance sheet data of the
Company as of December 31, 1996 and 1997, the selected historical operating and
financial data of the Company and the Lessee for the period from November 29,
1994 through December 31, 1994 and for each of the years in the three year
period ended December 31, 1997, and the selected combined historical operating
and financial data for the Initial Hotels for the year ended December 31, 1993
and the period from January 1, 1994 through November 29, 1994 have been derived
from the historical financial statements of the Company, the Lessee and the
Initial Hotels audited by Reznick Fedder & Silverman, independent public
accountants.
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 REVENUE AND EXPENSES AND FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from
November 29,
1994 (Inception)
Year Ended Year Ended Year Ended
December December December December
31, 1994 31, 1995 31, 1996 31, 1997
-------- -------- -------- --------
<S><C>
Operating data
Percentage lease revenue (1) $273 $3,750 $3,958 7,326
Other revenue - 21 47 106
---- ------ ------ ---
Total revenue 273 3,771 4,005 7,432
Depreciation and amortization 42 680 736 1,633
Interest expense 97 1,011 493 1,764
Real estate and personal pro-
perty taxes and property insurance 18 196 252 476
General and administrative 15 238 411 537
---- ------ ------ ----
Total Expenses 172 2,125 1,892 4,410
--- ----- ----- -----
Interest 101 1,646 2,113 3,022
Minority interest 29 396 435 465
---- ------ ------ ---
Net income applicable to
common shareholders $ 72 $1,250 $1,678 $2,557
==== ====== ====== ======
Basic earnings per common share(2) $.05 $.72 $.70 $.73
==== ==== ==== ====
Diluted earnings per common share(2) $.05 $.70 $.70 $.73
==== ==== ==== ====
</TABLE>
HUMPHREY HOSPITALITY TRUST, INC.
SELECTED HISTORICAL BALANCE SHEET DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
-----------------------------
<S><C>
Balance Sheet Data
Net investment in hotel properties..... $21,405 $50,476
Minority interest in Partnership....... $3,247 $3,370
Shareholders' equity................... $18,145 $17,852
Total assets........................... $30,221 $53,799
Total debt............................. $8,185 $31,755
</TABLE>
19
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
SELECTED FINANCIAL DATA - Continued
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from
November 29,
1994 (Inception)
through Year Ended Year Ended Year Ended
December December December December
31, 1994 31, 1995 31, 1996 31, 1997
-------- -------- -------- --------
<S><C>
Other Data
Funds from operations (3) $139 $2,132 $2,723 $4,548
Weighted avg. shares outstanding
Basic 1,321,800 1,742,533 2,410,252 3,481,700
Diluted 1,849,666 2,365,883 3,033,602 4,139,073
Net cash provided by (used in)
operating activities $170 $1,334 $2,751 $3,680
Net cash provided by (used in)
investing activities $(4,840) $ (619) $(1,967) $(29,406)
Net cash provided by (used in)
financing activities $ 5,223 $ (1,100) $6,148 $18,829
</TABLE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
SELECTED HISTORICAL REVENUE AND EXPENSES
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from
November 29,
1994 (Inception)
through Year Ended Year Ended Year Ended
December December December December
31, 1994 31, 1995 31,1996 31, 1997
-------- -------- ------- --------
<S><C>
Room revenue $459 $7,499 $7,942 $15,581
Other revenue (4) 38 556 637 871
---- ------ ------ ---
Total revenue 497 8,055 8,579 16,452
Hotel operating expenses 314 4,167 4,591 8,716
Percentage lease payments (1) 273 3,750 3,957 7,326
----- ----- ----- -----
Net (loss) income $(90) $138 $31 $410
==== ==== === ====
</TABLE>
20
<PAGE>
COMBINED SELLING PARTNERSHIPS - INITIAL HOTELS
SELECTED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
(In thousands, except operating data)
<TABLE>
<CAPTION>
PRO
HISTORICAL FORMA
---------- -----
1993 1994 (5) 1994 (5)
------ -------- --------
<S><C>
Financial Data
Room revenue $6,627 $6,583 $7,042
Other revenue 704 715 752
----- ------ -----
Total revenue 7,331 7,298 7,794
Operating expenses 4,603 4,513 4,827
----- ----- -----
Operating income before interest,
depreciation, and amortization 2,728 2,785 2,967
Interest 1,272 1,062 1,159
Depreciation and amortization 776 690 732
----- ----- -----
Net income (loss) $ 680 $1,033 $1,076
Other Data
Net cash provided by operating activities $1,503 $1,698 $1,896
Net cash used in investing activities $ (40) $ (373) $ (373)
Net cash used in financing activities $(1,275) $ (985) $ (985)
Operating Data
Total available room nights 202,608 203,062
Average daily rate $43.79 $46.68
Average occupancy 74.7% 74.3%
REVPAR $32.71 $34.68
</TABLE>
- ------------
(1) Represents annual Base Rent plus aggregate Percentage Rent and Fixed
Rent paid by the Lessee to the Partnership or the Subsidiary
Partnership pursuant to the Percentage Leases and the Fixed Lease,
which payments are calculated by applying the rent provisions in the
Percentage Leases to the historical room revenue of the Hotels.
(2) Represents basic and diluted earnings per share computed in accordance
with FAS No, 128, adopted by the Company during 1997. Basic earnings
per share is computed as net income available to common shareholders
divided by the weighted average common shares outstanding and diluted
earnings per share is computed as income before minority interests
divided by the weighted average common shares outstanding plus the
assumed conversion of the units held by minority interests. The
adoption of FAS No. 128 did not have a material effect on prior years.
21
<PAGE>
(3) Management considers Funds from Operations ("FFO") 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 FFO in the same
manner, therefore, the Company's calculation of Funds From Operations
may not be the same as the calculation of FFO for similar REITs.
Beginning with the year ended December 31, 1997, the Company changed
the way it computes FFO. The Company believes that its new method of
computing FFO is more consistent with the guidelines established by the
National Association of Real Estate Investment Trusts, Inc. (NAREIT)
for calculating FFO. FFO, as defined under the NAREIT standard,
represents net income (computed in accordance with generally accepted
accounting principles), excluding gains or losses from debt
restructuring and sales of properties, plus depreciation and
amortization of real property, 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. 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 following table computes FFO under both the new method and the
method formerly utilized by the Company:
<TABLE>
<CAPTION>
Period from Year Ended
November 29, 1994 December 31,
through ------------------------
December 31,1994 1995 1996 1997
---------------- ---- ---- ----
<S><C>
Net income applicable to
holders of common shares $ 72 $1,250 $1,678 $2,557
Add:
Minority interests 29 396 435 465
Depreciation and
amortization 38 486 610 1,502
Amortization of franchise costs - - - 24
------ --------- -------- -------
Funds From Operations
(new method) 139 2,132 2,723 4,548
Amortization of loan costs 4 194 126 107
------ ------- ------ ------
Funds From Operations
(old method) $143 $2,326 $2,849 $4,655
==== ====== ====== ======
</TABLE>
(4) Represents marina revenue (for the Comfort Inn-Beacon Marina,
Solomons, Maryland and the Best Western Suites Hotel in Key Largo,
Florida only), telephone revenue, restaurant revenue and other revenue.
(5) The Historical 1994 operating data of the Initial Hotels is for the
period January 1, 1994 through November 28, 1994. The pro forma 1994
operating data represents the historical operating data of the Initial
Hotels for the period January 1, 1994 through November 28, 1994 and the
Lessee for the period November 29, 1994 through December 31, 1994.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's principal source of revenue is from payments by the
Lessee under the 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 THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
THE COMPANY
The Company's total revenues for the twelve month period ended December
31, 1997 consisted substantially of Percentage Lease revenue recognized pursuant
to the Percentage Leases, as well as Fixed Lease revenue related to the Comfort
Suites-Dover, DE Hotel. The Company's revenue was approximately $7,432,000, an
increase of 85.6% compared to revenue of $4,005,000 for the year ended December
31, 1996. Net income for the period was approximately $2,557,000, an increase of
52.4% compared to 1996 net income of approximately $1,678,000. The increase in
both revenue and net income is attributable to the acquisition of 10 hotels and
the development of the Comfort Suites-Dover, DE Hotel. Interest expense
increased as a result of increased borrowings under the Credit Facility. These
funds were utilized to acquire and develop the above noted Hotels in 1997.
General and administrative expenses increased as the result of fees incurred
from auditing the financial performance of the Hotels acquired and from the land
leases associated with the purchase of the hotels in Comfort Inn-Gettysburg, PA
and Best Western-Harlan, KY Hotels.
THE LESSEE
The Lessee's revenues increased by $7,874,000, or 92 %, to $16,452,000
for the year ended December 31, 1997, as compared to $8,579,000 of revenue for
1996. The Lessee's net income for the year ended December 31, 1997 increased
approximately $379,000 to $410,000 compared to approximately $31,000 for the
year ended December 31, 1996. Average occupancy for the Hotels remained at 70%
for the year ended December 31, 1997 (the same as average occupancy for the year
ended December 31, 1996). The average daily rate at the hotels increased to
$56.21 for the year ended December 31, 1997 or 12% compared to $50.27 for the
same period in 1996. The increases in revenue and net income are the result of
adding eleven new Hotels to the portfolio in 1997. The increase in average daily
rate resulted from the addition of the Comfort Suites-Dover, DE and the Best
Western Suites-Key Largo, FL Hotels during 1997. These Hotels generated a
greater average daily rate than the remainder of the hotels. REVPAR increased to
$39.24 for the year ended December 31, 1997, or an increase of $4.07 compared to
$35.17 for the same period in 1996. The increase is attributed to acquisition in
1997 of hotels with higher room rates than existed for the Hotels owned in 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995
THE COMPANY
The Company's total revenues for the twelve month period ended December
31, 1996, consisted substantially 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-Farmville, VA Hotel, which substantially strengthened the Company's
market position for the Hotels located in Farmville, Virginia. The improvement
in net income is attributed to the additional revenue from the Days
Inn-Farmville, VA Hotel and the refinancing and/or
23
<PAGE>
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
approximately $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 decreased 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-Farmville, VA Hotel has an
annual occupancy below the average for the Company; accordingly, its inclusion
for 1996's occupancy lowers the average occupancy for all 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 in 1995. 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.
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 received
from the Lessee. The Lessee's obligations under the Leases are unsecured. The
Lessee's ability to make rent payments, and the Company's liquidity, including
its ability to make distributions to common shareholders, is dependent on the
Lessee's ability to generate sufficient cash flow from the operation of the
Hotels.
The hotel business is seasonal, with hotel revenue generally greater in
the second and third quarters than in the first and fourth quarters, with the
exception of the Best Western Suites-Key Largo, FL Hotel. The Best Western
Suites-Key Largo, FL Hotel is busiest in the first and fourth quarters of the
year. To the extent that cash flow from operating activities is insufficient to
provide all of the estimated monthly distributions (particularly in the first
quarter), the Company anticipates that it will be able to fund any such deficit
from future working capital.
The Company's Funds from Operations ("FFO") was $4,548,000 for the year
ended December 31, 1997, which is an increase of $1,825,000, or 67%, over FFO in
the comparable period in 1996, which was $2,723,000, or $1.10 and $.90,
respectively, per common share. Most of the improvements in FFO can be
attributed to the completion and opening of the Comfort Suites-Dover, DE Hotel
and the acquisition of ten Hotels between February 1997 and September 1997.
Management considers FFO 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. Beginning with the year ended December 31,
1997, the Company changed the way it computes FFO. The Company believes that its
new method of computing FFO is more consistent with the guidelines established
by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT")
for calculating FFO. FFO, as defined under the NAREIT standard, consists of net
income computed in accordance with generally accepted accounting principles,
excluding gains or losses from debt restructuring and sales of properties, plus
depreciation and amortization of real estate assets after adjustments for
unconsolidated partnerships and joint ventures. For the period presented,
depreciation and amortization and minority interest were the only non-cash
adjustments.
24
<PAGE>
FFO should not be considered as an alternative to net income or other
measurements under GAAP as an indicator of operating performance or to cash
flows form operating, investing or financing activities as a measure of
liquidity. FFO does not reflect working capital changes, cash expenditures for
capital improvements or debt service with respect to the hotel properties. FFO
may not be comparable to other similarly titled measures of operating
performance disclosed by other REITS.
The computation of historical Funds From Operations is as follows (in
thousands):
<TABLE>
<CAPTION>
Historical Twelve Historical Twelve
Month Period Ended Month Period Ended
December 31, 1996 December 31, 1997
------------------ ------------------
<S><C>
Net income before minority interests $ 2,113 $ 3,022
Depreciation 610 1,502
Amortization of initial franchise costs - 24
-------- --------
Funds From Operations (new method) 2,723 4,548
Amortization of loan costs 126 107
-------- --------
Funds From Operations (former method) $ 2,849 $ 4,655
======== ========
</TABLE>
The Company expects to meet its short-term liquidity requirements
generally through net cash provided by operations and existing cash balances.
The Company believes that its net cash provided by operations will be adequate
to fund both operating requirements and payment of dividends by the Company in
accordance with REIT requirements.
The Company expects to meet its long-term liquidity requirements, such as
scheduled debt maturities and property acquisitions, through long-term secured
and unsecured borrowings, the issuance of additional securities of the Company,
or, in connection with acquisitions of hotel properties, the issuance of units
of limited partnership interests in the Partnership.
DEBT
The Company's indebtedness consists of only long-term debt. At December
31, 1997, the Company's long-term debt had an outstanding principal balance of
approximately $31.7 million and is secured by the Hotels as follows:
Approximately $25.5 million from the Credit Facility which is secured
by and cross-collateralized by seventeen Hotels. The interest rate on
the Credit Facility is variable at 25 basis points above prime rate,
at a current rate of 8.75% per annum. The Credit Facility matures in
April 1999.
Approximately $3.9 million, secured by first deeds of trust on the
Hotels in Wytheville, VA and Morgantown, WV. Interest accrues 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% for the Wytheville, VA Hotel and 11.3636% for the
Morgantown, WV Hotel. At December 31, 1997, the interest rate was
4.15%. In addition, letter of credit fees and financing fees increase
the effective rate on the bonds. The letters of credit expire in
November 1999 for the Wytheville, VA Hotel and in April 2000 for the
Morgantown, WV Hotel.
Approximately $2.3 million, secured by a first deed of trust on the
Comfort Inn-Dublin, VA Hotel. The outstanding balance bears interest
at a fixed annual rate of 7.75% per annum with additional
underwriters' fees increasing the rate to 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, 1997 are as follows:
1998 $195,000
1999 $25,661,000
2000 $225,000
25
<PAGE>
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures have limited and may in the future limit
the Lessee's ability to raise room rates in the face of inflation.
Industry-wide ADR generally has failed to keep pace with inflation since 1987.
SEASONALITY OF HOTEL BUSINESS AND THE HOTELS
The Hotel industry is seasonal in nature. Generally, hotel revenues for
hotels operating in the geographic areas in which the Hotels operate are greater
in the second and third quarters than in the first and fourth quarters, with the
exception of the Best Western Suites-Key Largo, Florida, which is busiest in the
first and fourth quarters of the year. The Hotel's operations historically
reflect this trend. Although the hotel business is seasonal in nature, the
Company believes that it generally will be able to make its expected
distributions by using undistributed cash from the second and third quarters to
fund any shortfall in cash flow from operating activities from the Hotels in the
first and fourth quarters.
OTHER INFORMATION
Effective May 22, 1997 the Company's Board of Directors adopted a
resolution increasing the Company's limit on consolidated indebtedness from 50%
to 55% of the aggregate purchase price of the Hotels in which it has invested.
The aggregate purchase price paid by the Company for the Hotels as of December
31, 1997 was approximately $58 million. As of December 31, 1997, the Company's
total outstanding indebtness represented approximately 54.8% of the aggregate
purchase price of the Hotels.
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
The Board of Directors consists of six members, all of whom serve one
year terms. Certain information regarding the directors and executive officers
of the Company is set forth below.
James I. Humphrey, Jr., Member of the Acquisition Committee, Chairman
of the Board, President and Secretary. Mr. Humphrey, age 56, 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. Humphrey is a
graduate of the University of Maryland and obtained an M.B.A. degree from Loyola
College.
26
<PAGE>
Margaret Allen, Director and member of the Audit and Acquisition
Committees. Ms. Allen, age 53, is Chief Executive Officer 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. Ms. Allen is a graduate
of the University of California, Berkeley.
Jeffrey M. Zwerdling, Esq., Director and member of the Audit and
Acquisition Committees. Mr. Zwerdling, age 53, is Managing 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.
George R. Whittemore, Director. Mr. Whittemore, age 48, 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 previous public stock offerings. Mr. Whittemore is also a
consultant of Mills Management II, Inc., which is the manager and a member of a
privately-held limited liability company that was formed to, among other things,
acquire hotels that are substantially similar to the Company's hotels. 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. He is a graduate
of the University of Richmond.
Dr. Leah T. Robinson, Director. Dr. Robinson, age 66, 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 63, 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.
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 six directors, including four
independent directors. The Board of Directors held four meetings in 1997.
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
27
<PAGE>
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 1997.
Acquisition Committee
The Board of Directors has established an Acquisition Committee, which
currently consists of Ms. Allen and Messrs. Zwerdling 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
four times in 1997.
Compensation of Directors
On May 22, 1997, the Board of Directors unanimously voted to increase
the annual fees paid to them by the Company for serving on the Board from
$10,000 per year to $15,000 per year effective for the last three quarters of
1997. The Board's action was designed to make their fees more comparable to
those of other public companies (including REITs) that are of similar size to
the Company. On September 9, 1997, the Board of Directors voted to utilize their
full annual fees, with the exception of the fees received by Mr. Humphrey, to
purchase Common Stock on the open market, and to exercise their reasonable best
efforts to do so within ten days of receipt of such fees.
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 1997, 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.
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.
28
<PAGE>
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>
James I. Humphrey, Jr. 657,373 (1) 15.9%
12301 Old Columbia Pike, Suite 300
Silver Spring, MD 20904
Mr. James T. Martin 322,547 (2) 9.3%
Odyssey Capital Req.
6 Front Street
Hamilton, HM11 BERMUDA
Equitable Companies, Inc. 321,300 (3) 9.2%
787 Seventh Avenue
New York, NY 10019
Smith Barney Mutual Funds Management, Inc. 191,300 (4) 5.5%
388 Greenwich Street
New York, NY 10013
</TABLE>
(1) Assumes that all Units held by James I. Humphrey and his Affiliates are
redeemed for shares of Common Stock.
(2) Based on information contained in Schedule 13D/A, dated April 28, 1997,
and filed with the SEC on May 1, 1997.
(3) Based upon information contained in Schedule 13G/A, dated February 10,
1998, and filed with the SEC on February 17, 1998.
(4) Based upon information contained in Schedule 13D dated February 5, 1997
and filed with the SEC on February 6, 1997.
Security Ownership by Management
The following table sets forth certain information as of February 28,
1998 regarding the beneficial ownership of Common Stock by (i) each Director of
the Company, (ii) each officer of the Company, and (iii) by all Directors and
executive officers of the Company as a group. Unless otherwise indicated, all
shares are owned directly and the indicated person has sole voting and
investment power.
<TABLE>
<CAPTION>
Amount and Nature
Name of Beneficial of Beneficial Percent of
Owner Ownership Class
- --------------- ----------------- ----------
<S><C>
James I. Humphrey, Jr. 657,373 (1) 15.9%
Margaret Allen 3,846 - (3)
Jeffrey M. Zwerdling 59,062 (2) 1.7%
George R. Whittemore 92,952 2.7%
Dr. Leah T. Robinson 86,165 2.5%
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
Name of Beneficial of Beneficial Percent of
Owner Ownership Class
- --------------- ----------------- ----------
<S><C>
Andrew A. Mayer, M.D. 90,552 2.6%
-------- -----
All directors and executive officers as a group
(7 persons) 989,650 23.9%
</TABLE>
- ---------------
(1) 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, 95,484 shares issuable to Farmville Lodging
Associates, LLC upon redemption of its Units, and 34,023 shares issuable to
Humphrey-Key Largo 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 subject to certain conditions.
(2) Includes 33,087 shares of Common stock owned by Mr. Zwerdling and
25,975 shares of Common Stock over which Mr. Zwerdling has dispositive
power.
(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.
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-Farmville, VA 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 $1.2 million of debt secured by that Hotel, which was repaid
immediately with proceeds of the Company's second public stock offering.
The Partnership acquired the Best Western Suites-Key Largo, Florida
Hotel pursuant to a purchase agreement that was assigned to the Partnership by
Humphrey Key Largo. Pursuant to the assignment of the purchase agreement,
Humphrey Key Largo received 34,023 Units.
The Humphrey Affiliates own 657,373 Units with a value of approximately
$7.2 million based on the last bid price on March 24, 1998. 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.
30
<PAGE>
Guarantees by Mr. Humphrey
At December 31, 1997, Mr. Humphrey guaranteed, jointly and severally
with the Company, the payment of interest and principal on approximately $5.9
million of the Company's outstanding long-term debt. The debt is secured by 19
of the Hotels.
Leases
During 1997, the Partnership and the Lessee were parties to Percentage
Leases and one Fixed Lease with respect to each Hotel owned by the Partnership.
Each 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 Leases constituted all of the Partnership's
and the Company's revenue. For the period January 1, 1997 through December 31,
1997, the Lessee incurred an aggregate of $7,326,193 in rent under the 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 1997, the Lessee paid franchise fees in the aggregate amount
of approximately $875,104.
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 has 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 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 Dover, DE Hotel. 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 Humphrey 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 the Humphrey 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 Humphrey 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 Humphrey 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 the Humphrey 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 Humphrey
Affiliates may receive consideration for such property in additional
31
<PAGE>
Units provided that his and the Humphrey Affiliates' interests in the
Partnership shall not exceed 28.54% of the total limited partnership interest in
the Partnership.
Pursuant to a Development Agreement between the Company and Humphrey
Development Company, Humphrey Development holds the right to purchase the
Comfort Suites-Dover DE Hotel from the Company in January 2002 for $2,795,910.
Other
Charles A. Mills, III, who, until his resignation on March 23, 1998, was
the Vice President, Treasurer, and a director, is Senior Vice President and
Chairman of A & S. George E. Whittemore, who is a director of the Company, is
Senior Vice President of A & S. A& S was the underwriter of the Company's
previous three underwritings and received approximately $1,755,000 in investment
banking fees in connection with the three underwritings. A & S 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 serviced 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 provided construction supervision and paid all development costs in
excess of $2,795,910 in exchange for a right to purchase the Dover, DE Hotel
from the Company in January 2003 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 Initial Hotels and the Dover, Delaware Hotel.
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. Under the terms of the
amended Services Agreement, the services fee cannot exceed $100,000 in any year.
Effective March 17, 1998, Charles A. Mills, III, resigned from his
positions as Vice President, Treasurer and Director of the Company to devote
more attention to his other business interests. Mr. Mills is the Senior Vice
President, Chairman and largest shareholder of A & S and has served on the
Company's Board of Directors since its IPO on November 29, 1994. The Company
will enter into a Capital Consulting Agreement with Mr. Mills, who will continue
to provide the Company with advice as to future equity offerings and access to
capital markets generally. Under the terms of the Capital Consulting Agreement,
which has a one year term, the Company will pay Mr. Mills $20,000 plus .25% of
the net proceeds from public equity offerings over the next year.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including, without limitation,
statements containing the words "believes," "anticipates," "expects," and words
of similar import. Such forward-looking statements relate to future events, the
future financial performance of the Company, and involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
<TABLE>
<S><C>
Humphrey Hospitality Trust, Inc.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1997 35
Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997 36
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1996 and 1997 38
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 39
Notes to Consolidated Financial Statements 41
Schedule III - Real Estate and Accumulated Depreciation 56
Notes to Schedule III - Real Estate and Accumulated Depreciation 58
Humphrey Hospitality Management, Inc.
Independent Auditors' Report 59
Balance Sheets as of December 31, 1996 and 1997 60
Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 61
Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1995, 1996 and 1997 62
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 63
Notes to Financial Statements 64
</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
None
(c) Exhibits
1.1 Form of Underwriting Agreement (incorporated by reference to
Exhibit 1.1 to the registration Statement on Form S-11
(Registration No. 333-48583)).
10.1 Declaration of Trust of Humphrey Hospitality REIT Trust
(incorporated by reference to Exhibit 10.1 to the
registration Statement on Form S-11 (Registration No.
333-48583)).
10.2 Bylaws of Humphrey Hospitality REIT Trust incorporated by
reference to Exhibit 1.2 to the Registration Statement on Form
S-11 (Registration No. 333-48583)).
10.3 Agreement of Purchase and Sale dated March 26, 1997 between
344 Associates Limited partnership and Humphrey hospitality
limited Partnership for the Comfort Inn-Gettysburg,
Pennsylvania (incorporated by reference to Exhibit 10.17 to
the registration Statement on Form S-11 (Registration No.
333-48583)).
10.4 Agreement of Purchase and Sale dated March 26, 1997 between
144 Associates Limited partnership and Humphrey hospitality
limited Partnership for the Holiday Inn Express-Gettysburg,
Pennsylvania (incorporated by reference to Exhibit 10.18 to
the registration Statement on Form S-11 (Registration No.
333-48583)).
33
<PAGE>
10.5 Agreement of Purchase and Sale dated March 26, 1997 between
544 Associates Limited partnership and Humphrey hospitality
limited Partnership for the Comfort Inn-Chambersburg,
Pennsylvania (incorporated by reference to Exhibit 10.20 to
the registration Statement on Form S-11 (Registration No.
333-48583)).
10.6 Agreement of Purchase and Sale dated March 26, 1997 between
644 Associates Limited partnership and Humphrey hospitality
limited Partnership for the Holiday Inn Express-Allentown
Pennsylvania (incorporated by reference to Exhibit 10.19 to
the registration Statement on Form S-11 (Registration No.
333-48583)).
27.1 Financial Data Schedule.
34
<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, 1997 and
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997, and the financial statement schedule as of December 31,1997. 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 consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Humphrey
Hospitality Trust, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. The financial statement schedule referred to above, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
As described in Notes 1 and 6 to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share, in 1997.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 4, 1998
35
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S><C>
ASSETS
Investment in hotel properties, net of accumulated depreciation
of $1,134 and $2,636 $ 21,405 $ 50,476
Cash and cash equivalents 7,101 204
Accounts receivable from lessee 1,067 1,857
Reserve for replacements 68 149
Deferred expenses, net of accumulated amortization
of $76 and $207 373 904
Other assets 207 209
------------ ------------
Total assets $ 30,221 $ 53,799
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgages and bonds payable $ 8,151 $ 31,721
Obligations under capital leases 34 34
Dividends payable 561 559
Accounts payable and accrued expenses 83 263
------------ ------------
Total liabilities 8,829 32,577
------------ ------------
MINORITY INTEREST 3,247 3,370
------------ ------------
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;
3,481,700 shares issued and outstanding 35 35
Additional paid-in capital 18,202 18,042
Distributions in excess of net earnings (92) (225)
------------ ------------
18,145 17,852
------------ ------------
Total liabilities and shareholders' equity $ 30,221 $ 53,799
============ ============
</TABLE>
See notes to consolidated financial statements
36
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
--------------- ---------------- ----------------
<S><C>
Revenue
Percentage lease revenue $ 3,750 $ 3,958 $ 7,326
Other revenue 21 47 106
------------ ------------- -------------
Total revenue 3,771 4,005 7,432
------------ ------------- -------------
Expenses
Interest 1,011 493 1,764
Real estate and personal property taxes and
property insurance 196 252 476
General and administrative 238 411 537
Depreciation and amortization 680 736 1,633
------------ ------------- -------------
Total expenses 2,125 1,892 4,410
------------ ------------- -------------
Income before allocation to minority
interest 1,646 2,113 3,022
Income allocated to minority interest 396 435 465
------------ ------------- -------------
NET INCOME $ 1,250 $ 1,678 $ 2,557
============ ============= =============
Basic earnings per common share $ .72 $ .70 $ .73
============ ============= =============
Diluted earnings per common share $ .70 $ .70 $ .73
============ ============= =============
</TABLE>
See notes to consolidated financial statements
37
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Common Stock Additional Distribution
------------------------ Paid-In in excess of
Shares Dollars Capital net earnings Total
--------- ------------ -------------- --------------- ---------------
<S><C>
Balance, 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
Minority interest in the proceeds from the
common stock 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, 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
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, December 31, 1996 3,481,700 35 18,202 (92) 18,145
Offering expenses - - (7) - (7)
Minority interest issued in connection with the
acquisition of the Best Western Key Largo - - (153) - (153)
Dividends declared - - - (2,690) (2,690)
Net income - - - 2,557 2,557
----------- ---------- ------------ ------------ ------------
Balance, December 31, 1997 3,481,700 $ 35 $ 18,042 $ (225) $ 17,852
=========== ========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements
38
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------------- ---------------- ----------------
<S><C>
Cash flows from operating activities
Net income $ 1,250 $ 1,678 $ 2,557
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 680 736 1,633
Income allocated to minority interests 396 435 465
Changes in assets and liabilities
Deferred franchise fees paid - - (363)
Increase in accounts receivable (881) (42) (790)
Increase in other assets (43) (64) (2)
(Decrease) increase in accounts payable and accrued expenses (68) 8 180
------------- ------------- -------------
Net cash provided by operating activities 1,334 2,751 3,680
------------- ------------- -------------
Cash flows from investing activities
Investment in hotel properties (212) (2,306) (29,325)
Deposits to reserve for replacements (407) - (776)
Withdrawals from reserve for replacements - 339 695
------------- ------------- -------------
Net cash used in investing activities (619) (1,967) (29,406)
------------- ------------- -------------
Cash flows from financing activities
Proceeds from sale of stock 6,957 8,645 -
Stock issuance costs - - (7)
Proceeds from mortgages and bonds payable 1,283 - -
Principal payments on mortgages and bonds payable (7,930) (3,175) (1,400)
Proceeds from line of credit 600 2,999 23,750
Repayment of line of credit (600) - -
Financing costs paid (221) (53) (299)
Dividends paid (1,172) (2,246) (3,187)
Principal payments on capital leases (16) (22) (28)
Redemption of common stock (1) - -
------------- ------------- -------------
Net cash (used in) provided by financing activities (1,100) 6,148 18,829
------------- ------------- -------------
(DECREASE) INCREASE IN CASH (385) 6,932 (6,897)
Cash and cash equivalents, beginning 554 169 7,101
------------- ------------- -------------
Cash and cash equivalents, ending $ 169 $ 7,101 $ 204
============= ============= =============
</TABLE>
(continued)
39
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------------- -------------- ---------------
<S><C>
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 1,074 $ 495 $ 1,582
============= =========== ==============
</TABLE>
Supplemental disclosures of non-cash investing and financing activities
During 1995, the Partnership acquired the Days Inn Hotel in Farmville,
Virginia, in exchange for 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, and the assumption of approximately $1,231 of
indebtedness. The assets acquired and the liabilities assumed consisted of:
Investment in hotel properties $ 1,800
Deferred expenses 24
Mortgages payable (1,231)
Obligations under capital leases (20)
Accounts payable and accrued expenses (6)
Minority interest (119)
Net increase in additional paid-in capital resulting from
acquisition of Farmville Lodging Associates, LLC (448)
----------
$ -
==========
During 1997, the Partnership issued units of limited partnership interest to
Humphrey-Key Largo Associates, L.P., which are redeemable for an aggregate
of 34,023 common shares, with a value of approximately $370 based on an
average price of $10.875 per share in connection with the acquisition of the
Best Western Suites Hotel in Key Largo, Florida. The recording of the
increase in minority interest resulted in a $153 reduction in additional
paid in capital.
During 1997, the Company acquired the Culpeper Comfort Inn Hotel for $1,900
of which $1,220 represented debt assumed.
During 1997, the Company acquired equipment subject to capital leases
totalling $28.
Dividends declared on December 1, 1996, and on November 28, 1997 and
December 31, 1997, are payable as of December 31, 1996 and 1997, in the
amounts of $561 and $559, respectively. Dividends declared during 1996 and
1997 included $474 and $495, respectively, to the minority interests which
have been deducted from the minority interest on the balance sheets as of
December 31, 1996 and 1997, respectively.
See notes to consolidated financial statements
40
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Trust, Inc. was incorporated on August 23, 1994.
The Company is a self- administered real estate investment trust (REIT) for
Federal income tax purposes. Humphrey Hospitality Trust, Inc., through its
wholly-owned subsidiary Humphrey Hospitality REIT Trust (collectively, the
Company) owns a controlling partnership interest in Humphrey Hospitality Limited
Partnership (the Partnership) and through the Partnership owns interests in
twenty existing limited - service Hotels (including ten hotel properties
acquired during 1997) as of December 31, 1997. The Partnership owns a 99%
general partnership interest and the Company owns a 1% limited partnership
interest in Solomons Beacon Inn Limited Partnership (the Subsidiary
Partnership). As of December 31, 1997, the Company owns a 84.12% interest in the
Partnership. The Company began operations on November 29, 1994.
Since inception, the Partnership has leased all of its hotel facilities
to Humphrey Hospitality Management, Inc. (the Lessee), a corporation wholly
owned by James I. Humphrey, Jr., the President and Chairman of the Board of the
Company. The Lessee operates and leases the hotel properties pursuant to
separate percentage and fixed lease agreements (the Percentage Leases and the
Fixed Lease) which provide for both fixed base rents and percentage rents based
on the revenues of the hotels.
As of December 31, 1997, James I. Humphrey, Jr., Humphrey Associates,
Inc., Farmville Lodging Associates, LLC and Humphrey-Key Largo Associates, L.P.
(collectively, the Humphrey Affiliates) own a combined total of 657,373 units of
limited partnership interests, representing a 15.88% interest in the
Partnership.
The Company has completed the following public offerings since its
incorporation:
<TABLE>
<CAPTION>
Offering price Shares Net proceeds
Offering Date completed per share sold (in thousands)
- ------------------------- ------------------------- ------------------ -------------- --------------------
<S><C>
Initial public offering November 29, 1994 $ 6.00 1,321,700 $ 6,950
Second offering July 21, 1995 $ 7.75 1,010,000 $ 6,957
Third offering December 6, 1996 $ 8.25 1,150,000 $ 8,645
</TABLE>
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.
41
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Investment in Hotel Properties
The hotel properties are recorded at cost. Depreciation is computed
using the straight-line method over estimated useful lives of the assets which
range from 31 to 40 years for buildings and 5 to 12 years for furniture and
equipment. Maintenance and repairs are generally the responsibility of the
Lessee and are charged to the Lessee's operations as incurred; major
replacements, renewals and improvements are capitalized. Upon disposition, both
the asset and accumulated depreciation accounts are relieved and the related
gain or loss is credited or charged to the statement of income.
The Company reviews the carrying value of each hotel property in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121 to
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the hotel property or that depreciation periods should be
modified. If facts or circumstances support the possibility of impairment, the
Company will prepare a projection of the undiscounted future cash flows of the
specific hotel property and determine if the investment in the hotel property is
recoverable based on the undiscounted future cash flows. If impairment is
indicated, an adjustment will be made to the carrying value of the hotel
property based on the discounted future cash flows. The Company does not believe
that there are any current facts or circumstances indicating impairment of any
of its investment in hotel properties.
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.
42
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Deferred Expenses
Deferred expenses are recorded at cost and consist of the following at
December 31, 1996 and 1997:
1996 1997
---------------- --------------
(in thousands)
Initial franchise fees $ - $ 378
Computer software costs - 27
Loan costs 449 706
------------- -----------
449 1,111
Less accumulated amortization 76 207
------------- -----------
$ 373 $ 904
============= ===========
Amortization of loan costs 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.
Amortization of initial franchise fees is computed using the straight-line
method over the remaining lives of the franchise agreements, which range up to
20 years. Amortization of computer software costs is computed using the
straight-line method over three years.
Revenue Recognition
Lease income is recognized when earned from the Lessee under the lease
agreements from the date of acquisition of each hotel property (see Note 7).
Earnings Per Common Share
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share. Basic and diluted earnings per share
have been calculated in accordance therewith for 1995, 1996 and 1997 (see Note
6).
Distributions
The Company intends to pay regular monthly dividends which are
dependent upon the receipt of distributions from the Partnership.
43
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Minority Interest
Minority interest in the Partnership represents the limited partners'
proportionate share of the equity of the Partnership. The limited partnership
interests are owned by the Humphrey Affiliates as of December 31, 1997. Income
is allocated to minority interest based on weighted average percentage ownership
throughout the year.
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. Distributions made in 1996 are
considered to be 5.7% return of capital for Federal income tax purposes. During
1997, none of the distributions are considered to be return of capital.
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,
1997, the balances reported by the banks, exceeded the federal depository
insurance limit, however, management believes that no significant concentration
of credit risk exists with respect to these uninsured cash balances.
Note 2. Investment in Hotel Properties
Investment in hotel properties consist of the following at December 31,
1996 and 1997:
1996 1997
------------- -------------
(in thousands)
---------------------------
Land $ 3,048 $ 4,455
Buildings and improvements 16,140 43,595
Furniture and equipment 1,631 4,937
Leased equipment 100 125
Construction-in-progress 1,620 -
---------- ----------
22,539 53,112
Less accumulated depreciation 1,134 2,636
---------- ----------
$ 21,405 $ 50,476
========== ==========
44
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 2. Investment in Hotel Properties (Continued)
Depreciation expense was $486, $610 and $1,502 for the years ended
December 31, 1995, 1996 and 1997, respectively.
The twenty hotel properties owned at December 31, 1997 (including the
10 hotels acquired during 1997) are all limited service hotels located in nine
states in the eastern United States and are subject to leases as described in
Note 7. During 1997, the Company also completed the development of a Comfort
Suites Hotel located in Dover, Delaware (the Dover Hotel) at a cost of
approximately $2,688 (see Note 7).
During 1997, the Company acquired the following hotels for the
approximate amounts indicated:
Contract
Number of Purchase Price
Location hotels (in thousands)
- ---------------------------- ------------------- ------------------
Florida 1 $ 2,590
Kentucky 2 5,341
North Carolina 1 1,975
Pennsylvania 5 16,400
Virginia 1 1,900
------------
$ 28,206
============
The above acquisitions were accounted for as purchases, and the results
of such acquisitions are included in the Company's consolidated statements of
income from the date of acquisition. The hotel property in Key Largo, Florida,
was acquired pursuant to an assignment of a purchase contract from Humphrey-Key
Largo Associates, L.P. (the Affiliate), a partnership substantially owned by Mr.
Humphrey. Pursuant to the assignment of the contract, the Affiliate received as
compensation 34,023 units of limited partnership interest in the Partnership,
valued at $370 based on an average price of $10.875 per share of common stock
for the ten trading days prior to September 2, 1997. The acquisition of the
hotel has been recorded by the Company at its acquisition cost ($2,590) which
excludes the value of the units issued to the Affiliate ($370) and is less than
or equal to net realizable value.
45
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 3. Dividends Payable
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.
On November 28, 1997 and December 31, 1997, the Company declared a
$.0675 dividend on each share of common stock and on each unit of interest
outstanding on November 28, 1997 and December 31, 1997, respectively. The
dividends (including the distributions to minority interest) were paid on
January 9, 1998 and January 30, 1998, respectively.
Note 4. Mortgages and Bonds Payable
Mortgages and bonds payable at December 31, 1996 and 1997, consisted of
the following:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
(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 $3,064,725 and
$3,133,740 at December 31, 1996 and 1997, respectively, and
secured by a letter of credit issued by Crestar Bank in the amount
of $2,281,104 expiring in April 2000. The outstanding principal
and interest are guaranteed jointly and severally by the Company
and James I. Humphrey, Jr. $ 2,275 $ 2,230
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 $2,920,557 and
$2,741,938 at December 31, 1996 and 1997, respectively.
2,375 2,325
</TABLE>
46
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 4. Mortgage and Bonds Payable (Continued)
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
(in thousands)
<S><C>
Roadway Inn - 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 $2,133,880 and
$2,071,272 at December 31, 1996 and 1997, respectively, and
secured by a letter of credit issued by Crestar Bank in the amount
of $1,749,188 which expires November 1, 1999. The outstanding
principal and accrued interest are guaranteed jointly and
severally by the Company and James I. Humphrey, Jr. 1,795 1,710
Mortgage payable to Mercantile Safe Deposit and Trust Company
under the terms of a $25.5 million line of credit, collateralized
by 17 of the hotel properties (see (d) below). The terms of the
line of credit require monthly installments of interest only at
the prime rate plus .25% (8.75% per annum as of December 31, 1997).
The outstanding principal balance plus any accrued interest are
payable in full in April 1999, with two one year extensions at the
option of the bank. The mortgage is collateralized by hotel
facilities and equipment having a combined net book value of
$6,567,156 and $42,381,185 at December 31, 1996 and 1997,
respectively. The first $2 million outstanding on the line is
guaranteed jointly and severally by the Company and James I.
Humphrey, Jr. 1,706 25,456
------------ ------------
$ 8,151 $ 31,721
============ ============
</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, 1997, the interest rate was 4.15% . In addition,
letter of credit fees and financing
47
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 4. Mortgage and Bonds Payable (Continued)
fees increase the effective rate on the bonds. The bonds may be redeemed at
the option of the Partnership in denominations greater than $25,000.
Mandatory redemptions are pursuant to a sinking fund redemption schedule
which began on April 1, 1989, in the amount of $15,000 increasing annually
until April 1, 2017, when the payment equals $140,000. The Partnership is
required to fund a principal reserve fund monthly equal to one-twelfth of
the mandatory sinking fund redemption. In addition, the Partnership is
required to fund an interest reserve fund. All principal and interest
payments will be automatically deducted by the trustee. Any deficiencies
will be drawn down under the letter of credit.
(b) On October 14, 1992, $2,528,000 of Variable Rate First Mortgage Refunding
Revenue Bonds were issued by the Industrial Development Authority of
Pulaski County, Virginia. Crestar Bank is the trustee. 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, 1997, the interest rate was 4.15%.
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.
(d) As of December 31, 1997, the line of credit is secured by the Company's
hotels located in Solomons, MD; Farmville, VA (2 hotels); Elizabethton, TN;
Dahlgren, VA; Princeton, WV; Dover, DE; Culpeper, VA; New Castle, PA;
Harlan, KY; Danville, KY; Murphy, NC; Chambersburg, PA; Allentown, PA;
Gettysburg, PA (2 hotels); and Key Largo, FL.
48
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 4. Mortgages and Bonds Payable (Continued)
Aggregate annual principal payments and payments to bond sinking funds
for the five years following December 31, 1997, and thereafter are as follows:
(in thousands)
----------------
December 31, 1998 $ 195
1999 25,661
2000 225
2001 245
2002 265
Thereafter 5,130
----------
$ 31,721
==========
Bond sinking funds and escrows for taxes and insurance in the amounts
of approximately $114 and $198 are included in other assets at December 31, 1996
and 1997, respectively.
Management believes that the carrying amounts of the Company's
mortgages and bonds payable approximate fair value at December 31, 1997, 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, 1998 $ 25
1999 8
2000 6
2001 3
----------
42
Less amount representing interest 8
----------
Present value of net minimum lease payments $ 34
==========
49
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 6. Earnings Per Share
The following is a reconciliation of the income (numerator) and weighted average
shares (denominator) used in the calculation of basic earnings per common share
and diluted earnings per common share in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share:
<TABLE>
<CAPTION>
Year ended December 31, 1995 Year ended December 31, 1996
---------------------------------------------- ----------------------------------------
Income Income
(Numerator) (Numerator)
(In Shares Per Share (In Shares Per Share
thousands) (Denominator) Amount thousands) (Denominator) Amount
-------------- --------------- ------------ ------------ --------------- -----------
<S><C>
Basic earnings per share
Income available to common shareholders $ 1,250 1,742,533 $ 0.72 $ 1,678 2,410,252 $ 0.70
========= ========
Effect of diluted securities
Units held by minority interests 396 623,350 435 623,350
---------- ----------- ----------- -----------
Income available to common shareholders
plus assumed conversion $ 1,646 2,365,883 $ 0.70 $ 2,113 3,033,602 $ 0.70
========== =========== ========= =========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1997
--------------------------------------------
Income
(Numerator)
(In Shares Per Share
thousands) (Denominator) Amount
------------- ---------------- ----------
<S><C>
Basic earnings per share
Income available to common shareholders $ 2,557 3,481,700 $ 0.73
=========
Effect of diluted securities
Units held by minority interests 465 657,373
---------- -----------
Income available to common shareholders
plus assumed conversion $ 3,022 4,139,073 $ 0.73
========== =========== =========
</TABLE>
50
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 7. Commitments and Contingencies and Related Party Transactions
Pursuant to the Humphrey Hospitality Limited Partnership Agreement (the
Partnership Agreement), the Humphrey Affiliates have 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, excluding Humphrey - Key Largo Associates, L.P., at any time.
Humphrey Key Largo Associates, L.P. may redeem its units at any time after March
3, 1998. At December 31, 1997, the number of shares of common stock issuable to
the Humphrey Affiliates upon exercise of the redemption rights is 657,373. 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.
The Company acts as the general partner of the Partnership, which acts
as a general partner of the Subsidiary Partnership and as such, is liable for
all recourse debt of the partnerships to the extent not paid by the
partnerships. In the opinion of management, the Company does not anticipate any
losses as a result of its general partner obligations.
The Company has entered into percentage leases relating to nineteen of
its twenty Hotels, and a fixed lease relating to the Dover Hotel, with Humphrey
Hospitality Management, Inc. (the "Lessee"). Each such lease (the Percentage
Leases and the Fixed Lease) has 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 a fixed rent and certain other additional
charges and is entitled to all profits from the operations of the Hotel after
the payment of certain specified operating expenses. The percentage rents are
based on a percentage of gross room revenue and other revenue. Also pursuant to
the terms of the Percentage Leases and the Fixed Lease, the Company is required
to make available to the Lessee an amount equal to 4% of room revenue on a
quarterly, cumulative basis for capital improvements and refurbishments. The
Company has future lease commitments from the Lessee through August 2007.
Minimum future rental income under these noncancelable operating leases at
December 31, 1997, is as follows:
Years (in thousands)
--------------- --------------
1998 $ 4,082
1999 4,082
2000 4,082
2001 4,082
2002 4,082
Thereafter 13,693
----------
$ 34,103
==========
51
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 7. Commitments and Contingencies and Related Party Transactions
(Continued)
The Company earned base rents of $1,609, $1,679 and $3,303 and
percentage rents of $2,141, $2,279 and $4,023 for the years ended December 31,
1995, 1996 and 1997, respectively. As of December 31, 1996 and 1997, $1,067 and
$1,857, respectively, of lease revenue was due from the Lessee.
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 Dover Hotel). Under the terms of the amended agreement, the service fee
cannot exceed $100,000 in any year. As of December 31, 1996 and 1997, $67,503
and $79,388, respectively, has been charged to operations.
During 1996, the Company executed a Development Agreement with Humphrey
Development, Inc., a Humphrey Affiliate, pursuant to which Humphrey Development,
Inc. provided construction supervision services for the Dover Hotel and agreed
to pay any development costs in excess of $2,796 in exchange for a right to
purchase the Dover Hotel from the Company on the sixth anniversary of its
commencement of operations for $2,796. The development costs incurred in
connection with the Dover Hotel totaled approximately $2,794 of which $2,688 was
recorded as investment in hotel properties and $106 as deferred loan costs.
The hotel properties are operated under franchise agreements by the
Lessee that 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.
On April 17, 1997, the Company assumed a land lease agreement in
conjunction with the purchase of the Best Western, Harlan, Kentucky. The lease
requires monthly payments of the greater of $2 or 5% of room revenue through
November 2091. On May 23, 1997, the Company assumed a land lease agreement in
conjunction with the purchase of the Comfort Inn, Gettysburg, Pennsylvania. The
lease requires an annual payment of $35 through May 2025. For the year ended
December 31, 1997, land lease expense totaled approximately $52 and is included
in the general and administrative expense line item.
52
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 7. Commitments and Contingencies and Related Party Transactions (Continued)
As of December 31, 1997, the future minium lease payments applicable to
noncancellable land leases are as follows:
(in thousands)
--------------
December 31, 1998 $ 59
1999 59
2000 59
2001 59
2002 59
Thereafter 2,919
--------
Total minimum lease payments $ 3,214
========
In response to the year 2000 issue, the Company modified its existing
information systems in order to make them year 2000 compliant. The Company
believes that it has made all necessary modifications to its existing systems
and does not expect that additional costs associated with year 2000 compliance,
if any, will be material to the Company's results of operations or financial
position.
Note 8. Capital Stock
The Company's common stock is duly authorized, fully paid and
nonassessable. Subject to preferential rights of any other shares or series of
shares of capital stock, common shareholders are entitled to receive dividends
if and when authorized and declared by the Board of Directors of the Company out
of assets legally available therefore and to share ratably in the assets of the
Company legally available for distribution to its shareholders in the event of
its liquidation, dissolution or winding up after payment of, or adequate
provision for, all known debts and liabilities of the Company. Each outstanding
share of common stock entitles the holder to one vote on all matters submitted
to a vote of shareholders. See Notes 2 and 7 for a discussion of the units
issued during 1997 and the redemption rights of Humphrey Affiliates with respect
to 657,373 units that are redeemable on a one-for-one basis for shares of common
stock at any time. None of the units discussed in Notes 2 and 7 have been
redeemed.
The Board of Directors is authorized to provide for the issuance of ten
million shares of preferred stock in one or more series, to establish the number
of shares in each series and to fix the designation, powers, preferences and
rights of each such series and the qualifications, limitations or restriction
thereof. As of December 31, 1996 and 1997, no preferred stock was issued.
53
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 8. Capital Stock (Continued)
The Board of Directors, excluding the Chairman, unanimously agreed on
September 9, 1997, to utilize their Directors fees to purchase the Company's
common stock on the open market effective immediately. Presently, members of the
Board of Directors own approximately 9.5% of the Company's outstanding shares of
stock.
Note 9. Pro Forma Financial Information (Unaudited)
Due to the impact of the acquisitions discussed in Notes 1 and 2,
historical operations may not be indicative of future results of operations and
net income per common share.
The following unaudited Pro Forma Consolidated Statements of Income for
the years ended December 31, 1996 and 1997, are presented as if the acquisition
of all 20 hotels owned at December 31, 1997 had occurred on January 1, 1996, and
all of the hotels had been leased to the Lessee pursuant to the Percentage and
Fixed Leases Agreements. The Pro Forma Consolidated Statements of Income do not
purport to present what actual results of operations would have been if the
acquisitions had occurred and the leases executed on such date or to project
results for any future period.
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
----------------------------
(in thousands)
----------------------------
1996 1997
---------- ----------
<S><C>
Operating data
Revenue
Lease revenue $ 8,298 $ 8,827
Other revenue 47 106
---------- ----------
Total revenue 8,345 8,933
---------- ----------
Expense
Real estate and personal property taxes and insurance 554 592
Depreciation and amortization 1,735 2,040
Interest expense 2,549 2,582
General and administrative 521 568
Minority interest 474 504
---------- ----------
Total expense 5,833 6,286
---------- ----------
Net income applicable to common shareholders $ 2,512 $ 2,647
========== ==========
</TABLE>
54
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands, except per share data)
December 31, 1995, 1996 and 1997
Note 10. Subsequent Events
On January 30, 1998, the Company engaged Anderson & Strudwick,
Incorporated (A&S) as the exclusive underwriter in connection with a proposed
offering of at least 1,000,000 shares of common stock on a firm commitment
basis.
On February 3, 1998, the Company exercised its option to pay off
various capital leases for a total of $39.
55
<PAGE>
Humphrey Hospitality Trust, Inc.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Gross Amounts at which
Costs Capitalized Carried at
Initial Costs Subsequent to Acquisition Close of Period
--------------------- ------------------------- -----------------------
Encum- Buildings and Buildings and Buildings and
Description brances Land Improvements Land Improvements Land Improvements Total
- ------------------------ ------------ ------ ------------- --------- ------------- ------ ------------ -----------
<S><C>
Comfort Inn Hotel
Morgantown,
West Virginia $2,230 $ 277 $2,574 - $120 $ 277 $2,694 $ 2,971
Comfort Inn Hotel
Dublin, Virginia 2,335 118 2,611 - 44 118 2,655 2,773
Best Western Hotel
Wytheville, Virginia 1,710 137 1,737 - 73 137 1,810 1,947
Solomons Beacon Inn
Solomons Island, Maryland (e) 1,354 2,012 - 155 1,354 2,167 3,521
Comfort Inn Hotel
Elizabethton, Tennessee (e) 156 1,040 - 47 156 1,087 1,243
Comfort Inn Hotel
Farmville, Virginia (e) 148 1,201 - 17 148 1,218 1,366
Comfort Inn Hotel
Dahlgren, Virginia (e) 205 1,546 - 55 205 1,601 1,806
Comfort Inn Hotel
Princeton, West Virginia (e) 363 1,600 - 43 363 1,643 2,006
Days Inn Hotel
Farmville, Virginia (e) 290 1,389 - 29 290 1,418 1,708
Holiday Inn Express
Allentown, Pennsylvania (e) 139 3,360 - - 139 3,360 3,499
</TABLE>
<TABLE>
<CAPTION>
Life Upon
Which
Accumulated Net Book Value Depreciation
Depreciation Buildings and in Latest Income
Buildings and Improvements Year of Statement is
Description Improvements Acquisition Computed
- ------------------------ ------------- ------------- ----------- ----------------
<S><C>
Comfort Inn Hotel
Morgantown,
West Virginia $140 $2,831 1994 (d)
Comfort Inn Hotel
Dublin, Virginia 156 2,617 1994 (d)
Best Western Hotel
Wytheville, Virginia 94 1,853 1994 (d)
Solomons Beacon Inn
Solomons Island, Maryland 116 3,405 1994 (d)
Comfort Inn Hotel
Elizabethton, Tennessee 63 1,180 1994 (d)
Comfort Inn Hotel
Farmville, Virginia 74 1,292 1994 (d)
Comfort Inn Hotel
Dahlgren, Virginia 84 1,722 1994 (d)
Comfort Inn Hotel
Princeton, West Virginia 86 1,920 1994 (d)
Days Inn Hotel
Farmville, Virginia 54 1,654 1994 (d)
Holiday Inn Express
Allentown, Pennsylvania 49 3,450 1997 (d)
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Gross Amounts at which
Costs Capitalized Carried at
Initial Costs Subsequent to Acquisition Close of Period
--------------------- ------------------------- -----------------------
Encum- Buildings and Buildings and Buildings and
Description brances Land Improvements Land Improvements Land Improvements Total
- ------------------------ ------------ ------ ------------- --------- ------------- ------ ------------ -----------
<S><C>
Comfort Inn Hotel
Chambersburg,
Pennsylvania (e) 97 2,343 - - 97 2,343 2,440
Comfort Inn Hotel
Culpepper, Virginia (e) 97 2,343 - - 146 1,705 1,851
Holiday Inn Hotel Express
Danville, Kentucky (e) 140 2,366 - - 140 2,366 2,606
Comfort Suites
Dover, Delaware (e) 200 2,090 - - 200 2,090 2,290
Comfort Inn Hotel
Gettysburg, Pennsylvania (e) - 4,036 - - - 4,036 4,036
Holiday Inn Express
Gettysburg, Pennsylvania (e) 101 2,450 - - 101 2,450 2,551
Best Western Hotel
Harlan, Kentucky (e) - 2,395 - - - 2,395 2,395
Best Western Suites
Key Largo, Florida (e) 269 2,237 - - 269 2,237 2,506
Comfort Inn Hotel
Murphy, North Carolina (e) 276 1,569 - - 276 1,569 1,845
Comfort Inn Hotel
New Castle, Pennsylvania (e) 39 2,751 - - 39 2,751 2,790
------------ ------- ------------- --------- ------------ -------------------- -----------
$ 6,275 $ 4,455 $ 43,012 - $ 583 $ 4,455 $ 43,595 $ 48,050
============ ======= ============= ========= ============ ==================== ===========
</TABLE>
<TABLE>
<CAPTION>
Life Upon
Which
Accumulated Net Book Value Depreciation
Depreciation Buildings and in Latest Income
Buildings and Improvements Year of Statement is
Description Improvements Acquisition Computed
- ------------------------ ------------- ------------- ----------- ----------------
<S><C>
Comfort Inn Hotel
Chambersburg,
Pennsylvania 34 2,406 1997 (d)
Comfort Inn Hotel
Culpepper, Virginia 36 1,815 1997 (d)
Holiday Inn Hotel Express
Danville, Kentucky 39 2,467 1997 (d)
Comfort Suites
Dover, Delaware 48 2,242 1997 (d)
Comfort Inn Hotel
Gettysburg, Pennsylvania 59 3,977 1977 (d)
Holiday Inn Express
Gettysburg, Pennsylvania 36 2,515 1997 (d)
Best Western Hotel
Harlan, Kentucky 45 2,350 1997 (d)
Best Western Suites
Key Largo, Florida 18 2,488 1997 (d)
Comfort Inn Hotel
Murphy, North Carolina 26 1,819 1997 (d)
Comfort Inn Hotel
New Castle, Pennsylvania 51 2,739 1997 (d)
---------- -----------
$ 1,308 $ 46,742
========== ===========
</TABLE>
57
<PAGE>
Humphrey Hospitality Trust, inc.
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
(a) Reconciliation of real estate:
Balance at December 31, 1995 $15,809
Additions to building and improvements 331
-------
Balance at December 31, 1996 16,140
Acquisition of building and improvements 27,302
Additions to building and improvements 153
-------
Balance at December 31, 1997 $43,595
=======
(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
Depreciation for the period ended December 31, 1997 497
-------
Balance at December 31, 1997 $ 1,308
=======
(c) The aggregate cost of land, buildings, furniture and
equipment for Federal income tax purposes is
approximately $48,807.
(d) Depreciation is computed based upon the following useful lives:
Buildings and improvements 31 - 40 years
Furniture and equipment 5 - 12 years
(e) The Company has a mortgage payable with a bank which is
collateralized by 17 of the hotels. The outstanding
balance at December 31, 1997, was $25,456.
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, 1997 and 1996, and the related statements of
income, shareholder's equity and cash flows for each of the three years in the
period ended December 31,1997. 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, 1997 and 1996, and the results of its
operations, the changes in shareholder's equity and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
January 19, 1998
59
<PAGE>
Humphrey Hospitality Management, Inc.
BALANCE SHEETS
December 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
-------------- ---------------
<S><C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,127,573 $ 2,483,403
Accounts receivable 89,060 224,201
Accounts receivable - shareholder 51,250 -
Prepaid expenses 36,282 66,862
Other assets 818 60,377
------------ ------------
Total current assets $ 1,304,983 $ 2,834,843
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 107,845 $ 402,188
Accrued expenses 67,328 346,744
Advanced deposits 1,730 12,031
Prepaid slip rentals - Marina 31,203 31,914
Due to affiliates 1,066,996 1,857,021
------------ ------------
Total current liabilities 1,275,102 2,649,898
------------ ------------
COMMITMENTS - -
SHAREHOLDER'S EQUITY
Common stock, $.01 par value, 1,000 shares authorized; 100
shares issued and outstanding 1 1
Retained earnings 29,880 184,944
------------ ------------
Total shareholder's equity 29,881 184,945
------------ ------------
Total liabilities and shareholder's equity $ 1,304,983 $ 2,834,843
============ ============
</TABLE>
See notes to financial statements
60
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF INCOME
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------------- --------------- ----------------
<S><C>
Revenue from hotel operations
Room revenue $ 7,499,245 $ 7,941,875 $ 15,581,298
Telephone revenue 168,385 173,743 273,256
Slip revenue 262,113 243,725 252,481
Other revenue 104,137 192,147 313,316
Interest revenue 20,972 27,422 32,131
-------------- ------------ -------------
Total revenue 8,054,852 8,578,912 16,452,482
-------------- ------------ -------------
Expenses
Salaries and wages 1,737,805 2,062,594 3,849,840
Room expense 407,335 433,870 950,239
Telephone 145,777 182,735 258,926
Marina expense 33,822 42,925 34,821
General and administrative 299,591 386,670 729,163
Marketing and promotion 240,438 254,205 621,067
Utilities 390,894 429,608 768,138
Repairs and maintenance 150,932 227,200 384,050
Taxes and insurance 130,544 149,811 244,877
Management fees 241,010 - -
Franchise fees 387,853 420,809 875,104
Lease payments 3,750,456 3,957,401 7,326,193
-------------- ------------ -------------
Total expenses 7,916,457 8,547,828 16,042,418
-------------- ------------ -------------
NET INCOME $ 138,395 $ 31,084 $ 410,064
============== ============ =============
See notes to financial statements
61
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF SHAREHOLDER'S EQUITY
Years ended December 31, 1995, 1996 and 1997
</TABLE>
<TABLE>
<CAPTION>
Common Stock Retained
--------------------- Earnings
Shares Amount (Deficit) Total
------- ---------- -------------- ----------------
<S><C>
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
Distributions - - (255,000) (255,000)
Net income - - 410,064 410,064
------- ------- ------------ -------------
Balance, December 31, 1997 100 $ 1 $ 184,944 $ 184,945
======= ======= ============ =============
</TABLE>
See notes to financial statements
62
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------------- ---------------- ----------------
<S><C>
Cash flow from operating activities
Net income $ 138,395 $ 31,084 $ 410,064
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Changes in assets and liabilities
Decrease (increase) in accounts receivable 8,971 (10,475) (135,141)
Increase in prepaid expenses (368) (18,306) (30,580)
Increase in other assets - (818) (59,559)
Increase (decrease) in accounts payable 29,998 (62,610) 294,343
(Decrease) increase in prepaid slip rentals -
Marina (10,531) (6,862) 711
Increase (decrease) in due to affiliates 889,166 (25,477) 790,025
Increase in accrued expenses - 67,328 279,416
Increase in advanced deposits - 1,730 10,301
------------- ------------- -------------
Net cash provided by (used in)
operating activities 1,055,631 (24,406) 1,559,580
------------- ------------- -------------
Cash flows from financing activities
Distributions paid - (50,000) (255,000)
Advances to (from) shareholder - (51,250) 51,250
------------- ------------- -------------
Net cash used in financing activities - (101,250) (203,750)
------------- ------------- -------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,055,631 (125,656) 1,355,830
Cash and cash equivalents, beginning of year 197,598 1,253,229 1,127,573
------------- ------------- -------------
Cash and cash equivalents, end of year $ 1,253,229 $ 1,127,573 $ 2,483,403
============= ============= =============
</TABLE>
See notes to financial statements
63
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
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
hotel properties from Humphrey Hospitality Limited Partnership (the
Partnership). James I. Humphrey, Jr. is the sole shareholder of the Lessee. The
Lessee began operations on November 29, 1994. As of December 31, 1997, the
Lessee leases 20 hotel properties from the Partnership.
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 Lessee places cash deposits with major banks. The Company has not
experienced any losses with respect to bank balances in excess of government
provided insurance. As of December 31, 1997, 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, 1996 and 1997
Note 2. Related Party Transactions
Management Fees and Payroll Reimbursements
The Lessee 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 year ended
December 31, 1995, management fees of $241,010 were 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 year ended December
31, 1995, the Lessee incurred charges of $1,737,805 for such payroll
reimbursements.
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.
Shared Expenses
Humphrey Associates, Inc., and HAI Management, Inc., affiliates of the
Lessee, share certain operating expenses with the Lessee. Expenditures are
allocated based on each entity's pro rata share of the expense.
Percentage Lease Payment
The Lessee has entered into percentage leases, with the Partnership
relating to nineteen of its Hotels (including ten hotels acquired in 1997) and a
fixed lease relating to the Dover Hotel (collectively , the Acquired Hotels).
Each such lease (the "Percentage Leases" and the "Fixed Lease") has a term of 10
years. 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.
Pursuant to the terms of the Fixed Lease, the Lessee is required to pay a fixed
rent and certain other additional charges. The Lessee has future lease
commitments through August 2007. Minimum future lease payments due under these
noncancellable operating leases as of December 31, 1997 are as follows:
65
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
Note 2. Related Party Transactions (Continued)
Year Amount
---- ------
1998 $ 4,081,920
1999 4,081,920
2000 4,081,920
2001 4,081,920
2002 4,081,920
Thereafter 13,693,746
----------
$34,103,346
==========
The Lessee has incurred base rents of $1,608,976, $1,678,347 and
$3,302,922 and percentage rents of $2,141,480, $2,279,054 and $4,023,271 for the
years ended December 31, 1995, 1996 and 1997, respectively. As of December 31,
1996 and 1997, the amount due Humphrey Hospitality Limited Partnership and
Solomons Beacon Inn Limited Partnership for lease payments totalled $1,066,996
and $1,857,021, 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. (excluding the hotel property in Dover, DE). Under the terms of the
amendment, the service fee cannot exceed $100,000 in any year. As of December
31, 1996 and 1997, the Lessee received $67,503 and $79,388, respectively, for
the services provided in accordance with the Agreement, which is included in
other revenue.
66
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
Note 3. Commitments
Franchise Agreements
The Lessee operates the hotels acquired by the Partnership and the
Subsidiary Partnership, under the terms of existing franchise agreements. 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 years ended December 31, 1995,
1996 and 1997, $387,853, $420,809 and $875,104, respectively, of franchise fees
were charged to operations.
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.
Note 4. Economic Dependency
The Lessee receives the majority of its income from related hotel
entities. The related hotels are primarily located in the Mid-Atlantic region of
the United States.
67
<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 executed by the
undersigned, thereunto duly authorized.
HUMPHREY HOSPITALITY TRUST, INC.
By: /s/ James I. Humphrey, Jr.
_____________________________________
March 27, 1997 James I. Humphrey, Jr.
Chairman of the Board and President
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 indicated.
By: /s/ James I. Humphrey, Jr.
__________________________
James I. Humphrey, Jr.
Chairman of the Board and President
(Principal Executive, Financial and Accounting
Officer)
By: /s/ Margaret Allen
__________________________
Margaret Allen
Director
By: /s/ Andrew A. Mayer
__________________________
Andrew A. Mayer
Director
By: /s/ Leah T. Robinson
__________________________
Leah T. Robinson
Director
By: /s/ George R. Whittemore
__________________________
George R. Whittemore
Director
By: /s/ Jeffrey M. Zwerdling
__________________________
Jeffrey M. Zwerdling
Director
Each of the above signatures is affixed as of March 27, 1998.
68
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income on pages 36
through 58 of the Company's 1997 annual report on Form 10-K and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 353
<SECURITIES> 0
<RECEIVABLES> 1,857
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,210
<PP&E> 53,112
<DEPRECIATION> (2,636)
<TOTAL-ASSETS> 53,799
<CURRENT-LIABILITIES> 822
<BONDS> 31,755
0
0
<COMMON> 35
<OTHER-SE> 17,817
<TOTAL-LIABILITY-AND-EQUITY> 53,799
<SALES> 0
<TOTAL-REVENUES> 7,432
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,022
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,557
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.73
</TABLE>
