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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, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 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)
THE NASDAQ STOCK 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 _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $77,516,455 based on the last sale price in The
Nasdaq Stock Market for such stock on March 20, 2000.
The number of shares of the registrant's common stock outstanding was 11,173,543
as of March 20, 2000.
Documents Incorporated by Reference
Part III of the Registration Statement is incorporated by reference from the
Company's proxy statement for its 2000 Annual Meeting.
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TABLE OF CONTENTS
Form 10-K
Report
Item No. Page
PART I
1. Description of Business...............................................3
2. Properties............................................................9
3. Legal Proceedings....................................................11
4. Submission of Matters to a Vote of Security Holders..................11
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters..............................................12
6. Selected Financial Data..............................................13
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................15
7A. Quantitative and Qualitative Disclosures about Market Risk...........19
8. Financial Statements and Supplementary Data..........................20
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................48
PART III
10. Directors and Executive Officers of the Registrant...................48
11. Executive Compensation...............................................48
12. Security Ownership of Certain Beneficial Owners and Management.......48
13. Certain Relationships and Related Transactions.......................48
PART IV
14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K....49
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information both included and incorporated by reference in this
Form 10-K may contain forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, and as such may
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. Forward-looking statements, which are based
on certain assumptions and describe our future plans, strategies and
expectations are generally identifiable by use of the words "may," "will,"
"should," "expect," "anticipate," "estimate," "believe," "intend" or "project"
or the negative thereof or other variations thereon or comparable terminology.
Factors which could have a material adverse effect on the operations and future
prospects of the Company include, but are not limited to, changes in: economic
conditions generally and the real estate market specifically,
legislative/regulatory changes (including changes to laws governing the taxation
of real estate investment trusts), availability of capital, interest rates,
competition, supply and demand for hotel rooms in the Company's current and
proposed market areas and general accounting principles, policies and guidelines
applicable to real estate investment trusts. These risks and uncertainties
should be considered in evaluating any forward-looking statements contained or
incorporated by reference herein.
PART I
Item 1. Description of Business
(a) General Development of Business
Humphrey Hospitality Trust, Inc. was incorporated under the laws of the
Commonwealth of Virginia on August 23, 1994 and is a real estate investment
trust ("REIT") for federal income tax purposes. Humphrey Hospitality Trust,
Inc., through its wholly owned subsidiaries, Humphrey Hospitality REIT Trust and
E&P REIT Trust (collectively, the "Company"), owns a controlling interest in
Humphrey Hospitality Limited Partnership and E&P Financing Limited Partnership
(the "Partnerships"). As of December 31, 1999, the Company owned a 92.79%
interest in Humphrey Hospitality Limited Partnership. Humphrey Hospitality
Limited 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, 1999, the Company, through the Partnerships and the
Subsidiary Partnership, owned 88 existing limited service hotels (the "Hotels"),
including 63 hotels acquired during 1999, and one office building. The Hotels
(containing approximately 6,200 rooms in 19 states) and office building are
leased to Humphrey Hospitality Management, Inc. and its subsidiary Supertel
Hospitality Management, Inc. (collectively, the "Lessee").
On October 30, 1996, the Common Stock began to trade on The Nasdaq Stock
Market. Prior to that date, the Common Stock was traded on The Nasdaq SmallCap
Market. The Company believes that by trading on The Nasdaq Stock Market, shares
of the Common Stock may become more liquid, and the shareholder base of the
Company may expand geographically and structurally with the potential for the
Common Stock to be held by residents of almost every state and by institutional
investors.
From its inception in late 1994 through mid-1998, the Company had
completed four capital stock offerings, permitting it to grow from eight hotels
to twenty-five hotels. Through these years the Company entertained a variety of
strategies in order to grow the company, including major acquisitions,
additional capital offerings and strategic alliances. The Company's board
concluded in mid-1998 that the consolidation in the lodging industry, and the
difficult capital markets environment that existed in 1998 for hotel real estate
investment trusts to raise additional capital, made it necessary to seek
possible business combinations with other companies in order to continue to
grow.
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On October 26, 1999, the Company and Supertel Hospitality, Inc.
("Supertel"), consummated a merger pursuant to which the Company exchanged 1.30
shares of its common stock for each outstanding share of Supertel's common stock
(the "Merger"). As a result of the Merger and in accordance with the provisions
of Accounting Principles Board Opinion No. 16, "Business Combinations," Supertel
is considered the acquiring enterprise for financial reporting purposes.
Accordingly, the financial statements herein present Supertel's historical
financial information for periods prior to the Merger. So that the Company could
continue to qualify as a REIT after the Merger, the Merger agreement provided
for the shareholders of Supertel to receive a pre-closing dividend of Supertel's
earnings and profits. The earnings and profits dividend of $5.13 per share was
paid to Supertel shareholders on October 25, 1999. The boards and shareholders
of both companies approved the Merger.
(b) Financial Information About Industry Segments
The Company is engaged primarily 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 8 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, 1999, the Company owned, through the
Partnerships and the Subsidiary Partnership, hotels in Virginia (6), West
Virginia (2), Maryland (1), Pennsylvania (5), North Carolina (2), Kentucky (2),
Delaware (1), Florida (4), Tennessee (2), Arkansas (4), Illinois (2), Iowa (11),
Kansas (9), Missouri (8), Nebraska (9), Texas (11), Wisconsin (7), Arizona (1)
and South Dakota (1). The Hotels are leased to the Lessee, which is
substantially owned by Mr. Humphrey. 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 that 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 selectively developing new
nationally franchised hotels.
Internal Growth Strategy. The Company's use of Percentage Leases allows
the Company to participate in increased revenue from the Hotels. The Percentage
Leases provide for the Lessee to pay monthly base rent ("Base Rent") plus
percentage rent ("Percentage Rent"). The Percentage Rent for each Hotel is
comprised of (i) a set percentage of quarterly and semi-annual room revenue,
which is payable quarterly and semi-annually, respectively, (ii) a set
percentage of annual room revenue in excess of a threshold amount ("Threshold"),
which is payable annually, and (iii) 8% of monthly revenue other than room
revenue (including, but not limited to, telephone charges, movie rental fees and
rental payments under third-party leases), 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 Investment Committee of the Board of Directors
will conduct necessary due diligence and financial analysis required to make
recommendations regarding acquisitions, dispositions, renovations and
development. Any acquisition, investment or purchase of property involving a
total purchase price of $3 million or more shall require approval of the Board
of Directors and any transaction or series of related transactions involving
less than such amount may be effected by the Chief Executive Officer of the
Company or his designee without Board of Director approval. The Company has a
policy that governs the Company's investment in hotel properties (the
"Investment Policy"), including the acquisition and development of hotels. Under
the Investment Policy, the Company will not acquire a hotel property unless the
Company can demonstrate that it can reasonably expect an annual return on its
investment (calculated as Rent less 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. The Company applies the
Investment Policy to a hotel property prior to its acquisition. There can be no
assurance that increases in insurance rates, real estate or personal property
taxes or FFE Reserves, which are based on room revenues, will not decrease the
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Company's annual return on its investment in any Hotel to a level below that 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 could benefit from new management,
new marketing strategy and association with a national
franchisor;
o Hotels in a deteriorated physical condition, which could benefit
significantly from renovations; and
o Hotels in attractive locations that could benefit significantly
by changing franchises to a grade that is more appropriate for
the location and clientele.
Development Strategy. Although the Company expects to primarily grow
through the acquisition of existing hotels, the Company may selectively grow
through the development of new limited-service hotels located 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 applied, 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; and
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 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 Board of Directors may change the Company's Investment Policy without
shareholder approval.
Replacement Reserves. The Percentage Leases obligate the Partnerships or
the Subsidiary Partnership, as applicable, to make available to the Lessee an
amount equal to 6% of room revenue per quarter, on a cumulative basis, for
upgrading and maintaining the Hotels ("Replacement Reserve Deposits").
Operating Practices. The Lessee utilizes a centralized accounting and
data processing system, which facilitates financial statement and budget
preparation, payroll management, internal auditing and other support functions
for the on-site hotel management team. The Lessee provides centralized control
over purchasing and project management (which can create economies of scale in
purchasing) while emphasizing local discretion within specific guidelines.
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 six to nine Hotels.
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Daily operations are managed using a centralized approach through regional
operations managers who report to the Lessee's offices as applicable. The
Lessee's strategy is to encourage decision-making by those people closest to the
hotel operation level at the lowest administrative cost.
Property Management. In order for the Company to qualify as a REIT,
neither the Company, the Partnerships nor the Subsidiary Partnership can operate
hotels. Therefore, each of the Hotels is leased to the Lessee under Percentage
Leases. Mr. Humphrey is the majority shareholder of the Lessee.
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. Until the Merger, the Services Agreement provided that the
Lessee would perform such services for an annual fee of $100,000 per year . At
the time of the Merger, the Company and the Lessee executed an amendment to the
Services Agreement that increased the annual fee to $300,000 per year. For the
period from October 26, 1999 through December 31, 1999, the Company paid $50,000
pursuant to the Services Agreement. The Lessee employs approximately 1,900
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 Partnerships 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, consisting primarily of 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 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.
Capitalization Policy. Hotel properties are carried at the lower of cost
or net realizable value. In September 1999, the Company determined that the
carrying value of the hotel in Bullhead City, Arizona, exceeded its fair value.
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Accordingly, an impairment loss of approximately $1,300,000, which represents
the excess of the carrying value over the fair value, net of costs to sell, was
charged to operations in 1999.
Environmental Matters. Under various federal, state and local laws and
regulations, an owner or operator of real estate may be liable for the costs of
removal or remediation of certain hazardous or toxic substances on such
property. Such laws often impose liability without regard to whether the owner
knew of, or was responsible for, the presence of hazardous or toxic substances.
Furthermore, a person that arranges for the disposal or transports for disposal
or treatment of a hazardous substance at a property owned by another party may
be liable for the costs of removal or remediation of hazardous substances
released into the environment at that property. The costs of remediation or
removal of hazardous substances may be substantial, and the presence of
hazardous substances, or the failure to promptly remediate hazardous substances,
may adversely affect the owner's ability to sell real estate or use real estate
as collateral. In connection with the ownership and operation of the Hotels, the
Company, the Partnerships, the Subsidiary Partnership or the Lessee, as the case
may be, may be potentially liable for any such costs.
The Company obtained environmental assessments on all of its Hotels prior
to their acquisition or development. The environmental assessments were intended
to identify potential environmental contamination for which the Hotels may be
responsible. The 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 environmental assessments did not include
invasive procedures, such as soil sampling or ground water analysis.
The environmental assessments have not revealed any environmental
liability that the Company believes would have a material adverse effect on its
business, assets, results of operations or liquidity, nor is the Company aware
of any such liability. Nevertheless, it is possible that these environmental
assessments do not reveal all environmental liabilities or that there are
material environmental liabilities of which the Company is unaware. Moreover,
the Company cannot be sure that:
o future laws, ordinances or regulations will not impose any
material environmental liability or
o the current environmental condition of the Hotels will not be
affected by the condition of the properties in the vicinity of
the Hotels, such as the presence of leaking underground storage
tanks, or by third parties unrelated to the Company, the
Partnerships, the Subsidiary Partnership or the Lessee.
The Company believes that the hotels comply in all material respects with
all federal, state and local ordinances and regulations regarding hazardous or
toxic substances and other environmental matters. No governmental agency has
notified the Company of any material noncompliance, liability or claim relating
to hazardous or toxic substances or other environmental matters in connection
with any of the Hotels.
Government Regulations. The Americans with Disabilities Act ("ADA") and
similar state laws require public accommodations to meet certain requirements
related to access and use by disabled persons. Failure to comply with these laws
could result in the imposition of fines or the award of damages to private
litigants. Compliance with the ADA could require removal of structural barriers
to handicap access in certain public areas of the Hotels. The Company expects
that some of the Hotels will require improvements to comply with the ADA and
state laws. The Company is currently named as a defendant in one lawsuit
alleging violations of the ADA at one of its Hotels.
Franchise Agreements. The Lessee, which is owned substantially by Mr.
Humphrey, holds all of the franchise licenses for each of the Hotels and is
expected to hold all of the franchise licenses for any subsequently acquired
hotel properties. During 1999, the Lessee paid franchise fees in the aggregate
amount of approximately $1,900,000.
Fourteen of the Hotels operate as Comfort Inn hotels and one Hotel
operates as a Comfort Suites hotel. Comfort Inn(R) and Comfort Suites(R) are
registered trademarks of Choice Hotels International, Inc. Two of the Hotels
operate as a Best Western hotel and one of the Hotels operates as a Best Western
Suites hotel. Best Western was established in 1946 as a reservation referral
system by hoteliers and has developed into the world's largest hotel chain. One
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of the Hotels operates as a Days Inn hotel. Days Inn(R) has been operating for
more than 20 years and is a registered trademark of Cendant, Inc. Three of the
Hotels operate as Holiday Inn Express hotels. Holiday Inn Express(R) is a
registered trademark of Bass Hotels & Resorts, Inc. Four of the Hotels operate
as Hampton Inn(R) hotels which is a registered trademark of Hilton Hotels
Corporation. Fifty-eight of the hotels operate as Super 8 motels, and two hotels
operate as Wingate Inn hotels. Super 8(R) and Wingate Inn(R) are registered
trademarks of Cendant, Inc. One hotel operates as a Shoney's Inn(R) hotel which
is a registered trademark of Sholodge, Inc. One hotel operates as River Valley
Suites, an independent, extended-stay facility.
Tax Status. The Company made an election to be taxed as a REIT under 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 taxability of dividends to
shareholders, will differ from net income reported for financial reporting
purposes due to the differences for federal tax purposes in the estimated useful
lives and methods used to compute depreciation. Of the total 1999 distributions
to the Company's shareholders, 71% are considered ordinary income and 29% are
considered return of capital.
In conjunction with the merger and related transactions, the Company
had several significant events that affect income tax-related balances for the
year ended December 31, 1999. These events are summarized as follows:
o After the Merger, the Company will continue to qualify as a REIT
for tax purposes. REITs are generally not subject to Federal
income taxes, provided they comply with various requirements
necessary to maintain REIT status. Since the Company expects to
maintain its REIT status, the tax effect of cumulative temporary
differences as of October 26, 1999, has been reversed as a
credit to deferred income tax expense and a reduction in
deferred income taxes payable. This reversal reduced deferred
income taxes payable by $926,075 as of October 26, 1999.
o REITs are subject to Federal income taxes in certain instances
for asset dispositions occurring within 10 years of acquisition
by the REIT. The Company has elected to defer and recognize any
taxable gain as a result of the sale of any Supertel assets
resulting from the built-in gain at the time of the Merger. The
Company does not expect to incur significant Federal tax
liability resulting from the disposition of Supertel assets with
built-in gain, if any.
o The Company has determined that it is generally not subject to
state and local income taxes in the jurisdictions in which the
Company operates hotels.
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<TABLE>
Item 2. Properties
The following table sets forth certain information with respect to the Hotels
<CAPTION>
Super 8 Number of Rooms Super 8 (con't) Number of Rooms
--------------- ---------------
<S> <C> <C> <C>
Aksarben-Lincoln, NE (1) 73 Watertown, SD (1) 58
Antigo, WI (1) 52 Wayne, NE (1) 40
Batesville, AR (1) 49 West Dodge- Omaha, NE (1) 101
Bedford, TX (1) 113 West "O" - Lincoln, NE (1) 82
Burlington, IA (1) 62 Wichita Falls, TX (1) 104
Clinton, IA (1) 63 Wichita, KS (1) 119
College Station, TX (1) 89 Wichita - (Park City), KS(1) 59
Columbus, NE (1) 63 West Plains, MO (1) 49
Cornhusker-Lincoln, NE (1) 133 Comfort Inn
Creston, IA (1) 123 Culpeper, VA 49
Denton, TX (1) 80 Chambersburg, PA 65
El Dorado, KS (1) 49 Dahlgren, VA 59
Fayetteville, AR (1) 83 Dublin, VA 100
Ft. Madison, IA (1) 42 Farmville, VA 51
Garden City, KS (1) 60 Gettysburg, PA 81
Grapevine, TX (1) 102 Morgantown, WV 80
Hays, KS (1) 78 Minocqua, WI (1) 51
Iowa City, IA (1) 86 Murphy, NC 56
Irving, TX (1) 104 New Castle, PA 79
Jacksonville, IL (1) 43 Princeton, WV 51
Jefferson City, MO (1) 77 Rocky Mount, VA 60
Keokuk, IA (1) 61 Sheboygan, WI (1) 59
Kingdom City, MO (1) 62 Beacon Marina-Solomons, MD 60
Kirksville, MO (1) 61 Comfort Suites
Lenexa, KS (1) 101 Dover, DE 64
Macomb, IL (1) 41 Best Western
Manhattan, KS (1) 87 Harlan, KY 62
Marshall, MO (1) 54 Ellenton, FL 73
McKinney, TX (1) 80 Best Western Suites
Menomonie, WI (1) 81 Key Largo, FL 40
Moberly, MO (1) 60 Days Inn
Mountain Home, AR (1) 41 Farmville, VA 60
Mt. Pleasant, IA (1) 55 Hampton Inn
Muscatine, IA (1) 63 Brandon, FL 80
Neosho, MO (1) 58 Cleveland, T 60
Norfolk, NE (1) 66 Jackson, TN 121
Omaha, NE (1) 115 Shelby, NC 78
O'Neill, NE (1) 72 Shoney's Inn
Oskaloosa, IA (1) 51 Ellenton, FL 63
Parsons, KS (1) 48 River Valley Suites
Pella, IA (1) 40 Bullhead City, AZ (1) 76
Pittsburg, KS (1) 64 Wingate Inn
Plano, TX (1) 102 Irving, TX (1) 101
Portage, WI (1) 61 Houston, TX (1) 101
Russellville, AR (1) 61 Holiday Inn Express
Sedalia, MO (1) 87 Allentown, PA 82
Shawano, WI (1) 55 Danville, KY 63
Storm Lake, IA (1) 59 Gettysburg, PA 51
Tomah, WI (1) 64
Waco, TX (1) 78 Totals ---------------
6,240
</TABLE>
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Item 2. Properties - Continued
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(1) Hotels acquired through merger in October 1999.
Additional property information is found in Item 8 - Schedule III of this
FORM 10-K.
The Percentage Leases
The Hotels are leased to the Lessee under percentage leases. The percentage
leases provide for both base rent and percentage rents. However, the Company's
Board of Directors may, in its discretion, alter the lease provisions with
respect to any proposed percentage lease, depending on the purchase price paid
for the Hotel, economic conditions and other factors deemed relevant at the
time.
Percentage Lease Terms. Each percentage lease has an initial noncancelable
term of ten years, which the Lessee, at its option, may renew for an additional
term of five years, subject to earlier termination on the occurrence of defaults
and other events including, particularly, the provisions described in each lease
under "Damage to Hotels," "Condemnation of Hotels" and "Termination of
Percentage Leases on Disposition of the Hotels."
Amounts Payable Under the Percentage Leases. During the term of each
percentage lease, the Lessee is obligated to pay base rent, percentage rent and
other amounts, including additional charges resulting from interest accrued on
any late payments or charges. Base rent is a fixed amount that is paid monthly.
The percentage rent for each hotel is comprised of:
o a set percentage of quarterly room revenue, which is payable
quarterly;
o a set percentage of semi-annual room revenues, which is payable
semi-annually;
o a set percentage of annual room revenues, in excess of a minimum
amount, which is payable annually; and
o 8% of monthly revenues other than room revenues including, but
not limited to, telephone charges, movie rental fees and rental
payments under any third-party leases, which is payable monthly.
The portion of percentage rent that is based on annual room revenues is
designed to allow the Company to participate in any future increases in room
revenues. All percentage rents are due 30 days after the end of the applicable
calendar period.
The percentage leases require the Lessee to pay base rent, percentage rents,
additional charges and the operating expenses of the hotels, except the
following, which are obligations of the Company:
o real estate and personal property taxes;
o ground lease rent, where applicable;
o the cost of certain furniture, fixtures and equipment;
o expenditures for items that are classified as capital items
under generally accepted accounting principles, ("GAAP") which
are necessary for the continued operation of the hotels; and
o property and casualty insurance premiums.
Operating expenses include insurance, other than property and casualty
insurance, all costs and expenses, and all utility and other charges incurred in
the operation of the Hotels during the term of the percentage leases. The
percentage leases also provide for rent reductions and abatements in the event
of damage to or destruction or a partial taking of any Hotel.
10
<PAGE>
Item 3. Legal Proceedings
On June 14, 1999, Humphrey Hospitality Management d/b/a/ Best Western
Suites-Key Largo and Humphrey Hospitality Limited Partnership were served a
lawsuit filed by the Association for Disabled Americans, Inc., Daniel Ruiz and
Jorge Luis Rodriguez. The case is pending in the United States District Court
for the Southern District of Florida (Case No.: 99-10066). The case alleges
various violations of the Americans with Disabilities Act regarding
accessibility of the hotel for disabled citizens. An answer was filed in this
case. The case requests injunctive relief, including altering the subject
premises, closing the premises until the modifications are completed and
attorneys' fees and costs. An investigation is underway regarding the
allegations contained in this case. A proposed settlement agreement has been
received by the Company and is currently being reviewed.
With the exception of the litigation noted above, 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
A special meeting of the stockholders of Supertel Hospitality Inc. was
held at the DoubleTree Hotel in Omaha, Nebraska commencing at 11:00 a.m. on
September 27, 1999. The stockholders approved and adopted the Agreement and Plan
of Merger between Supertel and the Company. Voting on the matter was as follows:
1. Approval and adoption of the Agreement and Plan of Merger
between Supertel and the Company:
FOR ....................................... 3,713,584
AGAINST ................................... 200,045
ABSTAIN.................................... 500
The Annual Meeting of Shareholders of the Company was held at the Omni
Richmond Hotel, 100 South 12th Street, Richmond, Virginia, at 10:00 a.m. on
Monday, September 27, 1999. The meeting was adjourned and then reconvened at the
Company's headquarters in Silver Spring, Maryland at 10:00 a.m. on Tuesday,
October 5, 1999. Holders of record of 4,171,765 shares of the Company's common
stock were present in person or by proxy at the meeting out of a total of
4,631,700 shares outstanding on August 2, 1999, the record date for meeting.
Voting results were as follows:
1. The vote taken on the proposal to approve the Agreement and Plan
of Merger dated June 11, 1999 between Supertel Hospitality, Inc.
and Humphrey Hospitality Trust, Inc., and the issuance of shares
of Humphrey Hospitality Common Stock in connection with the
Merger, was as follows:
FOR 3,344,675
AGAINST 46,130
ABSTAIN 24,700
BROKER NON-VOTE 756,260
2. The vote for election of Directors of the Company was as
follows:
FOR WITHHOLD
James I. Humphrey, Jr. 4,119,697 52,068
Margaret Allen 4,146,547 25,218
Jeffrey Zwerdling 4,147,747 24,018
George R. Whittemore 4,130,547 41,218
Dr. Leah T. Robinson 4,147,097 24,668
Andrew A. Mayer, M.D. 4,147,147 24,618
3. The vote taken of the proposal to ratify the appointment of
Reznick Fedder & Silverman as independent auditors was as
follows:
FOR 4,151,946
AGAINST 12,214
ABSTAIN 7,605
11
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters.
(a) Market Information
On October 30, 1996, the Common stock was approved for listing and began
trading on The Nasdaq Stock Market ("Nasdaq") under the Company's symbol "HUMP".
The closing sales price for the common stock as of March 20, 2000 was $6.9375
per share. The table below sets forth the high and low sales prices per share
reported by Nasdaq for both the Company and Supertel and for the periods
indicated.
<TABLE>
<CAPTION>
Humphrey Hospitality Supertel
Common Stock Common Stock
------------ ------------
High Low Dividend High Low Dividend
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
1997
First Quarter................ $ 9.75 $ 8.00 $ .19 $ 11.00 $ 8.88 N/A
Second Quarter............... $ 10.75 $ 8.75 $ .19 $ 9.25 $ 8.00 N/A
Third Quarter................ $ 11.38 $ 10.50 $ .19 $ 12.00 $ 8.25 N/A
Fourth Quarter............... $ 12.00 $ 10.25 $ .2025 $ 16.25 $ 10.00 N/A
1998
First Quarter................ $ 12.06 $ 10.75 $ .2025 $ 14.00 $ 8.50 N/A
Second Quarter............... $ 11.00 $ 9.75 $ .2175 $ 14.25 $ 12.25 N/A
Third Quarter................ $ 10.00 $ 9.75 $ .225 $ 13.13 $ 9.00 N/A
Fourth Quarter............... $ 9.56 $ 8.75 $ .225 $ 10.50 $ 8.00 N/A
1999
First Quarter................ $ 9.63 $ 7.88 $ .225 $ 10.94 $ 8.25 N/A
Second Quarter............... $ 8.94 $ 7.25 $ .225 $ 12.56 $ 8.25 N/A
Third Quarter................ $ 8.38 $ 6.13 $ .225 $ 13.19 $ 12.06 N/A
Fourth Quarter .............. $ 8.00 $ 6.19 $ .225 N/A N/A $ 5.13
</TABLE>
(b) Holders
As of January 28, 2000, the approximate number of holders of record of
the shares was 300 and the approximate number of beneficial owners was 2,500.
(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.
During 1997, 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 $.075 per share for each
shareholder of record as of January 31, 2000, February 29, 2000 and March 31,
2000, payable on February 29, 2000, March 31, 2000 and April 30, 2000,
respectively. Of the $0.90 per share dividend paid during the year ended
December 31, 1999, approximately $0.26 per share represented a return of capital
based upon earnings per share determined for REIT taxable income purposes.
The Company expects to maintain its current dividend rate for 2000,
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.
12
<PAGE>
Future dividends paid will be at the discretion of the Board of
Directors. The dividends will depend on the Company's actual cash flow,
financial condition, capital requirements, the annual dividend requirements
under the REIT provisions of the Code and such other factors as the Directors
deem relevant.
Item 6. Selected Financial Data
EXPLANATORY NOTE
On October 26, 1999 (date of acquisition), Humphrey Hospitality and
Supertel consummated a merger pursuant to which Supertel was merged (the
"Merger") with and into Humphrey Hospitality. As a result of the merger and in
accordance with the provision of Accounting Principles Board Opinion No. 16,
"Business Combinations", Supertel was considered the acquiring enterprise for
financial reporting purposes. Accordingly, the operating results of Humphrey
Hospitality have been included in the Company's financial statements since the
date of acquisition. The Company established a new accounting basis for Humphrey
Hospitality's assets and liabilities based on their fair values. Prior to the
date of acquisition, the selected financial data and the financial statements of
the Company include the hotel operations and historical information of Supertel.
Subsequent to the date of acquisition, the hotel operations of Supertel are
leased to Supertel Hospitality Management, Inc., a subsidiary of Humphrey
Hospitality Management, Inc., and are no longer reflected in the Company's
operating results.
The following table sets forth selected historical financial information
for the Company. The selected operating data and balance sheet data have been
extracted from the Company's consolidated financial statements for each of the
periods presented. The selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto of the Company and the Lessee included elsewhere in this annual report
on Form 10-K.
13
<PAGE>
<TABLE>
HUMPHREY HOSPITALITY TRUST, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
<CAPTION>
For the years ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating data:
<S> <C> <C> <C> <C> <C>
Total hotel revenues (1) $43,871 $51,339 $46,345 $37,832 $31,368
======= ======= ======= ======= =======
Net income applicable to
common shareholders $5,588 $5,017 $4,102 $3,371 $3,624
====== ====== ====== ====== ======
Basic earnings per common share (2) $.93 $1.04 $.85 $.70 $.75
==== ===== ==== ==== ====
Diluted earnings per common share (2) $.93 $1.04 $.85 $.70 $.75
==== ===== ==== ==== ====
Dividends declared per common share (3) $5.28 N/A N/A N/A N/A
Balance Sheet Data:
Shareholders' equity $ 46,130 $ 37,919 $ 32,861 $28,759 $25,388
Total assets $173,750 $106,239 $103,406 $92,276 $67,928
Total long-term debt $118,973 $ 61,662 $ 65,476 $59,965 $39,255
</TABLE>
(1) Represents annual room revenues and related hotel revenues through
October 26, 1999. For the period October 27, 1999 through December 31,
1999, room revenues, other hotel revenue and related hotel expenses were
no longer reported due to the establishment of operating leases with
Humphrey Hospitality Management, Inc., and its subsidiary Supertel
Hospitality Management, Inc. For the period October 27, 1999 through
December 31, 1999, the Company reported lease revenues of approximately
$5,656,000.
(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 interest 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.
(3) Represents a pre-closing dividend of Supertel's earnings and profits of
$5.13 per share, which was paid to Supertel stockholders pursuant to the
merger agreement, plus dividends declared by the Company subsequent to
the merger totaling $.15 per share.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Explanatory Note
On October 26, 1999, the Company and Supertel consummated a merger
pursuant to which Supertel was merged with and into the Company. As a result of
the merger and in accordance with the provision of Accounting Principles Board
Opinion No. 16, "Business Combinations," Supertel was considered the acquiring
enterprise for financial reporting purposes. Accordingly, Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains comparisons of Supertel's historical information for the years ended
December 31, 1999, 1998, 1997 and 1996.
General
The Company's principal source of revenue after October 26, 1999 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 Partnerships under the
Percentage Leases is dependent on the operations of the Hotels. Therefore, room
revenue and its related other hotel revenues and hotel expenses related to the
normal operations of Hotels are not reported after October 26, 1999 for the
Company and become revenue and expense items for the Lessee.
Results of Operations
Comparison of the year ended December 31, 1999 to the year ended December 31,
1998
Total hotel revenue for the twelve-month period ended December 31, 1999
was $43,871,000, a decrease of $7,468,000 or 15%, over total revenue of
$51,339,000 or the year ended December 31, 1998. Total revenue for the
twelve-month period ended December 31, 1999 was $49,636,000, a decrease of
$1,821,000 or 4% over the total revenue of $51,457,000 for the twelve-month
period ended December 31, 1998. Hotel revenue and total revenue decreased for
the year ended 1999 because the principal source of revenue changed on the
merger date October 26, 1999 from room revenues and other hotel revenues to
revenue from operating leases, resulting in lower hotel and total revenue and
lower related hotel operating expenses.
For the year, the average daily room rate was $50.36 in 1999, compared
to $49.16 for the year 1998, an increase of 2% on a pro forma basis, assuming
the companies had been combined for the full-years. Revenue per available room
for 1999 increased slightly to $33.24 from $33.23. Pro forma occupancy as a
percentage of rooms available for the year ended 1999 was 66% versus 68% for the
same period in 1998.
Hotel operating expenses for the year ended 1999 were $26,268,000,
compared to $29,835,000 for the year ended 1998, a decrease of $3,567,000. Hotel
operating expenses decreased for the year ended 1999 because the principal
source of revenue changed on the merger date October 26, 1999 from room revenues
and other hotel revenues to revenue from operating leases, resulting in lower
total revenue and lower related hotel operating expenses.
Interest expense increased by $947,000 for the year ended 1999 to
$5,069,000 from $4,122,000 in 1998. The increase was primarily due to an
increase in debt related to the merger.
Depreciation expenses for the year ended 1999 were $5,223,000, compared
to $4,386,000 for the year ended 1998, an increase of $837,000. The increase in
depreciation expense was also primarily related to the merger.
Property operating expenses for the year ended 1999 were $553,000 with no
corresponding amount for 1998. As a result of the merger, no hotel operating
expenses were reported after October 26, 1999. Property operating expenses,
which were reported after October 26, 1999, primarily include expenses for real
estate taxes, property related insurance, and land lease rents.
15
<PAGE>
Comparison of the year ended December 31, 1999 to the year ended December 31,
1998 - Continued
General and administrative expenses for the year ended December 31, 1999
were $3,724,000, compared to $3,950,000 for the year ended 1998, a decrease of
$226,000. The decrease primarily was related to the merger.
Supertel also incurred a one-time charge reported as a transaction
expense of $708,000 in 1998 related to the terminated merger agreement with PMC
Commercial Trust.
A loss on sale of property and impairment loss was recorded for the years
ended December 31, 1999 and 1998. This included a $1,300,000 loss on properties
recognized as an impairment of fair value of the property in Bullhead City, AZ.
The balance or loss on sale of property for the years ended December 31, 1999
and 1998 was a result of losses on sales of property assets.
Net income for the year ended 1999 was $5,588,000, or $.93 per share,
versus net income of $5,017,000, or $1.04 per share, on a diluted basis for the
corresponding period in 1998.
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997
Total motel revenues for 1998 were $51,338,529, an increase of $4,993,714
or 10.8% over the total revenues of $46,344,815 for 1997. The increase was
primarily due to an increase of $4,910,813 in revenue from lodging operations.
Revenues from other lodging activities, which consisted of telephone, vending
and movie revenues, increased $82,901.
The increase in revenues from lodging operations resulted from an
increase in the number of rooms rented and an increase in the average daily room
rate. Supertel rented 1,094,009 rooms in 1998 compared to 1,041,904 rooms in
1997, an increase of 52,105 rooms or 5.0%. The average daily room rate was
$46.93 for 1998, compared to $44.48 for 1997, an increase of $2.45 or 5.5%.
Motel revenue was also favorably impacted by changes in occupancy.
Occupancy as a percentage of rooms available increased to 66.9% in 1998 compared
to 65.7% in 1997. For seasoned properties (those owned/opened over one year)
occupancy was 67.2% in both years. The increase in the occupancy percentage
resulted primarily from the continued seasoning of Supertel's properties in
Texas. Revenue per available room for 1998 increased to $31.41 from $29.24 in
1997.
Lodging expenses for 1998 was $28,697,945 compared to $26,952,031 for
1997, an increase of $1,745,914 or 6.5%. The increase in lodging expenses was
due primarily to the increase in the number of rooms rented. Lodging expenses as
a percentage of motel revenues decreased to 55.9% in 1998 from 58.2% in 1997.
The percentage decrease resulted from cost controls implemented under Supertel's
open book management program and a larger base of revenue to cover fixed costs.
Depreciation and amortization expenses for 1998 were $4,451,933 compared
to $4,060,778 in 1997, an increase of $391,155 or 9.6%. The increase was
primarily due to an increase in the number of motel properties owned for a full
year.
General and administrative expenses for 1998 were $3,949,588 compared to
$3,154,737 for 1997, an increase of $794,851 or 25.2%. General and
administrative expenses as a percent of motel revenue increased to 7.7% in 1998
from 6.8% in 1997. The increase in general and administrative expenses was due
primarily to increased payroll expense attributable to employee salary increases
and employee incentive programs initiated in 1998.
Interest expense decreased to $4,056,558 in 1998 from $4,529,700 in 1997,
a decrease of $473,142 or 10.4%. The decrease was due to the use of operating
income to pay down bank debt. Average bank borrowings were $53,285,701 in 1998
compared to $56,943,962 in 1997, a decrease of 6.4%.
16
<PAGE>
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997- Continued
Supertel also incurred a one-time charge of $708,143 in 1998 related to
the terminated merger agreement with PMC Commercial Trust. For the reasons
described above, and including the one-time charge, net income for 1998 was
$5,017,191 compared to $4,101,665 in 1997, an increase of $915,526 or 22.3%.
Basic and diluted net income per share from continuing operations for 1998,
including the one-time charge, was $1.04 compared to $0.85 for 1997, an increase
of 22.4%.
Comparison of the year ended December 31, 1997 to the year ended December 31,
1996
Total motel revenues for 1997 were $46,344,815, an increase of $8,512,427
or 22.5% over the total revenues of $37,832,388 for 1996. The increase was
primarily due to an increase of $8,212,728 in revenue from lodging operations.
Revenues from other lodging activities, which consisted of telephone, vending
and movie revenues, increased $299,699.
The increase in revenues from lodging operations resulted primarily from
renting 1,041,904 rooms in 1997 compared to 903,643 rooms rented in 1996, an
increase of 138,261 rooms or 15.3%. The increase in revenue from other lodging
activities resulted from the increase in the number of rooms rented. The
increase in rooms rented resulted primarily from the number of rooms added
during the year. Supertel opened two new Wingate Inn hotels in Texas and
purchased one existing Super 8 hotel in Wisconsin. In addition, new rooms were
added to one Nebraska property.
Revenues from lodging operations were favorably impacted by an increase
in the average daily room rate. The average daily room rate was $44.48 for 1997,
compared to $41.87 for 1996, an increase of $2.61 or 6.2%.
Occupancy as a percentage of rooms available was 65.7% in 1997 and 1996.
New motels generally have lower occupancy rates than those experienced by
seasoned properties. The occupancy rate for seasoned properties (properties
owned/opened more than one year) in 1997 was 67.2% versus 67.9% for 1996.
Revenue per available room for 1997 increased to $29.24 from $27.49 in the prior
year.
Lodging expense for 1997 was $26,952,031 compared to $22,023,380 for
1996, an increase of $4,928,651 or 22.4%. The increase in lodging expenses was
due primarily to the increase in the number of rooms rented. Lodging expenses as
a percentage of motel revenues for 1997 and 1996 was 58.2%.
Depreciation and amortization expenses for 1997 were $4,060,778 compared
to $3,132,866 for 1996, an increase of $927,912 or 29.6%. The increase was
primarily due to an increase in the number of motel properties owned for a full
year.
General and administrative expenses for 1997 were $3,154,737 compared to
$2,665,794 for 1996, an increase of $488,943 or 18.3%. The increase in general
and administrative expenses was due primarily to the expansion of staff to
handle current and anticipated motel growth.
Interest expense increased by 27.8% or $984,404 to $4,529,700 for 1997,
from $3,545,296 in 1996. The increase was primarily due to the additional
borrowings for acquisitions and construction. Average bank borrowings for 1997
increased to $56,943,962 from $45,320,603 for 1996, an increase of $11,623,359
or 25.6%.
For the reasons described above, net income increased 21.7% to $4,101,665
for 1997 from $3,371,247 for 1996. Basic and diluted net income per share from
continuing operations for 1997 was $0.85 compared to $0.70 for 1996.
17
<PAGE>
Liquidity and Capital Resources
Following the merger, the Company's principal source of cash to meet its
cash requirements, including distributions to shareholders, is its share of the
Partnerships' cash flow. The Partnerships' 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 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 Company's Hotels located in Florida, which are 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 with advances from its line of credit
replaced by future working capital.
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 interest in Humphrey Hospitality Limited Partnership.
Debt
At December 31, 1999, the Company's outstanding debt was approximately
$119 million and is secured by the Hotels as follows:
<TABLE>
<CAPTION>
Approximate
Loan Balance
At Interest Maturity
Lender 12/31/99 Rate Year Other information
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Bank Line of Credit $ 5,000,000 7.99% 2001 LIBOR + 175-225,
Fixed at 60,90,180 days
US Bank E&P Term loan $ 13,000,000 8.31% 2004 15 Year Amortization
US Bank Term loan $ 10,000,000 8.53% 2004 15 Year Amortization
First National Bank of Omaha $ 15,000,000 8.40% 2009 20 Year Amortization
Mercantile Bank of Sedalia $ 6,600,000 8.30% 2004 20 Year Amortization
Marquette Capital Bank, N.A. $ 25,900,000 8.69% 2000 25 Year Amortization
Bertha Wetzler Note $ 800,000 9.25% 2009
Mercantile Safe-Deposit & Trust
Line of Credit $ 21,400,000 8.75% 2002 Variable, Prime + 25%
BankBoston Line of Credit $ 11,200,000 7.79% 2001 Libor+185-235-$11.2M
Swap Ceiling 7.79%
Susquehanna Bank $ 5,000,000 7.75% 2009 Fixed>2004,Adjustable
every 5 yrs. Index+275
Regions Bank, NA $ 2,900,000 8.00% 2018 Fixed>2003,Adjustable
every 5 yrs.Index +250
Crestar Bank Bonds $ 2,200,000 8.00% 2005 7.75% + fees = 8%
</TABLE>
18
<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, which may
limit the Lessee's ability to pay Rent to the Company. Industry-wide average
daily rates generally have failed to keep pace with inflation since 1987.
Seasonality of Hotel Business and the Hotels
The hotel industry is seasonal in nature. Generally, 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 Company Hotels located in Florida, which are 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.
Year 2000
The Company believes its efforts to address Year 2000 concerns
contributed to the Year 2000 problem having no material adverse effect on the
Company's results of operations and financial condition.
Other Information
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of this
statement to have a significant impact on the financial position or results of
operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risks and Sensitivity Analysis
The Company is exposed to various market risks, including fluctuations in
interest rates. To manage these natural business exposures, the Company has
entered into derivative transactions. The Company does not hold or issue
derivative instruments for trading purposes. These contracts are entered into
with major financial institutions, thereby minimizing the risk of credit loss.
The following analyses presents the sensitivity of the market value, earnings
and cash flows of the Company's financial instruments to hypothetical changes in
the interest rates as if these changes occurred at December 31, 1999. Market
values are the present values of projected future cash flows based on the
interest rate assumptions. These forward-looking disclosures are selective in
nature and only address the potential impacts from financial instruments. They
do not include other potential effects that could impact the Company's business
as a result of these changes in interest rates.
Interest Rate and Debt Sensitivity Analysis
At December 31, 1999, the Company had debt totaling approximately
$119,000,000, including fixed rate debt totaling approximately $81,400,000 and
variable rate debt totaling approximately $37,600,000. Included in the variable
rate debt is approximately $11,200,000 of debt subject to an interest rate swap
agreement, which effectively changes the characteristics of the interest rate
without actually changing the debt instrument. At December 31, 1999, the
Company's interest rate swap agreement converted outstanding variable rate debt
totaling approximately $11,200,000 to fixed rate debt for a period of time. At
December 31, 1999, after adjusting for the effect of the interest rate swap
19
<PAGE>
agreement, the Company had fixed rate debt of approximately $92,600,000 and
variable rate debt of $26,400,000. Holding other variables constant, an increase
to market interest rates at December 31, 1999, would decrease the fair value of
the fixed rate debt by approximately $4,400,000. For variable rate debt,
interest rate changes do not affect the fair value of the debt but do impact
future earnings and cash flows. The earnings and cash flow impact for the next
year resulting from a one percentage point increase in interest rates would be
approximately $117,000, holding other variables constant.
Item 8. Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
----
HUMPHREY HOSPITALITY TRUST, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORTS......................................21
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 ......23
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998, AND 1997.................................24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997......................25
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 1999, 1998 AND 1997............................26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.........................28
SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION............44
NOTES TO SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION 47
20
<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, 1999, and
the related consolidated statements of income, shareholders' equity and cash
flows for the year then ended, and the financial statement schedule as of
December 31, 1999. 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 audit. The consolidated financial statements of Humphrey
Hospitality Trust, Inc. and Subsidiaries (formerly Supertel Hospitality, Inc.
and Subsidiaries) for the year ended December 31, 1998, and for each of the
years in the two year period ended December 31, 1998, were audited by other
auditors whose report, dated January 20, 1999, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1999 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, 1999, and
the results of their operations and their cash flows for the year then ended, 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.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
March 20, 2000
21
<PAGE>
Independent Auditors' Report
To the Shareholders and Board of Directors of Supertel Hospitality, Inc.:
We have audited the accompanying consolidated balance sheet of Supertel
Hospitality, Inc. and subsidiaries (now known as Humphrey Hospitality Trust,
Inc. ) (the Company) as of December 31, 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the two-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 Supertel
Hospitality, Inc. and subsidiaries at December 31, 1998 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Omaha, Nebraska
January 20, 1999
22
<PAGE>
<TABLE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<CAPTION>
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Investment in hotel properties $ 196,189,326 $ 115,455,808
Less accumulated depreciation 30,189,776 23,020,296
------------- -------------
165,999,550 92,435,512
Cash and cash equivalents 829,829 11,520,593
Accounts receivable - lessee 4,177,016 --
Accounts receivable -- 1,428,531
Prepaid expenses 237,428 388,409
Deferred financing cost, net of accumulated amortization
of $92,262 and $402,742 2,094,557 263,235
Other assets 411,771 202,499
------------- -------------
Total assets $ 173,750,151 $ 106,238,779
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Account payable and accrued expenses $ 2,822,093 $ 5,075,385
Income taxes payable 850,000 207,900
Dividends Payable 903,139 --
Deferred income taxes -- 926,075
Long-term debt 118,972,925 61,661,585
Other liabilities 487,166 448,610
------------- -------------
Total liabilities 124,035,323 68,319,555
------------- -------------
MINORITY INTEREST 3,584,439 --
------------- -------------
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;
11,173,543 and 4,843,400 shares issued and outstanding 111,735 48,434
Additional paid-in capital 48,438,594 18,387,933
Retains earnings (deficit) (2,419,940) 19,482,857
------------- -------------
Total shareholders' equity 46,130,389 37,919,224
------------- -------------
Total liabilities and shareholders' equity $ 173,750,151 $ 106,238,779
============= =============
See notes to consolidated financial statements
23
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
----------- ----------- -----------
Revenue
Room revenue $42,403,970 $49,732,576 $44,821,763
Other hotel revenue 1,466,969 1,605,953 1,523,052
----------- ----------- -----------
Total hotel revenue 43,870,939 51,338,529 46,344,815
Percentage lease revenue 5,655,676 -- --
Other revenue 109,448 118,020 172,685
----------- ----------- -----------
Total revenue 49,636,063 51,456,549 46,517,500
----------- ----------- -----------
Expenses
Hotel operating expenses 26,268,442 29,835,439 28,008,486
Interest expense 5,068,791 4,122,443 4,605,548
Property operating expense 552,900 -- --
Depreciation 5,222,838 4,386,048 3,984,930
General and administrative 3,724,351 3,949,588 3,154,737
Transaction expense -- 708,143 --
Loss on sale of property
and impairment loss 1,402,305 92,910 67,302
----------- ----------- -----------
Total expenses 42,239,627 43,094,571 39,821,003
----------- ----------- -----------
Income before minority interest and income
Taxes 7,396,436 8,361,978 6,696,497
Minority interest 113,341 -- --
----------- ----------- -----------
Income before income taxes 7,283,095 8,361,978 6,696,497
Income taxes 1,694,675 3,344,787 2,594,832
----------- ----------- -----------
Net income $ 5,588,420 $ 5,017,191 $ 4,101,665
=========== =========== ===========
Basic earnings per common share $ 0.93 $ 1.04 $ 0.85
=========== =========== ===========
Diluted earnings per common share $ 0.93 $ 1.04 $ 0.85
=========== =========== ===========
See notes to consolidated financial statements
24
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
Common Stock Additional Retained
---------------- Paid in Earnings
Dollars Capital (Deficit) Total
---------------- -------------------- -------------------- -----------------
Balance at December 31, 1996 $ 48,400 $ 18,346,529 $ 10,364,001 $ 28,758,930
Net income - - 4,101,665 4,101,665
---------------- -------------------- -------------------- -----------------
Balance at December 31, 1997 48,400 18,346,529 14,465,666 32,860,595
Exercise of share options 34 41,404 - 41,438
Net income - - 5,017,191 5,017,191
---------------- -------------------- -------------------- -----------------
Balance at December 31, 1998 48,434 18,387,933 19,482,857 37,919,224
Exercise of share of options 1,888 1,941,984 - 1,943,872
Issuance of shares in merger,
net of registration costs 61,413 31,855,192 - 31,916,605
Adjustments to minority interest
from issuance of common
stock in merger - (3,601,344) - (3,601,344)
Merger costs paid - (145,171) - (145,171)
Dividends declared - - (27,491,217) (27,491,217)
Net income - - 5,588,420 5,588,420
---------------- -------------------- -------------------- -----------------
Balance at December 31, 1999 $111,735 $48,438,594 $(2,419,940) $46,130,389
================ ==================== ==================== =================
See notes to consolidated financial statements
25
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities
Net income $ 5,588,420 $ 5,017,191 $ 4,101,665
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 5,222,838 4,386,048 3,984,930
Amortization of loan costs 355,497 65,885 75,848
Minority interest 113,341 -- --
Loss on sale of hotel properties 102,305 92,910 67,302
Impairment loss 1,300,000 -- --
Deferred income taxes (926,075) 411,175 460,000
(Increase) decrease in assets
Accounts receivable (776,826) (271,159) (139,327)
Prepaid expenses and other current assets 80,147 104,589 (173,136)
Recoverable income taxes -- 148,925 55,878
Other assets 268,514 -- --
Increase (decrease) in liabilities
Accounts payable (5,040,317) 598,839 (14,887)
Income taxes payable 642,100 207,900 --
Other liabilities (39,587) 405,041 619,395
------------ ------------ ------------
Cash provided by operating activities 6,890,357 11,167,344 9,037,668
------------ ------------ ------------
Cash flows from investing activities
Additions to hotel properties (4,625,541) (5,348,533) (11,765,451)
Acquisition costs paid, net of cash received (692,056) -- --
Increase in intangibles and other assets -- (36,574) (218,649)
Proceeds from sale of property and equipment 24,940 12,937 27,334
------------ ------------ ------------
Cash used in investing activities (5,292,657) (5,372,170) (11,956,766)
------------ ------------ ------------
Cash flows from financing activities
Repayments of long-term debt (61,664,317) (51,077,263) (67,077,199)
Proceeds from long-term debt 76,264,305 47,262,147 72,592,352
Other financing sources -- (33,333) 448,611
Payment of financing fees (1,556,452) -- --
Merger costs paid (145,171) -- --
Proceeds from issuance of common stock, net 1,943,872 41,438 --
Dividends paid (27,130,701) -- --
------------ ------------ ------------
Cash (used in) provided by financing activities (12,288,464) (3,807,011) 5,963,764
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (10,690,764) 1,988,163 3,044,666
Cash and cash equivalents at beginning of year 11,520,593 9,532,430 6,487,764
------------ ------------ ------------
Cash and cash equivalents at end of year $ 829,829 $ 11,520,593 $ 9,532,430
============ ============ ============
See notes to consolidated financial statements
26
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
--------------------- ------------------- ------------------
Supplemental cash flow information Cash paid during the year for:
Interest (net of amortization of $355,497, $65,885
and $75,848, respectively, and interest capitalized
of $12,090 in 1998 and $156,101 in 1997) $ 4,587,860 $ 4,136,135 $ 4,686,198
===================== =================== ==================
Income taxes $ 1,978,650 $ 2,817,472 $ 2,078,594
===================== =================== ==================
</TABLE>
During 1999, the Company acquired 25 hotels pursuant to a merger in exchange for
6,541,843 shares of common stock and the assumption of indebtness, the
assets acquired and liabilities assumed at fair value are as follows:
Fair value of hotel properties acquired $ 74,248,434
Fair value of other assets acquired 3,681,359
Fair value of liabilities assumed (3,301,836)
Fair value of debt assumed (42,711,352)
---------------------
Fair value of net assets acquired $ 31,916,605
=====================
Dividends totaling $903,139 (including $65,123 to minority interest) were
declared and are payable as of December 31, 1999. Dividends declared during 1999
included $130,246 to the minority interest which have been deducted from the
minority interest on the balance sheet as of December 31, 1999.
See notes to consolidated financial statements
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Trust, Inc. (HHTI) was incorporated on August 23,
1994. The Company is a self-administered real estate investment trust (REIT) for
federal income tax purposes. As of December 31, 1999, Humphrey Hospitality
Trust, Inc., through various wholly-owned subsidiaries (collectively, the
Company), owns a controlling interest in 88 existing limited service Hotels
(containing 6,240 rooms) located in 19 states.
On October 26, 1999 (date of acquisition), HHTI completed a merger with
Supertel Hospitality, Inc. (Supertel). Supertel owned and operated limited
service hotel properties under the Super 8, Comfort Inn, and Wingate Inn
franchises located primarily in the Midwest and Texas. Under the merger
agreement, HHTI exchanged 1.3 shares of HHTI common stock for each share of
Supertel common stock. The merger was accounted for as a purchase for financial
reporting purposes and in accordance with the provisions of Accounting
Principles Board Opinion No. 16, "Business Combinations", Supertel was
considered the acquiring enterprise for financial reporting purposes.
Accordingly, the operating results of HHTI have been included in the Company's
financial statements since the date of acquisition. The Company established a
new accounting basis for HHTI's assets and liabilities based on their fair
values. Prior to the date of acquisition, the financial statements of the
Company include the hotel operations and historical information of Supertel;
subsequent to the date of acquisition, the hotel operations of Supertel are
leased to Supertel Hospitality Management, Inc. and are no longer reflected in
the Company's operating results. The Company has included expenditures related
directly to the merger and acquisition as part of the cost of acquiring HHTI's
assets and those expenditures in connection with the registration of the common
stock issued in the merger have been reflected as a reduction of paid in
capital.
The merger agreement provided for the stockholders of Supertel to
receive a pre-closing dividend of Supertel's earnings and profits, which was
paid by Supertel on October 25, 1999, in the amount of $5.13 per share. Under
the merger agreement, HHTI acquired the hotel assets of Supertel, consisting of
63 hotels (containing 4,558 rooms) and one office building, all of which are
leased to Supertel Hospitality Management, Inc., a subsidiary of Humphrey
Hospitality Management, Inc. (collectively, the Lessee). The Lessee also leases
and manages 25 other hotels owned by HHTI.
Principles of Consolidation
The consolidated financial statements as of December 31, 1999 include
the accounts of Humphrey Hospitality Trust, Inc., its wholly-owned subsidiaries,
Humphrey Hospitality REIT Trust, E & P REIT Trust, and E & P Financing Limited
Partnership (EPFLP), and its majority owned subsidiaries, Humphrey Hospitality
Limited Partnership (HHLP) and Solomons Beacon Inn Limited Partnership (SBILP)
(collectively, the Partnerships). As of December 31, 1999, Humphrey Hospitality
REIT Trust owned a 92.79% interest in HHLP, which owned a 99% general
partnership interest in SBILP, with HHTI owning the 1% limited partnership
interest. As of and for the years ended December 31, 1998 and 1997, the
consolidated financial statements herein include the accounts of Supertel
Hospitality, Inc. and its wholly-owned subsidiaries, which were Simplex, Inc.
and Motel Developers, Inc. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
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 20 to 40 years for buildings and 5 to 12 years for furniture,
fixtures and equipment. Maintenance and repairs are generally the responsibility
of the Lessee. Major replacements, renewals and improvements are capitalized.
Upon disposition, both the asset and accumulated depreciation accounts are
removed and the related gain or loss is credited or charged to 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 prepares a projection of the undiscounted future cash flows of the
specific hotel property and determines if the investment in the hotel property
is recoverable based on the undiscounted future cash flows. If impairment is
indicated, an adjustment is 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, except as disclosed in Note 2.
Cash and Cash Equivalents
Cash and cash equivalents includes cash and various highly liquid
investments with original maturities of three months or less when acquired,
carried at cost which approximates fair value.
Deferred Financing Costs
Deferred financing costs are being amortized using the straight-line
method, which approximates the effective interest method, over the terms of the
respective loans. The unamortized balance of loan costs associated with retired
debt is expensed upon repayment of the related debt.
During 1999, the Company changed its classification of amortization of
deferred loan costs. The Company previously classified amortization of deferred
loan costs as part of depreciation and amortization in the consolidated
statements of operations. During 1999, such amortization has been included in
interest expense; accordingly, the prior years' interest and depreciation and
amortization expense amounts have been reclassified to reflect this change.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Revenue Recognition
Prior to October 26, 1999, revenue was earned through the operations
and management of the hotel properties and was recognized when earned.
Subsequent to October 26, 1999, 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). The Company defers recognition of contingent rental
income until the specified target is met. All leases between the Company and the
Lessee are operating leases.
Minority Interest
Minority interest represents their proportionate share of the Company's
equity. The minority interest equaled 7.21% at December 31, 1999, and are owned
by various individuals and companies. Income is allocated to minority interest
based on the weighted average percentage ownership throughout the year.
Income Taxes
The Company intends to continue to qualify as a REIT under the Internal
Revenue Code. 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. During 1999, 29% of the distributions made were considered to be a
return of capital for Federal income tax purposes.
Prior to the date of acquisition, income taxes were accounted for under
the asset and liability method. Deferred tax assets and liabilities were
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities were measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences were expected to be recovered or settled. Deferred taxes were
eliminated after the merger.
Earnings Per Share
Basic net income per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed using the weighted average number of common shares outstanding
during the period and dilutive potential common shares outstanding during the
period.
Concentration of Credit Risk
The Company maintains its deposits, including its repurchase
agreements, with three major banks. At December 31, 1999, the balance reported
by two 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.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Disclosures About Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts and notes
receivable, accounts payable, and accrued expenses approximate fair value
because of the short maturity of these instruments. Management believes that the
carrying amounts of the Company's mortgages and bonds payable approximate fair
value as of December 31, 1999, as there was no significant change in the market
rate of interest between that date and the dates of the respective mortgages and
bonds.
New Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of this
statement to have a significant impact on the Company's financial position or
results of operations.
Reclassification
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation.
Note 2. Investment in Hotel Properties
Investment in hotel properties consisted of the following at December
31, 1999 and 1998:
December 31,
----------------------------------------
1999 1998
----------------------------------------
Land $ 23,907,265 $ 16,319,837
Buildings and improvements 141,588,659 79,407,625
Furniture and equipment 28,758,340 18,611,306
Vehicles 278,203 305,682
Construction-in-progress 1,656,859 811,358
----------------------------------------
$ 196,189,326 $ 115,455,808
========================================
During 1999, the Company recognized an impairment loss of $1,300,000 on
its hotel property located in Bullhead City, Arizona.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 3. Dividends Payable
On November 30, 1999 and December 31, 1999, the Company declared a
$.075 dividend on each share of common stock and on each unit of interest
outstanding on November 30, 1999 and December 31, 1999, respectively. The
dividends (including the distributions to minority interest) were paid on
December 29, 1999 and January 28, 2000, respectively.
Note 4. Long-Term Debt
Long-term debt at December 31, 1999 and 1998, consisted of the
following bonds, notes and mortgages payable:
<TABLE>
<CAPTION>
1999 1998
----------------------- -------------------
<S> <C>
Bonds payable with interest ranging from 7.74% to 9.79%, due in monthly
installments of $12,043, including interest, with maturities through January
2027. $ - $ 841,877
Notes payable with interest ranging from 5.45% to 9.25%, due in variable
installments, with maturities through November 2009. - 59,917,264
Mortgage payable to Norfolk Super 8 Motel, Inc., evidenced by a promissory note
dated November 1, 1994, in the amount of $1,240,000. The note bears interest
at 9.25% per annum payable in monthly installments of principal and interest
totaling $13,979 through maturity on November 1, 2009, when the outstanding
balance and accrued interest are due. 819,777 902,444
Bonds payable with interest at 8.5% per annum, maturing in varying amounts
through November 1, 2005. 2,220,000 -
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 4. Long-Term Debt (Continued)
1999 1998
--------------------- -------------------
Mortgage payable to Regions Bank, N.A., evidenced by a promissory note dated
August 5, 1998, in the amount of $3 million. The note bears interest during the
initial five-year period at 8.00% per annum and thereafter during the remaining
term at a rate equal to 250 basis points over the index rate as defined in the
promissory note. The interest rate will be adjusted every fifth anniversary.
Monthly principal and interest payments of $25,318, are payable through maturity
on August 5, 2018, when the remaining principal and accrued interest are due. 2,914,697 -
Mortgage payable to Susquehanna Bank evidenced by a promissory note dated
February 8, 1999, in the amount of approximately $5 million. The note bears
interest during the initial five-year period at 7.75% per annum and thereafter
during the remaining term at a rate equal to 275 basis points over the index rate
as defined in the promissory note. The interest rate will be adjusted on the
fifth anniversary. Monthly principal and interest payments of $38,174 are
payable through maturity on February 8, 2009, when the remaining principal and
accrued interest are due. 5,002,889 -
Mortgages payable to Marquette Capital Bank, N.A. ($16 million) and Bremer Bank,
National Association ($10 million) evidenced by promissory notes dated October
22, 1999. The notes bear interest at 8.69% per annum through July 2000 and 9.69%
thereafter, payable monthly with the outstanding principal and accrued interest
payable in full on October 22, 2000. 25,937,273 -
Mortgage payable for First National Bank of Omaha evidenced by a promissory note
in the amount of $15 million dated October 20, 1999. The note bears interest at
8.4% per annum payable monthly with the outstanding principal and accrued
interest payable in full on November 1, 2009. 14,975,774 -
Term loan credit facility from U.S. Bank National Association evidenced by a
promissory note in the amount of $13 million dated October 20, 1999. The note
bears interest at 8.31% per annum through year three and LIBOR plus 2.25%
thereafter. Principal and interest are payable monthly based on a fifteen-year
amortization period with the outstanding principal and accrued interest payable
in full on October 15, 2004. 12,980,221 -
Term loan credit facility from U.S. Bank National Association evidenced by a
promissory note in the amount of $10 million dated October 20, 1999. The note
bears interest at 8.53% per annum. Principal and interest are payable in monthly
installments of $99,634 with the outstanding principal and accrued interest
payable in full on October 15, 2004. 9,985,666 -
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 4. Long-Term Debt (Continued)
1999 1998
--------------------- ------------------
Revolving credit facility from U.S. Bank National Association evidenced by a
promissory note dated October 30, 1999 in the amount of $7 million ($5 million
thereafter). The note bears interest at LIBOR plus 1.75% per annum (7.58% at
December 31, 1999) payable monthly with the outstanding principal and accrued
interest payable in full on October 15, 2001. 4,955,349 -
Mortgage payable to Mercantile Bank National Association evidenced by a promissory
note in the amount of $6.7 million dated October 20, 1999. The note bears
interest at 8.3% per annum. Principal and interest are payable in monthly
installments of $57,577 with the outstanding principal and accrued interest
payable in full on October 31, 2004. 6,630,133 -
Mortgage payable to Bank Boston, N.A. under the terms of a $20 million line of
credit. The terms of the line of credit require monthly installments of interest
only at the base rate as determined in accordance with the loan agreement (7.67%
at December 31, 1999). The loan agreement requires payment of an annual fee of
$20,000 plus a quarterly fee ranging from .15% to .25% of the unused credit
facility. The outstanding principal balance plus any accrued interest are payable
in full on September 1, 2001. 11,151,146 -
Mortgage payable to Mercantile Safe Deposit and Trust Company under the terms of a
$25.5 million line of credit. 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, 1999). The outstanding principal plus accrued interest are payable
in full in April 2002. The first $2 million outstanding on the line is guaranteed
jointly and severally by the Company and James I. Humphrey. Jr. 21,400,000 -
--------------------- ------------------
$ 118,972,925 $ 61,661,585
===================== ==================
</TABLE>
The long-term debt is secured by most of the Company's hotel
properties. In addition, as of December 31, 1999, Messrs. Schulte and Borgmann
guaranteed, jointly and severally with the Company, the payment of interest and
principal on $5 million of the Company's outstanding long-term debt. The
Company's debt agreements contain requirements as to the maintenance of minimum
levels of debt service coverage and loan-to-value ratios and net worth, and
place certain restrictions on distributions.
The Company entered into an interest rate swap agreement to reduce the
impact of changes in interest rates on certain variable long-term debt. At
December 31, 1999, the Company had an outstanding swap agreement with
BankBoston, N.A. having a notional balance of approximately $11.2 million,
maturing September 1, 2001. The agreement effectively changes the Company's
interest rate exposure on the Bank-Boston, N.A. line of credit due September 1,
2001, to a fixed rate of 7.79%. The Company is exposed to credit losses in the
event of nonperformance by the bank, related to the interest rate swap
agreement. However, the Company does not anticipate nonperformance by the bank.
Amounts receivable or payable under the swap agreement are accounted for as
adjustments to interest expense on the related debt.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 4. Long-Term Debt (Continued)
On October 26, 1999, the Company recognized an extraordinary loss of
$208,331 due to the write-off of unamortized deferred loan costs in conjunction
with refinancing certain Supertel credit facilities as a result of the merger.
Aggregate annual principal payments and payments to bond sinking funds
for the five years following December 31, 1999, and thereafter are as follows:
December 31, 2000 $ 27,350,382
2001 6,530,615
2002 23,104,008
2003 1,843,483
2004 26,535,577
Thereafter 33,608,860
--------------------
$ 118,972,925
====================
Note 5. Income Taxes
Income tax expense for the years ended December 31, 1999, 1998, and
1997 consists of the following:
1999 1998 1997
-------------- -------------- --------------
Current
Federal $ 2,118,828 $2,374,832 $ 1,707,866
State 501,922 558,780 426,966
-------------- -------------- --------------
2,620,750 2,933,612 2,134,832
-------------- -------------- --------------
Deferred
Federal (772,083) 345,157 367,000
State (153,992) 66,018 93,000
--------------- -------------- --------------
(926,075) 411,175 460,000
--------------- -------------- --------------
$ 1,694,675 $ 3,344,787 $ 2,594,832
=============== ============== ==============
Income tax expense is reconciled with income taxes computed at the
Federal statutory rate of 34% for the years ended December 31, 1999,1998, and
1997 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
Tax expense computed
at the Federal statutory rate $ 2,514,788 $ 2,843,073 $ 2,276,809
State income tax, net
of Federal tax effect 331,269 412,367 343,178
Elimination of deferred income taxes (926,075) - -
Stock based compensation (144,189) - -
Other (81,118) 89,347 (25,155)
---------------- ---------------- ---------------
$ 1,694,675 $ 3,344,787 $ 2,594,832
================ ================ ===============
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 5. Income Taxes (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities at December 31, 1998, are presented
below:
Deferred tax liabilities
Book basis over tax basis on property
and equipment $ 835,565
Book basis over tax basis on other assets 90,510
------------------
Total deferred tax liabilities $ 926,075
==================
In conjunction with the merger and related transactions, the Company
had several significant events that affect income tax-related balances for the
year ended December 31, 1999. These events are summarized as follows:
|_| After the merger, the combined entity will qualify as a REIT for tax
purposes. REITs are generally not subject to Federal income taxes,
provided they comply with various requirements necessary to maintain
REIT status. Since the Company expects to maintain its REIT status, the
tax effect of cumulative temporary differences as of October 26, 1999,
has been reversed as a credit to deferred income tax expense and a
reduction in deferred income taxes payable. This reversal reduced
deferred income taxes payable by $926,075 as of October 26, 1999.
|_| REITs are subject to Federal income taxes in certain instances for
asset dispositions occurring within 10 years of acquisition by the
REIT. The Company has elected to defer and recognize any taxable gain
as a result of the sale of any Supertel assets resulting from the
built-in gain at the time of the merger. The Company does not expect to
incur significant Federal tax liability resulting from the disposition
of Supertel assets with built-in gain, if any.
|_| The Company has determined that it is generally not subject to state
and local income taxes in the jurisdictions in which the Company
operates hotels.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
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 SFAS
No. 128, Earnings Per Share:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per common share:
Net income $ 5,588,420 $ 5,017,191 $ 4,101,665
Weighted average number of
shares of common stock
outstanding 6,002,512 4,841,403 4,840,000
----------------------------------------------------------
$ 0.93 $ 1.04 $ 0.85
==========================================================
Diluted Earnings per common share
Net income $ 5,588,420 $ 5,017,191 $ 4,101,665
Minority interest 113,341 - -
----------------------------------------------------------
Adjusted income $ 5,701,761 $ 5,017,191 $ 4,101,665
==========================================================
Weighted average number of
shares of common stock
outstanding 6,002,512 4,841,403 4,840,000
Common stock equivalents
Operating partnership units 157,008 - -
----------------------------------------------------------
Total weighted average number
of diluted shares of common
stock outstanding 6,159,520 4,841,403 4,840,000
==========================================================
$ 0.93 $ 1.04 $ 0.85
==========================================================
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 7. Commitments and Contingencies and Related Party Transactions
As of December 31, 1999, James I. Humphrey, Jr., Humphrey Associates,
Inc., and Humphrey Development, Inc. (collectively, the Humphrey Affiliates) own
a combined total of 708,798 units of limited partnership interest in HHLP.
Pursuant to the Humphrey Hospitality Limited Partnership Agreement (the
Partnership Agreement), the Humphrey Affiliates have redemption rights, which
will enable them to cause HHTI to redeem their interests in the partnership in
exchange for shares of common stock or for cash at the election of the Company.
The Humphrey Affiliates may exercise the redemption rights at any time. At
December 31, 1999, the number of shares of common stock issuable to the Humphrey
Affiliates and non-affiliated unit holders upon exercise of the redemption
rights is 708,798 and 159,506, respectively. 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, non-affiliated unit holders or the shareholders of the
Company.
The Company acts as the general partner of HHLP (which acts as a
general partner of the SBILP) and the EPFLP 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.
As of December 31, 1999, the Company has entered into percentage leases
relating to 88 hotel properties owned (the Hotels) with Humphrey Hospitality
Management, Inc. and its wholly-owned subsidiary, Supertel Hospitality
Management, Inc. Each such 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
Hotels 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, the Company is required to make
available to the Lessee an amount equal to 6% of room revenue on a quarterly,
cumulative basis for capital improvements and refurbishments. Effective October
26, 1999, the Company executed a 10-year lease with the Supertel Hospitality
Management, Inc. for the office building located in Norfolk, Nebraska. The lease
provides for an annual rent of $100,000. The Company has future lease
commitments from the Lessee through October 26, 2009. Minimum future rental
income under these non-cancelable operating leases at December 31, 1999 is as
follows:
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 7. Commitments and Contingencies and Related Party Transactions (Continued)
Years ending
December 31, Rents
------------------------------ --------------------
2000 $ 15,078,839
2001 15,078,839
2002 15,078,839
2003 15,078,839
2004 14,944,376
Thereafter 57,638,170
--------------------
Total minimum lease payments $ 132,897,902
====================
The Company earned base rents of $2,661,999 and percentage rents of
$2,993,677 for the year ended December 31, 1999.
The Company executed an agreement with the Lessee to provide accounting
and securities reporting services for the Company. Effective with the date of
the merger, the terms of the agreement provide for a fixed fee of $300,000 per
year. For the period October 26, 1999 through December 31, 1999, $50,000 has
been charged to operations.
The Hotels are operated by the Lessee under franchise agreements that
may be terminated by either party on certain anniversary dates as specified in
the agreements. The agreements require annual payments for franchise royalties,
reservation and advertising services based upon percentages of gross room
revenue, which are paid by the Lessee.
The Company assumed a land lease agreement in conjunction with the
purchase of the Best Western Hotel, Harlan, Kentucky. The lease requires monthly
payments of the greater of $2,000 or 5% of room revenue through November 2091.
The Company also assumed a land lease agreement in conjunction with the purchase
of the Comfort Inn, Gettysburg, Pennsylvania. The lease requires an annual
payment of $35,000 through May 2025. For the period from October 26, 1999
through December 31, 1999, land lease expense totaled approximately $12,487 and
is included in property operating expense.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 7. Commitments and Contingencies and Related Party Transactions (Continued)
As of December 31, 1999, the future minimum lease payments applicable
to non-cancelable land leases are as follows:
Years ending December 31, 2000 $ 59,000
2001 59,000
2002 59,000
2003 59,000
2004 59,000
Thereafter 2,860,000
----------------
$ 3,155,000
================
On June 14, 1999, Humphrey Hospitality Management d/b/a Best Western
Suites-Key Largo and Humphrey Hospitality Limited Partnership were served a
lawsuit filed by the Association for Disabled Americans, Inc., Daniel Ruiz and
Jorge Luis Rodriguez. The case is pending in the United States District Court
for the Southern District of Florida (Case No.: 99-10066). The case alleges
various violations of the Americans with Disabilities Act regarding
accessibility of the hotel for disabled citizens. An answer was filed in this
case. The case requests injunctive relief, including altering the subject
premises, closing the premises until the modifications are completed and
attorneys' fees and costs. An investigation is underway regarding the
allegations contained in this case. A proposed settlement agreement has been
received by the Company and is currently being reviewed.
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 Note 7 for a discussion of the units issued and
the redemption rights of minority interest shareholders with respect to 868,304
units that are redeemable on a one-for-one basis for shares of common stock.
None of the units discussed in Note 7 have been redeemed. The total market value
of these units at December 31, 1999, based on the last reported sales price of
the common stock on The Nasdaq Stock Market of $7.81, was approximately $6.78
million.
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, 1999 and 1998, no preferred stock was issued.
Presently, members of the Board of Directors own approximately 23% of
the Company's outstanding common shares.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 8. Capital Stock (Continued)
On June 11, 1999, HHTI and Supertel entered into an agreement and plan
of merger. Pursuant to the merger agreement, Supertel stockholders received 1.3
shares of HHTI common stock for each share of Supertel common stock owned. To
effect the merger, HHTI issued 6,541,843 shares, valued at approximately $32.5
million on the effective date of the merger, to former Supertel stockholders. As
a result, following the merger, the former Supertel stockholders own
approximately 59% of the outstanding HHTI common stock.
Note 9. Pro forma Financial Information (Unaudited)
The following unaudited pro forma summary financial information
presents information as if the merger had occurred and all 88 hotels had been
owned at the beginning of the periods presented and leased to the Lessee
pursuant to the Percentage Lease Agreements. The pro forma summary financial
information does not purport to present what actual results of operations would
have been if the merger had occurred and the leases executed on such date or to
project results for any future period. Additionally, the Pro Forma Consolidated
Statements of Income are presented without consideration of the gain on the sale
of and the impairment loss on HHTI hotel properties, which occurred in 1998.
Pro Forma (Unaudited)
----------------------------------------
(In thousands)
----------------------------------------
1999 1998
----------------------------------------
Total revenue $ 33,586,000 $ 31,451,000
Net income $ 8,924,000 $ 9,454,000
Diluted EPS $ 0.81 $ 0.88
Note 10. Stock Option Plan
Supertel adopted stock option plans in 1997 and 1994, whereby stock
options were offered at the discretion of the compensation committee of the
Board of Directors to key employees to purchase shares of common stock of
Supertel. Also, each non-employee Director received annually an option to
acquire 1,500 shares of common stock. Options for an aggregate of 400,000 common
shares could be granted and all shares subject to options were to be purchased
at a price not less than the fair market value at the date the options were
granted. All options outstanding under the Supertel stock option plans were
exercised or forfeited prior to the completion of the merger.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 10. Stock Option Plan (Continued)
The per share weighted average fair value of stock options granted
during 1998 and 1997 was $3.79 and $3.99, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted average
assumptions: 1998 - expected dividend yield of 0%, risk-free interest rate of
5%, and an expected life of five years; and 1997 - expected dividend yield of
0%, risk-free interest rate of 6%, and an expected life of five years.
Supertel applied APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had Supertel determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net income would have been reduced to the pro forma amounts
indicated below:
December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
Net income
As reported $ 5,588,420 $ 5,017,191 $ 4,101,665
Pro forma $ 5,588,420 $ 4,886,291 $ 4,019,955
Net income per share - basic
As reported $ 0.93 $ 1.04 $ 0.85
Pro forma $ 0.93 $ 1.01 $ 0.83
Net income
As reported $ 5,701,761 $ 5,017,191 $ 4,101,665
Pro forma $ 5,701,761 $ 4,886,291 $ 4,019,955
Net income per share - diluted
As reported $ 0.93 $ 1.04 $ 0.85
Pro forma $ 0.93 $ 1.01 $ 0.83
Pro forma net income reflects only options granted in 1999, 1998, and
1997, therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above, because compensation cost is reflected over the options'
vesting period of twelve months, and compensation cost for options granted prior
to January 1, 1995 is not considered.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Humphrey Hospitality Trust, Inc.
Note 10. Stock Option Plan (Continued)
The changes in the outstanding stock options during the three years
ended December 31, 1999, are summarized below:
Number of Option price per
options share range
---------------- ----------------
Options outstanding at December 31, 1996 72,900 $ 10.00 to $13.75
Granted 59,700 8.50 to 10.00
Canceled (19,900) 10.00 to 13.50
----------------
Options outstanding at December 31, 1997 112,700 8.50 to 13.75
Granted 57,600 10.75 to 13.03
Exercised (3,400) 10.00 to 11.125
Canceled (4,100) 10.00 to 13.50
----------------
Options outstanding at December 31, 1998 162,800 8.50 to 13.75
Granted 29,200 9.125 to 9.75
Exercised (188,800) 8.50 to 13.75
Canceled (3,200) 10.00 to 13.50
----------------
Options outstanding at December 31, 1999 -
================
Note 11. Profit Sharing Plan
Beginning in July 1996, the Company began sponsoring a non-standardized
401(k) profit sharing plan and trust, covering certain eligible full-time
employees. In January 1998, the plan was expanded to include all eligible
full-time and part-time employees. The Company contributions provided for by the
plan equal 50% of the participants' contributions not to exceed 5% of the
participant's compensation. The Company contributed and expensed approximately
$90,500, $310,000 and $41,000 in 1999, 1998, and 1997 respectively. Effective
October 26, 1999, the employees of Supertel were terminated and rehired by
Supertel Hospitality Management, Inc. Accordingly, the profit sharing plan and
related assets were transferred to Supertel Hospitality Management, Inc.
Note 12. Transaction Expense
In 1998, the Company incurred legal, accounting, investment banking,
environmental, and title expenses of $708,000 relating to a terminated merger
agreement, and all related expenses are included in the accompanying
consolidated financial statements as a separate component of operating expenses.
43
<PAGE>
<TABLE>
HUMPHREY HOSPITALITY TRUST, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
<CAPTION>
Cost Subsequent
Initial Cost to Acquisition
------------------------------------------------------------------------
Encum-
Location `brances Buildings & Buildings &
Hotel Description (e) Land Improvements Land Improvements
- ------------------------------------- ------------ --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Comfort Inns:
Minocqua, Wisconsin USR 214,505 1,458,389 - 17,532
Sheboygan, Wisconsin USR 286,970 1,716,782 - 43,996
Chambersburg, Pennsylvania MER 89,000 2,346,362 - -
Culpeper, Virginia MER 182,264 2,142,652 - -
Dahlgren, Virginia BBL 327,514 2,489,390 - -
Dublin, Virginia CRE 152,239 3,700,710 - -
Farmville, Virginia MER 253,618 2,162,087 - -
Gettysburg, Pennsylvania SUS - 4,158,453 - -
Morgantown, West Virginia MER 398,322 3,853,651 - -
Murphy, North Carolina MER 333,394 2,185,659 - -
New Castle, Pennsylvania MER 56,648 4,101,254 - -
Princeton, West Virginia BBL 387,567 1,774,501 - -
Rocky Mount, Virginia MER 193,841 2,162,429 - -
Solomons, Maryland MER 2,303,990 2,988,255 - -
Wingate Inns:
Las Colinas, Texas MAR 953,955 4,823,525 - 16,101
Houston, Texas MAR 372,021 4,622,107 - 4,876
Super 8:
Creston, Iowa MAR 56,000 840,580 89,607 1,868,308
Columbus, Nebraska USE 51,716 571,178 51,666 518,226
O'Neill, Nebraska MAR 75,000 667,074 46,075 943,695
Omaha, Nebraska FNB 164,034 1,053,620 - 775,045
Lincoln, Nebraska USE 139,603 1,234,988 63,153 670,843
Lincoln, Nebraska USE 226,174 1,068,520 271,817 1,444,627
Keokuk, Iowa MAR 55,000 642,783 71,175 299,886
Iowa City, Iowa MAR 227,290 1,280,365 - 99,215
Oskaloosa, Iowa USE 61,389 453,573 - 269,082
Omaha, Nebraska UST 203,453 1,054,497 - 79,026
Kirksville, Missouri MRC 151,225 830,457 - 67,397
Burlington, Iowa MAR 145,000 867,116 - 59,705
Sedalia, Missouri MRC 185,025 917,809 - 431,305
Hays, Kansas FNB 317,762 1,133,765 19,519 19,562
Moberly, Missouri USE 60,000 1,075,235 - 70,124
Pittsburg, Kansas MAR 130,000 852,131 - 56,188
Manhattan, Kansas FNB 261,646 1,254,175 - 200,508
Clinton, Iowa MAR 135,153 805,067 - 82,381
Marshall, Missouri USE 90,784 554,497 27,633 261,578
Mt. Pleasant, Iowa MAR 85,745 536,064 21,507 261,683
Wichita, Kansas FNB 435,087 1,806,979 - 97,375
Kingdom City, Missouri FNB 176,970 877,287 - 22,211
Lenexa, Kansas USE 454,113 1,722,866 - 84,807
Pella, Iowa MAR 61,853 664,610 - 40,313
Storm Lake, Iowa MAR 90,033 819,202 33,394 342,361
44
<PAGE>
<CAPTION>
Cost Subsequent
Initial Cost to Acquisition
------------------------------------------------------------------------
Encum-
Location `brances Buildings & Buildings &
Hotel Description (e) Land Improvements Land Improvements
- ------------------------------------- ------------ --------------------------------------------------------
West Plains, Missouri USE 112,279 861,178 - 42,989
Russellville, Arkansas MRC 161,576 973,413 - 67,549
Jefferson City, Missouri USE 264,707 1,206,886 - 107,002
Garden City, Kansas FNB 40,258 917,334 - 215,265
El Dorado, Kansas FNB 96,764 418,333 466 414,651
Mountain Home, Arkansas MRC 94,471 682,656 - 5,437
Wayne, Nebraska FNB 79,127 685,135 - 19,456
Batesville, Arkansas MRC 81,483 811,371 - 20,964
Fayetteville, Arkansas MRC 255,731 1,549,271 - 16,271
Omaha, Nebraska UST 593,518 1,758,275 - 33,556
College Station, Texas UST 454,599 1,939,879 - 10,946
Waco, Texas UST 211,821 1,628,629 - 106,583
Watertown, South Dakota FNB 51,237 1,296,312 - 248,379
Norfolk, Nebraska USR 226,971 1,587,581 - 256,566
Park City, Kansas FNB 275,962 891,933 - 318,540
Muscatine, Iowa UST 204,890 1,616,090 - 49,098
Fort Madison, Iowa USR 104,855 871,075 - 31,476
Macomb, Illinois USR 103,881 1,179,572 - 136,244
Irving, Texas UST 582,978 2,192,636 - 6,631
Jacksonville, Illinois USR 110,798 925,121 29,439 134,852
Plano, Texas UST 510,860 2,334,731 - 8,313
McKinney, Texas MAR 357,072 1,738,864 3,650 21,888
Denton, Texas MAR 458,916 1,841,064 - 5,560
Parsons, Kansas FNB 167,849 1,195,484 - 31,595
Grapevine, Texas MAR 733,685 2,300,227 - 8,706
Wichita Falls, Texas UST 623,781 2,203,971 - 21,703
Bedford, Texas USR 611,489 2,313,572 - 96,676
Portage, Wisconsin MAR 203,032 1,839,321 - 27,653
Antigo, Wisconsin USR 234,605 1,485,579 - 38,631
Shawano, Wisconsin - 244,935 1,672,123 - 17,133
Tomah, Wisconsin USR 211,975 2,079,714 - 67,434
Menomonie, Wisconsin MAR 451,520 2,398,446 - 14,066
Neosho, Missouri USE 232,000 1,416,216 - 8,154
River Valley Suites
Bullhead City, Arizona USR 166,456 917,667 - 386,474
Holiday Inn Express
Allentown, Pennsylvania MER 83,073 2,695,886 - -
Danville, Kentucky MER 155,717 2,971,403 - -
Gettysburg, Pennsylvania SUS 59,634 1,832,171 - -
45
<PAGE>
<CAPTION>
Cost Subsequent
Initial Cost to Acquisition
------------------------------------------------------------------------
Encum-
Location `brances Buildings & Buildings &
Hotel Description (e) Land Improvements Land Improvements
- ------------------------------------- ------------ --------------------------------------------------------
Hampton Inn
Cleveland, Tennessee BBL 212,914 2,370,499 - -
Jackson, Tennessee BBL 261,506 3,430,541 - -
Shelby, North Carolina BBL 253,921 2,782,042 - -
Brandon, Florida REG 322,203 3,150,779 - -
Comfort Suites
Dover, Delaware BBL 337,113 5,179,187 - -
Best Western
Ellentown, Florida BBL 546,945 2,293,464 - -
Harlan, Kentucky MER - 2,949,276 - -
Best Western Suites
Key Largo, Florida BBL 339,425 3,238,530 - -
Shoney's Inn
Ellentown, Florida BBL 290,373 2,102,371 - -
Days Inn
Farmville, Virginia MER 384,591 1,967,727 - -
--------------------------------------------------------
Subtotal Hotel Properties 23,109,399 156,967,179 729,101 12,144,397
--------------------------------------------------------
Construction in Progress - - - 1,656,858
Norfolk Office 68,765 1,516,627 - -
--------------------------------------------------------
Total 23,178,164 158,480,806 729,101 13,801,255
========================================================
46
<PAGE>
<CAPTION>
Gross Amount at the End of the Year
-------------------------------------------
Location Buildings & Accumulated Net Year
Hotel Description Land Improvements Depreciation Book Value Acquired Life
- ------------------------------------- --------------------------------------------------------------------------
Comfort Inns:
Minocqua, Wisconsin 214,505 1,475,921 173,197 1,517,229 1996 (d)
Sheboygan, Wisconsin 286,970 1,760,778 211,133 1,836,615 1996 (d)
Chambersburg, Pennsylvania 89,000 2,346,362 145,601 2,289,761 1997 (d)
Culpeper, Virginia 182,264 2,142,652 59,162 2,265,754 1997 (d)
Dahlgren, Virginia 327,514 2,489,390 132,995 2,683,909 1994 (d)
Dublin, Virginia 152,239 3,700,710 229,539 3,623,410 1994 (d)
Farmville, Virginia 253,618 2,162,087 123,022 2,292,683 1994 (d)
Gettysburg, Pennsylvania - 4,158,453 244,405 3,914,048 1997 (d)
Morgantown, West Virginia 398,322 3,853,651 257,629 3,994,344 1994 (d)
Murphy, North Carolina 333,394 2,185,659 137,147 2,381,906 1997 (d)
New Castle, Pennsylvania 56,648 4,101,254 168,269 3,989,633 1997 (d)
Princeton, West Virginia 387,567 1,774,501 105,145 2,056,923 1994 (d)
Rocky Mount, Virginia 193,841 2,162,429 82,425 2,273,845 1998 (d)
Solomons, Maryland 2,303,990 2,988,255 289,006 5,003,239 1994 (d)
Wingate Inns:
Las Colinas, Texas 953,955 4,839,626 762,366 5,031,215 1997 (d)
Houston, Texas 372,021 4,626,983 622,778 4,376,226 1997 (d)
Super 8:
Creston, Iowa 145,607 2,708,888 622,536 2,231,959 1978 (d)
Columbus, Nebraska 103,382 1,089,404 468,089 724,697 1981 (d)
O'Neill, Nebraska 121,075 1,610,769 418,398 1,313,446 1982 (d)
Omaha, Nebraska 164,034 1,828,665 864,625 1,128,074 1983 (d)
Lincoln, Nebraska 202,756 1,905,831 753,253 1,355,334 1983 (d)
Lincoln, Nebraska 497,991 2,513,147 826,758 2,184,380 1983 (d)
Keokuk, Iowa 126,175 942,669 424,447 644,397 1985 (d)
Iowa City, Iowa 227,290 1,379,580 650,501 956,369 1985 (d)
Oskaloosa, Iowa 61,389 722,655 319,338 464,706 1985 (d)
Omaha, Nebraska 203,453 1,133,523 526,926 810,050 1986 (d)
Kirksville, Missouri 151,225 897,854 400,107 648,972 1986 (d)
Burlington, Iowa 145,000 926,821 427,745 644,076 1986 (d)
Sedalia, Missouri 185,025 1,349,114 496,936 1,037,203 1987 (d)
Hays, Kansas 337,281 1,153,327 498,529 992,079 1987 (d)
Moberly, Missouri 60,000 1,145,359 502,628 702,731 1987 (d)
Pittsburg, Kansas 130,000 908,319 377,768 660,551 1987 (d)
Manhattan, Kansas 261,646 1,454,683 560,465 1,155,864 1987 (d)
Clinton, Iowa 135,153 887,448 365,729 656,872 1988 (d)
Marshall, Missouri 118,417 816,075 294,313 640,179 1988 (d)
Mt. Pleasant, Iowa 107,252 797,747 322,096 582,903 1988 (d)
Wichita, Kansas 435,087 1,904,354 715,737 1,623,704 1989 (d)
Kingdom City, Missouri 176,970 899,498 378,714 697,754 1989 (d)
Lenexa, Kansas 454,113 1,807,673 687,098 1,574,688 1989 (d)
Pella, Iowa 61,853 704,923 262,320 504,456 1990 (d)
Storm Lake, Iowa 123,427 1,161,563 351,552 933,438 1990 (d)
44
<PAGE>
<CAPTION>
Gross Amount at the End of the Year
-------------------------------------------
Location Buildings & Accumulated Net Year
Hotel Description Land Improvements Depreciation Book Value Acquired Life
- ------------------------------------- --------------------------------------------------------------------------
West Plains, Missouri 112,279 904,167 319,967 696,479 1990 (d)
Russellville, Arkansas 161,576 1,040,962 367,757 834,781 1991 (d)
Jefferson City, Missouri 264,707 1,313,888 450,702 1,127,893 1991 (d)
Garden City, Kansas 40,258 1,132,599 356,454 816,403 1991 (d)
El Dorado, Kansas 97,230 832,984 274,745 655,469 1992 (d)
Mountain Home, Arkansas 94,471 688,093 239,983 542,581 1992 (d)
Wayne, Nebraska 79,127 704,591 232,452 551,266 1992 (d)
Batesville, Arkansas 81,483 832,335 256,822 656,996 1992 (d)
Fayetteville, Arkansas 255,731 1,565,542 461,339 1,359,934 1993 (d)
Omaha, Nebraska 593,518 1,791,831 470,536 1,914,813 1993 (d)
College Station, Texas 454,599 1,950,825 475,556 1,929,868 1994 (d)
Waco, Texas 211,821 1,735,212 439,384 1,507,649 1994 (d)
Watertown, South Dakota 51,237 1,544,691 297,759 1,298,169 1994 (d)
Norfolk, Nebraska 226,971 1,844,147 324,705 1,746,413 1994 (d)
Park City, Kansas 275,962 1,210,473 266,445 1,219,990 1994 (d)
Muscatine, Iowa 204,890 1,665,188 278,384 1,591,694 1995 (d)
Fort Madison, Iowa 104,855 902,551 191,779 815,627 1995 (d)
Macomb, Illinois 103,881 1,315,816 223,637 1,196,060 1995 (d)
Irving, Texas 582,978 2,199,267 497,436 2,284,809 1995 (d)
Jacksonville, Illinois 140,237 1,059,973 182,822 1,017,388 1995 (d)
Plano, Texas 510,860 2,343,044 447,007 2,406,897 1995 (d)
McKinney, Texas 360,722 1,760,752 329,882 1,791,592 1995 (d)
Denton, Texas 458,916 1,846,624 328,534 1,977,006 1996 (d)
Parsons, Kansas 167,849 1,227,079 173,185 1,221,743 1996 (d)
Grapevine, Texas 733,685 2,308,933 411,562 2,631,056 1996 (d)
Wichita Falls, Texas 623,781 2,225,674 390,459 2,458,996 1996 (d)
Bedford, Texas 611,489 2,410,248 395,591 2,626,146 1996 (d)
Portage, Wisconsin 203,032 1,866,974 264,929 1,805,077 1996 (d)
Antigo, Wisconsin 234,605 1,524,210 185,489 1,573,326 1996 (d)
Shawano, Wisconsin 244,935 1,689,256 202,975 1,731,216 1996 (d)
Tomah, Wisconsin 211,975 2,147,148 264,481 2,094,642 1996 (d)
Menomonie, Wisconsin 451,520 2,412,512 217,137 2,646,895 1997 (d)
Neosho, Missouri 232,000 1,424,370 79,467 1,576,903 1998 (d)
River Valley Suites
Bullhead City, Arizona 166,456 1,304,141 641,372 829,225 1984 (d)
Holiday Inn Express
Allentown, Pennsylvania 83,073 2,695,886 265,771 2,513,188 1997 (d)
Danville, Kentucky 155,717 2,971,403 207,779 2,919,341 1997 (d)
Gettysburg, Pennsylvania 59,634 1,832,171 162,868 1,728,937 1997 (d)
45
<PAGE>
<CAPTION>
Gross Amount at the End of the Year
-------------------------------------------
Location Buildings & Accumulated Net Year
Hotel Description Land Improvements Depreciation Book Value Acquired Life
- ------------------------------------- --------------------------------------------------------------------------
Hampton Inn
Cleveland, Tennessee 212,914 2,370,499 90,914 2,492,499 1998 (d)
Jackson, Tennessee 261,506 3,430,541 214,744 3,477,303 1998 (d)
Shelby, North Carolina 253,921 2,782,042 141,054 2,894,909 1998 (d)
Brandon, Florida 322,203 3,150,779 154,242 3,318,740 1998 (d)
Comfort Suites
Dover, Delaware 337,113 5,179,187 313,537 5,202,763 1997 (d)
Best Western
Ellentown, Florida 546,945 2,293,464 51,616 2,788,793 1978 (d)
Harlan, Kentucky - 2,949,276 177,477 2,771,799 1997 (d)
Best Western Suites
Key Largo, Florida 339,425 3,238,530 216,878 3,361,077 1997 (d)
Shoney's Inn
Ellentown, Florida 290,373 2,102,371 78,356 2,314,388 1998 (d)
Days Inn
Farmville, Virginia 384,591 1,967,727 193,331 2,158,987 1995 (d)
---------------------------------------------------------
Subtotal Hotel Properties 23,838,500 169,111,576 29,469,728 163,480,348
---------------------------------------------------------
Construction in Progress - 1,656,858 - 1,656,858
Norfolk Office 68,765 1,516,627 720,048 865,344 (d)
---------------------------------------------------------
Total 23,907,265 172,282,061 30,189,776 165,999,550
=========================================================
</TABLE>
46
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
Total
------------
ASSET BASIS
(a) Balance @ 12/31/97 $110,664,563
Additions to building and improvements 5,348,740
Disposition of building and improvements (557,495)
------------
Balance @ 12/31/98 115,455,808
Acquisition of building and improvements 79,039,172
Additions to building and improvements 7,049,521
Disposition of building and improvements (3,710,175)
Impairment loss (1,645,000)
------------
Balance @ 12/31/99 $196,189,326
============
$78,347,116 of acquisition of building and improvements consists of
non-cash activity as a result of the merger.
Total
------------
ACCUMULATED DEPRECIATION
(b) Balance @ 12/31/97 19,086,258
Depreciation for the period ended 12/31/98 4,386,048
Depreciation on assets sold (452,010)
------------
Balance @ 12/31/98 23,020,296
Depreciation for the period ended 12/31/98 5,222,838
Depreciation on acquisition of Building &
Improvements 3,629,741
Impairment loss (345,000)
Depreciation on assets sold (1,338,099)
------------
Balance @ 12/31/99 $30,189,776
============
(c ) The aggregate cost of land, buildings, furniture and equipment for
Federal income tax purposes is approximately $190,334,000.
(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 mortgages payable on most of the properties as
described. Additional mortgage information can be found in the notes to
the consolidated financial statements.
Encumbrance codes refer to the following lenders:
USR = US Bank Revolver UST = US Bank Term Loan
USE = US Bank E&P Term Loan FNB = First National Bank of Omaha E&P
MAR = Marquette Bancshares MRC = Mercantile Bank (St. Louis)
BER = Bertha Wetzler Note BBL = Bank Boston Line of Credit
MER = Mercantile Bank (MD) Line CRE = Crestar Bond
REG = Regions Bank (FLA) SUS = Susquehanna Bank
47
<PAGE>
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
Information concerning the directors and executive officers of the
Company is incorporated by reference from the Company's Proxy Statement
for the 2000 Annual Meeting of Stockholders (the "2000 Proxy
Statement") under the caption "Election of Directors."
Item 11. Executive Compensation
Information regarding executive compensation is incorporated by
reference from the 2000 Proxy Statement under the caption "Executive
Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding the stock ownership of each person known to the
Company to be the beneficial owner of more than 5% of the Common Stock,
of each director and executive officer of Humphrey Hospitality Trust,
Inc., and all directors and executive officers as a group, is
incorporated by reference from the 2000 Proxy Statement under the
caption "Beneficial Ownership of Common Stock."
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
incorporated by reference from the 2000 Proxy Statement under the
caption "Certain Relationships and Related Transactions."
48
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Financial Statements
Humphrey Hospitality Management, Inc.
Independent Auditors' Report 53
Consolidated Balance Sheets as of December 31, 1999 and
1998 54
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 55
Consolidated Statements of Shareholder's Equity for the
Years Ended December 31, 1999, 1998 and 1997 56
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 57
Notes to Consolidated Financial Statements 58
Humphrey Hospitality Trust, Inc.
Selected Pro Forma Financial Data 64
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
Current Report on Form 8-K filed November 2, 1999.
(c) Exhibits
2.1 Agreement and Plan of Merger dated June 11, 1999 between the Company and
Supertel Hospitality, Inc. (incorporated by reference to the Company's Current
Report on Form 8-K filed on June 14, 1999).
3.1 Second Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to the Company's Quarterly Report on Form 10-Q/A
filed on December 10, 1999).
3.2 Third Amended and Restated Bylaws of the Registrant (incorporated by
reference to the Company's Quarterly Report on Form 10-Q/A filed on December 10,
1999).
10.1 Declaration of Trust of Humphrey Hospitality REIT Trust (incorporated by
reference to the Company's Registration Statement on Form S-11 (Registration No.
333-48583)).
10.2 Bylaws of Humphrey Hospitality REIT Trust (incorporated by reference to the
Company's Registration Statement on Form S-11 (Registration No. 333-48583)).
10.3 Declaration of Trust of E&P REIT Trust.
10.4 Bylaws of E&P REIT Trust.
10.5 Second Amended and Restated Agreement of Limited Partnership of Humphrey
Hospitality Limited Partnership (incorporated by reference to the Company's
Registration Statement on Form S-11 (Registration No. 333-48583)).
10.6 Second Amended and Restated Agreement of Limited Partnership of Solomons
Beacon Inn Limited Partnership (incorporated by reference to the Company's
Registration Statement on Form S-11 (Registration No. 33-93346)).
10.7 Agreement of Limited Partnership of E&P Financing Limited Partnership.
10.8 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
Company's Registration Statement on Form S-11 (Registration No. 333-48583)).
49
<PAGE>
10.9 Agreement of Purchase and Sale dated March 26, 1997, between 144 Associated
Limited Partnership and Humphrey Hospitality Limited Partnership for the Holiday
Inn Express-Gettysburg, Pennsylvania (incorporated by reference to the Company's
Registration Statement on Form S-11 (Registration No. 333-48583)).
10.10 Purchase Agreement 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 the Company's
Registration Statement on Form S-11 (Registration No. 333-48583)).
10.11 Purchase Agreement, dated March 26, 1997, between 544 Associates Limited
Partnership and Humphrey Hospitality Limited Partnership for the Comfort
Inn-Chambersburg, Pennsylvania Hotel (incorporated by reference to the Company's
Registration Statement on Form S-11 (Registration No. 333-48583)).
10.12 Option Agreement (incorporated by reference to the Company's Registration
Statement on Form S-11 (Registration No. 33-83658)).
10.13 Non-Competition Agreement (incorporated by reference to the Company's
Registration Statement on Form S-11 (Registration No. 33-83658)).
10.14 Services Agreement dated as of January 1, 1996 between the Company and
Humphrey Hospitality Management, Inc. (incorporated by reference to the
Company's Registration Statement on Form S-11 (Registration No. 333-15897)).
10.15 First Amendment to Services Agreement, dated as of October 1, 1996,
between the Company and Humphrey Hospitality Management, Inc. (incorporated by
reference to the Company's Registration Statement on Form S-11 (Registration No.
333-15897)).
10.16 Second Amendment to Services Agreement, dated as of October 26, 1999,
between the Company and Humphrey Hospitality Management, Inc.
10.17 Development Services Agreement, dated as of April 4, 1996, between
Humphrey Hospitality Limited Partnership and Humphrey Development (incorporated
by reference to the Company's Registration Statement on Form S-11 (Registration
No. 333-15897)).
10.18 First Amendment to Development Services Agreement dated November 6, 1996
between the Partnership and Humphrey Development (incorporated by reference to
the Company's Registration Statement on Form S-11 (Registration No. 333-15897)).
10.19 Agreement of Purchase and Sale dated May 31, 1998 between Allen
Investments, Inc. and Humphrey Hospitality Limited Partnership for the Best
Western - Ellenton, FL, the Shoney's Inn, Ellenton, FL and the Hampton Inn,
Brandon, FL (incorporated by reference to the Company's Current Report on Form
8-K/A filed August 6, 1998).
10.20 Revolving Credit and Guaranty Agreement dated August 18,1998 among the
Company, Humphrey Hospitality Limited Partnership, Humphrey Hospitality REIT
Trust and Solomons Beacon Limited Partnership and BankBoston, N.A. and other
banks that may become parties to the agreement (incorporated by reference to the
Company's Quarterly Report on Form 10-K405 filed on March 31, 1999).
10.21 First Amendment to BankBoston Revolving Credit and Guaranty Agreement
dated November 30, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K405 filed on March 31, 1999).
10.22 Right of First Opportunity Agreement dated June 10, 1999, between the
Company, Humphrey Hospitality Limited Partnership and Humphrey Hospitality
Management, Inc. (incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on August 5, 1999).
10.23 Non-Competition Agreement between the Company, Humphrey Hospitality
Limited Partnership, Humphrey Hospitality REIT Trust and Steve H. Borgmann.
10.24 Non-Competition Agreement between the Company, Humphrey Hospitality
Limited Partnership and Humphrey Hospitality REIT Trust and Paul J. Schulte.
10.25 [New Loan Agreement(s)]
21.1 Subsidiaries
27.1 Financial Data Schedule
50
<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/ Paul J. Schulte
----------------------------
March 29, 2000 Paul J. Schulte
Chairman of the Board and Chief
Executive Officer
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/ Paul J. Schulte
-----------------------------
Paul J. Schulte
Chairman of the Board and Chief Executive Officer
Principal Executive Officer
By: /s/ James I. Humphrey, Jr.
-----------------------------
James I. Humphrey, Jr.
Vice Chairman, Chief Operating Officer and Treasurer
Principal Financial Officer
By: /s/ Steve H. Borgmann
-----------------------------
Steve H. Borgmann
Executive Vice President & Secretary
By: /s/ Loren Steele
-----------------------------
Loren Steele
Director
By: /s/ Joseph Caggiano
-----------------------------
Joseph Caggiano
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 29, 2000.
51
<PAGE>
Humphrey Hospitality Management, Inc. and Subsidiary
Financial Statements
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Humphrey Hospitality Management, Inc.
We have audited the accompanying consolidated balance sheets of
Humphrey Hospitality Management, Inc. and Subsidiary, as of December 31, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Humphrey
Hospitality Management, Inc. and Subsidiary, as of December 31, 1999 and 1998,
and the results of its operations, the changes in shareholders' equity (deficit)
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with generally accepted accounting principles.
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
March 24, 2000
53
<PAGE>
<TABLE>
Humphrey Hospitality Management, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<CAPTION>
ASSETS
1999 1998
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,056,775 $ 3,262,524
Accounts receivable 1,390,110 349,133
Due from affiliates 55,172 40,403
Prepaid expenses 314,767 41,095
Other assets 133,827 71,973
----------------- -----------------
Total current assets 6,950,651 3,765,128
PROPERTY AND EQUIPMENT, net of accumulated
Depreciation of $7,844 31,378 -
----------------- -----------------
Total assets $ 6,982,029 $ 3,765,128
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,616,782 $ 892,351
Due to affiliates, net 4,177,016 2,618,559
Other liabilities 38,454 57,486
-----------------------------------
Total current liabilities 7,832,252 3,568,396
-----------------------------------
COMMITMENTS - -
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 1,000 shares authorized; 134
shares and 100 shares issued and outstanding 1 1
Additional paid-in capital 50,369 -
Retained earnings (deficit) (860,593) 196,731
-----------------------------------
(810,223) 196,732
Less: Note receivable - shareholder 40,000 -
-----------------------------------
Total shareholders' equity (deficit) (850,223) 196,732
-----------------------------------
Total liabilities and shareholders' equity (deficit) $ 6,982,029 $ 3,765,128
===================================
See notes to consolidated financial statements
54
<PAGE>
Humphrey Hospitality Management, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
----------------------------------------------------------
Revenue from hotel operations
Room revenue $ 33,850,907 $ 21,913,267 $ 15,581,298
Other hotel revenue 2,477,516 658,168 525,737
Other revenue 356,320 573,714 313,316
Interest income 67,088 73,929 32,131
----------------------------------------------------------
Total revenue 36,751,831 23,219,078 16,452,482
----------------------------------------------------------
Expenses
Hotel operating expenses 18,884,897 11,466,148 7,987,062
General and administrative 3,083,703 1,219,830 729,163
Depreciation 7,844 - -
Lease payments 15,832,711 10,441,313 7,326,193
----------------------------------------------------------
Total expenses 37,809,155 23,127,291 16,042,418
----------------------------------------------------------
NET INCOME (LOSS) $ (1,057,324) $ 91,787 $ 410,064
==========================================================
See notes to consolidated financial statements
55
<PAGE>
Humphrey Hospitality Management, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1999, 1998 and 1997
Common Stock Additional Note Retained
--------------------------- Paid-in Receivable - Earnings
Shares Amount Capital Shareholder (Deficit) Total
----------- --------------- --------------- ----------------- --------------- -----------------
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
Distributions - - - - (80,000) (80,000)
Net income - - - - 91,787 91,787
----------- --------------- --------------- ----------------- --------------- -----------------
Balance, December 31, 1998 100 1 - - 196,731 196,732
Issuance of common stock 34 - 50,369 (40,000) - 10,369
Net loss - - - - (1,057,324) (1,057,324)
----------- --------------- --------------- ----------------- --------------- -----------------
Balance, December 31, 1999 134 $ 1 $ 50,369 $ (40,000) $ (860,593) $ (850,223)
=========== =============== =============== ================= =============== =================
See notes to consolidated financial statements
56
<PAGE>
Humphrey Hospitality Management, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
-------------------- ------------------ ----------------
Cash flow from operating activities
Net income (loss) $ (1,057,324) $ 91,787 $ 410,064
Adjustments to reconcile net income (loss) to net
Cash provided by operating activities
Depreciation 7,844 - -
(Increase) decrease in assets
Accounts receivable (1,040,977) (165,335) (135,141)
Due from affiliate (14,769) - -
Prepaid expenses (273,672) 25,767 (30,580)
Other assets (61,854) (11,596) (59,559)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 2,724,435 144,322 574,470
Due to affiliates 1,788,715 1,167,303 790,025
Other liabilities (19,032) 12,638 10,301
-------------------- ------------------ ----------------
Net cash provided by operating activities 2,053,366 1,264,886 1,559,580
--------------------- ------------------ ----------------
Cash flows from investing activities
Additions to property and equipment (39,222) - -
Advances to affiliates (230,262) (405,765) -
-------------------- ------------------ ----------------
Net cash used in investing activities (269,484) (405,765) -
--------------------- ------------------ ----------------
Cash flows from financing activities
Distributions paid - (80,000) (255,000)
Issuance of common stock 10,369 - -
Advances to shareholders - - 51,250
-------------------- ------------------ ----------------
Net cash provided by (used in) financing activities 10,369 (80,000) (203,750)
--------------------- ------------------ ----------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,794,251 779,121 1,355,830
Cash and cash equivalents, beginning of year 3,262,524 2,483,403 1,127,573
--------------------- ------------------ ----------------
Cash and cash equivalents, end of year $ 5,056,775 $ 3,262,524 $ 2,483,403
===================== ================== ================
See notes to consolidated financial statements
</TABLE>
57
<PAGE>
Humphrey Hospitality Management, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Management, Inc. (HHMI) was incorporated under the
laws of the State of Maryland on August 18, 1994, to lease and operate hotel
properties from Humphrey Hospitality Trust, Inc. and its subsidiaries (HHTI). As
of December 31, 1998, James I. Humphrey, Jr. (the Shareholder) was the sole
shareholder of the Lessee. On June 1, 1999, HHMI sold shares of stock to certain
officers, constituting a 25% interest in the company, in exchange for $10,369 in
cash and a $40,000 note receivable.
During 1999, HHMI formed Supertel Hospitality Management, Inc. (SHMI),
as a wholly-owned subsidiary (collectively, the Lessee). Effective October 26,
1999, SHMI acquired the management operations of Supertel Hospitality, Inc., and
Subsidiaries (Supertel) and entered into leases with HHTI to lease and manage 63
limited service hotel properties acquired by HHTI in conjunction with its merger
with Supertel. As of December 31, 1999, the Lessee leases 88 hotel properties
(the Hotels) from HHTI.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, SHMI. All material intercompany
accounts and transactions have been eliminated in consolidation.
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.
Property and equipment
Property and equipment is recorded at cost. Depreciation is provided
for using the straight-line method over the estimated useful lives of the
assets.
Marketing Costs
The Lessee incurs costs for various marketing and advertising efforts.
All costs related to marketing and advertising are expensed in the period
incurred. Marketing and advertising costs totaled $1,172,641, $872,189 and
$621,067 for the years ended December 31, 1999,1998 and 1997, respectively.
58
<PAGE>
Humphrey Hospitality Management, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Lease Expense
Lease expense is recognized when accrued under the lease agreements
from the date of acquisition of each hotel property. Beginning in 1999,
contingent lease expense is accrued quarterly based on the probability of the
future revenue target being achieved, in accordance with the Emerging Issues
Task Force, Issue 98-9.
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 shareholders individually.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and a repurchase agreement
with various major banks with original maturities 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 Lessee has not
experienced any losses with respect to bank balances in excess of government
provided insurance. As of December 31, 1999, management believes that no
significant concentration of credit risk exists with respect to these cash
balances.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation.
Note 2. Related Party Transactions
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. As of December
31, 1999 and 1998, $55,172 and $0, respectively, is due from affiliates.
59
<PAGE>
Humphrey Hospitality Management, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Note 2. Related Party Transactions (Continued)
Lease Payments
As of December 31, 1999, the Lessee has entered into leases with HHTI
relating to the Hotels and the company's office building located in Norfolk,
Nebraska. Each such lease has a term of 10 years. Pursuant to the terms of the
Hotel leases (Percentage Leases), the Lessee is required to pay both base rent
and percentage rent and certain other additional charges. The Company's office
lease is for a term of ten years and requires annual rent payments of $100,000.
The Lessee has future lease commitments through September 2009. Minimum future
lease payments due under these non-cancelable operating leases as of December
31, 1999, are as follows:
Years Amount
-------------- ---------------------
2000 $ 15,078,839
2001 15,078,839
2002 15,078,839
2003 15,078,839
2004 14,944,376
Thereafter 57,638,170
---------------------
$ 132,897,902
=====================
The Lessee incurred base rents of $7,267,956, $4,745,489, and $3,302,922 and
percentage rents of $8,564,755, $5,695,824, and $4,023,271 for the years ended
December 31, 1999, 1998 and 1997, respectively. As of December 31, 1999 and
1998, the amount due to HHTI for lease payments, net of intercompany
receivables, totaled $4,177,016 and $2,618,559, respectively.
Services Agreement
The Lessee provides accounting and securities reporting services
pursuant to a services agreement with HHTI. The agreement provided for an annual
fee of $30,000 with an increase of $10,000 per year (prorated from the time of
acquisition) for each hotel acquired by HHTI, but not to exceed $100,000 in any
year. Effective October 26, 1999, the agreement was amended to provide for an
annual fee of $300,000. For the years ended December 31, 1999, 1998 and 1997,
the Lessee received $135,522, $99,996 and $79,388, respectively, for the
services provided in accordance with the agreement, which is included in other
revenue.
Beginning in 1998, the Lessee provides capital improvement supervisory
services to Humphrey Hospitality Trust, Inc. pursuant to the terms of an
agreement which provides for a fee equal to 9% of the total cost of the capital
improvements. For the years ended December 31, 1999 and 1998, the Lessee earned
fees totaling $214,862, and $128,382 respectively.
60
<PAGE>
Humphrey Hospitality Management, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Note 2. Related Party Transactions (Continued)
Advances to/from Shareholder
During the years ended December 31, 1999, 1998 and 1997, working
capital advances were made to/from one of the shareholders which were
subsequently repaid in full. The advances were due on demand and bore interest
at a variable rate.
As of December 31, 1999, the Company has a note receivable from a
shareholder in the amount of $40,000 related to the sale of stock (See Note 1).
The note is payable on demand and bears interest at 5% per annum.
Note 3. Commitments
Franchise Agreements
The Lessee operates the Hotels acquired by HHTI 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. For the years ended
December 31, 1999, 1998 and 1997, franchise fees totaling $1,902,197, $1,231,929
and $875,104, respectively, were charged to hotel operations.
Restaurant Leases
As of December 31, 1999 and 1998, three of the 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.
Leases
The Company assumed leases from Supertel for outdoor advertising signs
and various other items under noncancelable one to ten-year agreements. Rental
payments are expensed when incurred and charged to hotel operations. Future
minimum lease payments required under these non-cancelable operating lease
agreements at December 31, 1999, are as follows:
December 31, 2000 $ 446,383
2001 297,549
2002 109,329
2003 26,230
2004 18,290
-----------
$ 897,781
===========
61
<PAGE>
Humphrey Hospitality Management, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
Note 4. Profit Sharing Plans
HHMI has a 401(k) retirement savings and profit sharing plan under
which eligible HHMI employees may contribute up to 15% of their salaries or
$10,000. The Company's contributions to the plan equal 50% of the participants'
contributions not to exceed 5% of the participant's compensation. Effective
October 26, 1999, SHMI hired substantially all of the former employees of
Supertel and assumed Supertel's existing 401(k) profit sharing plan. The
Company's contributions to the SHMI plan equal 50% of the participants'
contributions not to exceed 5% of the participant's compensation. The Company
contributed and expensed approximately $40,756, $15,350 and $4,599 in 1999, 1998
and 1997, respectively.
Note 5. Economic Dependency
The Lessee receives substantially all of its income from hotels
operated pursuant to the Percentage Leases. The Lessee currently leases and
operates 88 hotel properties located in 19 states.
62
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
The data below reflects selected financial information for the HHTI
resulting from the Merger of Supertel and HHTI, which is referred to as "pro
forma" information. The selected unaudited pro forma financial data set forth
below assumes that the Merger was accounted for as a reverse acquisition using
the purchase method of accounting, that the companies had been combined for
accounting and financial reporting purposes as of January 1, 1999, and that the
Lessee leased the Supertel hotels from HHTI beginning January 1, 1999. The pro
forma lease revenue for HHTI for the Supertel hotels were derived by applying
the rent provisions of the leases for the Supertel hotels to the historical
revenues for those hotels. HHTI and Supertel expect that certain restructuring
expenses will be incurred as a result of combining the companies; however, the
unaudited pro forma financial data does not reflect any anticipated
reorganization expense. The companies also anticipate that the Merger will
provide the combined company with certain financial benefits that include
improved operating efficiencies and opportunities to earn more revenue. However,
these anticipated cost savings or benefits are not reflected in the pro forma
information. Therefore, the pro forma information, while helpful in illustrating
the financial characteristics of the combined company under one set of
assumptions, does not attempt to predict or suggest future results. The pro
forma information also does not attempt to show how the combined company would
actually have performed had the Merger been completed as of the dates or for the
periods presented. Additionally, no adjustments have been made to conform any
differences in accounting policies between HHTI and Supertel for the periods
presented. The information in the following tables is qualified in its entirety
by, and should be read in conjunction with the historical financial statements
of the Company, the Lessee and Supertel included elsewhere in this document or
incorporated by reference.
63
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
Selected Pro Forma Financial Data
(Unaudited, in thousands, except for share data)
Three
Months
Ended Year Ended
12/31/99 12/31/99
-------- --------
OPERATING DATA:
Revenue:
Percentage lease revenue............... $8,220 $33,421
Other revenue.......................... 48 165
------ -------
Total revenue.................. 8,268 33,586
------ -------
Expenses:
Interest............................... 2,616 10,714
Real estate operating expenses......... 844 3,505
General and administrative............. 197 1,104
Depreciation and amortization.......... 2,131 8,507
------ -------
Total expenses................. 5,788 23,830
------ -------
Income from operations................... 2,480 9,756
Income allocated to minority interest.... (313) (832)
------ -------
Net income............................... $2,167 $8,924
====== ======
Basic earnings per common share.......... $ 0.19 $ 0.80
====== ======
Diluted earnings per common share........ $ 0.21 $ 0.81
====== ======
Weighted average shares:
Basic.................................. 11,173 11,173
Diluted................................ 12,041 12,041
OTHER DATA:
Funds From Operations reconciliation:
Net income applicable to common shareholders $2,167 $8,924
Add Minority interest 313 832
Depreciation and amortization 2,131 8,507
------ -------
Funds From Operations (FFO) -Diluted $4,611 $18,263
====== =======
FFO Per Share - Diluted $ 0.38 $ 1.52
====== ======
64
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Humphrey Hospitality Trust, Inc. owns 100% of the voting securities of
the corporations listed below.
Subsidiary Jurisdiction of Incorporation
Humphrey Hospitality REIT Trust Maryland
E&P REIT Trust Maryland
Humphrey Hospital REIT Trust owns 92.79% of Humphrey Hospitality
Limited Partnership, a Virginia limited partnership.
Humphrey Hospitality Limited Partnership owns 99.0% of Solomon's Beacon
Inn Limited Partnership, a Maryland limited partnership.
Humphrey Hospitality Trust, Inc. owns 99.0% of E&P Financing Limited
Partnership, a Virginia limited partnership.
Supertel Hospitality, Inc. owned 100% of the voting securities of the
corporations listed below.
Subsidiary Jurisdiction of Incorporation
Simplex, Inc. Nebraska
Motel Developers, Inc. Nebraska
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidatd financial statements for Humphrey Hospitality Trust, Inc. and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 829,829
<SECURITIES> 0
<RECEIVABLES> 4,177,016
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 196,189,326
<DEPRECIATION> 30,189,776
<TOTAL-ASSETS> 173,750,751
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 118,972,925
0
0
<COMMON> 111,735
<OTHER-SE> 46,018,654
<TOTAL-LIABILITY-AND-EQUITY> 173,750,751
<SALES> 42,403,970
<TOTAL-REVENUES> 49,636,063
<CGS> 0
<TOTAL-COSTS> 42,239,672
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,068,791
<INCOME-PRETAX> 7,283,095
<INCOME-TAX> 1,694,675
<INCOME-CONTINUING> 5,588,420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,588,420
<EPS-BASIC> .93
<EPS-DILUTED> .93
<FN>:
<F1>
Humphrey Hospitality Trust, Inc. is in the specialized real estate industry for
which the current/noncurrent distinction is deemed in practice to have little or
no relevance. Therefore, it prepares unclassified balance sheets which do not
report current assets or current liabilities.
</FN>
</TABLE>
