 | Exhibit 99.1 |
COMBINED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS’ REPORT
MCINTOSH MOTOR INNS PORTFOLIO
DECEMBER 31, 2004 AND 2003
McIntosh Motor Inns Portfolio
TABLE OF CONTENTS
| PAGE | ||||
| INDEPENDENT AUDITORS’ REPORT | 3 | |||
| COMBINED FINANCIAL STATEMENTS | ||||
| COMBINED BALANCE SHEETS | 4 | |||
| COMBINED STATEMENTS OF OPERATIONS | 5 | |||
| COMBINED STATEMENTS OF EQUITY | 6 | |||
| COMBINED STATEMENTS OF CASH FLOWS | 7 | |||
| NOTES TO COMBINED FINANCIAL STATEMENTS | 8 | |||
| Reznick Group, P.C. 500 East Pratt Street Suite 200 Baltimore, MD 21202-3100 | Tel: (410) 783-4900 Fax: (410) 727-0460 www.reznickgroup.com |
INDEPENDENT AUDITORS’ REPORT
Board of Directors
Hersha Hospitality Trust, Inc.
We have audited the accompanying combined balance sheets of McIntosh Motor Inns Portfolio as of December 31, 2004 and 2003, and the related combined statements of operations, shareholders’ equity and cash flows for the years then ended. These combined financial statements are the responsibility of the Owners’ management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of McIntosh Motor Inns Portfolio as of December 31, 2004 and 2003, and the results of their operations, the changes in shareholders’ equity and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Baltimore, Maryland
July 1, 2005
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Atlantan Baltimoren Bethesdan Charlotten Chicagon Sacramento
McIntosh Motor Inns Portfolio
COMBINED BALANCE SHEETS
December 31, 2004 and 2003 and March 31, 2005 (Unaudited)
| December 31, | March | |||||||||||
| 2004 | 2003 | 31, 2005 | ||||||||||
| (Unaudited) | ||||||||||||
| ASSETS | ||||||||||||
| INVESTMENT IN HOTEL PROPERTIES | ||||||||||||
| Land | $ | 4,349,595 | $ | 4,399,595 | $ | 4,349,595 | ||||||
| Building and improvements | 27,204,525 | 24,376,734 | 27,056,918 | |||||||||
| Furniture and equipment | 8,712,478 | 8,305,499 | 8,876,139 | |||||||||
| 40,266,598 | 37,081,828 | 40,282,652 | ||||||||||
| Less accumulated depreciation | 14,633,039 | 14,273,442 | 15,046,189 | |||||||||
| Net investment in hotel properties | 25,633,559 | 22,808,386 | 25,236,463 | |||||||||
| OTHER ASSETS | ||||||||||||
| Cash | 1,699,757 | 2,927,013 | 1,729,808 | |||||||||
| Accounts receivable | 74,993 | 56,545 | 106,929 | |||||||||
| Prepaid expenses | 190,998 | 184,364 | 163,281 | |||||||||
| Franchise fees, net of accumulated amortization of $-0-, $1,141, and $3,211 respectively | 59,359 | — | 79,539 | |||||||||
| Intercompany receivables | 7,208 | — | — | |||||||||
| $ | 27,665,874 | $ | 25,976,308 | $ | 27,316,020 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
| LIABILITIES | ||||||||||||
| Mortgages and loans payable — related party | $ | 25,320,961 | $ | 21,311,537 | $ | 25,810,143 | ||||||
| Accrued interest | 164,690 | 147,480 | 170,554 | |||||||||
| Accounts payable and accrued expenses | 539,099 | 352,867 | 288,060 | |||||||||
| Intercompany advances | — | 1,812 | 84 | |||||||||
| Total liabilities | 26,024,750 | 21,813,696 | 26,268,841 | |||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||||
| Common stock | 50,075 | 50,075 | 50,075 | |||||||||
| Additional paid-in capital | 8,277,717 | 8,277,717 | 8,277,717 | |||||||||
| Accumulated deficit | (6,686,668 | ) | (4,165,180 | ) | (7,280,613 | ) | ||||||
| Total shareholders’ equity | 1,641,124 | 4,162,612 | 1,047,179 | |||||||||
| $ | 27,665,874 | $ | 25,976,308 | $ | 27,316,020 | |||||||
See notes to combined financial statements
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McIntosh Motor Inns Portfolio
COMBINED STATEMENTS OF OPERATIONS
Years ended December 31, 2004 and 2003
and the three months ended March 31, 2005 (Unaudited)
| Three | ||||||||||||
| December 31, | months ended | |||||||||||
| 2004 | 2003 | March 31, 2005 | ||||||||||
| (Unaudited) | ||||||||||||
| Revenue | ||||||||||||
| Room revenue | $ | 8,115,563 | $ | 8,227,894 | $ | 2,176,634 | ||||||
| Telephone revenue | 38,523 | 69,308 | 6,773 | |||||||||
| Other revenue | 303,045 | 324,958 | 83,374 | |||||||||
| Total revenue | 8,457,131 | 8,622,160 | 2,266,781 | |||||||||
| Expenses | ||||||||||||
| Management contract | 683,424 | 664,006 | 176,624 | |||||||||
| Operating expense | 2,198,836 | 1,328,063 | 368,100 | |||||||||
| General and administrative | 385,960 | 341,975 | 94,765 | |||||||||
| Salaries and wages | 2,664,653 | 2,501,819 | 598,955 | |||||||||
| Advertising | 118,728 | 111,523 | 36,176 | |||||||||
| Utilities | 374,933 | 350,989 | 122,327 | |||||||||
| Repairs and maintenance | 193,738 | 97,612 | 45,264 | |||||||||
| Insurance | 168,315 | 164,348 | 47,086 | |||||||||
| Real estate taxes | 341,176 | 331,573 | 88,837 | |||||||||
| Franchise fees | 271,158 | 223,416 | 162,216 | |||||||||
| Interest expense | 1,839,617 | 1,772,346 | 505,156 | |||||||||
| Depreciation | 1,662,959 | 1,626,955 | 413,150 | |||||||||
| Amortization | 1,141 | — | 2,070 | |||||||||
| Loss on disposal of equipment | 73,981 | 4,447 | — | |||||||||
| Total expenses | 10,978,619 | 9,519,072 | 2,660,726 | |||||||||
| NET LOSS | $ | (2,521,488 | ) | $ | (896,912 | ) | $ | (393,945 | ) | |||
See notes to combined financial statements
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McIntosh Motor Inns Portfolio
COMBINED STATEMENTS OF EQUITY
Years ended December 31, 2004 and 2003
and the three months ended March 31, 2005 (Unaudited)
| Common | Additional | Accumulated | ||||||||||||||
| Stock | Paid-in Capital | Deficit | Total | |||||||||||||
| Balance, December 31, 2002 | $ | 50,075 | $ | 8,277,717 | $ | (3,268,268 | ) | $ | 5,059,524 | |||||||
| Net loss | — | — | (896,912 | ) | (896,912 | ) | ||||||||||
| Balance, December 31, 2003 | 50,075 | 8,277,717 | (4,165,180 | ) | 4,162,612 | |||||||||||
| Net loss | — | — | (2,521,488 | ) | (2,521,488 | ) | ||||||||||
| Balance, December 31, 2004 | 50,075 | 8,277,717 | (6,686,668 | ) | 1,641,124 | |||||||||||
| Distributions (unaudited) | — | — | (200,000 | ) | (200,000 | ) | ||||||||||
| Net loss (unaudited) | — | — | (393,945 | ) | (393,945 | ) | ||||||||||
| Balance, March 31, 2005 (unaudited) | $ | 50,075 | $ | 8,277,717 | $ | (7,280,613 | ) | $ | 1,047,179 | |||||||
See notes to combined financial statements
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McIntosh Motor Inns Portfolio
COMBINED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004 and 2003
and the three months ended March 31, 2005 (Unaudited)
| Three | ||||||||||||
| December 31, | months ended | |||||||||||
| 2004 | 2003 | March 31, 2005 | ||||||||||
| (Unaudited) | ||||||||||||
| Cash flows from operating activities | ||||||||||||
| Net loss | $ | (2,521,488 | ) | $ | (896,912 | ) | $ | (393,945 | ) | |||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities | ||||||||||||
| Depreciation and amortization | 1,664,100 | 1,626,955 | 415,220 | |||||||||
| Loss on disposal of assets | 73,981 | 4,447 | — | |||||||||
| (Increase) decrease in assets | ||||||||||||
| Accounts receivable | (18,448 | ) | 11,702 | (31,936 | ) | |||||||
| Prepaid expenses | (6,634 | ) | (7,633 | ) | 27,717 | |||||||
| Increase (decrease) in liabilities | ||||||||||||
| Accounts payable and accrued expenses | 186,232 | 37,160 | (251,039 | ) | ||||||||
| Accrued interest | 17,210 | (65 | ) | 5,864 | ||||||||
| Net cash (used in) provided by operating activities | (605,047 | ) | 775,654 | (228,119 | ) | |||||||
| Cash flows from investing activities | ||||||||||||
| Franshise fees paid | (60,500 | ) | — | (22,250 | ) | |||||||
| Proceeds from sale of assets | 201,419 | — | — | |||||||||
| Investment in hotel property | (4,763,532 | ) | (266,232 | ) | (16,054 | ) | ||||||
| Net cash used in investing activities | (4,622,613 | ) | (266,232 | ) | (38,304 | ) | ||||||
| Cash flow from financing activities | ||||||||||||
| Proceeds from mortgages payable | 4,271,535 | 369,272 | 544,452 | |||||||||
| Principal payments on mortgage payable | (262,111 | ) | (171,203 | ) | (55,270 | ) | ||||||
| Intercompany advances | (9,020 | ) | (1,506,505 | ) | 7,292 | |||||||
| Distributions paid | — | — | (200,000 | ) | ||||||||
| Net cash provided by (used in) financing activities | 4,000,404 | (1,308,436 | ) | 296,474 | ||||||||
| NET DECREASE IN CASH | (1,227,256 | ) | (799,014 | ) | 30,051 | |||||||
| Cash, beginning | 2,927,013 | 3,726,027 | 1,699,757 | |||||||||
| Cash, ending | $ | 1,699,757 | $ | 2,927,013 | $ | 1,729,808 | ||||||
| Supplemental disclosure of cash flow information | $ | |||||||||||
| Cash paid during the year for interest | $ | 1,822,407 | $ | 1,772,411 | 482,082 | |||||||
| Supplemental disclosure of noncash investing and financing activities | ||||||||||||
| During 2004, the Company disposed of fixed assets with a basis of $1,578,762 and a net book value of $275,400. | ||||||||||||
| During 2003, the Company disposed of fixed assets with a basis of $1,751,325 and a net book value of $4,447. | ||||||||||||
See notes to combined financial statements
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McIntosh Motor Inns Portfolio
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2003 and 2004 and March 31, 2005 (Amounts and disclosures as of March 31,
2005 and for the three months then ended are unaudited)
NOTE A — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The McIntosh Motor Inns Portfolio combined financial statements are a combination of the balance sheets and statements of operations, shareholders’ equity and cash flows of four corporations under common ownership and management (collectively the Owners). The hotel entities combined in these financial statements consist of the following:
| Entity | Date Opened | Rooms | Location | |||||
| McIntosh Inn of Malvern, Inc. | May, 1991 | 88 | Malvern, Pennsylvania | |||||
| McIntosh Inn of King of Prussia, Inc. | May, 1983 | 155 | King of Prussia, Pennsylvania | |||||
| McIntosh Inn of Oxford Valley, Inc. | July, 1997 | 88 | Oxford Valley, Pennsylvania | |||||
| McIntosh Inn of Wilmington, Inc. | August, 1999 | 71 | Wilmington, Delaware | |||||
| October, 1999 | 78 | Wilmington, Delaware | ||||||
All intercompany transactions and balances have been eliminated in combination.
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 accounts of assets and liabilities and disclosures 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 stated at cost. Depreciation is provided for in amounts sufficient to relate the costs of depreciable assets to operations by use of accelerated methods over their estimated useful lives:
| Building and improvements | 7-39 years | |||||
| Furniture and equipment | 5-7 years |
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McIntosh Motor Inns Portfolio
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003 and 2004 and March 31, 2005 (Amounts and disclosures
as of March 31, 2005 and for the three months then ended are unaudited)
NOTE A — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Maintenance and repairs are charged to operations as incurred. Additions and major improvements are capitalized. Upon sale or disposition, both the asset and related accumulated depreciation are relieved and the related gain or loss is included in operations.
The Owners evaluate long-lived assets for potential impairment by analyzing the operating results, trends and prospects for the properties and considering any other events and circumstances which might indicate potential impairment.
Franchise Fees
Franchise fees are amortized over the terms of the corresponding agreement using the straight-line method.
Revenue Recognition
Room and other revenue are recognized as earned.
Accounts Receivable and Bad Debts
Accounts receivable are charged to bad debt expense when they are determined to be uncollectible based upon periodic review of the accounts by management. Accounting principles generally accepted in the United States of America require that the allowance method be used to recognize bad debt expense; however, the effects of using the direct write-off method is not materially different form the results that would have been obtained under the allowance method.
Advertising Costs
Advertising costs are expensed as incurred; including costs incurred under the terms of the franchise agreements.
Income Taxes
The Owners have elected to be treated as Subchapter S Corporations for federal and state income tax reporting purposes. Under this election, the individual stockholders are deemed to have received a pro rata distribution of the taxable income or loss (whether or not actual cash distribution is made), which is reported in their individual taxable income.
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McIntosh Motor Inns Portfolio
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003 and 2004 and March 31, 2005 (Amounts and disclosures
as of March 31, 2005 and for the three months then ended are unaudited)
NOTE B — MORTGAGES AND LOANS PAYABLE — RELATED PARTY
Mortgages and loans payable at December 31, 2004 and 2003 and March 31, 2005 are held by an affiliate of the Owners, secured by the hotel property and guaranteed by the Owners, consisted of the following:
| December 31, | March 31, | |||||||||||
| 2004 | 2003 | 2005 | ||||||||||
| (Unaudited) | ||||||||||||
| Malvern | ||||||||||||
| Mortgage payable in monthly installments of principal and interest of $9,047, bearing interest at 8.75% per annum. The mortgage matures in February 2012. | $ | 1,102,447 | $ | 1,113,993 | $ | 1,099,400 | ||||||
| Mortgage payable in monthly installments of principal and interest of $2,753, bearing interest at 8.75% per annum. The mortgage matures in February 2013. | 339,041 | 342,262 | 338,191 | |||||||||
| Revolving loan payable in monthly installments of interest only at the rate of prime plus 1/2% per annum. As of December 31, 2004, 2003 and March 31, 2005 the rates were 5.75%, 5.5% and 6.25%, respectively. The loan is due on demand. | 2,165,000 | 2,015,000 | 2,245,000 | |||||||||
| Construction loan payable in monthly installments of interest only at the rate of 6% per annum. The loan matures 12 years subsequent to the completion of the construction period. | 986,749 | — | 1,084,469 | |||||||||
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McIntosh Motor Inns Portfolio
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003 and 2004 and March 31, 2005 (Amounts and disclosures
as of March 31, 2005 and for the three months then ended are unaudited)
NOTE B - MORTGAGES AND LOANS PAYABLE - RELATED PARTY (Continued)
| December 31, | March 31, | |||||||||||
| 2004 | 2003 | 2005 | ||||||||||
| (Unaudited) | ||||||||||||
| King of Prussia | ||||||||||||
| Mortgage payable in monthly installments of principal and interest of $15,734, bearing interest at 8.75% per annum. The mortgage matures in February 2011. | $ | 1,895,389 | $ | 1,917,298 | $ | 1,889,607 | ||||||
| Mortgage payable in monthly installments of principal and interest of $11,801, bearing interest at 8.75% per annum. The mortgage matures in August 2012. | 1,445,668 | 1,460,086 | 1,441,863 | |||||||||
| Mortgage payable in monthly installments of principal and interest of $10,440, bearing interest at 5.25% per annum. The mortgage matures in February 2017. | — | — | 1,888,458 | |||||||||
| Construction loan payable in monthly installments of interest only at the rate of 6% per annum. The loan matures 12 years subsequent to the construction period. | 1,883,030 | — | — | |||||||||
| Oxford Valley | ||||||||||||
| Mortgage payable in monthly installments of principal and interest of $39,335, bearing interest at 8.75% per annum. The mortgage matures in February 2010. | 4,678,711 | 4,738,473 | 4,662,938 | |||||||||
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McIntosh Motor Inns Portfolio
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003 and 2004 and March 31, 2005 (Amounts and disclosures
as of March 31, 2005 and for the three months then ended are unaudited)
NOTE B - MORTGAGES AND LOANS PAYABLE - RELATED PARTY (Continued)
| December 31, | March 31, | |||||||||||
| 2004 | 2003 | 2005 | ||||||||||
| (Unaudited) | ||||||||||||
| Oxford Valley (Continued) | ||||||||||||
| Revolving loan payable in monthly installments of interest only at the rate of prime plus 1/2% per annum. As of December 31, 2004, 2003 and March 31, 2005, the rates were 5.75%, 5.5% and 6.25%, respectively. The loan is due on demand. | $ | 1,206,221 | $ | 1,006,221 | $ | 1,456,221 | ||||||
| Construction loan payable in monthly installments of interest only at the rate of 6% per annum. The loan matures 12 years subsequent to the construction period. | 990,861 | — | 1,100,000 | |||||||||
| Wilmington McIntosh and Wilmington Courtyard | ||||||||||||
| Mortgage payable in monthly installments of principal and interest of $70,803, bearing interest at 8.75% per annum. The mortgage matures in December 2011. | 8,627,844 | 8,718,204 | 8,603,996 | |||||||||
| $ | 25,320,961 | $ | 21,311,537 | $ | 25,810,143 | |||||||
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McIntosh Motor Inns Portfolio
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003 and 2004 and March 31, 2005 (Amounts and disclosures
as of March 31, 2005 and for the three months then ended are unaudited)
NOTE B - MORTGAGES AND LOANS PAYABLE - RELATED PARTY (Continued)
| Annual principal payments on the mortgages for the five years following December 31, 2004 are as follows: |
| December 31, 2005 | $ | 3,590,768 | ||
| 2006 | 239,546 | |||
| 2007 | 261,367 | |||
| 2008 | 285,177 | |||
| 2009 | 311,154 | |||
| $ | 4,688,012 | |||
NOTE C - RELATED PARTY TRANSACTIONS
| Management Fee | ||||
| All the hotels are managed by Hunter Service, Inc., an affiliate of the shareholder in the hotels, pursuant to an agreement which provides for a management fee of 8% of net room revenue as described in the management agreement. For the years ended 2004 and 2003 and the three months ended March 31, 2005, total fees of $683,424, $664,006 and $176,624, respectively, were incurred, of which $47,079, $42,136 and $66,202 respectively, remains payable at December 31, 2004 and 2003 and March 31, 2005 respectively, and are included in accounts payable and accrued expenses. | ||||
| Intercompany | ||||
| For the years ended December 31, 2004 , 2003 and the three months ended March 31, 2005, the Owners received human resource, information technology and accounting services from Hunter Service, Inc. in the amount of $573,919, $602,772 and $135,600, respectively, of which $7,208 was overpaid in 2004, $1,812 remains payable in 2003 and $84 remains payable as of March 31, 2005. Amounts due to/from Hunter Service, Inc. are non-interest bearing and due on demand. | ||||
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McIntosh Motor Inns Portfolio
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2003 and 2004 and March 31, 2005 (Amounts and disclosures
as of March 31, 2005 and for the three months then ended are unaudited)
NOTE D - COMMON STOCK
| The common stock of as of December 31, 2004, 2003 and March 31, 2005 consists of the following: |
| Shares | ||||||||||||
| authorized, | ||||||||||||
| issued and | ||||||||||||
| Entity | Par Value | outstanding | Value | |||||||||
| McIntosh Inn of Malvern, Inc. | $ | 0.01 | 2,500 | $ | 25 | |||||||
| McIntosh Inn of King of Prussia, Inc. | $ | 0.10 | 500,000 | 50,000 | ||||||||
| McIntosh Inn of Oxford Valley, Inc. | $ | 0.01 | 2,500 | 25 | ||||||||
| McIntosh Inn of Wilmington, Inc. | $ | 0.01 | 2,500 | 25 | ||||||||
| $ | 50,075 | |||||||||||
NOTE E - SUBSEQUENT EVENT
| On various dates through May and June 2005, Hersha Hospitality Trust completed the acquisition of substantially all of the assets of each of the individual hotel properties for a combined purchase price of $48.9 million, including $34.3 million in debt and $14.6 in cash. | ||||
| In connection with the purchase of the hotel properties, all related party mortgages and loans payable were paid in full. | ||||
NOTE F - CONCENTRATION OF CREDIT RISK
| The Owners maintain their cash accounts with major financial institutions. The cash balances consist of checking accounts. The checking accounts are insured by the Federal Deposit Insurance Corporation up to $100,000 for each entity. As of December 31, 2004, the checking account balances exceed the federally insured limits by $1,648,413. The Owners have not experienced any losses with respect to bank balances in excess of government provided insurance and do not believe that a significant concentration of credit risk exists with respect to these cash balances as of December 31, 2004. |
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