SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITIONAL
REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] 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: 005-55249
HERSHA HOSPITALITY TRUST
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 251811499
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
148 SHERATON DRIVE, BOX A, NEW CUMBERLAND, PENNSYLVANIA 17070
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (717) 770-2405
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
PRIORITY CLASS A COMMON SHARES OF BENEFICIAL INTEREST, AMERICAN STOCK EXCHANGE
PAR VALUE $.01 PER SHARE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark whether the registrant (i) 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 (or for such shorter period that the
registrant was required to file such reports), and (ii) 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 10-K. [X]
The aggregate market value of the voting and nonvoting common equity
held by non-affiliates of the registrant, as of March 24, 1999, was
approximately $13.4 million.
As of March 24, 1999, the number of outstanding Priority Class A Common
Shares of Beneficial Interest outstanding was 2,275,000.
Documents Incorporated By Reference: None.
HERSHA HOSPITALITY TRUST
INDEX
FORM 10-K
REPORT
ITEM NO. PAGE
- ------- --------
PART I
1. Business..................................................................................3
2. Properties................................................................................5
3. Legal Proceedings........................................................................11
4. Submission of Matters to a Vote of Security Holders......................................11
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters....................11
6. Selected Financial and Operating Data....................................................12
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................13
7A. Quantitative and Qualitative Disclosures About Market Risk...............................17
8. Financial Statements and Supplementary Data..............................................17
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures............................................................................17
PART III
10. Trustees and Executive Officers of the Company...........................................17
11. Executive Compensation...................................................................19
12. Security Ownership of Certain Beneficial Owners and Management...........................22
13. Certain Relationships and Related Transactions...........................................23
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................24
ITEM 1. BUSINESS
OVERVIEW
Hersha Hospitality Trust was formed in May 1998 to own initially ten
hotels in Pennsylvania and to continue the hotel acquisition and development
strategies of Hasu P. Shah, Chairman of the board of trustees and Chief
Executive Officer of our Company. We are a self-advised Maryland real estate
investment trust that intends to qualify as a REIT for federal income tax
purposes. As of March 24, 1999, we owned three Holiday Inn Express(R) hotels,
two Hampton Inn(R) hotels, two Holiday Inn(R) hotels, two Comfort Inn(R) hotels
and ONe Clarion Suites(R) hotel, which contain an aggregate of 989 rooms.
We completed an initial public offering of two million of our Class A
Priority Common Shares on January 26, 1999 at $6.00 per share. In addition, on
February 5, 1999, we sold an additional 275,000 Class A Priority Common Shares
pursuant to an over allotment option granted to the underwriter in our initial
public offering. Our Priority Class A Common Shares are traded on the American
Stock Exchange under the symbol "HT."
We contributed substantially all of the net proceeds from our initial
public offering to our operating partnership subsidiary, Hersha Hospitality
Limited Partnership, of which we are the sole general partner. We currently own
a 36.1% partnership interest in that partnership. With the proceeds of our
initial public offering, we caused the partnership to acquire ten hotels in
exchange for (1) 4,032,431 subordinated units of limited partnership interest in
the partnership that are redeemable for the same number of Class B Common Shares
with a value of approximately $24.2 million based on the initial public offering
price, and (2) the assumption of approximately $23.3 million of indebtedness of
which approximately $6.1 million was repaid immediately after the acquisition of
the hotels.
The purchase prices we paid for seven of those ten hotels will be
adjusted at certain dates in the future by applying the initial pricing
methodology to such hotels' cash flows as shown for the year ended on the
adjustment dates. Any such adjustments must be approved by a majority of our
independent trustees. If the repricing produces a higher aggregate price for the
hotels, sellers (who are affiliated with the officers of our Company) will
receive an additional number of subordinated units that equals the increase in
value plus the value of any distributions that would have been made with respect
to such subordinated units if such units had been issued at the time of the
acquisition of such hotels. If, however, the repricing produces a lower
aggregate value for such hotels, the sellers will forfeit to the partnership
that number of subordinated units that equals the decrease in value plus the
value of any distributions made with respect to such subordinated units.
In order for us to qualify as a REIT, we cannot operate hotels.
Therefore, our hotels are leased to Hersha Hospitality Management, L.P. (which
is owned in part by the officers of our Company) pursuant to the percentage
leases based in part on the revenues at such hotels. We structured each
percentage lease to provide us with anticipated rents at least equal to 12% of
the purchase price paid for the hotel, net of (1) property and casualty
insurance premiums, (2) real estate and personal property taxes, and (3) a
reserve for furniture, fixtures and equipment equal to 4% (6% for the Holiday
Inn Hotel and Conference Center, Harrisburg, PA and the Holiday Inn, Milesburg,
PA) of gross revenues per quarter at the hotel. This pro forma return is based
on certain assumptions and historical revenues for the hotels (including
projected revenues for the newly-developed and newly-renovated hotels) and no
assurance can be given that future revenues for the hotels will be consistent
with prior performance or the estimates. Until the purchase price adjustment
dates, the rent on the newly-developed and newly-renovated hotels will be fixed.
See Item 2. Properties. After the adjustment dates, rent will be computed based
on a percentage rent of revenues of those hotels. The percentage leases will
have initial terms of five years and may be extended for two additional
five-year terms at the option of the lessee.
GROWTH STRATEGY
We seek to enhance shareholder value by increasing amounts available for
distribution to our shareholders by (1) acquiring additional hotels that meet
our investment criteria and (2) participating in any increased revenue from our
hotels through our percentage leases.
ACQUISITION STRATEGY
We focus on limited service and full service hotels with strong,
national franchise affiliations in the upper-economy and mid-scale market
segments, or hotels with the potential to obtain such franchises. In particular,
we consider acquiring limited service hotels such as Comfort Inn(R), Best
Western(R), Days Inn(R), Fairfield Inn(R), Hampton Inn(R), Holiday Inn(R) and
Holiday Inn Express(R) hotels, and limited service extended-stay hotels such as
Hampton Inn and Suites(R), Homewood Suites(R), Main Stay Suites(R) and Residence
Inn by Marriott(R) hotels.
INVESTMENT CRITERIA
We focus predominantly on potential acquisitions in the eastern United
States. Such investments may include hotels newly developed by certain of our
affiliates. Pursuant to an option agreement, we have an option to acquire any
hotels owned or developed in the future by certain of our affiliates within 15
miles of any hotels that we own for two years after acquisition or development.
Our acquisition policy is to acquire hotels for which we expect to receive rents
at least equal to 12% of the purchase price paid for each hotel, net of (1)
property and casualty insurance premiums, (2) real estate and personal property
taxes, and (3) a reserve for furniture, fixtures and equipment equal to 4% (6%
in the case of full-service hotels) of annual gross revenues at each hotel. Our
board of trustees, however, may change our acquisition policy at any time
without the approval of our shareholders. We intend to acquire hotels that meet
one or more of the following criteria:
o nationally-franchised hotels in locations with a relatively high
demand for rooms, with a relatively low supply of competing
hotels and with significant barriers to entry into the hotel
business, such as a scarcity of suitable hotel sites or zoning
restrictions;
o poorly managed hotels, which could benefit from new management,
new marketing strategy and association with a national
franchisor;
o hotels in a deteriorated physical condition that could benefit
significantly from renovations; and
o hotels in attractive locations that we believe could benefit
significantly by changing franchises to a superior brand.
We intend to lease hotels that we acquire to operators, including the
current lessee of all our hotels, Hersha Hospitality Management, L.P., as well
as operators unaffiliated with the lessee. Future leases with our current lessee
generally will be similar to the percentage leases. We will negotiate the terms
and provisions of each future lease, depending on the purchase price paid,
economic conditions and other factors deemed relevant at the time.
FINANCING
We may finance additional investments in hotels, in whole or in part,
with undistributed cash, subsequent issuances of Priority Class A Common Shares
or other securities, or borrowings. Our debt policy is to limit consolidated
indebtedness to less than 67% of the aggregate purchase prices paid for the
hotels in which we invest. Our board of trustees, however, may change the debt
policy without the approval of our shareholders. The aggregate purchase prices
for our hotels was approximately $47.5 million, and our current indebtedness is
$17.2 million, which represents approximately 36% of the aggregate purchase
price for our hotels. Because of our debt policy and the amount of indebtedness,
the success of our acquisition strategy will depend primarily on our ability to
access additional capital through issuances of equity securities.
INTERNAL GROWTH STRATEGY
Our percentage leases are designed to allow us to participate in growth
in revenues at our hotels. Our percentage leases generally provide that the
lessee will pay in each calendar quarter the greater of base rent or percentage
rent. The percentage rent for each hotel is comprised (1) a percentage of room
revenues up to a threshold, (2) a higher percentage of room revenues in excess
of that threshold but not more than a incentive threshold, (3) a lower
percentage of room revenues in excess of that incentive threshold and (4) a
percentage of revenues other than room revenues. The threshold is designed to
provide incentive to the lessee to generate higher revenues at each hotel by
lowering the percentage of revenue paid as percentage rent once room revenues
reach certain levels. In the case of the newly-developed and newly-renovated
hotels, the lessee will pay fixed rent until the adjustment date, after which
the lessee will pay the greater of base rent or percentage rent.
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
hotels we acquired on January 26, 1999.
Twelve Months Ended December 31, 1998
----------------------------------------------------------------
Average
Year Number of Room Other Daily
Opened Rooms Revenue Revenue(1) Occupancy Rate REVPAR(2)
------ -------- ------- ---------- --------- ------- ---------
HOTELS
CLARION SUITES:
Philadelphia, PA....... 1995 96 $ 2,437,428 $ 290,214 70.2% $99.11 $69.56
COMFORT INNS:
Denver, PA (5)......... 1990 45 778,050 0 63.2% $74.99 $47.37
Harrisburg, PA (3)..... 1998 81 702,755 22,761 54.4% $65.88 $35.85
HAMPTON INNS:
Carlisle, PA........... 1997 95 1,472,854 39,954 66.8% $63.63 $42.48
Selinsgrove, PA (6).... 1996 75 1,392,803 48,982 78.6% $65.58 $51.57
HOLIDAY INNS:
Milesburg, PA.......... 1986 118 1,453,950 289,739 53.6% $62.96 $33.76
Harrisburg, PA......... 1970 196 3,102,495 1,995,322 63.5% $68.34 $43.37
HOLIDAY INN EXPRESS:
Harrisburg, PA (4)...... 1968 117 1,361,098 74,459 59.2% $53.87 $31.87
Hershey, PA............. 1997 85 1,623,536 100,595 64.4% $81.25 $52.33
New Columbia, PA (5).... 1997 81 859,820 39,556 49.3% $58.96 $29.08
Total/weighted average........... 989 $15,184,789 $2,901,582 62.3% $69.54 $43.30
TOTAL REVENUE.................... $18,086,371
- -------------------------
(1) Represents restaurant revenue, telephone revenue and other revenue.
(2) REVPAR is determined by dividing room revenue by available rooms for the
applicable period.
(3) This hotel opened in May 1998 and, thus, the data shown represents
operations from the date of opening through December 31, 1998.
(4) The land underlying this hotel is leased to our operating partnership by
certain affiliates for rent of $15,000 per year for 99 years.
(5) The land underlying this hotel is leased to our operating partnership by
certain affiliates for rent of $6,000 per year for 99 years.
(6) A portion of the land adjacent to this hotel, which is not currently
used for hotel operations, is leased to an affiliate for $1 per year for
99 years.
HOLIDAY INN EXPRESS (RIVERFRONT), HARRISBURG, PENNSYLVANIA
DESCRIPTION. The Holiday Inn Express Riverfront, Harrisburg,
Pennsylvania, is located at 525 South Front Street. The hotel was opened in
1968, was purchased in 1984 and was fully renovated in 1996. It is a 117-room,
limited service hotel with non-smoking units available with an adjacent
restaurant and lounge. Amenities include a fitness center and adjacent banquet
and meeting facilities with a 200-person capacity.
GUEST PROFILE AND LOCAL COMPETITION. Approximately 25% of the hotel's
business is related to business from the Commonwealth of Pennsylvania. The
remainder of the hotel's business consists of tourists, overnight travelers and
people visiting local residents. We consider this hotel's primary competition to
be the Ramada Hotel on Second Street in Harrisburg, Pennsylvania.
HOLIDAY INN EXPRESS, HERSHEY, PENNSYLVANIA
DESCRIPTION. The Holiday Inn Express, Hershey, Pennsylvania is located
on Walton Avenue, one and one half miles from Hershey Park. The hotel, which
opened in October 1997, is an 85-room limited service hotel. Amenities include
an indoor pool, hot tub, fitness center, business service center, meeting
facility, complimentary continental breakfast and 24-hour coffee. All rooms have
one king bed or two queen beds and some rooms have refrigerators, coffee makers
and microwaves.
GUEST PROFILE AND LOCAL COMPETITION. Approximately 30% of the hotel's
business is related to commercial activity from local business. The hotel's
group business, which accounts for approximately 5% of its business, is
generated from area institutions, local weddings and local social and sporting
events. The remainder of the hotel's business consists of transient guests,
visitors to area residents and demand generated by the hotel's proximity to
Hershey Park. We consider this hotel's primary competition to be the Comfort Inn
in Hershey, Pennsylvania.
HOLIDAY INN EXPRESS, NEW COLUMBIA, PENNSYLVANIA
DESCRIPTION. The Holiday Inn Express, New Columbia, Pennsylvania is
located at the intersection of Interstate 80 and Route 15. The hotel, which
opened in December 1997, is an 81-room limited service hotel. Amenities include
an indoor pool, hot tub, fitness center, meeting facility, complimentary
continental breakfast and 24-hour coffee. All rooms have one king bed or two
queen beds, some Jacuzzi suites are available and some rooms have refrigerators,
coffee makers and microwaves. The Holiday Inn Express in New Columbia,
Pennsylvania was ranked number one in its region for GSTS (Guest Satisfaction
Tracking System), for February and March of 1998. This award recognizes the
Holiday Inn Express in New Columbia as the leader in guest satisfaction and
product service out of 32 other Holiday Inns and Holiday Inns Express in the
Eastern region.
GUEST PROFILE AND LOCAL COMPETITION. Approximately 80% of the hotel's
business is related to commercial activity from local business. As a result of
its proximity to ski resorts and nearby tourist attractions, recreational
travelers generate approximately 10% of the hotel's business. The remainder of
the hotel's business consists of overnight travelers and visitors to area
residents. We consider this hotel's primary competition to be the Comfort Inn in
New Columbia, Pennsylvania.
HAMPTON INN, CARLISLE, PENNSYLVANIA
DESCRIPTION. The Hampton Inn, Carlisle, Pennsylvania is located at the
intersection of Route 11 and exit 16 off the Pennsylvania Turnpike. The hotel,
which opened in June 1997, is a 95-room limited service hotel. Amenities include
an indoor pool, hot tub, fitness center, meeting facilities, complimentary
continental breakfast and 24-hour coffee. All rooms have one king bed or two
queen beds, some Jacuzzi suites are available and some rooms have refrigerators,
coffee makers and microwaves.
GUEST PROFILE AND LOCAL COMPETITION. Approximately 50% of the hotel's
business is related to commercial activity from local businesses. The remainder
of the hotel's business consists of overnight travelers and general demand
generated by the hotel's proximity to the Carlisle Fairgrounds and the Army War
College. We consider this hotel's primary competition to be the Holiday Inn in
Carlisle, Pennsylvania.
HAMPTON INN, SELINSGROVE, PENNSYLVANIA
DESCRIPTION. The Hampton Inn, Selinsgrove, Pennsylvania is located on
Pennsylvania Routes 11 and 15. The hotel, which opened in September 1996, is a
75-room, three story, limited service hotel. Amenities include an indoor pool,
hot tub, fitness center, meeting facilities, complimentary continental breakfast
and 24-hour coffee. All rooms have one king bed or two queen beds, some Jacuzzi
suites are available and some rooms have refrigerators, coffee makers and
microwaves. The Hampton Inn in Selinsgrove was recently named one of the top
hotels in the entire Hampton Inn system, receiving the hotel chain's Circle of
Excellence Award. The award recognizes superior quality and guest satisfaction
and is the highest distinction a Hampton Inn hotel can receive.
GUEST PROFILE AND LOCAL COMPETITION. Approximately 80% of the hotel's
business is related to commercial activity from local businesses. The remainder
of the hotel's business consists of pleasure travelers, transient guests and
demand generated by the hotel's proximity to area universities and Knoebels
Amusement Park. We consider this hotel's primary competition to be the Best
Western near Selinsgrove, Pennsylvania.
HOLIDAY INN HOTEL AND CONFERENCE CENTER, HARRISBURG, PENNSYLVANIA
DESCRIPTION. The Holiday Inn Hotel and Conference Center, Harrisburg,
Pennsylvania is located at the intersection of the Pennsylvania Turnpike exit 18
and Interstate 83, ten minutes from downtown, Harrisburg International Airport
and Hershey Park. The hotel opened in 1970 as a Sheraton Inn and was converted
to a Ramada Inn in 1984. It was completely renovated and converted to a Holiday
Inn in September 1995. This hotel has 196 deluxe guest units and is a full
service hotel, including a full service restaurant as well as a nightclub.
Amenities include an indoor tropical courtyard with a pool and Jacuzzi as well
as a banquet and conference facility for up to 700 people.
GUEST PROFILE AND LOCAL COMPETITION. Approximately 40% of the hotel's
business is related to commercial activity from local businesses. The remainder
of the hotel's business consists of overnight travelers visiting Hershey and
Harrisburg. We consider this hotel's primary competition to be the Radisson Penn
Harris in Camp Hill, Pennsylvania.
HOLIDAY INN, MILESBURG, PENNSYLVANIA
DESCRIPTION. The Holiday Inn, Milesburg/State College, Pennsylvania is
located at Exit 23, I-80 and US 50 North. The hotel opened in 1977 as a Sheraton
and was completely renovated in 1992. In 1996, the hotel was converted into a
Holiday Inn. It is a 118-room, full service hotel with a full service restaurant
and cocktail lounge. Amenities include an outdoor pool as well as banquet and
meeting facilities for 220 people.
GUEST PROFILE AND LOCAL COMPETITION. Approximately 20% of the hotel's
business is related to commercial activity from local businesses and demand
generated by local businesses. Approximately 80% of the hotel's business
consists of leisure travelers visiting the many tourist attractions around State
College and I-80. We consider this hotel's primary competition to be the Best
Western in Milesburg, Pennsylvania.
COMFORT INN, DENVER, PENNSYLVANIA
DESCRIPTION. The Comfort Inn, Denver, Pennsylvania is located at 2015
North Reading Road. This 45-room limited service hotel was constructed in 1990
and renovated in 1995. All rooms have one king bed or two queen beds and
non-smoking units are available. Amenities include hairdryers in all rooms, a
fitness center and a complimentary continental breakfast.
GUEST PROFILE AND LOCAL COMPETITION. Approximately 75% of the hotel's
business is comprised of leisure travelers and transient guests related to its
location at the crossroads of two major interstate highways. The remainder of
the hotel's business is due to commercial activity from local businesses and
people visiting area residents. We consider this hotel's primary competition to
be the Holiday Inn in Denver, Pennsylvania.
COMFORT INN, HARRISBURG, PENNSYLVANIA
DESCRIPTION. The Comfort Inn, Harrisburg, Pennsylvania is located 8
miles north of Hershey, Pennsylvania at 7744 Linglestown Road off exit 27 of
Interstate 81. The hotel opened in May 1998. It is an 81-room limited service
hotel. Amenities include an indoor pool, hot tub, fitness center, meeting
facilities, complimentary continental breakfast and 24-hour coffee. All rooms
have one king bed or two queen beds and some Jacuzzi suites are available.
GUEST PROFILE AND LOCAL COMPETITION. Approximately 25% of the hotel's
business is related to commercial activity from local businesses. The hotel's
group business, which accounts for approximately 5% of its business, is
generated from area institutions, local weddings and local social and sporting
events. The remainder of the hotel's business consists of transient and
recreational travelers generated by its proximity to Hershey, Pennsylvania. We
consider this hotel's primary competition to be the Holiday Inn in Grantville,
Pennsylvania.
CLARION SUITES, PHILADELPHIA, PENNSYLVANIA
DESCRIPTION. The Clarion Suites, Philadelphia, Pennsylvania is located
at 1010 Race Street, one half block from the newly-built Philadelphia convention
center and six blocks from the Independence Hall historic district and the
Liberty Bell. The hotel is located in the historic Bentwood Rocking Chair
Company building, which was constructed in 1896 and converted to a Quality
Suites hotel in the 1980s. The hotel was purchased by an affiliate as a Ramada
Suites in 1995 and substantially rehabilitated. The affiliate later converted
the hotel to a Clarion Suites. The hotel has 96 executive suites with
fully-equipped kitchens and an eight-story interior corridor with Victorian
style architecture. The hotel has a lounge featuring light fare and a comedy
cabaret. Amenities include two large meeting rooms, boardrooms, a fitness room
and a complimentary continental breakfast.
GUEST PROFILE AND LOCAL COMPETITION. Approximately 20% of the hotel's
business is comprised of leisure travelers and transient guests related to its
close proximity to the historic district. The remainder of the hotel's business
is due to commercial activity from local businesses and people visiting area
residents. We consider this hotel's primary competition to be all Center City,
Philadelphia hotels.
The following table sets forth certain information with respect to each
of our hotels:
Year Ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
HOLIDAY INN EXPRESS - HARRISBURG, PA
Occupancy 59.2% 56.4% 40.7% 43.2% 44.9%
ADR $53.87 $56.33 $52.77 $48.05 $48.34
REVPAR $31.87 $31.78 $21.50 $20.74 $21.70
HOLIDAY INN EXPRESS - HERSHEY, PA (1)
Occupancy 64.4% 38.8%
ADR $81.25 $75.62
REVPAR $52.33 $29.35
HOLIDAY INN EXPRESS - NEW COLUMBIA, PA (2)
Occupancy 49.3% 9.0%
ADR $58.96 $59.68
REVPAR $29.08 $5.39
HAMPTON INN - CARLISLE, PA (3)
Occupancy 66.8% 53.5%
ADR $63.63 $65.33
REVPAR $42.48 $34.93
HAMPTON INN - SELINSGROVE, PA (4)
Occupancy 78.6% 71.9% 50.1%
ADR $65.58 $65.29 $60.76
REVPAR $51.57 $46.96 $30.43
HOLIDAY INN HOTEL AND CONFERENCE CENTER
- - HARRISBURG, PA (5)
Occupancy 63.5% 63.3% 58.9% 46.2%
ADR $68.34 $68.22 $61.36 $56.97
REVPAR $43.37 $43.17 $36.13 $26.31
HOLIDAY INN - MILESBURG, PA
Occupancy 53.6% 52.0% 48.4% 51.0% 55.3%
ADR $62.69 $56.07 $52.31 $51.59 $48.64
REVPAR $33.76 $29.13 $25.31 $26.29 $26.88
COMFORT INN - DENVER, PA
Occupancy 63.2% 54.7% 53.5% 60.4% 60.4%
ADR $74.99 $73.26 $61.04 $50.68 $49.72
REVPAR $47.37 $40.08 $32.63 $30.60 $30.01
COMFORT INN - HARRISBURG, PA (6)
Occupancy 54.4%
ADR $65.88
REVPAR $35.85
CLARION SUITES, PHILADELPHIA, PA
Occupancy 70.2% 73.7% 60.2%
ADR $99.11 $91.02 $86.10
REVPAR $69.56 $67.09 $51.83
- ---------------
(1) This hotel opened in October 1997 and, thus, the data shown for 1997
represent approximately three months of operations.
(2) This hotel opened in December 1997 and, thus, the data shown for 1997
represent approximately one month of operations.
(3) This hotel opened in June 1997 and, thus, the data shown for 1997 represent
approximately seven months of operations.
(4) This hotel opened in September 1996 and, thus, the data shown for 1996
represent approximately four months of operations.
(5) This hotel was converted to a Holiday Inn in September 1995 and, thus, the
data shown for 1995 represent approximately four months of operations.
(6) This hotel opened in May 1998 and, thus, the data shown for 1998 represent
approximately eight months of operations.
THE PERCENTAGE LEASES
The following summary is qualified in its entirety by the actual
percentage leases, the form of which has been filed as an exhibit to this Form
10-K.
Our hotels are operated by the lessee pursuant to percentage leases. We
intend to lease future acquired hotels to operators, including both our current
lessee and operators unaffiliated with the lessee. Future leases with our
current lessee generally will be similar to the percentage leases. Future leases
with operators unaffiliated with our current lessee may or may not be similar to
the percentage leases. Our board of trustees will negotiate the terms and
provisions of each future lease, depending on the purchase price paid, economic
conditions and other factors deemed relevant at the time.
Each percentage lease has an initial non-cancelable term of five years.
All, but not less than all, of our current percentage leases may be extended for
an additional five-year term at the lessee's option. At the end of the first
extended term, the lessee, at its option, may extend some or all of the
percentage leases for an additional five-year term. The percentage leases are
subject to earlier termination upon the occurrence of defaults thereunder and
certain other events described therein.
The percentage leases generally provide for the lessee to pay in each
calendar quarter the greater of the base rent or percentage rent. The percentage
rent for each hotel is comprised of (i) a percentage of room revenues up to a
Threshold, (ii) a percentage of room revenues in excess of the first threshold
but less than a second incentive threshold, (iii) a percentage of room revenues
in excess of the second incentive threshold and (iv) a percentage of revenues
other than room revenues. The second threshold is designed to provide an
incentive to the lessee to generate higher revenues at each hotel. Until the
applicable adjustment date, the rent on the newly-renovated hotels and the
newly-developed hotels will be the initial fixed rents applicable to those
hotels. After the adjustment date, rent will be computed with respect to the
newly-renovated hotels and the newly-developed hotels based on the percentage
rent formulas described herein. The lessee also will be obligated to pay certain
other amounts, including interest accrued on any late payments or charges. Rent
is payable quarterly in arrears.
The following table sets forth the initial fixed rent, if applicable,
the annual base rent and the percentage rent formulas:
Initial Annual Percentage
Initial Hotel Fixed Rent(1) Base Rent(1) Rent Formula
------------- ------------- ------------ -------------
NEWLY-DEVELOPED
HOLIDAY INN EXPRESS
Hershey, PA $794,686 $364,000 42.1% of room revenue up to
$1,479,523, plus 65.0% of room
revenue in excess of $1,479,523 but
less than $1,740,615, plus 29.0% of
room revenue in excess of $1,740,615,
plus 8.0% of all non-room revenue.
New Columbia, PA 498,198 227,500 46.7% of room revenue up to $850,986,
plus 65.0% of room revenue in excess
of $850,986 but less than $1,001,160,
plus 29.0% of room revenue in excess
of $1,001,160, plus 8.0% of all
non-room revenue.
HAMPTON INN:
Carlisle, PA 699,062 325,000 42.3% of room revenue up to
$1,293,906, plus 65.0% of room
revenue in excess of $1,293,906 but
less than $1,522,242, plus 29.0% of
room revenue in excess of $1,522,242,
plus 8.0% of all non-room revenue.
COMFORT INN:
Harrisburg, PA 514,171 234,000 40.7% of room revenue up to $980,050,
plus 65.0% of room revenue in excess
of $980,050 but less than $1,153,000,
plus 29.0% of room revenue in excess
of $1,153,000, plus 8.0% of all
non-room revenue.
NEWLY-RENOVATED
HOLIDAY INN EXPRESS:
Harrisburg, PA 504,406 195,000 31.0% of room revenue up to
$1,153,655, plus 65.0% of room
revenue in excess of $1,153,655 but
less than $1,357,241, plus 29.0% of
room revenue in excess of $1,357,241,
plus 8.0% of all non-room revenue.
Initial Annual Percentage
Initial Hotel Fixed Rent(1) Base Rent(1) Rent Formula
------------- ------------- ------------ -------------
HOLIDAY INN:
Milesburg, PA 524,750 214,500 36.1% of room revenue up to
$1,065,960, plus 65.0% of room
revenue in excess of $1,065,960 but
less than $1,254,070, plus 31.0% of
room revenue in excess of $1,254,070,
plus 8.0% of all non-room revenue.
COMFORT INN:
Denver, PA 262,234 112,288 35.4% of room revenue up to $559,542,
plus 65.0% of room revenue in excess
of $559,542 but less than $658,285,
plus 29.0% of room revenue in excess
of $658,285, plus 8.0% of all
non-room revenue.
STABILIZED
HOLIDAY INN HOTEL AND
CONFERENCE CENTER:
Harrisburg, PA n/a 675,921 44.3% of room revenue up to
$2,638,247, plus 65.0% of room
revenue in excess of $2,638,247 but
less than $3,103,820, plus 31.0% of
room revenue in excess of $3,103,820,
plus 8.0% of all non-room revenue.
HAMPTON INN:
Selinsgrove, PA n/a 308,469 49.0% of room revenue up to
$1,081,152, plus 65.0% of room
revenue in excess of $1,081,152 but
less than $1,271,943, plus 29.0% of
room revenue in excess of $1,271,943,
plus 8.0% of all non-room revenue.
CLARION SUITES:
Philadelphia, PA n/a 418,593 36.1% of room revenue up to
$1,998,097, plus 65.0% of room
revenue in excess of $1,998,097 but
less than $2,350,702, plus 29.0% of
room revenue in excess of $2,350,702,
plus 8.0% of all non-room revenue.
- -----------------
(1) The initial fixed rent or base rent, as applicable, will accrue pro rata
during each quarter of each lease year. The lessee, however, will pay
the initial fixed rent or the base rent, as applicable, for each
calendar quarter in each lease year based on the ratio of budgeted gross
revenues for such calendar quarter to budgeted gross revenues for such
lease year.
ITEM 3. LEGAL PROCEEDINGS
We are not presently subject to any material litigation. To our
knowledge, no litigation has been threatened against us or our affiliates other
than routine actions and administrative proceedings substantially all of which
are expected to be covered by liability insurance and which, in the aggregate,
are not expected to have a material adverse effect on our business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during 1998,
through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our Priority Class A Common Shares began trading on the American Stock
Exchange on January 21, 1999 under the symbol "HT." As of March 24, 1999, the
last reported closing price per Priority Class A Common Share on the American
Stock Exchange was $6.016. The following table sets forth the high and low sales
price per Priority Class A Common Share reported on the American Stock Exchange
as traded for the period indicated.
PERIOD HIGH LOW
------ ---- ----
1999
First Quarter (January 21, 1999 through March 24, 1999) $6.375 $6.00
SHAREHOLDER INFORMATION
At March 29, 1999, we had approximately 134 holders of record of our
Priority Class A Common Shares. The subordinated units of limited partnership
interest in our operating partnership subsidiary (which are redeemable for Class
B Common Shares subject to certain limitations) were held by twelve entities and
or persons, including us.
Our organizational documents limit the number of equity securities of
any series that may be owned by any single person or affiliated group to 9.9% of
the outstanding shares.
DISTRIBUTION INFORMATION
On February 12, 1999, we declared a cash distribution for the holders of
the Priority Class A Common Shares for the period from January 26, 1999 to March
31, 1999 in the amount of $0.13 per share, payable on April 30, 1999, to holders
of record on March 31, 1999. We currently anticipate maintaining at least the
current distribution rate for the immediate future, unless actual results of
operations, economic conditions or other factors differ from our current
expectations. Future distributions, if any, will be at the discretion of our
board of trustees and will depend on our actual cash flow, financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Internal Revenue Code and such other factors as we may deem
relevant.
Our operating partnership subsidiary has not yet paid a distribution to
the holders of its subordinated units of limited partnership interest.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following sets forth selected financial and operating data on a pro
forma and historical consolidated basis. The following data should be read in
conjunction with the financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K. The statement of operations and other data
for the year ended December 31, 1998 include the historical results of the
combined hotels prior to our acquisition of them.
Historical operating results of the combined hotels prior to our
acquisition, including net income, may not be comparable to future operating
results.
HERSHA HOSPITALITY TRUST
BALANCE SHEET DATE
(IN THOUSANDS)
December 31, 1998
Historical Pro Forma
---------- ---------
Net investment in hotel properties................ -- $ 40,489
Minority interest in Partnership.................. -- $ 18,355
Shareholders' equity.............................. -- $ 8,488
Total assets...................................... -- $ 44,243
Total debt........................................ -- $ 17,400
COMBINED ENTITIES - INITIAL HOTELS
SUMMARY COMBINED HISTORICAL OPERATING AND FINANCIAL DATA
(IN THOUSANDS)
Year Ended December 31
------------------------------
1998 1997 1996
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Room revenue $ 15,185 $10,880 $ 7,273
Other revenue (1) 2,901 2,565 2,716
----- ----- -----
Total revenue $ 18,086 $13,445 $ 9,989
Hotel operating expenses (2) 12,604 9,173 8,172
Interest 1,991 1,354 921
Depreciation and amortization 1,543 1,189 924
----- ----- ------
Net income (loss) (3) $1,948 $ 1,729 $ (28)
====== ======= =======
- -------------------------
(1) Represents restaurant revenue, telephone revenue and other revenue.
(2) Represents departmental costs and expenses, general and administrative,
repairs and maintenance, utilities, marketing, management fees, real
estate and personal property taxes, property and casualty insurance and
ground leases.
(3) The Combined Entities are not subject to income tax, except Hersha
Enterprises, Ltd., which had no tax liability for the periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained in this section that are not historical facts
are based on current expectations. This includes statements regarding our 1999
anticipated revenues, expenses and returns, and future capital requirements.
Words such as "believes", "expects", "anticipate", "intends", "plans" and
"estimates" and variations of such words and similar words also identify
forward-looking statements. Such statements are forward-looking in nature and
involve a number of risks and uncertainties, including the risks described under
the caption "Risk Factors" in our registration statement on Form S-11 (File No.
333-56087), which is attached hereto as Exhibit __. Our actual results may
differ materially. We caution you not to place undue reliance on any such
forward-looking statements. We assume no obligation to update any
forward-looking statements as a result of new information, subsequent events or
any other circumstances
OVERVIEW
Please refer to the information under Item 1, entitled "Overview."
RESULTS OF OPERATIONS OF OUR HOTELS
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31,
1997
Room Revenue for our hotels increased $4,305,000 or 40% to $15,185,000
in 1998 from $10,880,000 in 1997. The increase resulted from the addition of
86,114 available room nights with an overall increase of 58,986 room nights
sold. The increase in room nights available was a result of opening three new
hotels in 1997, which were open the full year in 1998, and one hotel that opened
in 1998. In addition, a 3% increase in occupancy to 62% from 60% in 1997 as well
as a 2% increase in our average daily rate to $69.54 compared to $68.27 in 1997
augmented the available room nights. Revenue per available room (REVPAR)
increased 5% to $43.30 from $41.09.
Total expenses less depreciation, amortization and interest increased by
$3,431,000 or 37% to $12,604,000. Operating income before interest expense,
depreciation and amortization increased by 28% to $5,482,000 from $4,272,000.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31,
1996
Room revenue increased by $3,607,000 or 50% to $10,880,000 in 1997 from
$7,273,000 in 1996. The increase resulted from the addition of four new hotels
opening in 1997 and one hotel which was only open during half of 1996 being open
for the entire 1997 period. These new properties added additional available
room-nights of 43,171. In addition, a 13% increase in occupancy to 60% from 53%
in 1996 as well as a 7% increase in our average daily rate to $68.27 compared to
$63.51 in 1996 augmented the available room-nights. Revenue per available room
increased 25% to $41.09 from $33.48.
Total expenses less depreciation, amortization and interest increased by
$1,001,000 or 12% to $9,173,000 but decreased as a percentage of total revenue
to 68% from 82%. Operating income before interest expense, depreciation and
amortization increased by 135% to $4,272,000 from $1,817,000.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31,
1995
Room revenue increased $2,011,000 or 38% to $7,273,000 in 1996 from
$5,262,000 in 1995. The increase in revenue came through the opening of two
hotels in 1996 adding additional room-nights available of 41,168. In addition,
an overall increase in occupancy of 10% to 53% from 48% in 1995 as well as a 2%
increase in our average daily rate to $63.51 compared to $62.40 in 1995
augmented the available room-nights. Revenue per available room increased 12% to
$33.48 from $29.89.
Total expenses less depreciation, amortization and interest increased by
$1,922,000 or 31% to $8,172,000 but decreased as a percentage of total revenue
to 82% from 87%. Operating income before interest expense, depreciation and
amortization increased by 87% to $1,817,000 from $969,000.
LIQUIDITY AND CAPITAL RESOURCES
We expect to meet our short-term liquidity requirements generally
through net cash provided by operations, existing cash balances and, if
necessary, short-term borrowings under our line of credit. We believe that our
net cash provided by operations will be adequate to fund both operating
requirements and our payment of dividends in accordance with REIT requirements
of the federal income tax laws. We expect to meet our long-term liquidity
requirements, such as scheduled debt maturities and property acquisitions,
through long-term secured and unsecured borrowings, the issuance of additional
equity securities or, in connection with acquisitions of hotel properties, the
issuance of units of limited partnership interest in our operating partnership
subsidiary.
We are currently pursuing a $10 million line of credit with several
regional or local banks in Pennsylvania. We may use the line of credit to fund
future acquisitions and for working capital. We anticipate that the line of
credit will be secured by three hotels and we expect the proposed interest rate
for the line of credit will be 7.75%. In the future, we may seek to increase the
amount of the line of credit, negotiate additional credit facilities or issue
corporate debt instruments. Any debt incurred or issued by us may be secured or
unsecured, long-term or short-term, fixed or variable interest rate and may be
subject to such other terms as we deem prudent.
We have a debt policy that limits our consolidated indebtedness to less
than 67% of the aggregate purchase prices for the hotels in which we have
invested. However, our organizational documents do not limit the amount of
indebtedness that we may incur and our board of trustees may modify our debt
policy at any time without shareholder approval. We intend to repay indebtedness
incurred under the line of credit from time to time, for acquisitions or
otherwise, out of cash flow and from the proceeds of issuances of additional
Priority Class A Common Shares and other securities.
We will invest in additional hotels only as suitable opportunities
arise. We will not undertake investments in hotels unless adequate sources of
financing are available. Our bylaws require the approval of a majority of our
board of trustees, including a majority of the independent trustees, to acquire
any additional hotel in which one of our trustees or officers, or any of their
affiliates, has an interest (other than solely as a result of his status as a
trustee, officer or shareholder of our company). We expect that future
investments in hotels will depend on and will be financed by, in whole or in
part, the proceeds from additional issuances of Priority Class A Common Shares
or other securities or borrowings. Because of the level of our indebtedness, the
success of our acquisition strategy will depend primarily on our ability to
access additional capital through issuances of equity securities. We currently
have no agreement or understanding to invest in any hotel and there can be no
assurance that we will make any investments in any other hotels that meet our
investment criteria.
Pursuant to our percentage leases, we will be required to make available
to the lessee of our hotels 4% (6% for the Holiday Inn Hotel and Conference
Center, Harrisburg, PA and the Holiday Inn, Milesburg, PA) of gross revenues per
quarter, on a cumulative basis, for periodic replacement or refurbishment of
furniture, fixtures and equipment at each of our hotels. We believe that a 4%
(6% for the Holiday Inn Hotel and Conference Center, Harrisburg, PA and the
Holiday Inn, Milesburg, PA) percentage set-aside is a prudent estimate for
future capital expenditure requirements. We intend to spend amounts in excess of
the obligated amounts if necessary to comply with the reasonable requirements of
any franchise license under which any of our hotels operate and otherwise to the
extent we deem such expenditures to be in our best interests. We will also be
obligated to fund the cost of certain capital improvements to our hotels. We
believe that amounts required to be set aside in our percentage leases will be
sufficient to meet required expenditures for furniture, fixtures and equipment
during the term of the percentage leases. We will use undistributed cash or
borrowings under credit facilities to pay for the cost of capital improvements
and any furniture, fixture and equipment requirements in excess of the set aside
referenced above.
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit the lessee's ability to raise
room rates in the face of inflation, and annual increases in average daily rates
have failed to keep pace with inflation.
SEASONALITY
Our hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates during the second and third quarters. This
seasonality can be expected to cause fluctuations in our quarterly lease revenue
to the extent that we receive percentage rent.
YEAR 2000 COMPLIANCE
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the year
1900. Like other organizations, we could be adversely affected if the computer
systems used by us or our service providers do not properly address this problem
prior to January 1, 2000. Currently, we do not anticipate that the transition to
the year 2000 will have any material impact on our performance. Our plan to
respond to the Year 2000 Problem, which is being conducted jointly with the
lessee of all of our hotels, consists of three phases that address the state of
readiness, Year 2000 costs, risks and contingency plans.
Phase I includes a plan to respond to the Year 2000 Problem, which
includes the following focus areas:
o telephone and call accounting systems;
o credit card readers;
o sprinkler systems and fire suppression system;
o security systems;
o card entry systems;
o elevator systems;
o computer systems and vendor contracts (hardware);
o fax machines and laundry equipment;
o HVAC (heating and air conditioning systems) and utility companies;
and
o computer software systems.
In cooperation with our lessee, we have created a task force and
procedures to survey, test and report results for management's review. We
believe that the cost to remediate our Year 2000 problems will be minimal and
have allocated funds of $25,000 to cover such costs. The Holiday Inn hotel and
conference center, Harrisburg, PA has been used as an example for our other
hotels. We reviewed this hotel for Year 2000 compliance, and the review resulted
in hardware and software compliance. The credit card readers, card entry system
and computers have been tested and are compliant. Based on the results
experienced for the Holiday Inn hotel and conference center, Harrisburg, PA,
management believes that the $25,000 allocation for funding will be adequate.
In cooperation with the lessee, we are currently proceeding with Phase
II of our assessment of the Year 2000 Problem. Phase II involves initiating a
survey and checklist to each hotel manager for completion and return to
management. The survey was customized for our hotels to include (1) the current
vendor list with a column for a listing of current product usage and (2) a
vendor address log and telephone number listing. Each hotel checklist included
the front desk, business center, housekeeping/back office, beverage and guest
rooms. Phase II also involves the testing of our computer systems. We obtained a
test computer disk-copy to test each of our computers and the lessee's
computers. All written tests and written confirmation that relate to our or our
lessee's hotel products, equipment and software are logged to monitor our
progress towards Year 2000 compliance. We are in the process of conducting such
testing and have yet to encounter any material Year 2000 compliance problems.
Phase III of our assessment of the Year 2000 Problem includes the
results of testing, action plans, reporting of results and contingency plans to
remediate any Year 2000 Problems. The risks and contingency plans include a
"reasonably likely worst case Year 2000 scenario." We believe that the
consequences of a worst case scenario rest almost exclusively with outside
vendors (not including the lessee) and not in systems within our hotels. The
contingency plan, which we are currently initiating, is to replace non-compliant
vendors with new compliant vendors. A thorough review of all vendors will
continue to be an ongoing Year 2000 strategy. However, our contingency plan has
back-up support to address each of our focus areas.
The franchisors of our hotels have provided compliance guides to assist
in our response to the Year 2000 Problem. Promus Hotel Corporation (Hampton Inn
Hotels), Holiday Hospitality/Bass Hotels & Resorts (Holiday Inn and Holiday Inn
Express Hotels) and Choice Hotels International (Comfort Inn and Clarion Suites
Hotels) have completed third party vendor checks, reviewed computer systems and
provided for reference a preferred compliant vendor list. A checklist for Year
2000 issues, a work plan and a sample vendor letter was provided to help us
complete our assessment of the Year 2000 Problem.
In cooperation with the lessee, we are in the process of mailing a
questionnaire to third party vendors to assess third party risks. We expect to
complete the results of this risk assessment by July 1999. In addition, we have
sought assurances from our lessee and other service providers that they are
taking all necessary steps to ensure that their computer systems will accurately
reflect the year 2000, and we will continue to monitor the situation. There can
be no assurance that the systems of such third parties will be Year 2000
compliant or that any third party's failure to have Year 2000 compliant systems
would not have a material adverse effect on our systems and operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
None.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedule on
page F-1 under Item 14 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF OUR COMPANY
TRUSTEES AND EXECUTIVE OFFICERS
Our board of trustees consists of seven members, three of whom are
independent. All of the trustees will serve staggered terms of two years, and
the trustees will be divided into two classes. Each trustee in Class I will hold
office initially for a term expiring at the first annual meeting of shareholders
(2000) and each trustee in Class II will hold office initially for a term
expiring at the second annual meeting of shareholders (2001). Certain
information regarding our trustees and executive officers is set forth below.
Name Age Position
---- --- ---------
Hasu P. Shah (Class II) 53 Chairman of the Board, Chief
Executive Officer and Trustee
Kiran P. Patel 49 Chief Financial Officer and
Secretary
Rajendra O. Ghandi 50 Treasurer
Bharat C. Mehta (Class II) 53 Trustee
K.D. Patel (Class II) 54 Trustee
L. McCarthy Downs, III (Class I) 46 Trustee
Everette G. Allen, Jr. (Class I) 58 Independent Trustee
Thomas S. Capello (Class II) 55 Independent Trustee
Mark R. Parthemer (Class I) 38 Independent Trustee
Hasu P. Shah is the President and CEO of Hersha Enterprises, Ltd. and
has held that position since its inception in 1984. He started Hersha
Enterprises, Ltd. with the purchase of the 125-room Quality Inn Riverfront in
Harrisburg, Pennsylvania which he converted to a 117-room Holiday Inn Express.
Recently the "Central Penn Business Journal" honored Hersha Enterprises, Ltd. as
one of the Fifty Fastest Growing Companies in 1997 in central Pennsylvania. His
interest in construction and renovations of hotels initiated the development of
Hersha Construction Company for the construction and renovation of new
properties and Hersha Hotel Supply Company to supply furniture, fixtures and
equipment supplies to the properties. Mr. Shah and his wife, Hersha, are active
members of the community. Mr. Shah serves on the Board of Directors of several
organizations including the Pennsylvania State University Capital Campus in
Harrisburg, Pennsylvania, the Harrisburg Foundation, Human Enrichment by Love
and Peace (H.E.L.P.), the Capital Region Chamber of Commerce and the Vraj Hindu
Temple. Mr. Shah received a Bachelors of Science degree in Chemical Engineering
from Tennessee Technical University and obtained a Masters degree in
Administration from Pennsylvania State University.
K.D. Patel has been a principal of Hersha Enterprises, Ltd. since 1989.
Mr. Patel currently serves as the President of the lessee of all our hotels. He
has received national recognition from Holiday Inn Worldwide for the successful
management of Hersha's Holiday Inn Express Hotels. In 1996, Mr. Patel was
appointed by Holiday Inn Worldwide to serve as an advisor on its Sales and
Marketing Committee. Prior to joining Hersha Enterprises, Ltd., Mr. Patel was
employed by Dupont Electronics in New Cumberland, Pennsylvania from 1973 to
1990. He is a member of the Board of Directors of a regional chapter of the
American Red Cross and serves on the Advisory Board of Taneytown Bank and Trust.
Mr. Patel received a Bachelor of Science degree in Mechanical Engineering from
the M.S. University of India and a Professional Engineering License from the
Commonwealth of Pennsylvania in 1982.
Rajendra O. Ghandi was appointed as Treasurer by our board of trustees
on February 12, 1999. Mr. Gandhi has been a principal of Hersha Enterprises,
Ltd. since 1986. Mr. Gandhi currently serves (and has served since 1997) as
President of Hersha Hotel Supply, Inc., which provides furnishings, case goods
and interior furnishing materials to hotels and nursing homes in several states.
Mr. Gandhi is a graduate of the University of Bombay, India and obtained an MBA
degree from the University of West Palm Beach, Florida.
Bharat C. Mehta has been a principal of Hersha Enterprises, Ltd. since
1985. Mr. Mehta currently serves as President of Hersha Health Care Management
Division of Hersha Enterprises, Ltd. Mr. Mehta worked as a chemical engineer
from 1967 to 1983. He was with Lever Brothers Corporation (UniLever, a
multinational company) where he started as a production supervisor in 1977 and
gradually was promoted to Production Manager of a large manufacturing department
in 1981. He left Lever Brothers in 1983 to start his own business. He is a
charter member of Denver-Adamstown (PA) Rotary Club. He is also a Board Member
of Cocalico Community Partnership, a non-profit organization whose goal is to
improve the health, stability and emotional well-being of the community. Mr.
Mehta received a Bachelor of Science degree in Chemical Engineering from the
Worcester Polytechnic Institute in Massachusetts and earned a Masters degree
from Pennsylvania State University.
Kiran P. Patel has been a principal of Hersha Enterprises, Ltd. since
1993. Mr. Patel is currently the partner in charge of Hersha's Land Development
and Business Services Divisions. Prior to joining Hersha Enterprises, Ltd., Mr.
Patel was employed by AMP Incorporated, in Harrisburg, Pennsylvania. Mr. Patel
serves on various Boards for community service organizations. Mr. Patel received
a Bachelor of Science degree in Mechanical Engineering from M.S. University of
India and obtained a Masters of Science degree in Industrial Engineering from
the University of Texas in Arlington.
L. McCarthy Downs, III, is the Senior Vice President and Manager of the
Corporate Finance Department of Anderson & Strudwick, Incorporated, the
underwriter of our initial public offering. He has held that position since 1990
and has been involved in several public and private financings for REITs. Prior
to 1990, Mr. Downs was employed by another investment banking and brokerage firm
for seven years. Mr. Downs received a Bachelor of Science degree in Business
Administration from The Citadel and obtained an M.B.A. from The College of
William and Mary.
Everette G. Allen, Jr. is chairman of and a senior partner in the law
firm of Hirschler, Fleischer, Weinberg, Cox & Allen, P.C. in Richmond, Virginia.
Mr. Allen concentrates his practice in litigation, real estate development,
commercial disputes law, finance and debt restructuring and has been practicing
at Hirschler, Fleischer since 1970. Mr. Allen was admitted to the Virginia State
Bar in 1965. He served as Executive Editor of the Virginia Law Review from 1964
to 1965 and served as a Law Clerk to Fourth Circuit Judge Albert V. Bryan of the
U.S. Court of Appeals during 1965 and 1966. He was a member of the Board of
Trustees of Randolph-Macon College from 1988 to 1992. Mr. Allen currently serves
as a member of the American College of Trial Lawyers, a member of the Board of
Directors of Virginia Gas Company and as a Trustee of the Virginia Student Aid
Foundation. Mr. Allen received his B.A. degree from Randolph Macon College in
1962 and his law degree from University of Virginia in 1965.
Thomas S. Capello is President, Chief Executive Officer and Director of
First Capitol Bank in York, Pennsylvania and has held these positions since its
founding in 1988. First Capitol Bank specializes in small business lending and
has expanded into three branches with assets of almost $105,000,000. From 1983
to 1988 Mr. Capello served as Vice President and Manager of the Loan Production
Office of The First National Bank of Maryland. Prior to his service at the First
National Bank of Maryland, Mr. Capello served as Vice President and Senior
Regional Lending Officer at Commonwealth National Bank and worked at the
Pennsylvania Development Credit Corporation. Mr. Capello is an active member of
the board of the Central Pennsylvania Venture Capital Forum, Farm and National
Lands Trust, Better York, WITF, Martin Library, Motter Printing Company, 19th
District, Second Mile and Shadofax. Mr. Capello is a graduate of the Stonier
Graduate School of Banking at Rutgers University and holds an undergraduate
degree with a major in Economics from Pennsylvania State University.
Mark R. Parthemer has served as Special Counsel at Saul, Ewing, Remick &
Saul LLP in the Harrisburg, Pennsylvania office since January, 1998. Mr.
Parthemer concentrates his practice in general business, tax and estates law.
Prior to joining Saul, Ewing, Remick & Saul LLP, Mr. Parthemer worked at Coopers
& Lybrand LLP as a tax specialist from 1985 to October 1989. From October 1989
to January 1998 he worked at, and became a partner of, Boswell, Tintner, Piccola
& Wickersham, another law firm located in Harrisburg, Pennsylvania. Mr.
Parthemer is the current First Assistant Solicitor of Dauphin County where he
advises the County Commissioners on legal matters, including tax, business and
finance. He has recently been appointed to the Board of Keystone Area Council,
Boy Scouts of America and the Board of The Vision Foundation. Mr. Parthemer
received his B.A. and B.S. degrees from Franklin and Marshall College and his
law degree from The Dickinson School of Law. He is admitted to practice law in
Pennsylvania and before the United States Tax Court.
ITEM 11. EXECUTIVE COMPENSATION
Our Compensation Committee consists of Everette G. Allen, Jr., Thomas A.
Capello and Mark R. Parthemer, all of whom are independent trustees. No
compensation was awarded to, earned by or paid to any of our trustees or
executive officers in 1998. Below we have described the arrangements by which we
intend to compensate our trustees and executive officers.
COMPENSATION
Each trustee is paid $10,000 per year for those residing outside the
Commonwealth of Pennsylvania and $7,500 per year for those residing in the
Commonwealth of Pennsylvania, payable in quarterly installments. In addition, we
will reimburse all trustees for reasonable out-of-pocket expenses incurred in
connection with their services on our board of trustees. No officers of our
Company receive any cash compensation other than the trustee's fees for those
officers who are trustees. However, the Chairman of our board of trustees will
be entitled to receive a salary of not more than $100,000 per year provided that
the Priority Class A Common Shares have a bid price of $9.00 per share or higher
for 20 consecutive trading days and remains at or above $9.00 per share.
On the effective date of our initial public offering, our independent
trustees received options to purchase the following Class B Common Shares at
$6.00 per share: Mr. Allen, 30,000; Mr. Capello, 3,000; and Mr. Parthemer,
1,000. The options were granted under the Hersha Hospitality Trust Non-Employee
Trustees' Option Plan (the "Trustees' Plan"), which may be amended by our board
of trustees to provide for other awards, including awards to future independent
trustees. The options granted on the effective date of our initial public
offering will become exercisable as described below under "The Trustees' Plan."
THE OPTION PLAN
We have adopted an Option Plan for the purpose of attracting and
retaining executive officers and employees. The Option Plan authorizes the
issuance of options to purchase Class B Common Shares ("Share Options") and
options to purchase subordinated units of limited partnership interest in our
operating partnership subsidiary ("Unit Options"), described more fully below.
Administration of the Option Plan will be carried out by (1) the compensation
committee of our board of trustees, with respect to grants of Share Options; and
(2) our operating partnership or its delegate, with respect to grants of Unit
Options. The compensation committee may not delegate its authority with respect
to option awards to individuals subject to Section 16 of the Securities Exchange
Act of 1934. As used in this summary, the term "Administrator" means the
compensation committee or its delegate, or our operating partnership subsidiary,
as appropriate.
Our officers and employees and other persons and entities that provide
services to us are eligible to participate in the Option Plan ("Participants").
Under the Option Plan, an aggregate of 650,000 Class B Common Shares and
subordinated units will be available for issuance. The Option Plan provides for,
in the event Class B Common Shares are converted into another security of our
Company, the issuance of equivalent amounts of such security and options to
purchase such security into which the Class B Common Shares are converted. The
Plan provides for the grant of (1) options intended to qualify as incentive
stock options ("ISOs") under Section 422 of the Internal Revenue Code, and (2)
options not intended to so qualify ("nonqualified options"). All Unit Options
granted under the Plan will be nonqualified options; Share Options may be either
ISOs or nonqualified options.
Section 422 of the Internal Revenue Code imposes various requirements in
order for an option to qualify as an ISO, including allowing a maximum ten-year
term of the option and an option price not less than the fair market value of
the underlying shares on the date of grant. In addition, under Section 422, no
Participant may receive ISOs (under all incentive share option plans of our
Company and our parent or subsidiary corporations) that are first exercisable in
any calendar year for Class B or Priority Common Shares having an aggregate fair
market value (determined as of the date the ISO is granted) that exceeds
$100,000 (the "$100,000 Limit"). To the extent options first become exercisable
by a Participant in any calendar year for a number of Class B or Priority Common
Shares in excess of the $100,000 Limit, they will be treated as nonqualified
options.
The principal difference between options qualifying as ISOs under
Section 422 of the Internal Revenue Code and nonqualified options is that a
Participant generally will not recognize ordinary income at the time an ISO is
granted or exercised, but rather at the time the Participant disposes of shares
acquired under the ISO. In contrast, the exercise of a nonqualified option
generally is a taxable event that requires the Participant to recognize, as
ordinary income, the difference between the shares' (or Units') fair market
value and the option price. The employer will not be entitled to a federal
income tax deduction on account of the grant or the exercise of an ISO, whereas
the employer is entitled to a federal income tax deduction on account of the
exercise of a nonqualified option equal to the ordinary income recognized by the
Participant. The employer may claim a federal income tax deduction on account of
certain dispositions of shares acquired upon the exercise of an ISO.
Options under the Option Plan may be awarded by the Administrator, and
the Administrator will determine the option exercise period and any conditions
on exercisability. The options granted under the Option Plan will be exercisable
only if (1) we obtain a per share closing price on the Priority Class A Common
Shares of $9.00 or higher for 20 consecutive trading days and (2) the closing
price on the Priority Class A Common Shares for the prior trading day was $9.00
or higher. In addition, no option granted under the Option Plan may be exercised
more than five years after the date of grant. The exercise price for options
granted under the Option Plan will be determined by the Administrator at the
time of grant, but will not be less than the fair market value of the Class B
Common Shares on the date of grant (in the case of Share Options), or less than
the fair market value of the Units on the date of grant (in the case of Unit
Options).
An option may be exercised for any number of Class B Common Shares or
Units up to the full number for which the option could be exercised. A
Participant will have no rights as a shareholder with respect to Class B Common
Shares subject to a Share Option until the Share Option is exercised, and will
have no rights as a unitholder with respect to Units subject to a Unit Option
until the Unit Option is exercised. Any Class B Common Shares or Units subject
to options which are forfeited (or expire without exercise) pursuant to the
terms established at the time of grant will again be available for grant under
the Option Plan.
Payment of the exercise price of an option granted under the Option Plan
may be made in cash, cash equivalents acceptable to the Administrator or, if
permitted by the option agreement (1) in the case of Share Options, by
exchanging Class B Common Shares having a fair market value equal to the option
exercise price of the Share Option; and (2) in the case of Unit Options, by
exchanging Units having a fair market value equal to the option exercise price
of the Unit Option. If an Agreement provides, an option that is not an ISO may
be transferred by a Participant to one or more persons or entities on terms
permitted by the Agreement and by Rule 16b-3 of the Exchange Act as in effect
from time to time.
No option award may be granted under the Option Plan more than 10 years
after the earlier of the date that our board of trustees adopted, or our
shareholder approved, the Option Plan. Our board of trustees and our operating
partnership may amend or terminate the Option Plan at any time, but an amendment
will not become effective without the approval of our shareholders if it
increases the number of Class B Common Shares or Units that may be issued under
the Option Plan (other than equitable adjustments upon certain corporate
transactions). No amendment will affect a Participant's outstanding awards
without the Participant's consent.
On the effective date of our initial public offering, options for an
aggregate of 499,975 Class B Common Shares and Units were granted to employees
and other service providers of our Company and our operating partnership, all of
whom are affiliates. Of that total, Hasu P. Shah will receive a Share Option,
intended to qualify as an ISO, for 21,850 Class B Common Shares, and a Unit
Option for 32,775 Units; Kiran P. Patel will receive a Share Option, intended to
qualify as an ISO, for 20,850 Class B Common Shares, and a Unit Option for
31,275 Units; Bharat C. Mehta will receive a Unit Option for 37,500 Units; and
K. D. Patel will receive a Unit Option for 89,625 Units. The remaining options
will be Unit Options covering a total of 266,100 Units. The Share Options and
Unit Options granted on the effective date of our initial public offering will
become exercisable in three annual installments beginning on the first
anniversary of the date of grant. The Share Options and Unit Options will have
an exercise price equal to $6.00 per share.
THE TRUSTEES' PLAN
Prior to our initial public offering, our board of trustees adopted and
our sole shareholder approved the Trustees' Plan to provide incentives to
attract and retain independent trustees. The Trustees' Plan authorizes the
issuance of up to 200,000 Class B Common Shares. The Trustees' Plan provides
for, in the event the Class B Common Shares are converted into another security
of our Company, the issuance of equivalent amounts of such security and options
to purchase such security into which the Class B Common Shares are converted.
The Trustees' Plan provides for the grant of nonqualified options for
the following Class B Common Shares to our independent trustees who are members
of our board of trustees on the effective date of our initial public offering:
Mr. Allen, 30,000; Mr. Capello, 3,000; and Mr. Parthemer, 1,000. The exercise
price of each such option will be equal to $6.00 per share. Each such option
shall become exercisable over the particular trustee's initial term, provided
that the trustee is a member of our board of trustees on the applicable date.
Thus, all of Mr. Allen's and Mr. Parthemer's options will become exercisable as
of the first anniversary of the date of grant and one-half of Mr. Capello's
options will become exercisable on the first anniversary of the date of grant
and the remaining options will become exercisable on the second anniversary of
the date of grant. Notwithstanding the foregoing, an option granted under the
Trustees' Plan will be exercisable only if (1) we obtain a per share closing
price on the Priority Class A Common Shares of $9.00 for 20 consecutive trading
days and (2) the per share closing price on the Priority Common Shares for the
prior trading day was $9.00 or higher. Options issued under the Trustees' Plan
are exercisable for five years from the date of grant.
A trustee's outstanding options will become fully exercisable if the
trustee ceases to serve on our board of trustees due to death or disability. All
awards granted under the Trustees' Plan shall be subject to board or other
approval sufficient to provide exempt status for such grants under Section 16 of
the Securities Exchange Act of 1934, as that section and rules thereunder are in
effect from time to time. No option may be granted under the Trustees' Plan more
than 10 years after the date that our board of trustees approved the Plan. Our
board of trustees may amend or terminate the Trustees' Plan at any time but an
amendment will not become effective without shareholder approval if the
amendment increases the number of shares that may be issued under the Trustees'
Plan (other than equitable adjustments upon certain corporate transactions).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Priority Class A Common Shares and Class B Common Shares
by each of our trustees, each executive officer and all trustees and executive
officers as a group. Unless otherwise indicated, all shares are owned directly
and the indicated person has sole voting and investment power. The number of
shares represents the number of Priority Class A Common Shares into which
subordinated units expected to be held by the person may be redeemed in certain
circumstances.
Number of Shares Percent of
Name of Beneficial Owner Beneficially Owned(1) Class(1)
- ------------------------ --------------------- --------
Hasu P. Shah 595,351(2) 20.7%
K.D. Patel 458,817(2) 16.8%
Bharat C. Mehta 760,878(2) 25.1%
Kiran P. Patel 316,920(2) 12.2%
L. McCarthy Downs 10,000(3) (5)
Everette G. Allen, Jr. 30,000(3) 1.3%
Thomas S. Capello 3,000(3) (5)
Mark R. Parthemer 1,000(3) (5)
Rajendra O. Ghandi 384,161(2) 14.4
Total for all officers and Trustees 2,560,127(4) 53.4%
========= =====
Others (as indicated in Schedule
13Ds filed by such persons)
James T. Martin 199,000 9.4%
Mills Value Advisor, Inc.(6) 300,000 14.2%
- ---------------------
(1) Does not include approximately 1.9 million Class B Common Shares
issuable upon redemption of approximately 1.9 million subordinated units
owned by affiliated individuals who are not officers or trustees. Such
subordinated units generally are not redeemable for Class B Common
Shares until at least one year following the acquisition of our hotels.
Four of such affiliates will own an aggregate of approximately 1.7
million subordinated units.
(2) Represents subordinated units owned by such person and assumes (i) that
all subordinated units held by such person are redeemed for Class B
Common Shares and (ii) conversion of the Class B Common Shares into
Priority Common Shares on a one-for-one basis. The total number of
shares outstanding used in calculating the percentage assumes that none
of the subordinated units held by other persons are redeemed for Class B
Common Shares. Such subordinated units generally are not redeemable for
Class B Common Shares until at least one year following the acquisition
of our hotels.
(3) Represents shares that such person has advised us he purchased in our
initial public offering.
(4) Assumes (i) that all subordinated units held by all persons on the list
are redeemed for Class B Common Shares and (ii) conversion of the Class
B Common Shares into Priority Common Shares on a one-for-one basis. The
total number of shares outstanding used in calculating the percentage
assumes that none of the subordinated units held by other persons are
redeemed for Class B Common Shares. Such subordinated units generally
are not redeemable for Class B Common Shares until at least one year
following the acquisition of our hotels.
(5) Owns less than 1% of the Priority Common Shares.
(6) The Mills Value Advisor, Inc. is an investment advisor registered under
the Investment Advisors Act that is affiliated with Andersen &
Strudwick, Incorporated, the underwriter in our initial public offering.
It purchased these shares on behalf of clients.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into a number of transactions with our affiliates in
connection with our formation and organization and the acquisition of our
hotels. Our officers and trustees collectively own 53% of the lessee of all our
hotels. The lessee is entitled to all income from the hotels after payment of
operating expenses and lease payments. There are no assurances that the terms of
these transactions are as favorable as those that we could have received from
third parties.
REPAYMENT OF INDEBTEDNESS AND GUARANTEES BY MR. SHAH AND OUR AFFILIATES
Approximately $6.4 million of indebtedness owed by the sellers of our
hotels was repaid with a portion of the proceeds of our initial public offering.
Approximately $4 million of such indebtedness was owed to entities controlled by
affiliates and relates principally to hotel development expenses in connection
with our hotels. Certain of the assumed indebtedness is and will remain
guaranteed by our affiliates. Upon the repayment of such indebtedness, our
affiliates were released from the related guarantees. Our affiliates may receive
increased cash distributions from the operations of our hotels as a result of
the reduction of indebtedness on our hotels. Mr. Shah, the partners of the
sellers of our hotels and certain of the sellers of our hotels guarantee the
assumed indebtedness, and the bankruptcy of any of the guarantors would
constitute a default under the related loan documents.
OPTION AGREEMENT
Hasu P. Shah, Jay H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti D.
Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni
and Manhar Gandhi, each an affiliate, and our operating partnership subsidiary
have entered into the Option Agreement. Pursuant to the Option Agreement, our
operating partnership will have a two-year option to acquire any hotels acquired
or developed by our affiliates within 15 miles of any of our hotels or any
subsequently acquired hotel, including the Hampton Inn, Danville, Pennsylvania,
the Harrisburg Inn, Harrisburg, Pennsylvania, the Sleep Inn, Pittsburgh,
Pennsylvania and the land owned by our affiliates in Carlisle, Pennsylvania.
With respect to the Hampton Inn, Danville, Pennsylvania and the Sleep Inn,
Pittsburgh, Pennsylvania, our operating partnership and our affiliate that owns
the hotel have agreed that if the option is exercised by the partnership, they
will use a purchase price methodology similar to the methodology used for the
newly-developed hotels and have agreed to fix the rent until the hotel has two
years of operating history. In addition, our operating partnership has agreed
that, if the option is exercised by our operating partnership, it will issue
units of limited partnership interest in our operating partnership valued at
$6.00 per unit as consideration for the purchase of the hotel. The rights
granted to the partnership under the Option Agreement commenced as of the date
of the Option Agreement and shall terminate one year after the later of: (1) the
date upon which Hasu P. Shah ceases to be a trustee, officer, partner or
employee of our Company; (2) the date on which Hasu P. Shah ceases to be an
employee, officer, trustee or director of a consultant to our Company; (3) the
date on which Hasu P. Shah and our affiliates cease to own, in the aggregate,
assuming a complete conversion of all units into shares of beneficial interest
in our Company, greater than 50% of shares of beneficial interest in our
Company; or (4) the date on which our board of trustees has less than three
members that are affiliates.
PAYMENT OF FRANCHISE TRANSFER FEES BY OUR COMPANY
We have paid certain expenses in connection with the transfer of the
franchise licenses to the lessee.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedule and Exhibits
(1 & 2) See Index to Financial Statements and Financial Statement
Schedule on page F-1 of this Form 10-K.
(3) Exhibits:
Unless otherwise indicated, the exhibits listed below are
incorporated by reference to our Registration Statement on
Form S-11, File No. 333-56087.
Exhibit Document
- ------- --------
3.1 Amended and Restated Declaration of Trust of the Registrant
3.2 Bylaws of the Registrant
4.1 Form of Common Share Certificate
10.1 Form of First Amended and Restated Agreement of Limited Partnership of Hersha
Hospitality Limited Partnership
10.2 Contribution Agreement, dated as of June 3, 1998, between Hasu P. Shah and
Bharat C. Mehta, as Contributor, and Hersha Hospitality Limited Partnership,
as Acquiror.
10.3 Contribution Agreement, dated as of June 3, 1998, between Shree Associates,
JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Devi
Associates, Neil H. Shah, David L. Desfor, Madhusudan I. Patni, Manhar Gandhi
and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality
Limited Partnership, as Acquiror.
10.4 Contribution Agreement, dated as of June 3, 1998, between JSK Associates,
Shanti Associates, Shreeji Associates, Kunj Associates, Devi Associates, Neil
H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd. as Contributor, and
Hersha Hospitality Limited Partnership, as Acquiror.
10.5 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.6 Contribution Agreement, dated as of June 3, 1998, between JSK Associates,
Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, David L.
Desfor, Madhusudan I. Patni, Manhar Gandhi and Shreenathji Enterprises, Ltd.,
as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.7 Contribution Agreement, dated as of June 3, 1998, between JSK Associates,
Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah,
Madhusudan I. Patni and Shreenathji Enterprises, Ltd., as Contributor, and
Hersha Hospitality Limited Partnership, as Acquiror.
10.8 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.9 Contribution Agreement, dated as of June 3, 1998, between JSK Associates,
Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, David L.
Desfor and Shreenathji Enterprises, Ltd., as Contributor, and Hersha
Hospitality Limited Partnership, as Acquiror.
10.10 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.11 Contribution Agreement, dated as of June 3, 1998, between 144 Associates, 344
Associates, 544 Associates and 644 Associates, Joint Tenants Doing Business as
2544 Associates, as Contributor, and Hersha Hospitality Limited Partnership,
as Acquiror.
10.12 Contribution Agreement dated June 3, 1998, between Shree Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.13 Contribution Agreement dated June 3, 1998, between 2144
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror.
10.14 Contribution Agreement dated June 3, 1998, between 144 Associates, 344
Associates, 544 Associates and 644 Associates, Joint Tenants Doing Business as
2544 Associates, as Contributor, and Hersha Hospitality Limited Partnership,
as Acquiror.
10.15 Contribution Agreement, dated June 3, 1998, between Shree Associates, Devi
Associates, Shreeji Associates, Madhusudan I. Patni and Shreenathji
Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership,
as Acquiror.
10.16 Contribution Agreement, dated June 3, 1998, between Shree
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror.
10.17 Form of Ground Lease
10.18 Form of Percentage Lease
10.19 Option Agreement, dated June 3, 1998, between Hasu P. Shah, Jay H. Shah, Neil
H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel,
David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and Hersha Hospitality
Limited Partnership.
10.19(a) Amendment to Option Agreement, dated December 4, 1998, between Hasu P. Shah,
Jay H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O.
Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar
Gandhi, and Hersha Hospitality Limited Partnership.
10.20 Administrative Services Agreement, dated January 26, 1999,
between Hersha Hospitality Trust and Hersha Hospitality
Management, L.P.
10.21 Warrant Agreement, dated January 26, 1999, between Anderson & Strudwick, Inc.
and Hersha Hospitality Trust.
10.22 Warrant Agreement, dated June 3, 1998, between 2744 Associates, L.P. and
Hersha Hospitality Limited Partnership.
10.23 Hersha Hospitality Trust Option Plan
10.24 Hersha Hospitality Trust Non-Employee Trustees' Option Plan
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule for the Year Ended December 31, 1998
- ---------------------
(b) Reports on Form 8-K
None.
INDEX TO FINANCIAL STATEMENTS
HERSHA HOSPITALITY TRUST
Independent Auditors' Report..................................................... F-1
Consolidated Balance Sheet as of December 31, 1998............................... F-2
Notes to Consolidated Balance Sheet.............................................. F-3
HERSHA HOSPITALITY MANAGEMENT, L.P.
Independent Auditors' Report..................................................... F-8
Balance Sheet as of December 31, 1998............................................ F-9
Notes to Balance Sheet........................................................... F-10
COMBINED ENTITIES - INITIAL HOTELS
Independent Auditors' Report..................................................... F-12
Combined Financial Statements
Balance Sheets as of December 31, 1998 and 1997................................ F-13
Statements of Operations for the years ended December 31,
1998, 1997, and 1996........................................................... F-14
Statement of Owners' Equity for the years ended December 31,
1998, 1997, and 1996........................................................... F-15
Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996........................................................... F-16
Notes to Combined Financial Statements......................................... F-17
Schedule III - Real Estate and Accumulated Depreciation.......................... F-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder
Hersha Hospitality Trust
We have audited the accompanying consolidated balance sheet of Hersha
Hospitality Trust as of December 31, 1998. This consolidated balance sheet is
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
balance sheet presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated balance sheet referred to above
presents fairly, in all material respects, the consolidated financial position
of Hersha Hospitality Trust as of December 31, 1998, in conformity with
generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
February 19, 1999
HERSHA HOSPITALITY TRUST
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998.
ASSETS $ --
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES --
COMMITMENTS AND CONTINGENCIES --
SHAREHOLDERS' EQUITY:
Preferred Shares, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding --
Common Shares - Priority Class A, $.01 par value, 50,000,000 shares
authorized, none issued and outstanding --
Common Shares - Class B, $.01 par value, 50,000,000 shares authorized,
100 shares issued and outstanding 1
Additional paid-in capital 99
Subscription Receivable (100)
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ --
============
The Accompanying Notes Are an Integral Part of This Financial Statement.
HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
[1] ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
Hersha Hospitality Trust [the "Company"] was formed in May, 1998 to
acquire equity interests in ten existing hotel properties. The Company is a
self-administered, Maryland real estate investment trust ["REIT"] and expects to
qualify as a REIT for Federal income tax purposes. As such, the Company is
subject to a number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its taxable income. The
Company intends to offer for sale 2,000,000 [See Note 3] Priority Class A Common
Shares of beneficial interest of which 1,833,334 shares will be offered to the
public and 166,666 shares will be offered to Mr. Hasu P. Shah and certain
affiliates [the "Hersha Affiliates"] in an initial public offering [the
"Offering"] and Hersha Hospitality Limited Partnership [the "Partnership"] will
issue approximately 3,960,000 Units of partnership interest ["Units"] to the
Hersha Affiliates owning 100% of the ownership interest in the ten existing
hotel properties [the "Initial Hotels"], which are redeemable under certain
circumstances beginning after one year from the closing of the Offering [See
Note 5]. The number of Units issued is subject to adjustment based on the
performance of certain Initial Hotels which as of the date of the Offering do
not have established operating histories.
Upon completion of the Offering, the Company will contribute
substantially all of the net proceeds of the Offering to the Partnership in
exchange for an approximate 32% general partnership interest in the Partnership.
The Partnership will use the proceeds from the Company to acquire the Initial
Hotels. The Partnership will acquire the Initial Hotels in exchange for (i)
Units, which will be redeemable, subject to certain limitations, for an
aggregate of approximately 3,960,000 Common Shares of the Company valued at
approximately $24 million based on an offering price of $6.00 per Common Share
[the "Offering Price"], and (ii) the assumption of approximately $26 million of
outstanding indebtedness as of December 31, 1997. The Hersha Affiliates have
agreed that they will (i) exchange all their interests in the Initial Hotels for
Units in the Partnership, and (ii) grant an option to the Company to acquire any
hotels acquired or developed by the Hersha Affiliates within 15 miles of any of
the Initial Hotels or any hotel subsequently acquired by the Company.
After consummation of the Offering, (a) the Company will own
approximately 32% of the Partnership, (b) the Hersha Affiliates will own
approximately 68% of the Partnership, and (c) the Partnership will own 100% of
the equity interest in the Initial Hotels.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated balance
sheet has been prepared in accordance with generally accepted accounting
principles ["GAAP"] and include all accounts of the Company and the Partnership.
All intercompany amounts have been eliminated in consolidation.
DISTRIBUTIONS - The Company intends to pay regular quarterly dividends
which are initially dependent upon receipt of distributions from the
Partnership.
[3] COMMITMENTS AND CONTINGENCIES
The Company, in conjunction with the Offering, intends to amend its
Declaration of Trust to provide for the issuance of up to 50,000,000, $.01 par
value, Priority Class A Common Shares of beneficial interest, 50,000,000, $.01
par value, Class B Common Shares of beneficial interest and 10,000,000, $.01 par
value, Preferred Shares of beneficial interest.
HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998, SHEET #2
[3] COMMITMENTS AND CONTINGENCIES [CONTINUED]
The Priority Class A Common Shares have priority as to the payment of
dividends until dividends equal $.72 per share on a cumulative basis and shares
equally in additional dividends after the Class B Common Shares have received
$.72 per share in each annual period. The Priority Class A Common Shares carry a
liquidation preference of $6.00 per share plus unpaid dividends and votes with
the Class B Common Shares on a one vote per share basis. The Priority period of
the Class A Shares will commence on the date of the closing of the initial
public offering and end on the earlier of (i) five years after the initial
public offering of the Priority Common Shares, or (ii) the date that is 15
trading days after the Company sends notice to the holders of the Priority
Common Shares, provided that the closing bid price of the Priority Common Shares
is at least $7 on each trading day during such 15-day period.
In conjunction with the Offering, the Partnership will acquire the ten
Initial Hotels and will enter into percentage lease agreements with Hersha
Hospitality Management L.P. [the "Lessee"]. Under the Percentage Leases, the
Partnership is obligated to pay the costs of certain capital improvements, real
estate and personal property taxes and property insurance, and to make available
to the Lessee an amount equal to 4% [6% for some hotels] of room revenues per
quarter, on a cumulative basis, for the periodic replacement or refurbishment of
furniture, fixtures and equipment at the Initial Hotels.
Pursuant to the Partnership Agreement, the Hersha Affiliates will
receive Redemption Rights, which will enable them to cause the Partnership to
redeem their interests in the Partnership in exchange for cash or, at the
election of the Company, Class B Common Shares on a one-for-one basis. The
Redemption Rights may be exercised by the Hersha Affiliates commencing one year
following the closing of the Offering depending on the length of time the hotel
has been in operation. The number of Common Shares initially issuable to the
Hersha Affiliates upon exercise of the Redemption Rights is approximately
3,960,000 and has been determined based on the value of their interests in the
Combined Entities divided by the expected offering price of $6.00 per share. 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 Hersha Affiliates or the shareholders of the
Company.
The Company acts as the general partner in the Partnership and as such,
is liable for all recourse debt of the Partnership to the extent not paid by the
Partnership. In the opinion of management, the Company does not anticipate any
losses as a result of its general partner obligations.
The Company expects to incur expenses of approximately $275,000 related
to the transfer of ownership of the franchise licenses from the existing owners
to the Lessee.
Summary operating results for the Initial Hotels [in thousands] are as
follows:
Years ended
December 31,
1998 1997 1996
------- ------- -------
Total Revenue $ 18,086 $ 13,445 $ 9,989
Total Expenses 16,138 11,716 10,017
-------- -------- ---------
NET INCOME [LOSS] $ 1,948 $ 1,729 $ (28)
----------------- ======== ======== =========
HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998, SHEET #3
[4] STOCK OPTION PLANS
[A] Prior to the Offering, the Company will adopt the Company's "Option
Plan". The Option Plan will be administered by the Compensation Committee of the
Board of Trustees, or its delegate [the "Administrator"].
Officers and other employees of the Company generally will be eligible
to participate in the Option Plan. The Administrator will select the individuals
who will participate in the Option Plan ["Participants"].
The Option Plan will authorize the issuance of options to purchase up to
650,000 Class B Common Shares and Subordinated Units. The Plan provides for the
grant of (i) options intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, [the Code], and
(ii) options not intended to so qualify. Options under the Option Plan may be
awarded by the Administrator, and the Administrator will determine the option
exercise period and any vesting requirements. The options granted under the
Option Plan will be exercisable only if (i) the Company obtains a per share
closing price on the Common Shares of $9.00 or higher for 20 consecutive trading
days and (ii) the closing price per Common Share for the prior trading day was
$9.00 or higher. In addition, no option granted under the Option Plan may be
exercised more than five years after the date of grant. The exercise price for
options granted under the Option Plan will be determined by the Compensation
Committee at the time of grant.
No option award may be granted under the Option Plan more than ten years
after the date the Board of Trustees approved such Plan. The Board may amend or
terminate the Option Plan at any time, but an amendment will not become
effective without shareholder approval if the amendment (i) increases the number
of shares that may be issued under the Option Plan, (ii) materially changes the
eligibility requirements or (iii) extends the length of the Option Plan. No
amendment will affect a Participant's outstanding award without the
Participant's consent.
No options have been granted under the Option Plan.
[B] Prior to the Offering, the Board of Trustees will also adopt, and
the Company's sole shareholder will approve, the Trustees' Plan to provide
incentives to attract and retain Independent Trustees. The Trustees' Plan
authorizes the issuance of up to 200,000 Class B Common Shares. The Trustees'
Plan provides for, in the event the Class B Common Shares are converted into
another security of the Company, the issuance of equivalent amounts of such
security and options to purchase such security into which the Class B Common
Shares are converted.
The Trustees' Plan provides for the grant of a nonqualified option for
Class B Common Shares to the Independent Trustees of the Company who are members
of the Board on the effective date of the Offering. The exercise price of each
such option will be equal to the Offering Price. Each such option shall become
exercisable over the particular Trustee's initial term, provided that the
Trustee is a member of the Board on the applicable date. An option granted under
the Trustees' Plan will be exercisable only if (i) the Company obtains a per
share closing price on the Priority Common Shares of $9.00 for 20 consecutive
trading days and (ii) the per share closing price on the Priority Common Shares
for the prior trading day was $9.00 or higher. Options issued under the
Trustees' Plan are exercisable for five years from the date of grant.
A Trustee's outstanding options will become fully exercisable if the
Trustee ceases to serve on the Board due to death or disability. All awards
granted under the Trustees' Plan shall be subject to Board or other approval
sufficient to provide exempt status for such grants under Section 16 of the
Exchange Act, as that section and Rules thereunder are in effect from time to
time. No option may be granted under the Trustees' Plan more than 10 years after
the date that the Board of Trustees approved the Plan. The Board may amend or
terminate the Trustees' Plan at any time but an amendment will not become
effective without shareholder approval if the amendment increases the number of
shares that may be issued under the Trustees' Plan (other than equitable
adjustments upon certain corporate transactions).
No options have been granted under the Trustees' Plan.
HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998, SHEET #4
[5] NEW AUTHORITATIVE PRONOUNCEMENTS
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and how it its designated, for example, gain or losses
related to changes in the fair value of a derivative not designated as a hedging
instrument is recognized in earnings in the period of the change, while certain
types of hedges may be initially reported as a component of other comprehensive
income until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of SFAS No. 133 should be as
of the beginning of a fiscal quarter; on that date, hedging relationships must
be designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
[6] SUBSEQUENT EVENTS
In January 1999, the Company completed the Offering of its common stock
whereby 2 million common shares were issued at $6 per share, resulting in net
proceeds of approximately $10.5 million, after underwriting discounts and
commissions and other expenses of the Offering. In February 1999, 0.275 million
common shares for the underwriters' over-allotment option were issued at $6 per
share, resulting in net proceeds of approximately $1.5 million, after
underwriting discounts and commissions. The Company contributed the net proceeds
of the Offering and over-allotment option from the sale of the 2.275 million
shares to the Partnership in exchange for an equal number of units [representing
a 36.07% interest] in the Partnership. A reconciliation of net proceeds from the
above is as follows [in thousands]:
Proceeds of Offerings $ 12,000
Underwriter Discounts and Commissions (880)
Offering Expenses (730)
------------
NET PROCEEDS $ 10,390
------------ ============
Proceeds of Over-Allotment Option $ 1,650
Underwriter Discounts and Commissions (132)
------------
NET PROCEEDS $ 1,518
------------ ============
At the time of the Offering, the Company contributed the net proceeds of
the Offering of $11,908 to the Partnership in exchange for a 36.07% general
partnership interest in the Partnership. The Partnership acquired the Initial
Hotels for 4,032,431 units representing a 63.93% limited partnership interest in
the Partnership. The Partnership also assumed outstanding indebtedness of
approximately $23.3 million [$3.7 million of which was related party
indebtedness] of which approximately $6.1 million was repaid [$3.7 million of
which was related party indebtedness] with the net proceeds of the Offering.
HERSHA HOSPITALITY TRUST
NOTES TO CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998, SHEET #5
[6] SUBSEQUENT EVENTS [CONTINUED]
The following unaudited condensed pro forma balance sheet gives effect
to the Offering as if it had occurred on December 31, 1998:
Net Investment in Hotel Properties $ 40,916
Cash 4,365
Intangibles 1,351
------------
TOTAL ASSETS $ 46,632
------------ ============
Mortgages $ 17,221
Minority Interest 18,802
Shareholders' Equity 10,609
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 46,632
============
In connection with the application of purchase accounting required by
the Securities and Exchange Commission Staff Accounting Bulletin 97, the
Partnership would have recorded purchase adjustments to the carrying value of
land of approximately $1.4 million and buildings and improvements of
approximately $12.8 million. The adjustment to buildings and improvements would
be depreciated over the remaining lives of the respective assets.
Concurrent with the Offering, the following transactions also took
place.
The Partnership entered into percentage rent agreements with the Lessee
for the Initial Hotels.
The Company issued, subject to shareholder approval of the Option Plan,
options to purchase 499,975 Class B common shares and units under the Option
Plan.
The Company issued, subject to shareholder approval of the Trustees'
Plan, options to purchase 34,000 Class B common shares under the Trustees' Plan.
INDEPENDENT AUDITORS' REPORT
To the Partners of
Hersha Hospitality Management, L.P.
We have audited the accompanying balance sheet of Hersha Hospitality
Management, L.P. as of December 31, 1998. This balance sheet is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards, Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Hersha Hospitality Management,
L.P. as of December 31, 1998, in conformity with generally accepted accounting
principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
February 19, 1999
HERSHA HOSPITALITY MANAGEMENT, L.P.
BALANCE SHEET AS OF DECEMBER 31, 1998.
ASSETS $ --
============
LIABILITIES AND PARTNERS' CAPITAL:
LIABILITIES --
COMMITMENTS AND CONTINGENCIES --
PARTNERS' CAPITAL --
------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ --
============
The Accompanying Notes Are an Integral Part of This Financial Statement.
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO BALANCE SHEET AS OF DECEMBER 31, 1998
[1] ORGANIZATION
Hersha Hospitality Management, L.P. [the "Lessee"] was organized under
the laws of the State of Pennsylvania in May, 1998 to lease and operate ten
existing hotel properties from Hersha Hospitality Limited Partnership [the
"Partnership"] [collectively the "Initial Hotels"]. The Lessee is owned by Mr.
Hasu P. Shah and certain affiliates some of whom have ownership interests in the
Initial Hotels.
[2] COMMITMENTS
The Lessee will enter into Percentage Leases, each with an initial term
of 5 years with two 5 year renewal options, relating to each of the Initial
Hotels. Pursuant to the terms of the Percentage Leases, the Lessee is required
to pay the greater of the Base Rent or the Percentage Rent for hotels with
established operating histories. The Base Rent is 6.5 percent of the purchase
price assigned to each Initial Hotel. The Percentage Rent for each Initial Hotel
is comprised of (i) a percentage of room revenues up to the Threshold, (ii) a
percentage of room revenues in excess of the Threshold, but not more than the
Incentive Threshold, (iii) a percentage of room revenues in excess of the
Incentive Threshold and (iv) a percentage of revenues other than room revenues.
For hotels with limited operating histories, the leases provide for the payment
of Initial Fixed Rent for certain periods as specified in the leases and the
greater of Base Rent or Percentage Rent thereafter. The Lessee also will be
obligated to pay certain other amounts, including interest accrued on any late
payments or charges. The Lessee is entitled to all profits from the operations
of the Initial Hotels after the payment of certain specified operating expenses.
The Lessee will assume the rights and obligations under the terms of
existing franchise licenses relating to the Initial Hotels upon acquisition of
the hotels by the Partnership. The franchise licenses generally specify certain
management, operational, accounting, reporting and marketing standards and
procedures with which the franchisee must comply and provide for annual
franchise fees based upon percentages of gross room revenue.
The Lessee will provide certain administrative services to the
Partnership for an annual fee of $55,000 plus $10,000 per hotel.
[3] NEW AUTHORITATIVE PRONOUNCEMENTS
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and how it its designated, for example, gain or losses
related to changes in the fair value of a derivative not designated as a hedging
instrument is recognized in earnings in the period of the change, while certain
types of hedges may be initially reported as a component of other comprehensive
income until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of SFAS No. 133 should be as
of the beginning of a fiscal quarter; on that date, hedging relationships must
be designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Lessee does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
[4] SUBSEQUENT EVENT
Effective January 1, 1999, the Lessee assumed the management of the
Initial Hotels. The percentage lease agreements commenced on January 26, 1999.
INDEPENDENT AUDITORS' REPORT
To the Partners and Shareholders of
The Combined Entities - Initial Hotels
We have audited the accompanying combined balance sheets of the Combined
Entities Initial Hotels as of December 31, 1998 and 1997, and the related
combined statements of operations, owners' equity, and cash flows for each of
the three years in the period ended December 31, 1998. Our audits also included
the combined financial statement schedule included on pages F-24 and F-25. These
combined financial statements and the combined financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements and the combined financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
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 financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Combined Entities - Initial Hotels as of December 31, 1998 and 1997, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the combined
financial statement schedule referred to above, when considered in relationship
to the basic combined financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein as of
December 31, 1998 and 1997.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
February 19, 1999
COMBINED ENTITIES - INITIAL HOTELS
COMBINED BALANCE SHEETS
[IN THOUSANDS]
DECEMBER 31,
-------------
1998 1997
-------- ---------
ASSETS:
INVESTMENT IN HOTEL PROPERTIES:
Land $ 2,099 $ 2,099
Buildings and Improvements 22,489 19,276
Furniture, Equipment and Other 7,176 6,056
----------- ------------
Totals 31,764 27,431
Less: Accumulated Depreciation 4,835 3,356
----------- ------------
Totals 26,929 24,075
Construction in Progress 235 1,412
----------- ------------
NET INVESTMENT IN HOTEL PROPERTIES 27,164 25,487
Cash and Cash Equivalents 373 694
Accounts Receivable 460 394
Prepaid Expenses and Other Assets 431 182
Due from Related Parties 103 268
Intangible Assets 1,348 1,427
----------- ------------
TOTAL ASSETS $ 29,879 $ 28,452
=========== ============
LIABILITIES AND OWNERS' EQUITY:
Mortgages Payable $ 19,578 $ 14,713
Accounts Payable and Accrued Expenses 525 1,092
Accrued Expenses - Related Parties 54 153
Due to Related Parties 4,459 9,169
Other Liabilities 149 172
----------- ------------
TOTAL LIABILITIES 24,765 25,299
COMMITMENTS -- --
OWNERS' EQUITY:
Net Combined Equity 5,114 3,153
----------- ------------
TOTAL LIABILITIES AND OWNERS' EQUITY $ 29,879 $ 28,452
=========== ============
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
[IN THOUSANDS]
YEARS ENDED
DECEMBER 31,
1998 1997 1996
------- ------- -------
REVENUES FROM HOTEL OPERATIONS:
Room Revenue $ 15,185 $ 10,880 $ 7,273
Restaurant Revenue 2,111 1,744 2,106
Other Revenue 790 821 610
---------- ----------- -----------
TOTAL REVENUE 18,086 13,445 9,989
---------- ----------- -----------
EXPENSES:
Hotel Operating Expenses 7,449 5,628 4,538
Restaurant Operating Expenses 1,469 996 1,304
Advertising and Marketing 918 571 532
Depreciation and Amortization 1,543 1,189 924
Interest Expense 1,605 821 605
Interest Expense - Related Parties 386 533 316
General and Administrative 2,065 1,644 1,422
General and Administrative - Related Parties 608 320 364
Loss on Abandonments and Asset Disposals 95 -- 12
Liquidation Damages -- 14 --
---------- ----------- -----------
TOTAL EXPENSES 16,138 11,716 10,017
---------- ----------- -----------
NET INCOME [LOSS] $ 1,948 $ 1,729 $ (28)
========== =========== ===========
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF OWNERS' EQUITY
[IN THOUSANDS]
Balance - December 31, 1995 $ 2,217
Net [Loss] (28)
Capital Contributions 470
Cash Distributions (470)
--------
Balance - December 31, 1996 2,189
Net Income 1,729
Capital Contributions 59
Cash Distributions (824)
--------
Balance - December 31, 1997 3,153
Net Income 1,948
Capital Contributions 1,159
Cash Distributions (1,146)
--------
Balance - December 31, 1998 $ 5,114
=======
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
[IN THOUSANDS]
YEARS ENDED
December 31,
1998 1997 1996
------- ------- -------
OPERATING ACTIVITIES:
Net Income [Loss] $ 1,948 $ 1,729 $ (28)
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization Expense 1,604 1,246 966
Loss on Abandonments and Disposal of Assets 95 -- 12
Writeoff of Financing Fees -- 44 --
Changes in Assets and Liabilities:
Accounts Receivable (66) (203) 105
Prepaid Expenses and Other Assets (249) (28) (28)
Accounts Payable and Accrued Expenses (666) 584 241
Other Liabilities (23) (78) 79
-------- -------- --------
Net Cash - Operating Activities 2,643 3,294 1,347
-------- -------- --------
INVESTING ACTIVITIES:
Improvements and Additions to Hotel Properties (3,251) (12,821) (5,601)
Payment for Intangibles (46) (166) (117)
Advances to Related Parties (501) (268) (99)
Repayment of Advances to Related Parties 666 107 584
Proceeds from Sale of Assets -- -- 129
-------- -------- --------
Net Cash - Investing Activities (3,132) (13,148) (5,104)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from Mortgages Payable 5,639 9,526 3,631
Principal Payments on Mortgages Payable (774) (3,383) (612)
Advances from Related Parties 3,411 6,555 2,756
Repayments of Advances from Related Parties (8,121) (1,622) (1,915)
Capital Contributions 1,159 59 470
Distributions Paid (1,146) (824) (470)
-------- -------- --------
Net Cash - Financing Activities 168 10,311 3,860
-------- -------- --------
Net [Decrease] Increase in Cash and
Cash Equivalents (321) 457 103
Cash and Cash Equivalents at
Beginning of Years 694 237 134
-------- -------- --------
Cash and Cash Equivalents at
End of Years $ 373 $ 694 $ 237
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest [Net of Amounts Capitalized] $ 2,087 $ 1,133 $ 903
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[AMOUNTS IN THOUSANDS]
[1] ORGANIZATION, PROPOSED INITIAL PUBLIC OFFERING AND BASIS OF PRESENTATION
ORGANIZATION - Hersha Hospitality Trust [the "Company"] has been
established to own initially ten existing hotels [collectively the "Initial
Hotels"] and to continue the hotel acquisition and operating strategies of Mr.
Hasu P. Shah, Chairman of the Board of Trustees and President of the Company.
The Company intends to qualify as a real estate investment trust [REIT] under
the Internal Revenue Code of 1986, as amended, [the "Code"]. The Initial Hotels
include three hotels operated as Holiday Inn Express(R) hotels, two Hampton
Inn(R) hotels, two Holiday Inn(R) hotels, two Comfort Inn(R) hotels, and one
Clarion Suites(R) hotel with an aggregate of 989 rooms and are located in
Pennsylvania. Upon completion of the proposed initial public offering [see
below], the Company will own an approximate 32% general partnership interest in
Hersha Hospitality Limited Partnership, a Pennsylvania limited partnership [the
"Partnership"]. The Company will be the sole general partner of the Partnership.
The Partnership will own the Initial Hotels and lease them to Hersha Hospitality
Management, L.P. ["Lessee"] under Percentage Leases, each having a 5 year term
with two 5 year renewals, which shall provide for rent equal to the greater of
(i) fixed base rent, or (ii) percentage rents based upon specific percentages of
room and other revenue of each of the Initial Hotels. The Company will enter
into management agreements with the Lessee whereby the Lessee will be required
to perform all management functions necessary to operate the Initial Hotels.
Under the administrative services agreement, the Lessee will be paid a fee equal
to $10 per hotel or $100 per year based on the ten initial hotels [See Note 10].
BASIS OF PRESENTATION - The combined financial statements include the
accounts of various partnerships, individuals, certain other corporations and
Subchapter S corporations which perform property management services and own
property improvements and furniture and fixtures [collectively the "Combined
Entities"] [See Note 5] using their historical cost basis. No adjustments have
been reflected in these combined financial statements to give effect to the
purchase of the Initial Hotels by the Partnership.
The Combined Entities are owned by Mr. Hasu P. Shah and certain
affiliates of Mr. Hasu P. Shah [the "Hersha Affiliates"] for all periods
presented. Due to common ownership and management of the Combined Entities, the
historical combined financial statements have been accounted for as a group of
entities under common control. All significant intercompany transactions and
balances have been eliminated in the combined presentation.
PROPOSED INITIAL PUBLIC OFFERING - The Company has filed a registration
statement with the Securities and Exchange Commission pursuant to which the
Company expects to offer 1,833,334 common shares to the public and 166,666
common shares to Mr. Hasu P. Shah and certain affiliates of Mr. Hasu P. Shah
[the "Offering"]. The Company expects to qualify as a real estate investment
trust under Sections 856-860 of the Code. Under the proposed structure, the
Company will become the sole general partner in the Partnership and the Hersha
Affiliates will be the limited partners.
Upon completion of the Offering, the Company will contribute
substantially all of the net proceeds of the offering to the Partnership in
exchange for an approximate 32% general partnership interest in the Partnership.
The Partnership will use the proceeds from the Company to acquire the Initial
Hotels from the Combined Entities and to repay certain outstanding indebtedness.
Rather than receiving cash for their interests in the Combined Entities upon the
sale of the Initial Hotels, the Hersha Affiliates have elected to receive
limited partnership interests in the Partnership aggregating an approximate 68%
ownership interest in the Partnership.
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #2
[AMOUNTS IN THOUSANDS]
[1] ORGANIZATION, PROPOSED INITIAL PUBLIC OFFERING AND BASIS OF PRESENTATION
[CONTINUED]
PROPOSED INITIAL PUBLIC OFFERING [CONTINUED] - After consummation of the
Offering, the Company's acquisition of an interest in the Partnership and the
Partnership's acquisition of the Initial Hotels, (a) the Company will own
approximately 32% of the Partnership, (b) the Hersha Affiliates will own an
aggregate of approximately 68% of the Partnership, and (c) the Partnership will
own 100% of the equity interest in the Initial Hotels [See Note 10].
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Operations consist of hotel room rental,
conferences room rental and the associated sales of food and beverages
principally in the Harrisburg and central Pennsylvania area.
INVESTMENT IN HOTEL PROPERTIES - Investment in hotel properties are
stated at cost. Depreciation for financial reporting purposes is principally
based upon the straight-line method for buildings and improvements and
accelerated methods for furniture and equipment acquired prior to the year ended
December 31, 1998 and the straight-line method thereafter.
The estimated lives used to depreciate the Initial Hotel properties are
as follows:
Years
-----
Building and Improvements 15 to 40
Furniture and Equipment 5 to 7
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulated depreciation are removed from the
accounts, and the gain or loss is included in income from operations.
Depreciation expense was $1,432, $1,076 and $819 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Room linens and restaurant supplies are capitalized and amortized
utilizing the straight-line method over periods of three and two years,
respectively, and are charged to Hotel Operating Expenses. Amortization expense
was $61, $57 and $42 for the years ended December 31, 1998, 1997 and 1996,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets are reviewed for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. The Company
performs undiscounted cash flow analyses to determine if an impairment exists.
If an impairment is determined to exist, any related impairment loss is
calculated based on fair value.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of
certain highly liquid investments with a maturity of three months or less when
purchased.
INVENTORIES - Inventories, consisting primarily of food and beverages
and which are included in prepaid expenses and other assets, are stated at the
lower of cost [generally, first-in, first-out] or market.
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #3
[AMOUNTS IN THOUSANDS]
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
INTANGIBLE ASSETS - Intangible assets are carried at cost and consist of
initial franchise fees, loan acquisition costs and goodwill. Amortization is
computed using the straight-line method based upon the terms of the franchise
and loan agreements which range from 5 to 30 years, and over a 15 year period
for goodwill.
INCOME TAXES - The Combined Entities are not a legal entity subject to
income taxes. Hersha Enterprises, Ltd., an entity included in these combined
financial statements, is a taxable corporate entity [See Note 6]. Income taxes
are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes resulting from
temporary differences. Such temporary differences result from differences in the
carrying value of assets and liabilities for tax and financial reporting
purposes. The deferred tax assets and liabilities represent the future tax
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. Deferred taxes are
also recognized for operating losses that are available to offset future taxable
income. Valuation allowances are established to reduce deferred tax assets to
the amount expected to be realized. The Combined Partnerships and S corporations
are not subject to federal or state income taxes; however, they must file
informational income tax returns and the partners must take income or loss of
the Combined Entities into consideration when filing their respective tax
returns. The cumulative difference between the book basis and tax basis of the
Combined Entities' assets and liabilities is approximately $4,620 due primarily
to depreciation and amortization expense on the tax basis in excess of the book
basis.
REVENUE RECOGNITION - Revenue is recognized as earned which is generally
when a guest occupies a room and utilizes the hotel's services.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentrations of credit risk include cash and cash
equivalents and accounts receivable arising from its normal business activities.
The Company places its cash with high credit quality financial institutions. The
Company does not require collateral to support its financial instruments.
The Company periodically has money in financial institutions that is
subject to normal credit risk beyond insured amounts. This credit risk,
representing the excess of the bank's deposit liabilities reported by the bank
over the amounts that would have been covered by federal insurance, amounted to
approximately $355 and $71 at December 31, 1998 and 1997, respectively.
The Company's extension of credit to its customers results in accounts
receivable arising from its normal business activities. The Company does not
require collateral from its customers, but routinely assesses the financial
strength of its customers. Based upon factors surrounding the credit risk of its
customers and the Company's historical collection experience, no allowance for
uncollectible accounts has been established at December 31, 1998 and 1997,
respectively. The Company believes that its accounts receivable credit risk
exposure is limited. Such assessment may be subject to change in the near term.
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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
DEFERRED OFFERING COSTS - Costs of $267 associated with the Company's
anticipated public offering are deferred and will be charged against the
proceeds of the offering. If the offering is not consummated, the cost will be
charged to operations [See Note 10].
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #4
[AMOUNTS IN THOUSANDS]
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
ADVERTISING AND MARKETING - Advertising costs are expensed as incurred
and totaled $596, $370 and $418 for the years ended December 31, 1998, 1997 and
1996, respectively. In connection with its franchise agreements, a portion of
the franchise fees paid is for marketing services. Payments under these
agreements related to marketing services amounted to $323, $201 and $114 for the
years ended December 31, 1998, 1997 and 1996, respectively, and are included in
Advertising and Marketing.
RECLASSIFICATION - Certain prior year's figures have been reclassified
to conform with the current year's presentation.
[3] INTANGIBLE ASSETS
At December 31, 1998 and 1997, intangibles consisted of the following:
Accumulated
December 31, 1998: Cost Amortization Net
---- ------------ ---
Goodwill $ 1,168 $ 294 $ 874
Franchise Fees 374 66 308
Loan Acquisition Fees 196 30 166
---------- ---------- ---------
TOTALS $ 1,738 $ 390 $ 1,348
------ ========== ========== =========
Accumulated
December 31, 1997: Cost Amortization Net
---- ------------- ---
Goodwill $ 1,168 $ 216 $ 952
Franchise Fees 342 46 296
Loan Acquisition Fees 196 17 179
---------- ---------- ---------
TOTALS $ 1,706 $ 279 $ 1,427
------ ========== ========== =========
Amortization expense was $111, $113 and $105 for the years ended December 31,
1998, 1997 and 1996, respectively.
[4] MORTGAGES PAYABLE
December 31,
-------------
1998 1997
--------- --------
Holiday Inn, Harrisburg, Pennsylvania:
Note payable to bank dated August 19, 1997 with monthly payments of $34
including interest at 8.45% until November 1, 2002. Thereafter the rate is
negotiated or the bank's prime rate plus 1/4%. Final payment is due November
1, 2012. The property previously was financed by a bank with a note payable
with monthly payments of $27 including interest at the prime rate plus 1-1/2%
maturing March 2, 2010 and another note payable with monthly payments of $7
plus
interest at 8-1/2% maturing January 5, 2001. $ 3,379 $3,500
Holiday Inn, Milesburg, Pennsylvania:
Note payable to bank dated June 2, 1977 with monthly payments of
$11 including interest at 8% until June 6, 1999 835 914
---- ----
Totals - Forward $ 4,214 $4,414
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #5
[AMOUNTS IN THOUSANDS]
[4] MORTGAGES PAYABLE [CONTINUED]
December 31,
------------
1998 1997
-------- -------
Totals - Forwarded $ 4,214 $ 414
Clarion Suites, Philadelphia, Pennsylvania:
Note payable to a bank dated June 21, 1995 with monthly payments of $16 as
adjusted for interest at the prime rate plus 1.25% until July 1, 2010.
Guaranteed by PIDC Local Development Corporation and the
Small Business Administration. 1,139 1,195
Note payable to a bank dated June 21, 1995 with monthly payments of $3 plus
interest at the prime rate plus .5%. Principal balance is
due July 1, 2002. 383 419
Hampton Inn, Selinsgrove, Pennsylvania:
Note payable to a bank dated April 3, 1996 with monthly payments of
$24 including interest at 7-3/4% until October 3, 2011. 2,287 2,385
Hampton Inn, Carlisle, Pennsylvania:
Note payable to a bank dated September 6, 1996 with monthly payments of $28
including interest at 8% until March 6, 2001. Thereafter, the rate is
negotiated or prime rate plus 1%. Final payment is due
June 6, 2012. 2,739 2,848
Holiday Inn Express, New Columbia, Pennsylvania:
Note payable to a bank dated September 9, 1997 with monthly payments
of $27 including interest at 8-1/2% until February 1, 2003. Thereafter
interest will be at the prime rate plus 1/4% as of January 1, 2003 and
January 1, 2008. Final payment is due January 1, 2013. 2,613 1,000
Comfort Inn, West Hanover, Pennsylvania:
Note payable to a bank dated August 28, 1997, drawn May 8, 1998, with
monthly payments of $23 including interest at 8.0% until May 28, 2003.
Thereafter, the rate shall be annually adjusted at the prime rate. Final
payment is due May 28, 2008. 2,450 --
Holiday Inn Express, Harrisburg, Pennsylvania:
Note payable to a bank dated September 26, 1997 with monthly payments of $11
including interest at 8.35% until October 1, 2000. Thereafter, the rate is as
negotiated or at prime plus 1%. Final payment is due
October 1, 2012. 1,071 1,110
Holiday Inn Express, Hershey, Pennsylvania:
Note payable to a bank dated December 30, 1996 with monthly payments of $27
including interest at 8.15% until December 31, 2001. Thereafter, the rate is
as negotiated or prime plus 3/4%. Final payment is due
January 1, 2013. 2,682 1,342
----- -----
TOTALS $19,578 $14,713
- ------ ======= =======
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #6
[AMOUNTS IN THOUSANDS]
[4] MORTGAGES PAYABLE [CONTINUED]
Substantially all the Combined Entities' mortgage indebtedness is
collateralized by property and equipment and is personally guaranteed by the
partners and stockholders of the Combined Entities. Certain of the hotel
properties also collateralize lines of credit of a related party aggregating
$7,500 and $500 at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, the prime rate was 7.75% and 8.5%,
respectively.
As of December 31, 1998, aggregate annual principal payments for the
five years following December 31, 1998, and thereafter are as follows:
Year ending
December 31,
- ------------
1999 $ 1,636
2000 878
2001 955
2002 1,260
2003 1,078
Thereafter 13,771
------------
TOTAL $ 19,578
----- ============
[5] OWNERS' EQUITY
The owners' equity of the Combined Entities by entity is as follows:
December 31,
1998 1997
------- --------
244 Associates $ 527 $ 542
844 Associates 488 285
944 Associates 133 29
1244 Associates 228 373
1444 Associates 1,099 829
1644 Associates 321 (72)
2144 Associates 801 833
2244 Associates 472 (54)
2544 Associates 478 (60)
Hersha Enterprises 394 267
MEPS Associates 204 170
Shree Associates (31) 11
--------- ---------
TOTALS $ 5,114 $ 3,153
------ ========= =========
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #7
[AMOUNTS IN THOUSANDS]
[6] INCOME TAXES
Included in the Combined Entities for the years ended December 31, 1998,
1997 and 1996 is a corporation which computed its income taxes pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes at December 31, 1998 and 1997 was comprised of
deferred tax assets of $10 and $20, respectively, representing net operating
loss carryforwards, offset by full valuation allowances of $10 and $20,
respectively. Under the transaction contemplated in connection with the proposed
initial public offering, the net operating loss carryforwards will not be
available to the Company.
The Combined Entities neither incurred nor paid any income taxes during
the periods presented.
[7] RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, the Combined Entities are indebted to
various related entities, partners, and stockholders in the amount of $4,459 and
$9,169, respectively. The loans carry interest ranging from 8.5% on short-term
loans to 10.5% on longer term loans. Accrued interest payable was $54 and $153
at December 31, 1998 and 1997, respectively, and interest expense was $386, $533
and $316 for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, various related entities, partners and
stockholders are indebted to the Combined Entities in the amount of $103 and
$268, respectively. The loans carry interest ranging from 0% on short-term loans
to 9% on longer term loans. Accrued interest receivable was $1 and $1 at
December 31, 1998 and 1997, respectively, and interest income was $6, $9 and $1
for the years ended December 31, 1998, 1997 and 1996, respectively.
The Combined Entities have paid or accrued $2,359, $9,433 and $856
during the years ended December 31, 1998, 1997 and 1996 to related entities for
various hotel construction projects and interest costs during construction.
Capitalized interest amounted to $63, $183 and $10 for the years ended December
31, 1998, 1997 and 1996, respectively.
Certain properties are managed by individual partners or related
entities. Management fees paid to these individuals or related entities were
$608, $272 and $97 during the years ended December 31, 1998, 1997 and 1996,
respectively.
A related entity rents office space in a hotel owned by the Combined
Entities on a month to month basis. The Combined Entities received rent of $-0-
and $30 for the years ended December 31, 1998 and 1997, respectively. The rent
amount includes an allocation of certain related expenses.
During the year ended December 31, 1996, the Combined Entities sold for
$129, the book value of the assets, certain leasehold improvements to Mr. Hasu
P. Shah.
On September 26, 1997, the Combined Entities acquired from Mr. Hasu P.
Shah, the Holiday Inn Express in Harrisburg, Pennsylvania by paying off the
$1,106 indebtedness on the property. Prior to the sale, the Combined Entities
had rented the property from Mr. Hasu P. Shah under an informal rent
arrangement. Rent paid to Mr. Hasu P. Shah was $48 and $267 for the years ended
December 31, 1997 and 1996, respectively. Mr. Hasu P. Shah owns a parcel of land
on which a hotel is situated for which no land rent is charged.
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #8
[AMOUNTS IN THOUSANDS]
[8] COMMITMENTS
FRANCHISE AGREEMENTS - The Initial Hotels have executed franchise
agreements that have initial lives ranging from 10 to 20 years but may be
terminated by either party on certain anniversary dates specified in the
agreements. In addition to initial fees totaling $374, which are being amortized
over the franchise lives, the agreements require annual payments for franchise
royalties, reservation, and advertising services which are based upon
percentages of gross room revenue. Such fees were approximately $1,135, $779 and
$524 for the years ended December 31, 1998, 1997, 1996, respectively. The
Initial Hotels will continue to be operated under the franchise agreements.
CONSTRUCTION IN PROGRESS - At December 31, 1998, the Combined Entities
had commenced improvements of a hotel property in Harrisburg, Pennsylvania.
These improvements involve the construction of offices and the installation of a
sprinkler system for the entire property. Through December 31, 1998, the
Combined Entities had incurred expenses of $235. The improvements are being
contracted and funded through a related party and the total construction cost is
expected to be approximately $425. At December 31, 1998, $235 was outstanding to
a related party in relation to the construction project. Interest is payable on
this amount at 9.5% per annum payable quarterly. There is no security provided
against this loan.
At December 31, 1997, the Combined Entities had future obligations under
various hotel construction project in the amount of $255. Through December 31,
1997, the Combined Entities had incurred expenses of $1,412 in connection with
the construction of a hotel property in Harrisburg, Pennsylvania. The
construction is being contracted and funded through a related party and the
total construction cost is expected to be approximately $3,100. The Combined
Entities have obtained a construction/term loan in the amount of $2,500 under
which no borrowings are outstanding at December 31, 1997. The loan bears
interest at 8% for 5 years and 9 months and the Wall Street Journal prime rate
thereafter through maturity 10 years and 9 months from inception. The loan is
collateralized by the property and is guaranteed by certain partners,
stockholders, Combined Entities and related parties. Construction of the
property was completed and the property opened for business May 15, 1998.
[9] FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998 and 1997, financial instruments include cash and
cash equivalents, accounts receivable, accounts payable, loans to and from
related parties and mortgage payables. The fair values of cash, accounts
receivable and accounts payable approximate carrying value because of the
short-term nature of these instruments. Loans to and from related parties carry
interest at rates that approximate the Combined Entities' borrowing cost. The
fair value of mortgages payable approximates carrying value since the interest
rates approximate the interest rates currently offered for similar debt with
similar maturities.
[10] SUBSEQUENT EVENTS
On January 1, 1999, the Combined Entities transferred all management
operations to the Lessee.
In January 1999, the Company completed its offering of common stock
whereby a total of 2.275 million common shares, including the underwriters over
allotment, were issued. Concurrent with the offering, certain assets and
partnership interests of the Combined Entities were exchanged for 4,032,431
units representing a 63.93% limited partnership interest in the Partnership.
COMBINED ENTITIES - INITIAL HOTELS
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998.
[IN THOUSANDS]
COST CAPITALIZED GROSS AMOUNTS AT
SUBSEQUENT TO WHICH CARRIED AT ACCUMULATED
INITIAL COST ACQUISITION CLOSE OF PERIOD DEPRECIATION
BUILDINGS AND BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL IMPROVEMENTS
- ----------- ------------ ---- ----------- ---- --------------- ----- ---------------- ----- -------------
Holiday Inn,
Harrisburg, PA $ 3,379 $ 412 $ 1,234 $ -- $ 1,593 $ 412 $ 2,827 $ 3,239 $ 300
Holiday Inn,
Milesburg, PA 835 42 1,158 -- 784 42 1,942 1,984 499
Holiday Inn Express,
New Columbia, PA 2,613 94 2,510 -- 98 94 2,608 2,702 71
Holiday Inn Express,
Harrisburg, PA 1,071 256 850 -- 244 256 1,094 1,350 39
Holiday Inn Express,
Hershey, PA 2,682 426 2,645 -- 40 426 2,685 3,111 84
Clarion Suites,
Philadelphia, PA 1,522 262 1,049 150 817 412 1,866 2,278 188
Comfort Inn,
Harrisburg, PA 2,450 -- 2,720 -- -- -- 2,720 2,720 43
Comfort Inn,
Denver, PA 419 -- 782 -- 327 -- 1,109 1,109 244
Hampton Inn,
Selinsgrove, PA 2,287 157 2,511 -- 6 157 2,517 2,674 151
Hampton Inn,
Carlisle, PA 2,739 300 3,109 -- 12 300 3,121 3,421 123
------- ------- -------- -------- ------- ------- ------- -------- -------
$19,997 $ 1,949 $ 18,568 $ 150 $ 3,921 $ 2,099 $22,489 $24,588 $ 1,742
======= ======= ======== ======== ======= ======= ======= ======== ======
LIFE
NET UPON WHICH
BOOK VALUE LATEST INCOME
BUILDINGS AND DATE OF STATEMENT IS
DESCRIPTION IMPROVEMENTS ACQUISITION COMPUTED
- ----------- ------------- ------------ --------------
Holiday Inn,
Harrisburg, PA $ 2,939 12/15/94 15 to 40
Holiday Inn,
Milesburg, PA 1,471 08/15/85 15 to 40
Holiday Inn Express
New Columbia, PA 2,632 12/01/97 15 to 40
Holiday Inn Express
Harrisburg, PA 1,312 06/15/84 15 to 40
Holiday Inn Express
Hershey, PA 3,027 10/01/97 15 to 40
Clarion Suites,
Philadelphia, PA 2,090 06/30/95 15 to 40
Comfort Inn,
Harrisburg, PA 2,677 05/15/98 15 to 40
Comfort Inn,
Denver, PA 865 01/01/88 15 to 40
Hampton Inn,
Selinsgrove, PA 2,523 09/12/96 15 to 40
Hampton Inn,
Carlisle, PA 3,298 06/01/97 15 to 40
-------
$22,846
=======
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO SCHEDULE III
[IN THOUSANDS]
[A] Reconciliation of Real Estate:
1998 1997 1996
------- ------- -------
Balance at Beginning of Year $ 19,276 $ 9,950 $ 6,354
Additions During Year 3,213 9,369 3,725
Deletions During Year -- (43) (129)
---------- -------- -------
Balance at End of Year $ 22,489 $ 19,276 $ 9,950
========== ========= ========
[B] Reconciliation of Accumulated Depreciation:
Balance at Beginning of Year $ 1,141 $ 834 $ 614
Depreciation for the Year 601 307 220
Accumulated Depreciation on Deletions -- -- --
---------- --------- --------
Balance at End of Year $ 1,742 $ 1,141 $ 834
========== ========= ========
[C] The aggregate cost of land, buildings and improvements for federal income
tax purposes is approximately $21,482.
[D] Depreciation is computed based upon the following useful lives:
Buildings and Improvements 15 to 40 years
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Hersha Hospitality Trust,
a Maryland real estate investment trust
(Registrant)
By: /s/ Hasu P. Shah
------------------------------
Hasu P. Shah
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on the 31st day of March,
1999 in the capacities indicated.
Signature Title
- --------- -----
/s/ Hasu P. Shah
- --------------------------------- Chairman of the Board of Trustees,
Hasu P. Shah Chief Executive Officer and Trustee
(Principal Executive Officer)
/s/ Kiran P. Patel
- --------------------------------- Chief Financial Officer and Secretary
Kiran P. Patel (Principal Financial and Accounting Officer)
/s/ Bharat C. Mehta
- --------------------------------- Trustee
Bharat C. Mehta
/s/ K.D. Patel
- --------------------------------- Trustee
K.D. Patel
/s/ L. McCarthy Downs, III
- --------------------------------- Trustee
L. McCarthy Downs, III
/s/ Everette G. Allen, Jr.
- -------------------------------- Trustee
Everette G. Allen, Jr.
_________________________________ Trustee
Thomas S. Capello
/s/ Mark R. Parthemer
- --------------------------------- Trustee
Mark R. Parthemer
Exhibit Index
-------------
Unless otherwise indicated, the exhibits listed below are incorporated by
reference to our Registration Statement on Form S-11, File No. 333-56087.
3.1 Amended and Restated Declaration of Trust of the Registrant
3.2 Bylaws of the Registrant
4.1 Form of Common Share Certificate
10.1 Form of First Amended and Restated Agreement of Limited Partnership of Hersha
Hospitality Limited Partnership
10.2 Contribution Agreement, dated as of June 3, 1998, between Hasu P. Shah and
Bharat C. Mehta, as Contributor, and Hersha Hospitality Limited Partnership,
as Acquiror.
10.3 Contribution Agreement, dated as of June 3, 1998, between Shree Associates,
JSK Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Devi
Associates, Neil H. Shah, David L. Desfor, Madhusudan I. Patni, Manhar Gandhi
and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality
Limited Partnership, as Acquiror.
10.4 Contribution Agreement, dated as of June 3, 1998, between JSK Associates,
Shanti Associates, Shreeji Associates, Kunj Associates, Devi Associates, Neil
H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd. as Contributor, and
Hersha Hospitality Limited Partnership, as Acquiror.
10.5 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as
` Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.6 Contribution Agreement, dated as of June 3, 1998, between JSK Associates,
Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, David L.
Desfor, Madhusudan I. Patni, Manhar Gandhi and Shreenathji Enterprises, Ltd.,
as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.7 Contribution Agreement, dated as of June 3, 1998, between JSK Associates,
Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah,
Madhusudan I. Patni and Shreenathji Enterprises, Ltd., as Contributor, and
Hersha Hospitality Limited Partnership, as Acquiror.
10.8 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.9 Contribution Agreement, dated as of June 3, 1998, between JSK Associates,
Shanti Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, David L.
Desfor and Shreenathji Enterprises, Ltd., as Contributor, and Hersha
Hospitality Limited Partnership, as Acquiror.
10.10 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.11 Contribution Agreement, dated as of June 3, 1998, between 144 Associates, 344
Associates, 544 Associates and 644 Associates, Joint Tenants Doing Business as
2544 Associates, as Contributor, and Hersha Hospitality Limited Partnership,
as Acquiror.
10.12 Contribution Agreement dated June 3, 1998, between Shree Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.13 Contribution Agreement dated June 3, 1998, between 2144
Associates, as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror.
10.14 Contribution Agreement dated June 3, 1998, between 144 Associates, 344
Associates, 544 Associates and 644 Associates, Joint Tenants Doing Business as
2544 Associates, as Contributor, and Hersha Hospitality Limited Partnership,
as Acquiror.
10.15 Contribution Agreement, dated June 3, 1998, between Shree Associates, Devi
Associates, Shreeji Associates, Madhusudan I. Patni and Shreenathji
Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership,
as Acquiror.
10.16 Contribution Agreement, dated June 3, 1998, between Shree Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.17 Form of Ground Lease
10.18 Form of Percentage Lease
10.19 Option Agreement, dated June 3, 1998, between Hasu P. Shah, Jay H. Shah, Neil
H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel,
David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and Hersha Hospitality
Limited Partnership.
10.19(a) Amendment to Option Agreement, dated December 4, 1998, between Hasu P. Shah,
Jay H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O.
Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar
Gandhi, and Hersha Hospitality Limited Partnership.
10.20 Administrative Services Agreement, dated January 26, 1999, between Hersha
Hospitality Trust and Hersha Hospitality Management, L.P.
10.21 Warrant Agreement, dated January 26, 1999, between Anderson & Strudwick, Inc.
and Hersha Hospitality Trust.
10.22 Warrant Agreement, dated June 3, 1998, between 2744 Associates, L.P. and
Hersha Hospitality Limited Partnership.
10.23 Hersha Hospitality Trust Option Plan
10.24 Hersha Hospitality Trust Non-Employee Trustees' Option Plan
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule for the Year Ended December 31, 1998