EXHIBIT 99.1
FINANICAL STATEMENTS
AND INDEPENDENT AUDITORS' REPORT
HERSHA ACQUISITION HOTELS
DECEMBER 31, 1998 AND JUNE 30, 1999
Hersha Acquisition Hotels
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1998
AND JUNE 30, 1999 (UNAUDITED) 4
COMBINED STATEMENTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1999 (UNAUDITED) 5
COMBINED STATEMENTS OF PARTNERS' EQUITY FOR THE
YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1999 (UNAUDITED) 6
COMBINED STATEMENTS OF CASH FLOWS FOR THE YEAR
ENDED DECEMBER 31, 1998 AND THE SIX MONTHS ENDED
JUNE 30, 1999 (UNAUDITED) 7
NOTES TO COMBINED FINANCIAL STATEMENTS 8
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Hersha Hospitality Trust, Inc.
We have audited the accompanying combined balance sheet of the Hersha
Acquisition Hotels as of December 31, 1998, and the related combined statements
of operations, partners' equity and cash flows for the year then ended. These
financial statements are the responsibility of the management of the Hersha
Acquisition Hotels. Our responsibility is to express an opinion on these
financial statements 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
presently fairly, in all material respects, the combined financial position of
the Hersha Acquisition Hotels as of December 31, 1998, the combined results of
their operations and their combined cash flows for the year then ended in
conformity with generally accepted accounting principles.
Baltimore, Maryland
August 18, 1999, except for the first paragraph
of Note A as to which the date is August 31, 1999
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Hersha Acquisition Hotels
COMBINED BALANCE SHEETS
December 31, 1998 and June 30, 1999 (Unaudited)
December 31, June 30,
1998 1999
----------------- -----------------
(Unaudited)
ASSETS
INVESTMENT IN HOTEL PROPERTIES
Land $ 979,332 $ 979,332
Buildings and improvements 4,488,607 4,549,930
Furniture and equipment 1,322,727 1,342,774
----------------- -----------------
6,790,666 6,872,036
Less accumulated depreciation and amortization 74,669 232,852
----------------- -----------------
Net investment in hotel properties 6,715,997 6,639,184
OTHER
Cash 32,783 17,924
Accounts receivable 21,907 59,797
Due from affiliates 1,589 203,849
Prepaid expenses 20,275 62,313
Mortgage costs, net of accumulated amortization of $536 and $1,676 33,974 32,834
Franchise fees, net of accumulated amortization of $2,249 and $28,805 67,736 61,180
----------------- -----------------
$ 6,894,261 $ 7,077,081
================= =================
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Mortgages payable $ 4,664,346 $ 4,608,714
Loans payable - affiliate 1,283,607 1,736,806
Cash overdraft 114,239 10,388
Accounts payable and accrued expenses 50,682 129,200
Accrued interest payable 79,509 56,328
----------------- -----------------
6,192,383 6,541,436
PARTNERS' EQUITY 701,878 535,645
----------------- -----------------
$ 6,894,261 $ 7,077,081
================= =================
See notes to combined financial statements
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Hersha Acquisition Hotels
COMBINED STATEMENTS OF OPERATIONS
Year ended December 31, 1998 and the six months ended
June 30, 1999 (Unaudited)
December 31, June 30,
1998 1999
--------------- ---------------
(Unaudited)
Revenue
Room revenue $ 415,852 $ 863,598
Telephone revenue 4,511 16,510
Other revenue 1,388 4,788
--------------- ---------------
Total revenue 421,751 884,896
--------------- ---------------
Expenses
Salaries and wages 144,387 184,362
Room expense 73,048 71,939
Management fee 19,568 35,508
General and administrative 35,898 45,336
Advertising 37,842 17,559
Utilities 93,408 114,116
Repairs and maintenance 16,776 17,245
Insurance 6,613 1,589
Real estate taxes 29,636 41,176
Franchise fees 27,866 59,956
Interest expense 198,608 276,464
Depreciation and amortization 77,454 185,879
--------------- ---------------
Total expenses 761,104 1,051,129
--------------- ---------------
NET LOSS $ (339,353) $ (166,233)
=============== ===============
See notes to combined financial statements
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Hersha Acquisition Hotels
COMBINED STATEMENTS OF PARTNERS' EQUITY
Year ended December 31, 1998 and the six months ended
June 30, 1999 (Unaudited)
Balance, December 31, 1997 $ -
Contributions 1,041,231
Net loss (339,353)
---------------
Balance, December 31, 1998 701,878
Net loss (166,233)
---------------
Balance, June 30, 1999 (unaudited) $ 535,645
===============
See notes to combined financial statements
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Hersha Acquisition Hotels
COMBINED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 and the six months ended
June 30, 1999 (Unaudited)
December 31, June 30,
1998 1999
------------- -----------
(Unaudited)
Cash flows from operating activities
Net loss $ (339,353) $ (166,233)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 74,669 158,183
Amortization of mortgage costs and franchise fees 2,785 27,696
Changes in assets and liabilities
Increase in accounts receivable (21,907) (37,890)
Increase in prepaid expenses (20,275) (42,038)
Increase in payment of franchise fees (69,985) (20,000)
Increase in accounts payable and accrued expenses 50,682 78,518
Increase in due from affiliates (1,589) (202,260)
Increase (decrease) in accrued interest payable 79,509 (23,181)
-------------- -----------
Net cash used in operating activities (245,464) (227,205)
-------------- -----------
Cash flow from investing activities
Investment in hotel property (6,790,666) (81,370)
------------- -----------
Net cash used in investing activities (6,790,666) (81,370)
------------- -----------
Cash flow from financing activities
Contributions 1,041,231 -
Increase (decrease) in bank overdraft 114,239 (103,851)
Payment of mortgage costs (34,510) -
Proceeds from mortgage payable 4,700,000 -
Principal payments on mortgage payable (35,654) (55,632)
Proceeds from loans payable - affiliates 7,335,470 453,199
Principle payments on loans payable - affiliates (6,051,863) -
------------- -----------
Net cash provided by financing activities 7,068,913 293,716
------------- -----------
NET INCREASE (DECREASE) IN CASH 32,783 (14,859)
Cash, beginning - 32,783
------------- -----------
Cash, ending $ 32,783 $ 17,924
============= ===========
Supplemental disclosures of cash flow information
Cash paid during the year for interest, net of
amounts capitalized $ 119,099 $ 299,645
============= ===========
See notes to combined financial statements.
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Hersha Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998 and June 30, 1999
(Amounts and disclosures as of June 30, 1999 and for the
six months then ended are unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The Hersha Acquisition Hotels combined financial statements are a combination
of the balance sheets and statements of operations, partners' equity and cash
flows of two hotel properties owned and operated by various limited
partnerships under common control and management (collectively, the Owners).
On August 31, 1999, the Owners entered into agreements to sell the hotel
properties to Hersha Hospitality Limited Partnership. The sales agreements do
not extend to any other assets or liabilities of the Owners. The hotel
properties combined in these financial statements, which commenced operations
in 1998, consist of the following:
Hotel Date Opened Rooms Location
----- ----------- ----- --------
Hampton Inn September 1998 72 Danville, Pennsylvania
Clarion Inn August 1998 77 Harrisburg, Pennsylvania
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Investment in Hotel Properties
------------------------------
The hotel properties are stated at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations by
use of the straight-line method over estimated useful lives:
Building and improvements ................................. 15 - 40 years
Furniture and equipment ................................... 3 -7 years
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Hersha Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and June 30, 1999
(Amounts and disclosures as of June 30, 1999 and for the
six months then ended are unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Maintenance and repairs are charged to operations as incurred. Additions and
major improvements are capitalized. Upon sale or disposition, both the asset
and related accumulated depreciation are relieved and the related gain or
loss is included in operations.
The Owners evaluate long-lived assets for potential impairment by analyzing
the operating results, trends and prospects for the properties and
considering any other events and circumstances which might indicate potential
impairment.
Mortgage Costs
--------------
Mortgage costs are amortized over the term of the debt using the
straight-line method which approximates the effective interest method.
Franchise Fees
--------------
The Hampton Inn Hotel is operated under a franchise agreement with Promus
Hotels, Inc. The Clarion Inn Hotel was operated under a franchise agreement
with Choice Hotels International, Inc. through May, 1999. Beginning in June
1999, the Clarion Inn Hotel was re-flagged as a Comfort Inn under a franchise
agreement with Choice Hotels International, Inc. Franchise fees are amortized
over the term of the franchise agreement using the straight-line method.
During 1999, unamortized franchise fees of $24,062 associated with the
Clarion franchise agreement were written off and are included in amortization
expense.
Revenue Recognition
-------------------
Room and other revenue are recognized as earned. Ongoing credit evaluations
are performed and accounts deemed uncollectible are charged to operations.
Advertising Costs
-----------------
Advertising costs are expensed as incurred, including costs incurred under
the terms of the franchise agreements.
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HERSHA ACQUISITION HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and June 30, 1999
(Amounts and disclosures as of June 30, 1999 and for the
six months then ended are unaudited)
Income Taxes
------------
No provision or benefit for income taxes has been included in the combined
financial statements for the Owners since taxable income or loss passes
through to, and is reportable by, the partners individually.
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Hersha Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and June 30, 1999
(Amounts and disclosures as of June 30, 1999 and for the
six months then ended are unaudited)
NOTE B - MORTGAGES PAYABLE
Mortgages payable at December 31, 1998 and June 1999, consisted of the
following:
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
Hampton Inn
Mortgage payable in equal monthly
installments of principal
and interest of $26,585
bearing interest at 8.375%
per annum. The mortgage
matures on April 18, 2012. $ 2,564,346 $ 2,512,466
Clarion Inn
Mortgage payable in equal monthly
installments of principal
and interest $18,382 bearing
interest at 8.36% per annum.
The mortgage matures on July 1,
2004. 2,100,000 2,096,248
----------- -----------
$ 4,664,346 $ 4,608,714
=========== ===========
The mortgages are secured by the hotel property and guaranteed by partners of
the Owners.
Annual principal payments on the mortgages for the five years following
December 31, 1998 and June 30, 1999, are as follows.
December 31, June 30,
------------ --------
(Unaudited)
1999 $217,786 $ -
2000 $336,789 $331,883
2001 $347,224 $341,900
2002 $358,551 $352,771
2003 $370,849 $364,574
2004 $ - $377,388
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Hersha Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and June 30, 1999
(Amounts and disclosures as of June 30, 1999 and for the
six months then ended are unaudited)
NOTE C - INTEREST
Interest incurred during the period of construction of the hotels was
capitalized as part of the costs of the investment in hotel properties.
During the year ended December 31, 1998, interest costs incurred totaled
$330,446 of which $131,838 was capitalized. During 1999, no interest costs
were capitalized.
NOTE D - RELATED PARTY TRANSACTIONS
Due from Affiliates
-------------------
Due from affiliates consists of operating advances to related parties which
are unsecured, non-interest bearing and payable on demand.
Management Fees
---------------
During 1998, the hotel properties were managed by Shreenathji Enterprises,
Ltd., an affiliate, under agreements providing for monthly fees equal to the
greater of $1,500 or 4% of gross revenue. Beginning in 1999, the hotel
properties were managed by Hersha Hospitality Management Limited Partnership,
an affiliate, under agreements providing for monthly fees equal to 4% of
gross revenue. Management fees totaling $19,568 and $35,508 were charged to
operations during 1998 and 1999, respectively.
Loans Payable - Affiliate
-------------------------
During 1998 and 1999,an affiliate of the hotel properties, Shreenathji
Enterprise, Ltd, provided funds for the payment of development and operating
costs. The loans bear interest at the rate of 9.5% per annum payable
quarterly, the outstanding balance and accrued interest are due on demand. As
of December 31, 1998 and June 30, 1999, the following amounts were
outstanding:
1998 1999
---- ----
(Unaudited)
Hampton Inn $ 58,187 $ 308,187
Clarion Inn 1,225,420 1,428,619
---------- ----------
$ 1,283,607 $ 1,736,806
========== ==========
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Hersha Acquisition Hotels
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and June 30, 1999
(Amounts and disclosures as of June 30, 1999 and for the
six months then ended are unaudited)
NOTE E - COMMITMENTS
Franchise fees represent the annual expense for franchise royalties,
reservations and advertising services under the terms of the hotel franchise
agreements. The payments are based upon percentages of gross room revenue.
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