-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ugt4+rvPc81cBMVNPuw/FDF/+ttGbTTSjUKpSmzGzXSEX1AA72Kj9wQ4Xim4IfoV IpZlolmJsKdwpBvdFh4Mbg== 0001015402-03-001018.txt : 20030331 0001015402-03-001018.hdr.sgml : 20030331 20030331172118 ACCESSION NUMBER: 0001015402-03-001018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERSHA HOSPITALITY TRUST CENTRAL INDEX KEY: 0001063344 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 251811499 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14765 FILM NUMBER: 03632057 BUSINESS ADDRESS: STREET 1: 148 SHERATON DRIVE, BOX A CITY: NEW CUMBERLAND STATE: PA ZIP: 17070 BUSINESS PHONE: 7177702405 10-K 1 doc1.txt 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, 2002 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: 001-14765 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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant, as of June 28, 2002, was approximately $15.97 million. As of March 27, 2003, the number of outstanding Priority Class A Common Shares of Beneficial Interest outstanding was 2,576,863. Documents Incorporated By Reference: Portions of the 2002 Hersha Hospitality Trust Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to the Annual Meeting of Shareholders to be held on May 28, 2003 are incorporated by reference into Part III hereof.
HERSHA HOSPITALITY TRUST INDEX FORM 10-K REPORT ITEM NO. PAGE - ------- --------- PART I 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . 24 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . 24 6. SELECTED FINANCIAL AND OPERATING DATA . . . . . . . . . . . . . . . . . . . . . . . . 25 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . . . . . . . 34 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . 36 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 79 10. TRUSTEES AND EXECUTIVE OFFICERS OF OUR COMPANY. . . . . . . . . . . . . . . . . . . . 79 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . 79 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . 79 14. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . 80
2 CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS This report contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements containing the words, "believes," "anticipates," "expects" and words of similar import. Such forward-looking statements relate to future events, our future financial performance, and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers should specifically consider the various factors identified, or incorporated by reference in this report including, but not limited to those discussed in the sections entitled "Growth Strategy" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and those discussed in any documents filed by us with the Securities and Exchange Commission that could cause actual results to differ. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 1. BUSINESS OVERVIEW Hersha Hospitality Trust is a Maryland real estate investment trust organized in 1998 that invests in limited service and full service hotels with strong, national franchise affiliations, or hotels with the potential to obtain these franchises, in the mid-scale market segment in the eastern United States. Since our initial public offering in January 1999, we have concentrated on owning economy, mid-scale and upper-economy hotels located in diverse markets. We recently have re-focused our business strategy toward acquiring mid-scale hotels in leading central business districts, in close proximity to business and leisure demand generators in suburban areas around major metropolitan markets. 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. During the quarter ended March 31, 2002, we sold in a public offering an additional 300,000 Priority Class A Common Shares. Our Priority Class A Common Shares are traded on the American Stock Exchange under the symbol "HT." In connection with our initial public offering of priority common shares, our operating partnership, Hersha Hospitality Limited Partnership, acquired ten initial hotels in exchange for (i) 4,032,431 subordinated units of operating 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 (ii) the assumption of approximately $23.3 million of indebtedness of which approximately $6.1 million was repaid immediately after the acquisition of the hotels using the proceeds of the offering. Since our initial public offering, we have purchased an additional 16 hotels and disposed of 8 hotels. Of the eight hotels that we sold, four of the hotels consisted of properties contributed at our initial public offering. We currently own 18 hotels, which we acquired in exchange for (i) an aggregate of 5,099,722 subordinated units of operating partnership interest in the partnership that are redeemable for the same number of Class B Common Shares and (ii) the assumption of approximately $67.1 million of indebtedness, the current balance of which is approximately $65.3 million. We own our hotels through our operating partnership of which we are the general partner and own 36.1% of the partnership interests. In order for us to qualify as a REIT, we cannot operate our hotels. Therefore, we lease each of our hotels to management companies to operate our hotels. We lease 14 of our hotels to Hersha Hospitality Management, L.P. (HHMLP), a Pennsylvania limited partnership. HHMLP is owned in part by three of our executive officers, two of our trustees and their affiliates. We lease the remaining four hotels located in Atlanta, Georgia to subsidiaries of Noble Investment Group, Ltd., an unaffiliated third party real estate development and hotel management company. In addition, HHMLP provides administrative services to us for a fixed annual fee. We have five executive officers, and these officers are our only employees. 3 The leases are designed to allow us to participate in revenue growth at our hotels by providing for percentage rent based on hotel revenues. The percentage rent calculation in each of these leases is based upon incentive thresholds. These thresholds are designed to provide incentive to our lessees to generate higher revenues at each hotel and to increase the rent percentage due above the incentive thresholds while simultaneously increasing the lessee's profitability from the hotel's operations. As of December 31, 2002, we owned the following 18 hotels:
- ------------------------------------------------------------------------------------- NUMBER OF NUMBER OF HOTELS ROOMS HOTELS ROOMS - ------------------------------------------------------------------------------------- HOLIDAY INN EXPRESS: HOLIDAY INN EXPRESS AND SUITES: Hershey, PA 85 Harrisburg, PA 77 Duluth, GA 68 MAINSTAY SUITES: Long Island City, NY 79 King of Prussia, PA 69 New Columbia, PA 81 Frederick, MD 72 HAMPTON INN: SLEEP INN: Carlisle, PA 95 King of Prussia, PA 87 Danville, PA 72 COMFORT SUITES: Hershey, PA 110 Duluth, GA 85 Newnan, GA 91 HOLIDAY INN HOTEL AND CONFERENCE CENTER: Peachtree, GA 61 Harrisburg, PA 196 Selinsgrove, PA 75 DOUBLETREE CLUB COMFORT INN: JFK Airport, NY 110 Harrisburg, PA 81 - ------------------------------------------------------------------------------------- Total Rooms 1,594 =========
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 percentage leases. ACQUISITION STRATEGY Our acquisition policy is to acquire hotels for which we expect to receive rents at least equal to 10% -12% of the purchase price paid for each hotel, net of certain costs. In addition, we intend to acquire hotels that meet one or more of the following criteria: - nationally-franchised hotels such as Comfort Inn(R), Fairfield Inn(R), Marriott Courtyard(R), Hampton Inn(R), Hilton Garden Inn(R), Holiday Inn(R) and Holiday Inn Express(R) hotels, and limited service extended-stay hotels such as Comfort Suites(R), Homewood Suites(R), Main Stay Suites(R), Staybridge Suites(R), Embassy Suites(R), Summerfield Suites(R) and Residence Inn by Marriott(R) hotels; - hotels with significant barriers to entry, such as high development costs, limited availability of land and the presence of similarly branded hotels; - poorly-managed hotels, which could benefit from new management, a new marketing strategy and association with a national franchisor; - hotels in deteriorated physical condition that could benefit significantly from renovations; and - hotels in attractive locations that we believe could benefit significantly by changing franchises to a superior brand. Future acquisitions may include hotels newly developed by some of our executive officers, trustees and their affiliates. 4 In addition to the direct acquisition of hotels, we may make investments in hotels through joint ventures with strategic partners or through equity contributions, sales and leasebacks, or secured loans. We seek to identify acquisition candidates located in markets with economic, demographic and supply dynamics favorable to hotel owners and operators. Through our extensive due diligence process, we select those acquisition targets where we believe selective capital improvements and intensive management will increase the hotel's ability to attract key demand segments, enhance hotel operations and increase long-term value. We intend to lease hotels that we acquire to operators, including our current lessees, HHMLP and Noble, as well as other third party non-affiliated lessees. Future leases with our current lessees generally will be similar to the current 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. Effective January 1, 2002, we acquired the Mainstay Suites, Frederick, Maryland. We acquired this 72-room hotel from certain executive officers and trustees for approximately $5.5 million. On November 1, 2002, we completed the acquisition of the Doubletree Club at the JFK International Airport, Jamaica, NY. We also acquired this 110-room hotel from affiliates of certain of our executive officers and trustees for $11.5 million. We have leased both of these hotels to HHMLP under percentage lease terms similar to other leases that we have entered into with them in previous transactions. FINANCING We may finance additional investments in hotels, in whole or in part, with undistributed cash, issuances of priority common shares, preferred stock or operating partnership units, cash received from the disposition of hotels 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 eighteen hotels, owned as of December 31, 2002, was approximately $108.0 million, and our indebtedness at December 31, 2002 was approximately $65.3 million, which represents approximately 60.5% of the aggregate purchase price for our hotels. In February 2000, we entered into a portfolio refinancing of seven of our hotel properties for approximately $22.1 million. Outstanding borrowings under the refinancing bear interest at a fixed rate of 8.94%, have a total loan amortization period of 23.5 years and have a maturity date of February 2010. The first eighteen months of the loan were structured to be interest only financing with no principal pay off during the period. The loan proceeds were utilized to pay off existing loans, to pay accrued distributions to the limited partners of our operating partnership and to acquire hotel properties. We maintain a credit line with Sovereign Bank for $11.5 million. Outstanding borrowings under the line of credit bear interest at the bank's prime rate. The line of credit is collateralized by a first mortgage on one of our hotels. The interest rate on borrowings under the line of credit at December 31, 2002 was 4.25%. The line of credit expires on December 31, 2004. The outstanding principal balance on the line of credit was approximately $3.8 million at December 31, 2002. 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 month or calendar quarter the greater of base rent or percentage rent. The percentage rent for each hotel leased to HHMLP is comprised of: - a percentage of room revenues up to a certain threshold amount, - a percentage of room revenues in excess of the first threshold but less than a second incentive threshold, - a percentage of room revenues in excess of the second incentive threshold and 5 - a percentage of revenues other than room revenues. The percentage rent for each hotel leased to Noble is comprised of: - a percentage of room revenues up to an incentive threshold and - a percentage of room revenues above this threshold amount. The incentive thresholds are designed to provide incentive to our lessees to generate higher revenues at each hotel by reducing the percentage of revenue paid as rent above certain thresholds. In the case of any newly-renovated hotels or newly-developed hotels, our lessees pay a fixed rent until an adjustment date, after which our lessees pay the greater of a base rent or percentage rent. We seek to increase percentage lease payments through the following: - asset management, which includes monitoring the operators' marketing programs, sales management policies and operational initiatives at the hotels; and - reinvestment in the hotels as management deems necessary. DISPOSITION We will evaluate our hotels on a periodic basis to determine if these hotels continue to satisfy our investment criteria. We may sell hotels opportunistically based upon management's forecast and review of the cash flow potential for the hotel and re-deploy the proceeds into debt reduction or acquisitions of hotels. We utilize several criteria to determine the long-term potential of our hotels. Hotels are identified for sale based upon management's forecast of the strength of the hotel's cash flows and its ability to remain accretive to our portfolio. Our decision to sell an asset is often predicated upon the size of the hotel, strength of the franchise, property condition and related costs to renovate the property, strength of market demand generators, projected supply of hotel rooms in the market, probability of increased valuation and geographic profile of the hotel. All asset sales are comprehensively reviewed by our Board of Trustees, including our independent trustees. A majority of the independent trustees must approve the terms of all asset sales. We have sold four hotels since the initial public offering to third parties and have sold four hotels back to some of our executive officers, trustees and their affiliates to prevent the REIT from having to take on seller financing, including the Sleep Inn, Corapolis, PA as described below. Three of these hotels were ultimately sold to third parties on substantially the same terms (except for the terms of the seller financing) as the terms of the sales to our executive officers, trustees and their affiliates. The business purpose of the sales was to dispose of assets that did not satisfy our investment criteria. We sold two properties during 2002. The property sales were undertaken as a result of our strategic and cash flow forecasts of the individual hotels and other strategic criteria mentioned above. The Clarion Suites, Philadelphia was sold directly to third party owner operators for approximately $6.3 million. We sold the Sleep Inn, Corapolis, PA to affiliates of certain of our executive officers and trustees for $5.5 million. This hotel was initially purchased from affiliates of certain of our executive officers and trustees for $5.5 million. As of March 27, 2003, the Sleep Inn, Corapolis, PA had not been sold to a third party due to difficult market conditions. INDEPENDENT REVIEW OF ACQUISITION AND DISPOSITIONS WITH RELATED PARTIES As of September 2001, the Board of Trustees has elected to hire an independent third party accounting firm to review in advance all asset purchases and asset sales between us and related parties. The Board of Trustees will determine the scope of each review on a case-by-case basis. The independent third party accounting firm will review each acquisition or sale to determine if the terms of the transaction are in line with then-current market conditions as well as how the transaction impacts us. The accounting firm then will present its findings to the Board of Trustees to aid it in its evaluation of the terms of the transaction. 6 RE-PRICING OUR HOTELS We have acquired, and expect to acquire in the future, from affiliates of certain of our executive officers and trustees, newly-developed or newly-renovated hotels that do not have an operating history that would allow us to make purchase price decisions based on historical performance. In buying these hotels we have utilized, and expect to continue to utilize, a "re-pricing" methodology that, in effect, adjusts the initial purchase price for the hotel, one or two years after we initially purchase the hotel, based on the actual operating performance of the hotel during the previous twelve months. All purchase price adjustments are approved by a majority of our independent trustees. The initial purchase price for each of these hotels was based upon management's projections of the hotel's performance for one or two years following our purchase. The leases for these hotels provide for fixed initial rent for the one- or two-year adjustment period that provides us with a 12% annual yield on the initial purchase price, net of certain expenses. At the end of the one- or two-year period, we calculate a value for the hotel, based on the actual net income during the previous twelve months, net of certain expenses, such that it would have yielded a 12% return. We then apply the percentage rent formula to the hotel's historical revenues for the previous twelve months on a pro forma basis. If the pro forma percentage rent formula would not have yielded a pro forma annual return to us of 11.5% to 12.5% based on this calculated value, this value is adjusted either upward or downward to produce a pro forma return of either 11.5% or 12.5%, as applicable. If this final purchase price is higher than the initial purchase price, then the seller of the hotel will receive consideration in an amount equal to the increase in price. If the final purchase price is lower than the initial purchase price, then the sellers of the hotel will return to us consideration in an amount equal to the difference. Any purchase price adjustment will be made either in operating partnership units or cash as determined by our Board of Trustees, including the independent trustees. Any operating partnership units issued by us or returned to us as a result of the purchase price adjustment historically have been valued at $6.00 per unit. Any future adjustments will be based upon a value per unit approved by our Board of Trustees, including our independent trustees. The sellers are entitled to receive quarterly distributions on the operating partnership units prior to the units being returned to us in connection with a downward purchase price adjustment. We re-priced seven of our hotels acquired in connection with our initial public offering based upon operating results as of December 31, 1999 or December 31, 2000. Before we implemented the current pricing methodology in December 2000, our pricing methodology provided for re-pricing of a hotel if there was any variance from our initial forecasted 12% return. Under this previous pricing methodology, as of January 1, 2000, we issued an aggregate of 235,026 additional operating partnership units in connection with the re-pricing of the Holiday Inn, Milesburg; the Comfort Inn, Denver; and the Comfort Inn, Harrisburg, each of which subsequently was sold. In addition, on January 1, 2001, we issued an aggregate of 531,559 additional operating partnership units in connection with the re-pricing of the Holiday Inn Express, Hershey; Hampton Inn, Carlisle; Holiday Inn Express, New Columbia; and the Comfort Inn, Harrisburg. We also issued 175,538 operating partnership units at a value equal to approximately $1 million in connection with the repricing of the Comfort Inn, Jamaica, New York located at John F. Kennedy International Airport prior to its sale in June 2001. On January 1, 2002, we issued an aggregate of 333,541 additional operating partnership units in connection with the re-pricing of the Holiday Inn Express & Suites, Harrisburg, the Hampton Inn & Suites, Hershey and the Hampton Inn, Danville, Pennsylvania. We and some of our executive officers, trustees and their affiliates have agreed to enter into an option agreement that would allow for an extension of the fixed rent and repricing periods for the Mainstay Suites and Sleep Inn hotel, King of Prussia, Holiday Inn Express, Long Island City, NY, Doubletree Club, JFK, NY and the Mainstay Suites, Frederick, MD. These hotels were purchased by the REIT with anticipated repricing dates from December 31, 2002 to December 31, 2004. Due to the current operating environment, the ramp up and stabilization for these newly-built properties is forecasted to take longer than initially projected. The fixed rent period will be extended to coincide with the extension period of the repricing period. We will maintain the right to sell each of these properties back to the executive officers, trustees and their affiliates that initially sold the hotels to us at the end of the applicable repricing period if adequate stabilization has not occurred during the repricing period for a price not less than the purchase price of the asset. 7 PROPERTY MANAGEMENT In order for us to qualify as a REIT, neither we, our operating partnership nor the subsidiary partnerships can operate hotels. Therefore, each of the hotels is leased to a lessee under percentage leases. We currently lease properties to HHMLP and Noble. HHMLP commenced operations on January 1, 1999 and as of December 31, 2002 leased 14 hotel properties from our operating partnership and also managed other properties for affiliates of certain of our executive officers and trustees. Noble is an independent third party real estate development and management company based in Atlanta, GA. DISTRIBUTIONS We have made sixteen consecutive quarterly distributions to the holders of our priority common shares since our initial public offering in January 1999 and intend to continue to make regular quarterly distributions to our shareholders. Our Board of Trustees will determine the amount of our future distributions and its decision will depend on a number of factors, including the amount of funds from operations, our partnership's financial condition, debt service requirements, capital expenditure requirements for our hotels, the annual distribution requirements under the REIT provisions of the Code and such other factors as the trustees deem relevant. Our ability to make distributions will depend on our receipt of distributions from our operating partnership and lease payments from our lessees with respect to the hotels. We rely on our lessees to generate sufficient cash flow from the operation of the hotels to meet their rent obligations under the percentage leases. The priority common shares have a priority period which expires on the earlier of (i) January 26, 2004 and (ii) an election by us to end the priority period within 15 days if the share price remains over $7.00 per share for these 15 days. During the priority period, holders of the priority common shares are entitled to receive, prior to any distributions either to the holders of the operating partnership units or to the holders of the Class B Common Shares, cumulative dividends in an amount per priority common share equal to $0.18 per quarter. After holders of the priority common shares have received the $0.18 quarterly distribution, holders of the operating partnership units and the Class B Common Shares are entitled to receive an amount per operating partnership unit or Class B Common Share equal to the distribution paid to the holders of the priority common shares. Thereafter, holders of priority common shares and the holders of the operating partnership units and the Class B Common Shares are entitled to receive future distributions on a pro rata basis. As of December 31, 2002, no Class B Common Shares are outstanding. Thus, the priority common shares have priority distribution rights only with respect to the outstanding operating partnership units. In the future, we may issue additional priority common shares, and our partnership may issue operating partnership units that are not subordinated to the priority common shares. The hotel business is seasonal in nature and, therefore, revenues from the hotels in the first and fourth quarters are traditionally lower than those in the second and third quarters and our lease revenue may be lower in these quarters. We expect to use excess cash flow from the second and third quarters to fund distribution shortfalls in the first and fourth quarters. There are no assurances we will be able to continue to make quarterly distributions at the current rate. OPERATING PRACTICES HHMLP and Noble utilize a centralized accounting and data processing system, which facilitates financial statement and budget preparation, payroll management, internal auditing and other support functions for the on-site hotel management team. The lessees provide centralized control over purchasing and project management (which can create economies of scale in purchasing) while emphasizing local discretion within specific guidelines. We have entered into an Administrative Services Agreement with HHMLP for HHMLP to provide accounting and securities reporting services to us. The terms of the agreement provide for a fixed annual fee of $80,000 with an additional fee of $10,000 per property per year (pro-rated from the time of acquisition) for each hotel added to our portfolio. Based upon the revised 11.5% to 12.5% pricing methodology, the administrative services agreement was reduced by $75,000 per year as of January 1, 2001. Each of the lessees has advised us that its relationship with its employees is good. 8 CAPITAL IMPROVEMENTS, RENOVATION AND REFURBISHMENT The percentage leases require the lessees to maintain the hotels in a condition that complies with their respective franchise licenses among other requirements. In addition, we may upgrade the hotels in order to capitalize on opportunities to increase revenue, and as deemed necessary by our management to seek to meet competitive conditions and preserve asset quality. We will also renovate hotels when we believe the investment in renovations will provide an attractive return to us through increased revenue under the percentage leases or is otherwise in the best interests of our shareholders. BUSINESS RISKS The hotels are subject to all operating risks common to the hotel industry. These risks include, among other things, competition from other hotels, which can adversely affect occupancy and room rates; increases in operating costs due to inflation and other factors, which increases have not in recent years been, and may not necessarily in the future be, offset by increased room rates; significant dependence on business and commercial travelers and tourism; increases in energy costs and other expenses of travel; and adverse effects of general and local economic conditions. These factors could adversely affect a lessee's ability to make lease payments and, therefore, our ability to make expected distributions to shareholders. Further, decreases in room revenue at the hotels will result in decreased revenue to our partnership and the subsidiary partnerships, as applicable, under the percentage leases. ENVIRONMENTAL RISKS Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances, on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect the owner's ability to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Certain environmental laws and common law principles could be used to impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs. In connection with the ownership of the hotels, we, our partnership or the subsidiary partnerships may be potentially liable for any such costs. Phase I environmental site assessments were obtained on all of the hotels prior to their acquisition by us. Phase I environmental assessments were intended to identify potential environmental contamination for which the hotels may be responsible. The Phase I environmental assessments included historical reviews of the hotels, reviews of certain public records, preliminary investigations of the sites and surrounding properties, screening for the presence of hazardous substances, toxic substances and underground storage tanks, and the preparation and issuance of a written report. The Phase I environmental assessments did not include invasive procedures, such as soil sampling or ground water analysis. The Phase I site assessments have not revealed any environmental liability that we believe would have a material adverse effect on our business, assets, results of operations or liquidity, nor are we aware of any such liability. Nevertheless, it is possible that the Phase I site assessments do not reveal environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, no assurance can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability, or (ii) the current environmental condition of the hotels will not be affected by the condition of other properties in the vicinity of the hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us, our partnership, the subsidiary partnerships or HHMLP. We believe that the hotels are in compliance in all material respects with all federal, state and local ordinances and regulations regarding hazardous or toxic substances or other environmental matters. Neither we nor, to our knowledge, any of the former owners of our hotels have been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of the hotels. 9 FRANCHISE AGREEMENTS HHMLP, which is owned by affiliates of certain of our executive officers and trustees, holds all of the franchise licenses for all of the hotels that it leases from us. HHMLP is expected to hold all of the franchise licenses for any subsequently acquired hotel properties that it leases. We do not hold the franchise licenses for the hotels leased to Noble. We do not anticipate maintaining the franchise licenses for hotel properties managed by third party management companies. It is anticipated that franchise licenses for hotel properties managed by other lessees will be maintained by that lessee. Holiday Inn Express and Holiday Inn are registered trademarks of Six Continents Hotels Plc; Hampton Inn and Doubletree Club are registered trademarks of Hilton Hotels Corporation, and Comfort Inn, Comfort Suites, Mainstay Suites, Sleep Inn and Clarion Suites are registered trademarks of Choice Hotels International. We anticipate that most of the additional hotels in which we invest will be operated under franchise licenses. We believe that the public's perception of quality associated with a franchisor is an important feature in the operation of a hotel. Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems. The franchise licenses generally specify certain management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which the franchisee must comply. The franchise licenses obligate our lessees to comply with the franchisors' standards and requirements with respect to training of operational personnel, safety, maintaining specified insurance, the types of services and products ancillary to guest room services that may be provided by our lessees, display of signage, and the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas. The following table sets forth certain information in connection with the franchise licenses:
HOTEL EFFECTIVE DATE EXPIRATION DATE FRANCHISE FEE(1) - ----------------------------------------------- ------------------ ------------------ ---------------- Comfort Inn, Harrisburg, PA May 15, 1998 May 15, 2018 8.85% Comfort Suites, Duluth, GA May 19, 2000 May 19, 2020 8.00% Doubletree Club, Jamaica, NY (2) April 25, 2001 April 24, 2023 6.00% Hampton Inn, Peachtree, GA April 20, 2000 April 19, 2021 8.00% Hampton Inn, Newnan, GA April 20, 2000 April 19, 2021 8.00% Hampton Inn, Selinsgrove, PA September 12, 1996 September 11, 2016 8.00% Hampton Inn, Carlisle, PA June 16, 1997 June 15, 2017 8.00% Hampton Inn, Danville, PA March 28, 1997 March 27, 2018 8.00% Hampton Inn & Suites, Hershey, PA September 24, 1998 September 23, 2019 8.00% Holiday Inn Hotel and Conference Center, Harrisburg, PA September 29, 1995 September 29, 2005 7.50% Holiday Inn Express, Duluth, GA May 20, 2000 May 20, 2010 8.00% Holiday Inn Express, Hershey, PA September 30, 1997 September 30, 2007 8.00% Holiday Inn Express, New Columbia, PA December 3, 1997 December 3, 2007 8.00% Holiday Inn Express, Long Island City, NY December 28, 2000 December 28, 2010 8.00% Holiday Inn Express and Suites, Harrisburg, PA December 22, 1999 December 22, 2009 8.00% Mainstay/Sleep Inn, King of Prussia, PA November 30, 1997 November 30, 2017 7.50% Mainstay Suites, Frederick, MD (2) April 4, 2000 April 3, 2020 4.00%
10 (1) Percentage of room revenues payable to the franchisors. (2) Franchise Fees are structured to increase on a yearly basis during the first five years of operations. TAX STATUS We have elected to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code, commencing with our taxable year ending December 31, 1999. As long as we qualify for taxation as a REIT, we generally will not be subject to Federal income tax on the portion of our income that is distributed to shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to Federal income and excise taxes on our undistributed income. Earnings and profits, which will determine the taxability of dividends to shareholders, will differ from net income reported for financial reporting purposes due to the differences for federal tax purposes in the estimated useful lives and methods used to compute depreciation. Of the total 2002 and 2001 distributions, 89.8% and 89.0%, respectively, is considered ordinary income while 10.2% and 11.0%, respectively, is considered a non-taxable return of capital. All of the 2000 distributions were considered ordinary income. AVAILABLE INFORMATION Our Internet website address is: www.hersha.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. The information of our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC. ITEM 2. PROPERTIES The following table sets forth certain information with respect to the hotels we owned as of December 31, 2002.
Twelve Months Ended December 31, 2002 ----------------------------------------------------------------------------- Average Year Number of Room Other Daily Opened Rooms Revenue Revenue(1) Occupancy Rate REVPAR(2) ------ --------- ----------- ----------- ---------- -------- ---------- HOTELS - ------ COMFORT INN: Harrisburg, PA . . . . . . . . 1998 81 $ 1,451,148 $ 34,487 64.4% $ 78.20 $ 50.33 COMFORT SUITES: Duluth, GA . . . . . . . . . . 1996 85 $ 1,096,909 $ 29,549 57.8% $ 61.37 $ 35.45 DOUBLETREE CLUB Jamaica, NY (3). . . . . . . . 2002 110 $ 2,525,846 $ 357,564 59.5% $ 105.66 $ 62.91 HAMPTON INN Peachtree City, GA . . . . . . 1994 61 $ 1,065,300 $ 34,284 73.3% $ 65.28 $ 47.85 Newnan, GA . . . . . . . . . . 1996 91 $ 1,446,082 $ 27,776 68.4% $ 63.62 $ 43.54 Selinsgrove, PA (4). . . . . . 1996 75 $ 1,832,635 $ 35,756 77.6% $ 87.40 $ 67.85 Carlisle, PA . . . . . . . . . 1997 95 $ 1,901,593 $ 24,769 65.4% $ 82.08 $ 53.71 Danville, PA . . . . . . . . . 1998 72 $ 1,533,644 $ 25,879 71.5% $ 81.66 $ 58.36 Hershey, PA. . . . . . . . . . 1999 110 $ 2,721,697 $ 67,213 57.3% $ 118.23 $ 67.79 HOLIDAY INN: Harrisburg, PA . . . . . . . . 1970 196 $ 2,954,492 $ 2,472,350 56.7% $ 72.45 $ 41.08 11 HOLIDAY INN EXPRESS: Duluth, GA . . . . . . . . . . 1996 68 $ 1,080,225 $ 21,123 62.3% $ 69.89 $ 43.52 Hershey, PA. . . . . . . . . . 1997 85 $ 1,971,923 $ 24,441 62.1% $ 111.57 $ 69.26 New Columbia, PA . . . . . . . 1997 81 $ 1,412,168 $ 18,114 63.0% $ 76.82 $ 48.36 Long Island City, NY . . . . . 2001 79 $ 1,909,708 $ 32,635 74.5% $ 94.28 $ 70.19 HOLIDAY INN EXPRESS AND SUITES: Harrisburg, PA NY. . . . . . . 1997 77 $ 1,516,106 $ 17,278 65.9% $ 82.91 $ 54.65 MAINSTAY SUITES: Frederick, MD. . . . . . . . . 2000 72 $ 1,214,359 $ 35,140 74.8% $ 60.93 $ 45.58 King of Prussia, PA. . . . . . 2000 69 $ 1,268,747 $ 83,109 60.2% $ 83.74 $ 50.38 SLEEP INN: King of Prussia, PA. . . . . . 2000 87 $ 1,117,017 $ 23,151 56.7% $ 68.27 $ 38.74 Total 1,594 $30,019,599 $ 3,364,618 ----------- ----------- Total Revenues $ 33,384217 =========== Weighted average 64.0% $ 82.04 $ 52.34
- --------------- (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) Hotel opened in January 2002. (4) 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. 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 our primary competition to be the Comfort Suites and Holiday Inn in Grantville, Pennsylvania. COMFORT SUITES, DULUTH, GEORGIA Description. The Comfort Suites, Gwinnett Place Mall is located just off Pleasant Hill Road and Interstate 85 at exit 40. Opened in June 1996, this 85-suite hotel features large spacious guest suites each equipped with a king size bed or two double beds. Amenities include a fitness center, Jacuzzi within a large sunroom, indoor pool and meeting facilities with a 60-person capacity. Guest Profile and Local Competition. Numerous local business parks in Duluth, Norcross and Lawrenceville play a vital role in the hotel's success. Companies such as Scientific Atlanta, Primerica Financial Services, NCR, Motorola, Hitachi, and Lucent Technologies all have major offices in the area and use this hotel frequently for room nights and meeting space. The leisure market is fueled by the Gwinnett Place Mall and many local events. We consider the hotel's primary competitors to be the Holiday Inn Express, the Hampton Inn & Suites, the Courtyard Gwinnett Mall and the Fairfield Inn. DOUBLETREE CLUB, JFK INTERNATIONAL AIRPORT, JAMAICA, NY Description. The Doubletree Club, JFK Airport, Jamaica, New York is located 16 miles from Manhattan, and is adjacent to the JFK International Airport. Opened in January 2002, this 110-room hotel features high-speed internet access in all rooms, a 24-hour business center with printers and computers, a fitness room and a full service restaurant. 12 Guest Profile and Local Competition. Located near JFK Airport and close to Manhattan, this hotel's main source of room nights is business travelers and transient leisure travelers utilizing the JFK Airport. The main competitors in the area are the Ramada Plaza JFK, Hampton Inn, Courtyard by Marriott and the Radisson Hotel JFK Airport. HAMPTON INN, PEACHTREE, GEORGIA Description. This Hampton Inn is located in the Atlanta community of Peachtree City. This 61-room, limited service hotel opened in 1994. A poured concrete structure, this two-story building features the traditional Hampton Inn architecture with metal rooflines and an ample porte-cochere. This hotel features an outdoor pool and has a well equipped fitness facility. The hotel has a meeting room that can accommodate 25 persons. Guest Profile and Local Competition. Peachtree City is home to over ten Fortune 500 companies and boasts a two million square foot industrial park. Several major Japanese companies, including Panasonic, Hoshizaki, TDK and Shinsei, are located in Peachtree City. The hotel's primary competitors are the Holiday Inn, Sleep Inn, and Days Inn located in Peachtree City. HAMPTON INN, NEWNAN, GEORGIA Description. The Hampton Inn, Newnan is located in one of Atlanta's fastest growing counties. This 91-room hotel sits adjacent to Interstate I-85 and features traditional Hampton Inn architecture with three floors on poured concrete. This hotel features an outdoor pool, fitness centers, and full-service meeting room. Guest Profile and Local Competition. The primary demand generators for the Hampton Inn, Newnan include several major corporations located in the industrial park, which include Yokogawa, Johnson-Yokogawa, Yamaha, Kawasaki, Ryder, Ritchie Brothers, and Southern States Vehicle Auctions. The industrial park is slated for expansion and Coweta County's population has grown by over 40% since 1991. Leisure demand is generated by weddings, festivals, local racetracks and a tourist base. The main competition for this hotel includes the Jameson Inn, Springhill Suites, Comfort Inn, Best Western and Holiday Inn Express. 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. 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 our primary competition to be the Best Western near Selinsgrove, Pennsylvania. 13 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 our primary competition to be the Holiday Inn in Carlisle, Pennsylvania. HAMPTON INN, DANVILLE, PENNSYLVANIA Description. The Hampton Inn, Danville, Pennsylvania, is located at Exit 33 off Interstate 80. The hotel, which opened in September 1998, is a 72-room, three story, limited service hotel. Amenities include an indoor pool, hot tub, fitness center, meeting facilities, complimentary continental breakfast, and 24-hour coffee service. All rooms offer queen beds or king beds, and coffee makers. Guest Profile and Local Competition. The majority of the hotel guests consist of tourists or overnight business travelers. We consider our primary competition to be several non-franchised hotels located in the surrounding area. HAMPTON INN AND SUITES, HERSHEY, PENNSYLVANIA Description. The Hampton Inn and Suites is located at 749 East Chocolate Avenue in Hershey, Pennsylvania. The hotel opened in September 1999 and has 110 rooms, 35 of which are suites. The hotel is located near all of the major attractions in Hershey, including the amusement park and the Hershey chocolate factory. Amenities include an indoor pool, exercise room, hot tub, meeting facilities, complimentary continental breakfast and 24-hour coffee. Guest Profile and Local Competition. The majority of the hotel guests consist of tourists and overnight travelers. The hotel's close proximity to all Hershey attractions makes this property especially attractive to leisure travelers. The hotel's primary competitors are the Hilton Garden Inn, Comfort Inn, Holiday Inn Express and Springhill Suites. 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 our primary competition to be the Radisson Penn Harris in Camp Hill, Pennsylvania. Additional Information Regarding Depreciation. This is our only hotel that generates more than 10% of our revenue. The federal tax basis is $1,238,000. The depreciation method used is Modified Accelerated Recovery System and the depreciation rate is based upon tables issued by the Internal Revenue Service for properties utilizing this depreciation method. The life claimed with respect to this property for purposes of depreciation is 39 years. HOLIDAY INN EXPRESS, DULUTH, GEORGIA Description. The Holiday Inn Express, Gwinnett Place Mall is located just off Pleasant Hill Road and Interstate 85 at exit 40. Opened in June 1996, this 68-room hotel features spacious guestrooms equipped with a king size bed or two double beds. This hotel features an outdoor pool along with a well-equipped fitness center. Meeting space is also available and accommodates up to 50 people. Guest Profile and Local Competition. Numerous local business parks in Duluth, Norcross and Lawrenceville play a vital role in the hotel's success. Companies such as Scientific Atlanta, Primerica Financial Services, NCR, Motorola, Hitachi, and Lucent Technologies all have major offices in the area and use this hotel frequently for room nights and meeting space. The Gwinnett Civic and Cultural Center and the millions of Priority Club members worldwide are also solid contributors of room nights throughout the year. We consider the hotel's primary competitors to be the Comfort Suites, the Hampton Inn & Suites, the Courtyard Gwinnett Mall and the Fairfield Inn. 14 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 our 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 is consistently ranked number one in its region for GSTS (Guest Satisfaction Tracking System). 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 our primary competition to be the Comfort Inn in New Columbia, Pennsylvania. HOLIDAY INN EXPRESS, LONG ISLAND CITY (MIDTOWN TUNNEL), NEW YORK Description. This Holiday Inn Express is located adjacent to the entrance of the Midtown Tunnel in Long Island City and is within minutes from midtown Manhattan. This 79-room, limited service hotel opened in 2001. A poured concrete structure, this three-story building is conveniently located alongside the Long Island Expressway. Guest Profile and Local Competition. Long Island City is within minutes of midtown Manhattan and is accessible via car or via direct access to the subway line into Times Square. The hotel also serves numerous corporate headquarters and businesses within Queens and is located within six miles of La Guardia airport and within 13 miles of the JFK International Airport. The hotel competes directly with the Best Western and numerous other limited service hotels within Long Island City and Manhattan. HOLIDAY INN EXPRESS AND SUITES, HARRISBURG, PENNSYLVANIA Description. The Holiday Inn Express and Suites, Harrisburg, Pennsylvania is located at 5680 Allentown Boulevard and is easily accessible from Interstates 81 and 83. The hotel, which opened in August 1998 as a Clarion Inn and Suites, is a 77-room limited service hotel. Amenities include an outdoor pool, meeting facilities, complimentary continental breakfast, and 24-hour coffee. All rooms have one king bed or two queen beds. Jacuzzi suites are available and some rooms also have refrigerators and microwaves. 15 Guest Profile and Local Competition. Approximately 40% of the hotel's business is comprised of business travelers, 30% is related to group business, 20% is leisure travelers, and 10% is government business. We consider our primary competition the Best Western and the Baymont Inn, both located in Harrisburg, Pennsylvania. MAINSTAY SUITES, FREDERICK, MD Description. The Mainstay Suites, Frederick, Maryland is an all-suites extended stay hotel located near the office parks of Frederick and convenient to Baltimore and Washington, D.C. Each suite features a separate living area and fully equipped kitchen and dining area. The property also features a fitness room and indoor pool. There are also several suites with computers available in the room. Guest Profile and Local Competition. The Frederick market has experienced significant growth over the past five years due to the development of new office parks and governmental agencies due to its proximity to Baltimore and Washington, D.C. Both governmental agencies and private companies utilize this hotel for long-term accommodations for their employees. Tourist attractions in close proximity to Frederick also attract leisure travelers that complement the corporate and governmental business. The primary competition for this hotel comes from the Residence Inn, Frederick and the Courtyard, Frederick. MAINSTAY SUITES, KING OF PRUSSIA, PENNSYLVANIA Description. This Mainstay Suites is located just off the Pennsylvania Turnpike and is part of a unique dual branded hotel, the first to feature a Mainstay Suites and Sleep Inn under one roof. This unique property combines many amenities convenient for both the business and leisure traveler. This 69-room hotel opened in 2000 and the suites include fully-equipped kitchens, a comfortable living room and a spacious work area. Guest Profile and Local Competition. This hotel serves both the nearby corporate market as well as the strong leisure demand generators such as the Valley Forge Historic Park, Valley Forge Convention Center, King of Prussia Mall. The hotel is within twenty miles of downtown Philadelphia and serves all of the corporate and leisure demand generators of this market. The hotel's primary competition includes the Fairfield Inn, Best Western, Comfort Inn and McIntosh Inn located within King of Prussia. SLEEP INN, KING OF PRUSSIA, PENNSYLVANIA Description. This Sleep Inn is located just off the Pennsylvania Turnpike and is part of a unique dual branded hotel, the first to feature a Mainstay Suites and Sleep Inn under one roof. This unique property combines many amenities convenient for both the business and leisure traveler. This 87-room limited service hotel opened in 2000. Guest Profile and Local Competition. This hotel serves both the nearby corporate market as well as the strong leisure demand generators such as the Valley Forge Historic Park, Valley Forge Convention Center and King of Prussia Mall. The hotel is within twenty miles of downtown Philadelphia and serves all of the corporate and leisure demand generators of this market. The hotel's primary competition includes the Fairfield Inn, Best Western, Comfort Inn and McIntosh Inn all located within King of Prussia. The following table sets forth certain information with respect to each of our hotels:
YEAR ENDED DECEMBER 31, -------------------------------------------- 2002 2001 2000 1999 1998 -------- ------- ------- ------- ------- COMFORT INN - HARRISBURG, PA (1) Occupancy 64.4% 58.9% 63.9% 60.3% 54.4% ADR $ 78.20 $75.48 $73.91 $68.38 $65.88 REVPAR $ 50.33 $44.47 $47.20 $41.23 $35.85 COMFORT SUITES, DULUTH, GA Occupancy 57.8% 70.4% 73.4% 71.8% 71.9% ADR $ 61.37 66.3% $68.38 $67.70 $64.69 REVPAR $ 35.45 $46.70 $50.20 $48.59 $46.53 16 DOUBLETREE CLUB, JFK AIRPORT, JAMAICA, NY (2) Occupancy 59.5% ADR $105.66 REVPAR $ 62.91 HAMPTON INN, PEACHTREE CITY, GA Occupancy 73.3% 68.1% 71.5% 74.5% 79.6% ADR $ 65.28 $67.64 $67.81 $68.21 $65.31 REVPAR $ 47.85 $46.04 $48.46 $50.79 $51.96 HAMPTON INN, NEWNAN, GA Occupancy 68.4% 74.1% 71.4% 81.7% 79.8% ADR $ 63.62 $64.68 $65.17 $64.23 $63.37 REVPAR $ 43.54 $47.91 $46.50 $52.46 $50.53
17
Year Ended December 31, ----------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- ------- HAMPTON INN - SELINSGROVE, PA Occupancy 77.6% 80.6% 82.3% 80.7% 78.6% ADR $ 87.40 $ 81.50 $ 75.54 $ 69.80 $65.58 REVPAR $ 67.85 $ 65.66 $ 62.16 $ 56.31 $51.57 HAMPTON INN - CARLISLE, PA Occupancy 65.4% 69.2% 71.4% 68.8% 66.8% ADR $ 82.08 $ 76.71 $ 72.96 $ 70.10 $63.63 REVPAR $ 53.71 $ 53.09 $ 52.08 $ 48.26 $42.48 HAMPTON INN, DANVILLE, PA (3) Occupancy 71.5% 73.8% 77.4% 68.5% 46.6% ADR $ 81.66 $ 79.41 $ 71.54 $ 63.62 $61.97 REVPAR $ 58.36 $ 58.57 $ 55.34 $ 43.60 $28.85 HAMPTON INN & SUITES, HERSHEY, PA (4) Occupancy 57.3% 50.4% 46.7% 30.2% ADR $118.23 $106.15 $111.45 $ 80.07 REVPAR $ 67.79 $ 53.45 $ 52.02 $ 24.20 HOLIDAY INN HOTEL AND CONFERENCE CENTER - - HARRISBURG, PA Occupancy 56.7% 56.1% 61.1% 62.3% 63.5% ADR $ 72.45 $ 68.81 $ 69.92 $ 69.76 $68.34 REVPAR $ 41.08 $ 38.62 $ 42.75 $ 43.48 $43.37 HOLIDAY INN EXPRESS, DULUTH, GA Occupancy 62.3% 69.7% 75.2% 75.2% 70.3% ADR $ 69.89 $ 71.13 $ 68.24 $ 65.07 $64.38 REVPAR $ 43.52 $ 49.55 $ 51.31 $ 48.91 $45.24 HOLIDAY INN EXPRESS - HERSHEY, PA Occupancy 62.1% 59.3% 57.0% 59.2% 64.4% ADR $111.57 $107.98 $108.44 $101.91 81.25 REVPAR $ 69.26 $ 64.08 $ 61.84 $ 60.36 $52.33 HOLIDAY INN EXPRESS - NEW COLUMBIA, PA Occupancy 63.0% 60.6% 60.0% 55.2% 49.3% ADR $ 76.82 $ 70.69 $ 66.81 $ 61.34 $58.96 REVPAR $ 48.36 $ 42.81 $ 40.12 $ 33.83 $29.08 HOLIDAY INN EXPRESS, LONG ISLAND CITY, NY (5) Occupancy 74.5% 57.5% ADR $ 94.28 $114.63 REVPAR $ 70.19 $ 65.86 HOLIDAY INN EXPRESS & SUITES, HARRISBURG, PA Occupancy 65.9% 66.4% 63.4% 54.4% 24.5% ADR $ 82.91 $ 76.64 $ 76.26 $ 61.83 $63.77 REVPAR $ 54.65 $ 50.87 $ 48.32 $ 33.66 $15.61 MAINSTAY SUITES, KING OF PRUSSIA, PA (6) Occupancy 60.2% 51.5% 35.7% ADR $ 83.74 $ 80.11 $ 85.79 REVPAR $ 50.38 $ 41.26 $ 30.60 MAINSTAY SUITES, FREDERICK, MD (7) Occupancy 74.8% 84.6% 81.1% ADR $ 60.93 $ 59.29 $ 59.39 REVPAR $ 45.58 $ 50.17 $ 48.16 SLEEP INN, KING OF PRUSSIA, PA (6) Occupancy 56.7% 57.4% 35.7% ADR $ 68.27 $ 73.47 $ 74.48 REVPAR $ 38.74 $ 42.15 $ 26.62
18 - --------------- (1) This hotel opened in May 1998 and, thus, the data shown for 1998 represents approximately eight months of operations. (2) This hotel opened in January 2002. (3) This hotel opened in September 1998 and, thus, the data shown for 1998 represents approximately four months of operations. (4) This hotel opened in September 1999 and, thus, the data shown for 1999 represents approximately four months of operations. (5) This hotel opened in May 2001 and, thus, the data shown for 2001 represents approximately eight months of operations. (6) This hotel opened in September 2000 and, thus, the data shown for 2000 represents approximately four months of operations. (7) This hotel opened in April 2000 and, thus, the data shown for 2000 represents approximately nine months of operations. THE PERCENTAGE LEASES Our hotels are operated by our lessees, HHMLP and Noble, pursuant to percentage leases. We intend to lease any hotels acquired in the future to operators, including both our lessees and operators unaffiliated with our lessees. We anticipate that future leases with our lessees generally will be similar to the percentage leases. Future leases with operators unaffiliated with our lessees may or may not 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. Each percentage lease with HHMLP has an initial non-cancelable term of five years. All, but not less than all, of these leases may be extended for an additional five-year term at HHMLP's option. At the end of the first extended term, HHMLP, at its option, may extend some or all of the leases for an additional five-year term. The percentage leases are subject to early termination upon the occurrence of defaults thereunder and certain other events described therein. Each percentage lease with Noble has an initial non-cancelable term of three years. These leases may be extended for an additional three-year period at Noble's option and upon agreement by both parties for an additional three-year period. The percentage leases are designed to allow us to participate in growth in revenues at our hotels. The percentage lease formulas are based on certain projections including projected revenues for the newly-developed and newly-renovated hotels. We can give no assurance that future revenues for the hotels will be consistent with prior performance or the estimates. With respect to hotels subject to purchase price adjustment, until the purchase price adjustment dates the rent is a fixed annual rent payable quarterly. After the adjustment dates, rent will be computed based on a percentage of revenues of those hotels. These percentage leases generally provide for the lessees to pay in each month or calendar quarter the greater of a base rent or percentage rent. The percentage rent for each hotel leased to HHMLP is comprised of: - a percentage of room revenues up to a certain threshold amount, - a percentage of room revenues in excess of the first threshold but less than a second incentive threshold, - a percentage of room revenues in excess of the second incentive threshold and - a percentage of revenues other than room revenues. The percentage rent for each hotel leased to Noble is comprised of: - a percentage of room revenues up to an incentive threshold and - a percentage of room revenues above this threshold amount. 19 The incentive thresholds are designed to provide incentive to our lessees to generate higher revenues at each hotel by reducing the percentage of revenue paid as rent above certain thresholds. In the case of any newly-renovated hotels or newly-developed hotels, our lessees pay a fixed rent until an adjustment date, after which our lessees pay the greater of a base rent or percentage rent. The following table sets forth (i) room revenue, (ii) other revenue, (iii) the fixed rent, if applicable, (iv) the annual base rent and (v) the percentage rent formulas:
Room Other Initial Annual Percentage Hotel Revenue(1) Revenue(1) Fixed Rent Base Rent Rent Formula - --------------------- ----------- ----------- -------------- ---------- ----------------------------------------------- COMFORT INN: Harrisburg, PA $ 1,451,148 $ 34,487 N/A $ 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. COMFORT SUITES: Duluth, GA $ 1,096,909 $ 29,549 N/A $ 745,000 47.54% of room revenue up to $1,567,000, plus 40% of room revenue in excess of $1,567,000. DOUBLETREE CLUB: JFK International $ 2,525,846 $ 357,564 $ 1,587,000(2) $ 747,500 53.3% of room revenue up to $2,000,000, plus Airport, Jamaica, NY 65.0% of room revenue in excess of 2,000,000 but less than $2,750,000, plus 29.0% of room revenue in excess of 2,750,000, plus 8.0% of all non-room revenue. HAMPTON INN: Peachtree City, GA $ 1,065,300 $ 34,284 N/A $ 557,000 46.85% of room revenue up to $1,189,000, plus 40% of room revenues in excess of $1,189,000. Newnan, GA $ 1,446,082 $ 27,776 N/A $ 965,000 53.76% of room revenue up to $1,795,000, plus 40% of room revenues in excess of $1,795,000. Selinsgrove, PA $ 1,832,635 $ 35,756 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. Carlisle, PA $ 1,901,593 $ 24,769 N/A $ 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. Danville, PA $ 1,533,644 $ 25,879 N/A $ 234,000 43.2% of room revenue up to $916,749, plus 65% of room revenue in excess of $916,749 but less than $1,078,528, plus 29.0% of room revenue in excess of $1,078,528, plus 8.0% of all non-room revenue. Hershey, PA $ 2,721,697 $ 67,213 N/A $ 487,528 51.2% of room revenue up to $1,643,560, plus 65% of room revenue in excess of $1,643,560 but less than $1,993,600, plus 29.0% of room revenue in excess of 1,933,600, plus 8.0% of all non-room revenue. 20 Room Other Initial Annual Percentage Hotel Revenue(1) Revenue(1) Fixed Rent Base Rent Rent Formula - --------------------- ----------- ----------- -------------- ---------- ----------------------------------------------- HOLIDAY INN HOTEL AND CONFERENCE CENTER: Harrisburg, PA $ 2,954,492 $ 2,472,350 N/A $ 675,921 44.3% of room revenue up to $2,638,247, plus 65% of room revenue in excess of $2,638,247 but less than $3,103,820, plus 31.0% of room revenues in excess of $3,103,820, plus 8.0% of all non-room revenue. HOLIDAY INN EXPRESS Duluth, GA $ 1,080,225 $ 21,123 N/A $ 533,000 43.47% of room revenue up to $1,226,000, plus 40% of room revenues in excess of $1,226,000. Hershey, PA $ 1,971,923 $ 24,441 N/A $ 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 $ 1,412,168 $ 18,114 N/A $ 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. Long Island City, NY $ 1,909,708 $ 32,635 $1,179,389 (2) $ 552,468 43.96% of room revenue up to $2,117,542, plus 65.0% of room revenue in excess of 2,117,542 but less than $2,491,226, plus 29.0% of room revenue in excess of 2,491,226, plus 8.0% of all non-room revenue. HOLIDAY INN EXPRESS & SUITES: Harrisburg, PA $ 1,516,106 $ 17,278 N/A $ 175,500 35.3% of room revenue up to $855,611, plus 65% of room revenue in excess of $855,611 but less than $1,006,601, plus 29.0% of room revenue in excess of $1,006,601, plus 8.0% of all non-room revenue. MAINSTAY SUITES: Frederick, MD $ 1,214,359 $ 35,140 $ 770,790 (2) $ 357,535 50.0% of room revenue up to $1,246,688 plus 65% of room revenues in excess of $1,246,688 but less than $1,466,692 plus 29.0% of room revenue in excess of $1,466,692, plus 8.0% of all non-room revenue. MAINSTAY SUITES AND SLEEP INN: King of Prussia, $ 2,385,764 $ 106,260 $1,352,010 (2) $ 613,798 43.7% of room revenue up to $2,434,590 plus PA(3) 65% of room revenues in excess of $2,434,590 but less than $2,864,224 plus 29.0% of room revenue in excess of $2,864,224, plus 8.0% of all non-room revenue.
(1) For year ended December 31, 2002. (2) Property is within the Initial fixed rent period. (3) Dual branded hotel that includes both a Mainstay Suites and a Sleep Inn under one roof. We entered into one lease with respect to these two hotels. 21 Other than real estate and personal property taxes; ground lease rent (where applicable); the cost of certain furniture, fixtures and equipment; certain capital expenditures; and property and casualty insurance premiums, all of which are our obligations, the percentage leases require our lessees to pay the operating expenses of the hotels (including insurance other than property and casualty insurance, all costs, expenses, utility and other charges incurred in the operation of the hotels) during the term of the percentage leases. The percentage leases also provide for rent reductions and abatements in certain cases in the event of damage, destruction or a partial taking of any of our hotels. Under the percentage leases, we make available to our lessees for the replacement and refurbishment of furniture, fixtures and equipment and other capital improvements, determined in accordance with generally accepted accounting principles, when and as deemed necessary by the lessees, an amount equal to 4% (6% for the Holiday Inn Hotel and Conference Center, Harrisburg, PA) of gross revenues per quarter on a cumulative basis. Our obligation will be carried forward to the extent that the lessees have not expended such amount, and any unexpended amounts will remain our property upon termination of the percentage leases. Other than as described above, our lessees are responsible for all repair and maintenance of the hotels and any capital improvements thereto. Our lessees, at their expense, may make non-capital and capital additions, modifications or improvements to the hotels, provided that such action does not significantly alter the character or purposes of the hotels or significantly detract from the value or operating efficiencies of the hotels. All of these alterations, replacements and improvements are subject to all the terms and provisions of the percentage leases and will become our property upon termination of the leases. We own substantially all personal property (other than inventory, linens and other non-depreciable personal property) not affixed to, or deemed a part of, the real estate or improvements on the hotels, except to the extent that ownership of such personal property would cause the rent under a percentage lease not to qualify as "rents from real property" for REIT income test purposes. We are responsible for paying or reimbursing our lessees for real estate and personal property taxes on our hotels (except to the extent that personal property associated with the hotels is owned by the lessees), and all premiums for property and casualty insurance. Our lessees are required to pay for all other insurance on the hotels, including comprehensive general public liability, workers' compensation and other insurance appropriate and customary for properties similar to our hotels, and to name us as an additional named insured. Our lessees are not permitted to sublet all or any part of our hotels or assign their interest under any of the percentage leases without our prior written consent. No assignment or subletting will release our lessees from any of their obligations under the percentage leases. In the event of damage to or destruction of any hotel, covered by insurance, that renders the hotel unsuitable for its primary intended use, the percentage lease will terminate as of the date of the casualty, neither we nor our lessees shall have any further liability under the percentage lease, and we will retain all insurance proceeds after the payment of all mortgage obligations. In the event of damage to or destruction of any hotel covered by insurance that does not render that hotel unsuitable for its primary intended use, we (or, at our election, our lessees) will restore the hotel, the percentage lease will not terminate and we will retain all insurance proceeds (if, however, our lessees restore the hotel, the insurance proceeds will be paid out by us to the lessees). If the cost of restoration exceeds the amount of insurance proceeds received by us, we will contribute any excess amounts prior to requiring our lessees to commence work. In the event of damage to or destruction of any hotel not covered by insurance, whether or not such damage or destruction renders the hotel unsuitable for its primary intended use, we at our option either (i) will restore the hotel at our cost and expense and the percentage lease will not terminate or (ii) will terminate the percentage lease and neither we nor our lessees shall have any further liability under the percentage lease. Any damage or destruction notwithstanding, and provided the percentage lease has not been terminated, our lessees' obligation to pay rent will remain unabated by any damage or destruction that does not result in a reduction of gross revenues at the hotel. If any damage or destruction results in a reduction of such gross revenues, we will receive all loss of income insurance and our lessees will not have an obligation to pay rent in excess of the amount of percentage rent, if any, realizable from gross revenues generated by the operation of the hotel during the existence of such damage or destruction. In the event of a total condemnation of any of our hotels, or in the event of a partial taking that renders the hotel unsuitable for its primary intended use, either we or our lessees will have the option to terminate the relevant percentage lease as of the date of taking, and we and our lessees will be entitled to their shares of the condemnation award in accordance with the provisions of the percentage lease. In the event of a partial taking that does 22 not render the hotel unsuitable for its primary intended use, we (or, at our option, our lessees) will restore the untaken portion of the hotel to a complete architectural unit and we shall contribute the cost of such restoration in accordance with the provisions of the percentage lease. In the event of a partial taking, the base rent will be abated taking into consideration, among other factors, the number of usable rooms, the amount of square footage, or the revenues affected by the partial taking. Events of default under the percentage leases include, among others, the following: (i) the failure by our lessees to pay base rent, percentage rent (or fixed rent, as applicable) or any additional charges when due and the continuation of such failure for a period of 10 days after receipt by our lessees of notice from us that the same has become due and payable, provided that we shall not be required to give any such notice more than twice in any lease year and that any third or subsequent failure by our lessees during such lease year to make any payment of base rent or percentage rent (or fixed rent, as applicable) on the date the same becomes due and payable shall constitute an immediate event of default; (ii) the failure by our lessees to observe or perform any other term of a percentage lease and the continuation of such failure for a period of 30 days after receipt by our lessees of notice from us thereof, unless: (A) such failure cannot be cured within such period and our lessees commence appropriate action to cure such failure within such 30-day period and thereafter act, with diligence, to correct such failure within such time as is necessary, provided in no event shall such period exceed 120 days, which 120-day period shall cease to run during any period that a cure of such failure is prevented by certain unavoidable delays and shall resume running upon the cessation of such unavoidable delay; and (B) such failure does not result in a notice or declaration of default under any material contract or agreement to which we or any affiliate thereof is a party or by which any of our assets are bound; (iii) if our lessees shall file a petition in bankruptcy or reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law; shall be adjudicated a bankrupt; shall make an assignment for the benefit of creditors; shall admit in writing its inability to pay its debts generally as they become due; if a petition or answer proposing the adjudication of our lessees as a bankrupt or their its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law shall be filed in any court and our lessees shall be adjudicated a bankrupt and such adjudication shall not be vacated or set aside or stayed within 60 days after the entry of an order in respect thereof; if a receiver of our lessees or of the whole or substantially all of the assets of our lessees shall be appointed in any proceeding brought by our lessees; or if any such receiver, trustee or liquidator shall be appointed in any proceeding brought against our lessees and shall not be vacated or set aside or stayed within 60 days after such appointment; (iv) if our lessees liquidate or dissolve, begin proceedings toward such liquidation or dissolution, or in any manner cease to do business or permit the sale or divestiture of substantially all of their assets; (v) if the estate or interest of our lessees in the percentage lease or any part thereof is voluntarily or involuntarily transferred, assigned, conveyed, levied upon or attached in any proceeding (for this purpose, a change in control of our lessees constitutes an assignment of the lease); (vi) if our lessees voluntarily discontinue operations of any of our hotels except as a result of damage, destruction or condemnation; (vii) if the franchise license with respect to any of our hotels is terminated by the franchisor as a result of any action or failure to act by our lessees or their agents, other than the failure to complete improvements required by a franchisor because our operating partnership fails to pay the costs of such improvements; or (viii) the occurrence of an event of default occurs under any other percentage lease between us and our lessees. 23 If an event of default occurs and continues beyond any curative period, we will have the option of terminating the percentage lease and any or all other percentage leases by giving our lessees 10 days' written notice of the date for termination of the percentage leases and, unless such event of default is cured prior to the termination date set forth in such notice, the percentage leases shall terminate on the date specified in our notice and the lessees shall be required to surrender possession of the affected hotels. In the event we enter into an agreement to sell or otherwise transfer one of our hotels to a third party, we have the right to terminate the percentage lease with respect to such hotel if within six months after the closing of such sale we either (i) pay our lessee the fair market value of our lessees' leasehold interest in the remaining term of the percentage lease to be terminated, or (ii) offer to lease to our lessee one or more substitute hotels on terms that would create a leasehold interest in such hotels with a fair market value equal to or exceeding the fair market value of our lessee's remaining leasehold interest under the percentage lease to be terminated. Upon notice from our lessees that we have breached any of the leases, we will have 30 days to cure the breach or proceed to cure the breach, which period may be extended in the event of certain specified, unavoidable delays. All inventory required in the operation of our hotels is and will be purchased and owned by our lessees at their expense. We will have the option to purchase all inventory related to a particular hotel at fair market value upon termination of the percentage lease for that hotel. 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 we expect to be covered by liability insurance and which, in the aggregate, we do not expect 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 the fourth quarter of 2002, 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 20, 1999 under the symbol "HT." As of March 27, 2002, the last reported closing price per Priority Class A Common Share on the American Stock Exchange was $6.81. 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. 24
PERIOD HIGH LOW - --------------------------------------------------------------- ----- ----- 2001 First Quarter (January 1, 2001 through March 31, 2001) $6.06 $5.50 Second Quarter (April 1, 2001 through June 30, 2001) $6.00 $5.35 Third Quarter (July 1, 2001 through September 30, 2001) $6.90 $4.25 Fourth Quarter (October 1, 2001 through December 31, 2001) $6.25 $5.70 2002 First Quarter (January 1, 2002 through March 31, 2002) $6.70 $5.51 Second Quarter (April 1, 2002 through June 30, 2002) $6.55 $6.10 Third Quarter (July 1, 2002 through September 30, 2002) $6.40 $5.90 Fourth Quarter (October 1, 2002 through December 31, 2002) $6.75 $5.71
SHAREHOLDER INFORMATION At March 27, 2003, we had approximately 150 holders of record and 1,100 beneficial owners of our Priority Class A Common Shares. The subordinated units of limited partnership interest in our operating partnership (which are redeemable for Class B Common Shares subject to certain limitations) were held by 15 entities and/or persons. 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 Our Board of Trustees declared a cash distribution for the holders of the priority common shares and the operating partnership units for the period from January 1, 2003 to March 31, 2003 in the amount of $0.18 per share and unit, payable on April 18, 2002, to holders of record on March 28, 2002. 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 anticipates that it will pay a distribution to the holders of its subordinated units of limited partnership interest concurrently with the payment of the first quarter 2002 cash distribution to our public shareholders. RECENT SALES OF UNREGISTERED SECURITIES Effective January 1, 2002, the operating partnership issued 333,541 units of limited partnership interest redeemable for Class B Common Shares to some of our executive officers, trustees and their affiliates in transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. These units were issued in connection with the repricing of the Hampton Inn and Suites, Hershey, Holiday Inn Express and Suites, Harrisburg and Hampton Inn, Danville hotels. ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The following sets forth selected financial and operating data on a 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. 25
HERSHA HOSPITALITY TRUST SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA 2002 2001 2000 1999 (1) ----------- ----------- ----------- ----------- REVENUE: Percentage Lease Revenues - HHMLP (2) $ 11,433 $ 9,558 $ 9,723 $ 7,264 Percentage Lease Revenues - Other (3) 2,801 2,801 1,850 - Interest 207 165 50 78 Interest - Related Party 7 21 1 28 ----------- ----------- ----------- ----------- Total Revenue 14,448 12,545 11,624 7,370 EXPENSES: Interest expense 4,826 4,769 4,142 1,428 Land Lease - Related Party - 13 15 20 Real Estate and Personal Property Taxes and Property Insurance 1,021 812 632 450 General and Administrative 567 534 578 363 Early Payment Penalty - - 107 - Gain on Sale of Assets - (598) - - Depreciation and Amortization 3,994 3,897 3,507 2,064 ----------- ----------- ----------- ----------- Total Expenses 10,408 9,427 8,981 4,325 Income Before Minority Interest and discontinued operations 4,040 3,118 2,643 3,045 Income Allocated to Minority Interest 3,238 2,342 1,908 1,707 Discontinued Operations: Gain on Sale of Discontinued Operations 449 - - - Income from Discontinued Operations 41 58 112 - Net income $ 1,292 $ 834 $ 847 $ 1,338 =========== =========== =========== =========== Basic and Diluted Earnings Per Common Share (4) $ 0.51 $ 0.37 $ 0.37 $ 0.48 Funds from Operations per Diluted Share (5) $ 1.09 $ 0.97 $ 0.99 $ 0.79 Dividends declared per Common Share $ 0.72 $ 0.72 $ 0.72 $ 0.67 BALANCE SHEET DATA Net investment in hotel properties $ 93,814 $ 88,100 $ 87,671 $ 51,908 Minority interest in Partnership $ 20,258 $ 20,436 $ 17,679 $ 18,980 Shareholder's equity $ 11,378 $ 10,210 $ 11,014 $ 11,805 Total assets $ 101,516 $ 96,017 $ 94,531 $ 56,382 Total debt $ 65,341 $ 61,535 $ 61,450 $ 24,754 OTHER DATA Funds from Operations (See Page 26) $ 8,293 $ 7,054 $ 6,647 $ 5,109 Net cash provided by operating activities $ 7,977 $ 6,828 $ 5,032 $ 3,075 Net cash provided by (used in) investing activities $ (145) $ 5,513 $ (14,895) $ (9,149) Net cash provided by (used in) financing activities $ (7,859) $ (12,174) $ 9,739 $ 6,198 Weighted average shares outstanding Basic 2,519,820 2,275,000 2,275,000 2,275,000 Diluted 7,619,542 7,296,596 6,715,996 6,326,690
26 - --------------- (1) The Company commenced operations on January 26, 1999. (2) Represents initial fixed rent plus aggregate Percentage Rent paid by HHMLP to the Partnership pursuant to percentage leases, which payments are calculated by applying the rent provisions in the respective percentage leases to the historical room revenues. (3) Represents initial fixed rent paid by Noble to the Partnership pursuant to percentage leases, which payments are calculated by applying the rent provisions in the respective percentage leases to the historical room revenues. (4) Represents basic and diluted earnings per share computed in accordance with FAS No. 128. (5) We calculate FFO for all periods consistent with the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") definition from their White Paper issued in April 2002. FFO represents net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring or sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. THE FOLLOWING TABLE COMPUTES FFO AND FFO PER WEIGHTED AVERAGE DILUTED SHARE:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2000 -------------- -------------- ------------- Net income applicable to common shares $ 1,292 $ 834 $ 847 Less: Gain on Sale of Assets (449) (598) -0- Add: Minority interest 3,238 2,342 1,908 Depreciation and amortization 4,212 4,476 3,892 -------------- -------------- ------------- Funds From Operations $ 8,293 $ 7,054 $ 6,647 ============== ============== ============= FFO per Weighted Average Diluted Share $ 1.09 $ 0.97 $ 0.99 ============== ============== =============
We believe this supplemental "non-GAAP" measure of operating performance is meaningful but should not be considered an alternative to generally accepted accounting principles. We calculate FFO for all periods consistent with the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") definition from their White Paper issued in April 2002. We note that industry analysts and investors use Funds From Operations (FFO) as a tool to compare equity real estate investment trust performance. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies due to the fact that not all real estate companies use the same definition. - --------------- 27
HERSHA HOSPITALITY MANAGEMENT, L.P. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2000 1999 -------------- -------------- -------------- -------------- REVENUES FROM HOTEL OPERATIONS Room Revenue $ 24,711 $ 25,560 $ 26,903 $ 21,871 Restaurant Revenue 2,445 1,880 1,875 2,074 Other revenue 2,782 1,843 1,340 1,354 -------------- -------------- -------------- -------------- TOTAL REVENUES FROM HOTEL OPERATIONS $ 29,938 $ 29,283 $ 30,118 $ 25,299 EXPENSES: Hotel Operating Expenses 10,061 10,373 10,739 9,788 Restaurant Operating Expenses 1,971 1,593 1,743 1,822 Advertising and Marketing 2,061 2,086 1,754 1,228 Bad Debts 13 124 17 247 Depreciation and Amortization 250 229 192 102 General and Administrative 4,746 4,708 4,911 3,873 General and Admin. - Related Parties 21 126 141 45 Lease Expense - HHLP 11,432 10,396 9,933 7,264 Lease Expense - Other Related Parties - 703 798 1,316 -------------- -------------- -------------- -------------- TOTAL EXPENSES $ 30,555 $ 30,338 $ 30,228 $ 25,685 -------------- -------------- -------------- -------------- Loss before Discontinued $ (617) $ (1,055) $ (110) $ (386) Operations Loss from Discontinued $ (54) $ (49) $ (37) $ - Operations NET LOSS $ (671) $ (1,104) $ (147) $ (386) ============== ============== ============== ==============
28 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. Words such as "believes", "expects", "anticipate", "intends", "plans" and "estimates" and variations of such words and similar words also identify forward-looking statements. 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." GENERAL Our principal source of revenue is from payments by HHMLP and Noble under the percentage leases. The principal determinants of percentage rent are the hotels' room revenue, and to a lesser extent, other revenue. HHMLP's and Noble's ability to make payments to us under their respective percentage leases is dependent on the operations of the hotels. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, all estimates are evaluated by us, including those related to carrying value of investments in hotel properties. All estimates are based upon historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: REVENUE RECOGNITION Percentage lease income is recognized when earned from the lessees under the agreements from the date of acquisition of each hotel property. Lease income is recognized under fixed rent agreements ratably over the lease term. All leases between us and the lessees are operating leases. We recognize lease revenue for interim and annual reporting purposes on an accrual basis pursuant to the terms of the respective percentage leases and on an interim basis in accordance with the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements." Under the provisions of SAB 101, which we adopted in the fourth quarter of 2000, a portion of our percentage lease revenues, which historically were recognized in the first, second, and third quarters, are deferred and recognized in the fourth quarter. The adoption of SAB 101 impacts the interim reporting of revenues related to our leases, but has no impact on our interim cash flow or year-end results of operations. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company has not recorded an allowance for doubtful accounts. Substantially all of the Company's receivables at December 31, 2002 and 2001 were comprised of rent due from the Lessees under the Percentage Leases ("Rent"), which were fully paid in January 2003 and 2002, respectively. 29 Historically, the Company has not experienced any losses on the Lessees' receivables. However, the Lessees rely primarily on cash flow from their operation of the hotels to pay rent, and collection of future receivables from the Lessees, therefore, cannot be assured. IMPAIRMENT OF LONG-LIVED ASSETS We review the carrying value of each hotel property in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel property or if depreciation periods should be modified. 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. We perform undiscounted cash flow analyses to determine if impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Hotel properties held for sale are presented at the lower of carrying amount or fair value less cost to sell. We would record an impairment charge if we believe an investment in hotel property has been impaired such that future undiscounted cash flows would not recover the book basis of the investment in the hotel property. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's carrying value, thereby possibly requiring an impairment charge in the future. We have reviewed each of our hotel properties at December 31, 2002 for impairment and, based on our estimate of each hotel's future undiscounted cash flows, determined that no impairment existed at any of our hotels. REIT QUALIFICATION TESTS We are subject to numerous operational and organizational requirements to maintain our REIT status. Based on tests performed by management for the years ended December 31, 2002 and 2001, we believe that we satisfied the requirements needed to maintain our REIT status. However, we are subject to audit and if the taxing authorities determined that we failed one or more of these tests, we could lose our REIT status. If we did not qualify as a REIT, our income would become subject to federal and state income taxes, which would be substantial, and the resulting adverse effects on our results of operations, liquidity and amounts distributable to shareholders would be material. COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001 HERSHA HOSPITALITY TRUST Our total revenues for the twelve-month period ended December 31, 2002 consisted substantially of percentage lease revenue recognized pursuant to percentage leases with HHMLP and Noble. Our revenue was approximately $14,448,000, an increase of 15.2% compared to revenue of $12,545,000 for the year ended December 31, 2001. Net income for the period was approximately $1,292,000, an increase of 54.9% compared to 2001 net income of approximately $834,000. The increase in revenue is primarily attributable to additional percentage lease revenues at several of our existing properties along with a full twelve months of operations at the Mainstay Suites and Sleep Inn, King of Prussia, PA that was acquired on June 1, 2001 and the Holiday Inn Express, Long Island City, NY that was acquired on November 1, 2001. Net income increased from the prior year due to an increase in percentage lease revenues, as highlighted above, along with a decrease in interest expense from our floating rate debt and a gain of approximately $449,000 on the sale of the Clarion Suites, Philadelphia, PA. HHMLP HHMLP's revenues increased by approximately $655,000 for the year ended December 31, 2002, or 2.2%, to approximately $29,938,000 as compared to $29,283,000 for the year ended 2001. The increase in revenues was due to additional Food and Beverage revenues at the Holiday Inn Conference Center, New Cumberland and the increase in third party management fees. HHMLP's revenues were slightly offset by a reduction in total room revenues. HHMLP's net loss for the year ended December 31, 2002 decreased to approximately $671,000 from 30 $1,104,000 in 2001. The decrease in our net loss was primarily a result of increased total revenues in addition to lower operating expenses and related party rent payments. This net loss is primarily due to the significant start-up expenses absorbed by HHMLP related to newly-built properties that have either commenced operations or are currently in the development stage. COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000 HERSHA HOSPITALITY TRUST During 2002, we adopted the provisions of FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The previously reported 2001 and 2000 results of operations have been reclassified to reflect the provisions of FASB No. 144. Our total revenues for the twelve-month period ended December 31, 2001 consisted substantially of percentage lease revenue recognized pursuant to percentage leases with HHMLP and Noble. Our revenue was approximately $12,545,000, an increase of 7.9% compared to revenue of $11,624,000 for the year ended December 31, 2000. Net income for the period was approximately $834,000, a decrease of 1.5% compared to 2000 net income of approximately $847,000. The increase in revenue is primarily attributable to the full year of operations in 2001 from several properties acquired during 2000 along with three additional acquisitions completed during 2001. Lease revenues were slightly offset by the disposition of six hotels during 2001 and lower percentage lease revenues from several of the hotels owned during 2001. Net income decreased from the prior year due to an increase in interest expense, property taxes, insurance and depreciation and amortization as a result of the acquisitions during 2000 and 2001, as mentioned above. HHMLP During 2002, we adopted the provisions of FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The previously reported 2001 and 2000 results of operations have been reclassified to reflect the provisions of FASB No. 144. HHMLP's revenues decreased by $1,835,000 for the year ended December 31, 2001, or 6.1%, to approximately $29,283,000 as compared to $30,118,000, for the year ended 2000. The decrease in revenues was due to the sale of six properties during 2001 along with lower occupancies and average daily rates at several hotels. HHMLP's net loss for the year ended December 31, 2001 increased to approximately $1,104,000 from $147,000 in 2000. The increase in our net loss was a result of lower revenues mentioned above and consequently lower gross operating profits at several of our leased hotels. In addition we incurred losses due to the start up expenses incurred at several of the newly-built properties that commenced operations in 2001. LIQUIDITY AND CAPITAL RESOURCES Our principal source of liquidity is rent payments from the Lessees under the Percentage Leases, and the Company is dependent on the Lessees to make such payments to provide cash for debt service, distributions, capital expenditures at its Hotels, and working capital. 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 operating requirements, debt service 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 operating partnership interest in our operating partnership subsidiary. We currently maintain an $11.5 million line of credit with Sovereign Bank. We may use the line of credit to fund future acquisitions and for working capital. Outstanding borrowings under the line of credit bear interest at the bank's prime rate and are collateralized by certain of our properties. In the 31 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. The outstanding principal balance on the line of credit was approximately $3.8 million at December 31, 2002. The weighted average interest rate on short-term borrowings was 4.73%. 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 and our current level is approximately 60.5%. 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 common shares and other securities. We intend to invest in additional hotels only as suitable opportunities arise and 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 our trustee, officer or shareholder). 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 common shares, issuances of operating partnership units 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 are required to make available to the lessees of our hotels 4% (6% for full service properties) 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 full service hotels) reserve 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 are also 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. DISTRIBUTIONS/DIVIDENDS We have paid regular distributions on our Priority Class A Common Shares, and each of the 2002 and 2001 quarterly distributions was $0.18 per share. In addition, the operating partnership has paid regular distributions to the holders of units of limited partnership interest in the partnership in an amount of $0.18 per unit. There currently are no accruals for distributions not yet paid to the unitholders. RELATED PARTY TRANSACTIONS The Company has entered into a number of transactions and arrangements that involve related parties. For a description of the transactions and arrangements, please see Notes 4, 5 and 6 to the Company's financial statements that begin on page 36. 32 CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table summarizes the Company's contractual obligations and commitments to make future payments under contracts, such as debt and lease agreements, as of December 31, 2002.
CONTRACTUAL OBLIGATIONS: - ------------------------- PAYMENTS DUE BY PERIOD --------------------------------------------- 2003 2004 2005 2006 2007 THEREAFTER ----- ----- ----- ----- ----- ---------- Long-term Debt 1,438 1,551 1,678 1,816 1,965 53,090 Line of credit 3,803
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. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") of the FASB has set forth in EITF Issue No 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also included (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS No. 146 will be effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 had no impact on our results of operations or financial position for 2003. The FASB has issued SFAS No. 147, "Acquisitions of Certain Financial Institutions," which is effective for certain transactions arising on or after October 1, 2002. SFAS No. 147 will have no impact on the Company. The FASB has issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have adopted the disclosure requirements of SFAS No. 148. We currently account for stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, the alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation mandated by SFAS No. 148 are not applicable to us at this time. FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107 33 and rescission of FASB Interpretation No. 34," was issued in November 2002. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We have made the disclosures required by FIN 45. FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," was issued in January 2003. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company will continue to monitor and evaluate the impact of FIN 46 on our financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our primary market risk exposure is to changes in interest rates on our variable rate Line of Credit and other floating rate debt. At December 31, 2002, we had total outstanding indebtedness under the Line of Credit of approximately $3,804 at an interest rate of 4.25% and total floating rate mortgages payable of $18,666 at a current weighted average interest rate of 4.96%. Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates for a portion of our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. We may enter into derivative financial instruments such as interest rate swaps or caps and treasury options or locks to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable rate debt. Currently, we have no derivative financial instruments. We do not enter into derivative or interest rate transactions for speculative purposes. Approximately 69.7% of our outstanding mortgages payable are subject to fixed rates while approximately 30.3% of our outstanding mortgages payable are subject to floating rates. We regularly review interest rate exposure on our outstanding borrowings in an effort to minimize the risk of interest rate fluctuations. For debt obligations outstanding at December 31, 2002, the following table presents principal repayments and related weighted average interest rates by expected maturity dates (in thousands): 34
2003 2004 2005 2006 2007 THEREAFTER ----- ----- ------ ------ ------ ----------- Fixed Rate Debt 915 998 1,090 1,189 1,298 37,382 Average Interest 8.79% 8.79% 8.79% 8.79% 8.79% 8.82% Rate Floating Rate Debt 524 552 588 626 667 15,708 Average Interest 4.97% 4.96% 4.96% 4.96% 4.96% 4.96% Rate
The table incorporates only those exposures that existed as of December 31, 2002 and does not consider exposure or positions that could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the future period, prevailing interest rates, and our hedging strategies at that time. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS HERSHA HOSPITALITY TRUST AND SUBSIDIARIES Report of Independent Auditor. . . . . . . . . . . . . . . . . . . . . 37 Consolidated Balance Sheets as of December 31, 2002 and 2001 . . . . . 38 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . 39 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . 40 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . 41 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 46 Schedule III - Real Estate and Accumulated Depreciation for the year ended December 31, 2002 . . . . . . . . . . . . . . . . . . . . . 65 HERSHA HOSPITALITY MANAGEMENT, L.P. Report of Independent Auditor. . . . . . . . . . . . . . . . . . . . . 67 Balance Sheets as of December 31, 2002 and 2001. . . . . . . . . . . . 68 Statement of Operations for the years ended December 31, 2002,2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Statements of Partners' Capital for the years ended December 31, 2002, 2001 and 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . 72 36 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Trustees of Hersha Hospitality Trust New Cumberland, Pennsylvania We have audited the accompanying consolidated balance sheets of Hersha Hospitality Trust and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the consolidated financial statement schedule included on Pages 66 and 67. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hersha Hospitality Trust and subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the consolidated financial statement schedule referred to above, when considered in relationship to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein as of December 31, 2002. MOORE STEPHENS, P. C. Certified Public Accountants. New York, New York February 28, 2003 37
================================================================================================= HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS [IN THOUSANDS EXCEPT SHARE AMOUNTS] ================================================================================================= ASSETS: DECEMBER 31, 2002 DECEMBER 31, 2001 ------------------- ------------------- Cash and cash equivalents $ 140 $ 167 Investment in Hotel Properties, Net of Accumulated Depreciation 93,814 88,100 Escrow Deposits 1,749 1,647 Lease Payments Receivable - Related Party 2,562 2,376 Lease Payments Receivable - Other 233 - Intangibles, Net of Accumulated Amortization 1,165 1,515 Due from Related Party 1,130 1,884 Other Assets 723 328 ------------------- ------------------- TOTAL ASSETS $ 101,516 $ 96,017 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY: Line of Credit $ 3,803 $ 7,058 Deposits Payable 1,000 1,000 Mortgages Payable 61,538 54,477 Dividends Payable 1,382 1,325 Due to Related Party 1,303 1,093 Accounts Payable and Accrued Expenses 854 418 ------------------- ------------------- TOTAL LIABILITIES $ 69,880 $ 65,371 ------------------- ------------------- MINORITY INTEREST 20,258 20,436 ------------------- ------------------- 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, 2,576,863 and 2,275,000 Shares Issued and Outstanding at December 31, 2002 and 2001, (Aggregate Liquidation Preference $15,460 and $13,650) respectively 26 23 Common Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized, None Issued and Outstanding -- -- Additional Paid-in Capital 13,679 11,968 Distributions in Excess of Net Earnings (2,327) (1,781) ------------------- ------------------- TOTAL SHAREHOLDERS' EQUITY 11,378 10,210 ------------------- ------------------- Total Liabilities and Shareholders' Equity 101,516 96,017 =================== ===================
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements. 38
========================================================================================= HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002,2001 AND 2000 [IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS] ========================================================================================= 2002 2001 2000 ---------- ----------- ---------- REVENUE: Percentage Lease Revenues - HHMLP $ 11,433 $ 9,558 $ 9,723 Percentage Lease Revenues - Other 2,801 2,801 1,850 Interest 207 165 50 Interest - Related Party 7 21 1 ---------- ----------- ---------- TOTAL REVENUE 14,448 12,545 11,624 EXPENSES: Interest expense 4,826 4,769 4,142 Land Lease - Related Party - 13 15 Real Estate and Personal Property Taxes and Property Insurance 1,021 812 632 General and Administrative 567 534 578 Early Payment Penalty - - 107 (Gain) on Sale of Assets - (598) - Depreciation and Amortization 3,994 3,897 3,507 ---------- ----------- ---------- TOTAL EXPENSES 10,408 9,427 8,981 ---------- ----------- ---------- INCOME BEFORE MINORITY INTEREST AND DISCONTINUED OPERATIONS 4,040 3,118 2,643 INCOME ALLOCATED TO MINORITY INTEREST 3,238 2,342 1,908 DISCONTINUED OPERATIONS (NOTE 6): Gain on Sale of Discontinued Operations 449 - - Income from Discontinued Operations 41 58 112 NET INCOME $ 1,292 $ 834 $ 847 ========== =========== ========== EARNINGS PER SHARE DATA: ----------------------- Basic and Diluted - before discontinued operations $ 0.32 $ 0.34 $ 0.32 Discontinued operations $ 0.19 $ 0.03 $ 0.05 Basic and Diluted Earnings Per Common Share $ 0.51 $ 0.37 $ 0.37 WEIGHTED AVERAGE SHARES: Basic and Diluted 2,519,820 2,275,000 2,275,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 39
=========================================================================================================== HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 [IN THOUSANDS, EXCEPT SHARES] =========================================================================================================== Priority Class A Class B Common Shares Common Shares Additional Distributions ------------------- ---------------- paid-in in excess of Shares Dollars Shares Dollars capital net earnings Total --------- -------- ------ -------- ----------- --------------- -------- Balance at December 31, 1999 2,275,000 $ 23 - $ - $ 11,968 $ (186) $11,805 Dividends declared - - - - - $ (1,638) $(1,638) ($0.72 per share) Net Income $ 847 $ 847 ----------------------------------------------------------------------------- Balance at December 31, 2000 2,275,000 $ 23 - $ - $ 11,968 $ (977) $11,014 Dividends declared - - - - - $ (1,638) $(1,638) ($0.72 per share) Net Income $ 834 $ 834 ----------------------------------------------------------------------------- Balance at December 31, 2001 2,275,000 $ 23 - $ - $ 11,968 $ (1,781) $10,210 Issuance of shares, 300,000 $ 3 - $ - $ 1,711 $ 1,714 net of offering expenses Issuance of shares, 1,863 $ - - $ - - $ - Dividend Reinvestment Plan Dividends declared - - - - - $ (1,838) $(1,838) ($0.72 per share) Net Income $ 1,292 $ 1,292 ----------------------------------------------------------------------------- Balance at December 31, 2002 2,576,863 $ 26 - $ - $ 13,679 $ (2,327) $11,378 =============================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 40
==================================================================================== HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ===================================================================================== 2002 2001 2000 --------- --------- --------- OPERATING ACTIVITIES: Net Income $ 1,292 $ 834 $ 847 --------- --------- --------- Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities: Depreciation and Amortization 4,212 4,476 3,892 Gain on Sale of Assets (449) (598) - Income Allocated to Minority Interest 3,238 2,342 1,908 Change in Assets and Liabilities: (Increase) Decrease in: Escrow Deposits (102) (469) (1,178) Lease Payments Receivable - Related Party (419) 501 (761) Other Assets (395) (92) 115 Due from Related Party (46) 122 (21) Increase (Decrease): Due to Related Parties 210 (179) 54 Accounts Payable and Accrued Expenses 436 (109) 176 --------- --------- --------- Total Adjustments 6,685 5,994 4,185 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,977 6,828 5,032 INVESTING ACTIVITIES: Purchase of Hotel Property Assets (5,142) (5,017) (13,017) Sale of Hotel Property Assets 5,997 12,599 - Purchase of Intangible Assets - (69) (1,078) Loans to Related Party (1,000) (2,000) (800) --------- --------- --------- NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES (145) 5,513 (14,895) FINANCING ACTIVITIES: Net Proceeds from Issuance of Stock 1,711 - - Proceeds from Borrowings Under Line of Credit 12,077 10,766 5,496 Repayment of Borrowings Under Line of Credit (15,332) (15,108) - Borrowings from Mortgages Payable 2,985 - 25,050 Principal Repayment of Mortgages Payable (3,857) (2,729) (17,016) Dividends Paid (1,774) (1,638) (1,638) Limited Partnership Unit Distributions Paid (3,669) (3,495) (3,561) Borrowings from Related Party - - 1,408 Repayment of Related Party Loans - 30 - --------- --------- --------- NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES (7,859) (12,174) 9,739 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27) 167 (124) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 167 - 124 --------- --------- --------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 140 $ 167 $ - ========= ========= =========
41 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED) [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid During the Period: 12/31/02 12/31/01 12/31/00 --------- --------- --------- Interest $ 4,802 $ 5,364 $ 4,445 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: We have acquired an Investment in Hotel Properties with an approximate value, at the commencement of operations, of $40,307 in exchange for (i) 4,032,321 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 $24,200 based on the initial offering price and (ii) the assumption of approximately $23,300 of indebtedness of which approximately $6,100 was repaid immediately after the acquisition of the hotels and approximately $2,800 was repaid prior to June 30, 1999. On August 11, 1999 we purchased, from Messrs. Hasu P. Shah, our chairman, chief executive officer and trustee, K.D. Patel, one of our trustees, Kiran P. Patel, our secretary, certain officers of HHMLP and other affiliated individuals, [the "Hersha Affiliates"], all the partnership interests in 3744 Associates, a Pennsylvania limited partnership and through the ownership of 3744 Associates, a 60- room Comfort Inn hotel located near the John F. Kennedy International Airport in Jamaica, New York. The Comfort Inn, JFK was newly constructed and commenced operations on August 12, 1999. We have purchased the Comfort Inn, JFK for $5,500. On September 1, 1999 we purchased, from the Hersha Affiliates, all the partnership interests in 2844 Associates, a Pennsylvania limited partnership and through the ownership of 2844 Associates, a 77-room Clarion Inn & Suites hotel located in Harrisburg, Pennsylvania. We acquired the Clarion Inn & Suites for a purchase price of $2,700. We have assumed a mortgage payable of $2,000 in connection with the acquisition of this hotel. The Clarion Inn & Suites was subsequently converted to a Holiday Inn Express and Suites in 2000. On September 1, 1999 we purchased, from the Hersha Affiliates, all the partnership interests in 3544 Associates, a Pennsylvania limited partnership and through the ownership of 3544 Associates, a 72-room Hampton Inn hotel located in Danville, Pennsylvania. The total purchase price was $3,600. We have acquired an Investment in the Hampton Inn, Danville, PA in exchange for (i) 173,359 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 $1,000 based on the initial offering price and (ii) the assumption of approximately $2,600 of indebtedness. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 42 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED) [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ As of January 1, 2000, we issued an additional 235,026 units of limited partnership interest in connection with final settlement of the purchase prices for the Holiday Inn, Milesburg, the Comfort Inn, Denver and the Holiday Inn Express, Riverfront. The total number of units outstanding as of January 1, 2000 was 4,440,996. No additional units were issued during 2000. On January 1, 2000, we purchased three hotels from the Hersha Affiliates. These hotels consist of the Hampton Inn, Hershey, the Best Western, Indiana and the Comfort Inn, McHenry. The purchase prices paid for these hotels were $7,500, $2,200 and $1,800, respectively. We have assumed mortgages payable of $5,000, $1,400 and $1,200, respectively, and also assumed related party debt of $1,000 related to the purchase of the Hampton Inn, Hershey. The Hersha Affiliates have received cash of approximately $1,500, $800 and $600, respectively, for the remainder of the proceeds from the sale of these hotels. On May 19, 2000, we completed the acquisition of four hotels from Noble Investment Group, Ltd. ("Noble") for $20,000. We have simultaneously entered into lease agreements with Noble for the four properties. We lease the properties to entities owned by Noble pursuant to percentage leases that provide for rent based, in part, on the room revenues from the hotels. The leases for the Comfort Suites, Duluth, GA and the Holiday Inn Express, Duluth, GA are effective as of May 19, 2000. The leases for the Hampton Inn hotels located in Newnan and Peachtree City are effective as of April 20, 2000. On October 1, 2000, we purchased the Sleep Inn in Corapolis, PA from the Hersha Affiliates. The purchase price paid for this hotel was $5,500. We have assumed a mortgage payable of $3,800. The Hersha Affiliates have received cash of approximately $1,700 for the remainder of the proceeds from the sale of this hotel. As of January 1, 2001, we have issued an additional 531,559 units of limited partnership interest in connection with the repricing of the Holiday Inn Express, Hershey, Hampton Inn, Carlisle, Holiday Inn Express, New Columbia and the Comfort Inn, Harrisburg. The total number of units outstanding as of January 1, 2001 was 4,972,555. On April 1, 2001, we sold the Best Western, Indiana for $2,200 to the Hersha Affiliates. In conjunction with this transaction we received cash proceeds of $400 and have redeemed 76,252 limited partnership units valued at $457. The buyer also assumed the outstanding mortgage balance of $1,342. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 43 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED) [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ On May 1, 2001, we sold the Comfort Inn, Denver for $2,100 to an unrelated third party. Net of settlement fees and other costs we received $1,868. In conjunction with this transaction we received cash proceeds of $460 and have paid down the outstanding mortgage balance of $1,408 to Shreenathji Enterprises, Ltd., a related party. On June 1, 2001, we sold the Comfort Inn, JFK for $7,000 to an unrelated third party. Net of settlement fees and other costs we received cash proceeds of $6,613. Based upon the initial repricing formula, we issued an additional 175,538 limited partnership units in conjunction with this transaction. On June 1, 2001, we purchased the Mainstay Suites and Sleep Inn in King of Prussia from the Hersha Affiliates. We purchased these assets for $9,445 plus settlement costs and leased them to Hersha Hospitality Management, LP. In conjunction with this transaction, we assumed the mortgage indebtedness of $6,738, assumed $1,000 of related party debt and funded the remainder of the proceeds of $1,768 from our available cash and outstanding line of credit. On November 1, 2001, we purchased the Holiday Inn Express hotel located in Long Island City, New York. We purchased this asset for $8,500 plus settlement costs of approximately $100 and leased it to Hersha Hospitality Management, LP. In conjunction with this transaction, we assumed the mortgage indebtedness of approximately $5,445, assumed $1,000 of related party debt, issued additional units for $459 and paid cash of approximately $1,600. On November 1, 2001, we sold the Comfort Inn, McHenry, MD to the Hersha Affiliates for approximately $1,800, including the assumption of approximately $1,180 in indebtedness, redemption of 55,175 limited partnership units valued at approximately $331 and cash proceeds of approximately $300. On November 1, 2001, we sold the Comfort Inn, Riverfront, Harrisburg, PA to the Hersha Affiliates for $3,400 net of selling costs, including the assumption of approximately $2,500 in indebtedness and approximately $900 in cash. On November 1, 2001, we sold the Holiday Inn, Milesburg, PA to a third party owner operator for approximately $4,700 less broker fees, settlement and transfer costs of $617. Net of these fees and expenses we received cash proceeds of $3,926 and paid down a related party loan receivable of $157. On December 28, 2001, we declared a $0.18 per Class A Common Share dividend and a distribution of $0.18 per limited partnership unit that was paid on January 25, 2002. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 44 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED) [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ As of January 1, 2002, we issued an aggregate of 333,541 additional operating partnership units in connection with the re-pricing of the Holiday Inn Express & Suites, Harrisburg, the Hampton Inn, Danville and the Hampton Inn & Suites, Hershey, Pennsylvania. The total number of units outstanding as of January 1, 2002 was 5,099,722. The Board of Trustees approved the purchase of the Mainstay Suites, Frederick, Maryland, on February 27, 2002 to be effective January 1, 2002. We purchased this asset for $5,500 plus settlement costs of approximately $21 and leased it to HHMLP. In conjunction with this transaction, we assumed mortgage indebtedness of approximately $3,100, assumed $800 of related party debt, and paid cash of approximately $1,600. The financial position and results of operations related to the Mainstay Suites, Frederick, Maryland are included as of January 1, 2002. Further, on February 27, 2002, the Board of Trustees also approved the sale of the Sleep Inn, Corapolis, Pennsylvania to some of our executive officers, trustees and their affiliates to be effective as of January 1, 2002. We sold this asset for $5,500, including the assumption of approximately $3,500 in indebtedness and the redemption of 327,038 limited partnership units valued at approximately $2,000. We initially purchased this property from these executive officers, trustees and their affiliates on October 1, 2000 for $5,500. This transaction has been accounted for as of January 1, 2002. During the quarter ended March 31, 2002, we issued an additional 300,000 Priority Class A Common Shares. We received gross proceeds of $1,800. We received net proceeds of $1,711 after selling and offering expenses. On September 26, 2002, we sold the Clarion Suites, Philadelphia, PA to a third party for $6,300 less transfer costs that are estimated at $103. In order to complete the sale of this hotel, the Company is currently carrying $200 of seller financing that is due and payable on October 1, 2003. This financing was completed at an interest rate of 10%. The remaining proceeds from the sale were utilized to payoff $5,997 of the Company's line of credit balance. On October 1, 2002, we purchased the Doubletree Club hotel at the JFK International Airport, Jamaica, NY. We purchased this asset for $11,500 and leased it to Hersha Hospitality Management, LP. In conjunction with this transaction, we assumed the mortgage and lease indebtedness of approximately $8,705, assumed $1,000 of related party debt, and paid cash of $1,795. On December 28, 2002 we declared a $0.18 per Class A Common Share dividend and a distribution of $0.18 per limited partnership unit that was paid on January 17, 2003. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 45 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [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. We are a self-administered, Maryland real estate investment trust for federal income tax purposes. On January 26, 1999, we completed an initial public offering of 2,275,000 shares of $.01 par value Priority Class A Common Shares. The offering price per share was $6 resulting in gross proceeds of $13,650. Net of underwriters discount and offering expenses, we received proceeds of $11,991. During the quarter ended March 31, 2002, we issued 300,000 shares of $.01 par value Priority Class A Common Shares. The offering price per share was $6, resulting in gross proceeds of $1,800. Net of selling and offering expenses, we received proceeds of $1,700. Upon completion of the initial public offering, we contributed substantially all of the net proceeds to Hersha Hospitality Limited Partnership [the "Partnership"] in exchange for a 36.1% general partnership interest in the Partnership. The Partnership used these proceeds to acquire an equity interest in ten hotels [the "Initial Hotels"] through subsidiary partnerships, and to retire certain indebtedness relating to these hotels. The Partnership acquired these hotels in exchange for (i) units of limited partnership interest in the Partnership which are redeemable by the Company, subject to certain limitations, for an aggregate of 4,032,431 Priority Class B Common Shares, with a value of approximately $24,200 based on the initial public offering price, and (ii) the assumption of approximately $23,300 of indebtedness of which approximately $6,100 was repaid immediately after the acquisition of the hotels. Hasu P. Shah, K.D. Patel, Kiran Patel, David Desfor and Neil Shah (certain of our executive officers and trustees) and their affiliates [the "Hersha Affiliates"] received units of limited partnership interests in the Partnership aggregating a 63.9% equity interest in the Partnership. The Partnership owns a 99% limited partnership interest and Hersha Hospitality, LLC ["HHLLC"], a Virginia limited liability company, owns a 1% general partnership interest in the subsidiary partnerships. The Partnership is the sole member of HHLLC. We instituted a dividend reinvestment plan ["DRIP"] for our Priority Class A Common Shares on February 13, 2002. Our DRIP provides holders of our Priority Class A Common Shares with a convenient method of purchasing additional priority common shares without payment of any brokerage commission or service charges. Any holder of record of priority common shares is eligible to participate in the plan. Participants in the plan may have cash dividends on all or a portion of their priority common shares automatically reinvested. The purchase price of the priority common shares purchased with reinvested cash dividends will be at a price equal to 95% of the "average market price," which means the average of the closing prices of our priority common shares as reported by the American Stock Exchange for each of the five (5) trading days immediately preceding the investment date as of which such purchase is made. Shareholders who do not elect to participate in the plan will continue to receive cash dividends on shares registered in their names. As of December 31, 2002 we had issued an additional 1,863 Priority Class A Common Shares pursuant to the DRIP. Of the total dividends payable of $464 at December 31, 2002, we paid a cash dividend of $458 and issued an additional 762 shares on January 17, 2003. We lease 14 of our hotel facilities to Hersha Hospitality Management, LP ["HHMLP"], a Pennsylvania limited partnership. HHMLP is owned in part by three of our executive officers, two of our trustees and their affiliates. HHMLP operates and leases the hotel properties pursuant to separate percentage lease agreements [the "Percentage Leases"] that provide for initial fixed rents or 46 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [1] ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION [CONTINUED] percentage rents based on the revenues of the hotels. The hotels are located principally in the Mid-Atlantic region of the United States. We have also entered into percentage leases with Noble Investment Group, Ltd. ["Noble"], an independent third party management company, to lease and manage four hotels in the metropolitan Atlanta market. The following summarizes the number of hotels owned for the periods presented:
2002 2001(a) 2000 ----- ------- ---- Hotels owned at beginning of years 18 21 13 Acquisitions 2 3 8 Sales of hotels (2) _(6) _0 ----- ------- ---- Hotels owned at end of years 18 18 21 ===== ======= ====
(a) - The Sleep Inn and Mainstay Suites in King of Prussia, PA consist of two separate hotels yet are accounted for as one purchase due to the fact that the hotels share a common lobby and guest area and a common deed. Since the completion of the initial public offering we have issued an additional 173,539 units of limited partnership interest in connection with the acquisition of the Hampton Inn, Danville, PA and 76,555 units in connection with the acquisition of the Holiday Inn Express, Long Island City. We have also issued an additional 1,275,662 units of limited partnership interest in connection with final settlement of the purchase prices of several hotels and have redeemed 458,465 units of limited partnership interest in connection with the sale of certain hotels. The total number of units of limited partnership interest outstanding as of December 31, 2002, 2001 and 2000 was 5,099,722, 5,093,220 and 4,440,996, respectively. [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include all of our accounts as well as accounts of the Partnership and the subsidiary Partnerships. All inter-company amounts have been eliminated. 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 amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT IN HOTEL PROPERTIES - Investment in hotel properties are stated at cost. Depreciation for financial reporting purposes is principally based upon the straight-line method. 47 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] The estimated lives used to depreciate the Hotel properties are as follows: Building and Improvements 15 to 40 Years Furniture and Fixtures 5 to 7 Years CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of cash and certain highly liquid investments with maturities of three months or less when acquired, carried at cost, which approximates fair value. We had no cash equivalents at December 31, 2002 and 2001. INTANGIBLE ASSETS AND GOODWILL - Intangible assets consist of loan acquisition fees and are carried at cost net of accumulated amortization. Amortization of loan acquisition fees is computed using the straight-line method over the term of the related debt. The Company has not recognized amortization expense on goodwill subsequent to December 31, 2001. The Company tests goodwill for impairment at least annually and has not recognized any impairment during the three years ended December 31, 2002. REVENUE RECOGNITION - Percentage lease income is recognized when earned from the Lessees under the agreements from the date of acquisition of each hotel property. Lease income is recognized under fixed rent agreements ratably over the lease term. All leases between us and the lessees are operating leases. DISTRIBUTIONS - The Company intends to pay distributions which, at a minimum, will be sufficient for the Company to maintain its REIT status. INCOME TAXES - We qualify as a real estate investment trust under Section 856 through 860 of the Internal Revenue Code. Accordingly, no provision for federal income taxes has been reflected in the financial statements. Earnings and profits that determine the taxability of dividends to shareholders differ from net income reported for financial reporting purposes due to the differences for Federal tax purposes in the estimated useful lives and methods used to compute depreciation. During 2002 and 2001, 10.2% and 11.0%, respectively, of the distributions were considered to be return of capital for Federal income tax purposes. During 2000, none of the distributions were considered to be return of capital for Federal income tax purposes. MINORITY INTEREST - Minority interest in the Partnership represents the limited partners' proportionate share of the equity of the Partnership. The limited partnership interests are owned by numerous individuals and companies. Income is allocated to minority interest based on weighted average percentage ownership throughout the year. EARNINGS PER COMMON SHARE - We compute earnings per share in accordance with Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per Share." 48 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] IMPAIRMENT OF LONG LIVED ASSETS - We review the carrying value of each hotel property in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 to determine if circumstances exist indicating an impairment in the carrying value of the investment in the hotel property or if depreciation periods should be modified. 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. We perform undiscounted cash flow analyses to determine if impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Hotel properties held for sale are presented at the lower of carrying amount or fair value less cost to sell. RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") of the FASB has set forth in EITF Issue No 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also included (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS No. 146 will be effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 had no impact on our results of operations or financial position for 2002. The FASB has issued SFAS No. 147, "Acquisitions of Certain Financial Institutions," which is effective for certain transactions arising on or after October 1, 2002. SFAS No. 147 will have no impact on the Company. The FASB has issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure requirements of SFAS No. 148. The Company currently accounts for stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, the alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation mandated by SFAS No. 148 are not applicable to the Company at this time. FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," was issued in November 2002. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related 49 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has made the disclosures required by FIN 45. FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," was issued in January 2003. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company will continue to monitor and evaluate the impact of FIN 46 on our financial statements. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject us to concentrations of credit risk include cash and cash equivalents and rent receivable arising from our normal business activities. We place our cash and cash equivalents with high credit quality financial institutions. We do not require collateral to support our financial instruments. At December 31, 2002 and 2001, we did not have any monies in financial institutions that exceeded federally insured amounts. Rental income is earned from one related party lessee and one unrelated party lessee. Therefore, the collection of rent receivable and rent income is reliant on the continued financial health of these Lessees. FAIR VALUE OF FINANCIAL INSTRUMENTS - At December 31, 2002 and 2001, financial instruments include cash and cash equivalents, lease payments receivable, accounts payable, accrued expenses, loans to and from related parties, a line of credit and mortgages payable. The fair values of cash and cash equivalents, lease payments receivable and accounts payable and accrued expenses approximate carrying value because of the short-term nature of these instruments. Loans to and from related parties carry interest at rates that approximate our borrowing cost. The fair value of mortgages payable and the line of credit approximates carrying value since the interest rates approximate the interest rates currently offered for similar debt with similar maturities. STOCK BASED COMPENSATION - We account for employee stock-based compensation under the intrinsic value based method as prescribed by Accounting Principles Board ["APB"] Opinion No. 25. We apply the provisions of SFAS No. 123, "Accounting for Stock Based Compensation," to non-employee stock-based compensation and the pro forma disclosure provisions of that statement to employee stock-based compensation. 50 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [3] INTANGIBLE ASSETS At December 31, 2002 and 2001 intangibles consisted of the following: ACCUMULATED DESCRIPTION COST AMORTIZATION NET - --------------------- ------------ ------------- ------ December 31, 2002: Goodwill $ 412 $ 0 $ 412 Loan Acquisition Fees 1,183 430 753 ------------ ------------- ------ Totals $ 1,595 $ 430 $1,165 ============ ============= ====== December 31, 2001: Goodwill $ 1,168 $ 528 $ 640 Loan Acquisition Fees 1,183 308 875 ------------ ------------- ------ Totals $ 2,351 $ 836 $1,515 ============ ============= ====== Amortization expense was $123, $274 and $213 for the years ending December 31, 2002, 2001 and 2000, respectively. The Company estimates that amortization expense for each of the next five years will be $123. [4] INVESTMENT IN HOTEL PROPERTIES Hotel properties consist of the following at December 31, 2002 and 2001:
2002 2001 -------- -------- Land $ 10,500 $ 10,156 Buildings and Improvements 81,160 74,592 Furniture, Fixtures and Equipment 15,519 15,648 -------- -------- 107,179 100,396 Less Accumulated Depreciation 13,365 12,296 -------- -------- $ 93,814 $ 88,100 ======== ========
Depreciation expense was $4,089, $4,202 and $3,679 for the years ended December 31, 2002, 2001 and 2000, respectively. The eighteen hotels owned at December 31, 2002 consist of seventeen premium limited service hotels and one full service hotel property. 51 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [4] INVESTMENT IN HOTEL PROPERTIES [CONTINUED] In 2002, 2001 and 2000, we acquired and sold the following hotels for the approximate amounts indicated.
NO. OF PURCHASE SALE ROOMS PRICE PRICE ------- --------- --------- 2002 - ---- Mainstay Suites, Frederick, MD 72 5,500 Sleep Inn, Corapolis, PA (143) (5,500) Clarion Suites, Philadelphia, PA (96) (6,300) Doubletree Club, Jamaica, NY 110 11,500 ------- --------- --------- Total (57) $ 17,000 $(11,800) ======= ========= ========= 2001 - ---- Mainstay Suites/Sleep Inn, King of Prussia, PA 156 9,445 Holiday Inn Express, LI City, NY 79 8,500 Best Western, Indiana, PA (96) (2,200) Comfort Inn, McHenry, MD (77) (1,800) Comfort Inn, Denver, PA (45) (2,100) Comfort Inn, JFK, NY (60) (7,000) Holiday Inn Milesburg, PA (118) (4,700) Comfort Inn, Harrisburg, PA (117) (3,400) ------- --------- --------- Total (278) $ 17,945 $(21,200) ======= ========= ========= 2000 - ---- Hampton Inn & Suites, Hershey, PA 110 $ 7,500 Best Western, Indiana, PA 96 2,200 Comfort Inn, McHenry, MD 77 1,800 Hampton Inn, Newnan, GA 91 7,117 Hampton Inn, Peachtree City, GA 61 3,940 Comfort Suites, Duluth 85 5,208 Holiday Inn Express, Duluth 68 3,735 Sleep Inn, Corapolis, PA 143 5,500 ------- --------- Total 731 $ 37,000 ======= =========
52 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [4] INVESTMENT IN HOTEL PROPERTIES [CONTINUED] On January 1, 2000, we purchased three hotels from the Hersha Affiliates. These hotels consist of the Hampton Inn, Hershey, the Best Western, Indiana and the Comfort Inn, McHenry. The purchase prices paid for these hotels were $7,500, $2,200 and $1,800, respectively. We have assumed mortgages payable of $5,000, $1,400 and $1,200, respectively, and also assumed related party debt of $1,000 related to the purchase of the Hampton Inn, Hershey. The Hersha Affiliates have received cash of approximately $1,500, $800 and $600, respectively, for the remainder of the proceeds from the sale of these hotels. On May 19, 2000, we completed the acquisition of four hotels from Noble Investment Group, Ltd. ("Noble") for $20,000. We have simultaneously entered into lease agreements with Noble for the four properties. We lease the properties to entities owned by Noble pursuant to percentage leases that provide for rent based, in part, on the room revenues from the hotels. The leases for the Comfort Suites, Duluth, GA and the Holiday Inn Express, Duluth, GA are effective as of May 19, 2000. The leases for the Hampton Inn hotels located in Newnan and Peachtree City are effective as of April 20, 2000. On October 1, 2000, we purchased the Sleep Inn in Corapolis, PA from the Hersha Affiliates. The purchase price paid for this hotel was $5,500. We have assumed a mortgage payable of $3,800. The Hersha Affiliates have received cash of approximately $1,700 for the remainder of the proceeds from the sale of this hotel. As of January 1, 2001, we have issued an additional 531,559 units of limited partnership interest in connection with the repricing of the Holiday Inn Express, Hershey, Hampton Inn, Carlisle, Holiday Inn Express, New Columbia and the Comfort Inn, Harrisburg. On April 1, 2001, we sold the Best Western, Indiana for $2,200 to the Hersha Affiliates. In conjunction with this transaction we received cash proceeds of $400 and have redeemed 76,252 limited partnership units valued at $457. The buyer also assumed the outstanding mortgage balance of $1,342. On May 1, 2001, we sold the Comfort Inn, Denver for $2,100 to an unrelated third party. Net of settlement fees and other costs we received $1,868. In conjunction with this transaction we received cash proceeds of $460 and have paid down the outstanding mortgage balance of $1,408 to Shreenathji Enterprises, Ltd., a related party. On June 1, 2001, we sold the Comfort Inn, JFK for $7,000 to an unrelated third party. Net of settlement fees and other costs we received cash proceeds of $6,613. Based upon the initial repricing formula, we issued an additional 175,538 limited partnership units in conjunction with this transaction. 53 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [4] INVESTMENT IN HOTEL PROPERTIES [CONTINUED] On June 1, 2001, we purchased the Mainstay Suites and Sleep Inn in King of Prussia from the Hersha Affiliates. We purchased these assets for $9,445 plus settlement costs and leased them to Hersha Hospitality Management, LP. In conjunction with this transaction, we assumed the mortgage indebtedness of $6,738, assumed $1,000 of related party debt and funded the remainder of the proceeds of $1,768 from our available cash and outstanding line of credit. On November 1, 2001, we purchased the Holiday Inn Express hotel located in Long Island City, New York. We purchased this asset for $8,500 plus settlement costs of approximately $100 and leased it to Hersha Hospitality Management, LP. In conjunction with this transaction, we assumed the mortgage indebtedness of approximately $5,445, assumed $1,000 of related party debt, issued additional units for $459 and paid cash of approximately $1,600. On November 1, 2001, we sold the Comfort Inn, McHenry, MD to the Hersha Affiliates for approximately $1,800, including the assumption of approximately $1,180 in indebtedness, redemption of 55,175 limited partnership units valued at approximately $331 and cash proceeds of approximately $300. On November 1, 2001, we sold the Comfort Inn, Riverfront, Harrisburg, PA to the Hersha Affiliates for $3,400 net of selling costs, including the assumption of approximately $2,500 in indebtedness and approximately $900 in cash. On November 1, 2001, we sold the Holiday Inn, Milesburg, PA to a third party owner operator for approximately $4,700 less broker fees, settlement and transfer costs of $617. Net of these fees and expenses we received cash proceeds of $3,926 and paid down a related party loan receivable of $157. For the year ended December 31, 2001, we recorded a gain of approximately $125, $145, $170 and $266 on the sale of the Best Western, Indiana, Comfort Inn, McHenry, Comfort Inn, Riverfront and the Holiday Inn, Milesburg, respectively. We recorded a loss of approximately $108 on the sale of the Comfort Inn, Denver. The net amount of these gains and losses of $598 is included in the consolidated statement of operations and the consolidated statement of cash flows for the year ended December 31, 2001, under the caption "gain on sale of assets." The use of fair value as the appropriate accounting treatment was determined with reference to APB 29 and related accounting guidance. As of January 1, 2002, we issued an aggregate of 333,541 additional operating partnership units in connection with the re-pricing of the Holiday Inn Express & Suites, Harrisburg, the Hampton Inn, Danville and the Hampton Inn & Suites, Hershey, Pennsylvania. The total number of units outstanding as of January 1, 2002 was 5,099,722. 54 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [4] INVESTMENT IN HOTEL PROPERTIES [CONTINUED] The Board of Trustees approved the purchase of the Mainstay Suites, Frederick, Maryland, on February 27, 2002 to be effective January 1, 2002. We purchased this asset for $5,500 plus settlement costs of approximately $21 and leased it to HHMLP. In conjunction with this transaction, we assumed mortgage indebtedness of approximately $3,100, assumed $800 of related party debt, and paid cash of approximately $1,600. The financial position and results of operations related to the Mainstay Suites, Frederick, Maryland are included as of January 1, 2002. Further, on February 27, 2002, the Board of Trustees also approved the sale of the Sleep Inn, Corapolis, Pennsylvania to some of our executive officers, trustees and their affiliates to be effective as of January 1, 2002. We sold this asset for $5,500, including the assumption of approximately $3,500 in indebtedness and the redemption of 327,038 limited partnership units valued at approximately $2,000. We initially purchased this property from these executive officers, trustees and their affiliates on October 1, 2000 for $5,500. This transaction has been accounted for as of January 1, 2002. On September 26, 2002, we sold the Clarion Suites, Philadelphia, PA to a third party for $6,300 less transfer costs that are estimated at $93. In order to complete the sale of this hotel, the Company is currently carrying $200 of seller financing that is due and payable on October 1, 2003. This financing was completed at an interest rate of 10%. The remaining proceeds from the sale were utilized to payoff $5,997 of the Company's line of credit balance. On October 1, 2002, we purchased the Doubletree Club hotel at the JFK International Airport, Jamaica, NY. We purchased this asset for $11,500 and leased it to Hersha Hospitality Management, LP. In conjunction with this transaction, we assumed the mortgage and lease indebtedness of approximately $8,705, assumed $1,000 of related party debt, and paid cash of $1,795. The above acquisitions were accounted for as purchases, and the results of such acquisitions are included in the Company's consolidated statements of operations from the dates of acquisition. No goodwill arose in the transactions. 55 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [5] DEBT Debt is comprised of the following at December 31, 2002 and 2001:
2002 2001 ------- ------- Mortgages Payable $61,538 $54,477 Revolving Credit Facility 3,803 7,058 ------- ------- $65,341 $61,535 ======= =======
Substantially all of our mortgage indebtedness is collateralized by property and equipment and in certain situations is personally guaranteed by the Hersha Affiliates. The total mortgages payable balance at December 31, 2002 and 2001 was $61,538 and $54,477, respectively, and consisted of mortgages with fixed interest rates ranging from 6.0% to 9.43%. The maturities for the outstanding mortgages ranged from August 2004 to December 2012. On August 9, 1999, the Company obtained a $7,000 credit facility from Sovereign Bank (the "Line of Credit"). The Line of Credit was extended to $11,500 as of December 1, 2000. Outstanding borrowings under the Line of Credit bear interest at the bank's prime rate and the Line of Credit is collateralized by the Holiday Inn Express and Suites, Harrisburg. The interest rate on borrowings under the Line of Credit at December 31, 2002 and 2001 was 4.25% and 5.0%, respectively. The Line of Credit expires in December 2004. The outstanding principal balance on the Line of Credit was approximately $3,803 and $7,058 at December 31, 2002 and 2001, respectively. The weighted average interest rate on short-term borrowings for 2002, 2001, 2000 was 4.73% 7.1%, and 9.0%, respectively. Aggregate annual principal payments for the Company's mortgages payable at December 31, 2002 are due as follows: 2003 $ 1,438 2004 1,551 2005 1,678 2006 1,816 2007 1,965 Thereafter 53,090 ---------- TOTAL $ 61,538 ========== 56 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [6] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS In conjunction with the initial public offering, we acquired the ten Initial Hotels and entered into percentage lease agreements with Hersha Hospitality Management, L.P. ("HHMLP"). We have acquired twelve properties from the Hersha Affiliates that were subsequently leased to HHMLP and four properties from Noble Investment Group, Ltd. ("Noble") that were leased to Noble, subsequent to our public offering. We sold four properties back to the Hersha Affiliates subsequent to our public offering and have sold four properties to unaffiliated third parties subsequent to our public offering. 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 these hotels. There was no commitment outstanding to the limited partners as of December 31, 2002 and 2001. The Priority Class A Common shareholders will be entitled to receive dividends in excess of the priority distribution [See Note 10] after the limited partners have received an amount equal to the priority distribution. The holders of the Priority Class A Common Shares will be entitled to receive further distributions on a pro rata basis with the holders of the limited partnership units. We are the sole general partner in the Partnership, which is the sole general partner in the subsidiary partnerships and, as such, are liable for all recourse debt of the Partnership to the extent not paid by the partnerships. In the opinion of management, we do not anticipate any losses as a result of our obligations as general partner. We have entered into percentage leases relating to 14 hotels with HHMLP. Each percentage lease has an initial non-cancelable term of five years. All, but not less than all, of the percentage leases for these 14 hotels 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 these hotels for an additional five-year term. Pursuant to the terms of the percentage leases, the Lessee is required to pay initial fixed rent, base rent or percentage rent and certain other additional charges and is entitled to all profits from the operations of the hotels after the payment of certain specified operating expenses. We have future lease commitments from HHMLP through November 2007 and with Noble through May 2003. Minimum future rental income under these non-cancellable operating leases at December 31, 2002, is as follows: 2003 $ 7,715 2004 4,049 2005 2,759 2006 1,821 2007 1,489 Thereafter 561 ---------- TOTAL $ 18,394 ========== 57 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [6] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED] We have entered into percentage leases relating to 4 hotels with Noble. Each percentage lease has an initial non-cancelable term of three years. All, but not less than all, of the Percentage Leases for these 4 hotels may be extended for an additional three-year term at Noble's option. At the end of the first extended term, we or Noble may extend all, but not less than all, of the Percentage Leases for these hotels for an additional three-year term. Pursuant to the terms of the Percentage Leases, Noble is required to pay initial fixed rent or percentage rent and certain other additional charges and is entitled to all profits from the operations of the hotels after the payment of certain specified operating expenses. For the year ended December 31, 2002 we earned initial fixed rents of $6,510 and earned percentage rents of $8,252. For the year ended December 31, 2001 we earned initial fixed rents of $7,203 and earned percentage rents of $6,698. We have acquired five hotels, since the commencement of operations, for prices that will be adjusted at a future date. We have acquired, and expect to acquire in the future, from affiliates of certain of our executive officers and trustees, newly-developed or newly-renovated hotels that do not have an operating history that would allow us to make purchase price decisions based on historical performance. In buying these hotels we have utilized, and expect to continue to utilize, a "re-pricing" methodology that, in effect, adjusts the initial purchase price for the hotel after we initially purchased the hotel, based on the actual operating performance of the hotel during the previous twelve months. All purchase price adjustments are approved by a majority of our independent trustees. The initial purchase price for each of these hotels was based upon management's projections of the hotel's performance following our purchase. The leases for these hotels provide for fixed initial rent during the adjustment period that provides us with a 12% annual yield on the initial purchase price, net of certain expenses. At the end of repricing period, we calculate a value for the hotel, based on the actual net income during the previous twelve months, net of certain expenses, such that it would have yielded a 12% return. We then apply the percentage rent formula to the hotel's historical revenues for the previous twelve months on a pro forma basis. If the pro forma percentage rent formula would not have yielded a pro forma annual return to us of 11.5% to 12.5% based on this calculated value, this value is adjusted either upward or downward to produce a pro forma return of either 11.5% or 12.5%, as applicable. If this final purchase price is higher than the initial purchase price, then the seller of the hotel will receive consideration in an amount equal to the increase in price. If the final purchase price is lower than the initial purchase price, then the sellers of the hotel will return to us consideration in an amount equal to the difference. Any purchase price adjustment will be made either in operating partnership units or cash as determined by our Board of Trustees, including the independent trustees. Any operating partnership units issued by us or returned to us as a result of the purchase price adjustment historically have been valued at $6.00 per unit. Any future adjustments will be based upon a value per unit approved by our Board of Trustees, including our independent trustees. The sellers are entitled to receive quarterly distributions on the operating partnership units prior to the units being returned to us in connection with a downward purchase price adjustment. 58 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [6] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED] We have entered into an Administrative Services Agreement with HHMLP for HHMLP to provide accounting and securities reporting services to us. The terms of the agreement provide for a fixed annual fee of $80,000 with an additional fee of $10,000 per property per year (pro-rated from the time of acquisition) for each hotel added to our portfolio. Based upon the revised 11.5% to 12.5% pricing methodology, the administrative services agreement was reduced by $75,000 per year as of January 1, 2001. For the years ending December 31, 2002, 2001 and 2000, we incurred administrative services fee expenses of $175, $134 and $243 for the years ended December 31, 2002, 2001 and 2000, respectively. We owed the Lessee, a related party, $303 and $24 for replacement reserve reimbursements and $0 and $39 under the administrative services agreement as of December 31, 2002 and 2001, respectively. We leased a parcel of real estate to Mr. Hasu P. Shah for a nominal amount during 2001. We leased one parcel of real estate from the Hersha Affiliates for an aggregate annual rental of $13 during the year ended December 31, 2001. We did not incur any related party lease expense in 2002. We paid to Mr. Jay H. Shah, son of Mr. Hasu P. Shah, certain legal fees aggregating $60 and $43 during the years ended December 31, 2002 and 2001, respectively. Of this amount $28 and $10 was capitalized as Settlement costs, respectively. We have approved the lending of up to $3,000 to the Hersha Affiliates to construct hotels and related improvements on specific hotel projects. As of December 31, 2002 and 2001, the Hersha Affiliates owed us $1,000 and $1,800 related to this borrowing. The Hersha Affiliates have borrowed this money from us at an interest rate of 12.0% per annum. Interest income from these advances was $206 and $154 for the year ended December 31, 2002 and 2001, respectively. Our Due from Related Party balance was $1,130 and $1,884 as of December 31, 2002 and 2001, respectively. The December 31, 2002 balance consisted primarily of $1,000 of development line funding, as mentioned above. The remainder of the balance of approximately $130 consisted primarily of outstanding payments related to property acquisitions and dispositions between the related parties and interest receivable. The December 31, 2001 balance consisted primarily of $1,800 of development line funding, as mentioned above. The remainder of the balance of approximately $84 consisted primarily of outstanding payments related to property acquisitions and dispositions between the related parties and interest receivable. We have entered into an option agreement with the Hersha Affiliates that provides us the right to purchase any hotel owned or developed in the future by these individuals or entities that are within fifteen miles of any of our currently owned hotels or any hotel subsequently acquired by us. This option is in place for two years after the acquisition or development of a hotel by the Hersha Affiliates. Of the 14 hotel properties purchased since our initial public offering, six of the hotels have been purchased under this option agreement. 59 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [7] STOCK OPTION PLANS [A] Prior to the initial public offering, we adopted the Option Plan. The Option Plan is administered by the Compensation Committee of the Board of Trustees, or its delegate. Our officers and other employees generally are eligible to participate in the Option Plan. The administrator of the plan selects the individuals who participate in the Option Plan. The Option Plan authorizes the issuance of options to purchase up to 650,000 Class B Common Shares and subordinated units. The Option 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, and (ii) options not intended to so qualify. Options under the Option Plan may be awarded by the administrator of the Option Plan, 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) we obtain 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. In January 1999, we issued options to purchase 500,000 Class B common shares and units under the Option Plan with an exercise price of $6.00, subject to the price restrictions mentioned above. Of these, 300,000 were issued to two of our Trustees for the express purpose of facilitating the HHMLP Share Appreciation Rights Plan (the "HHMLP SAR Plan"). Participants in the HHMLP SAR Plan are not our employees. We therefore accounted for the option issuance within the scope of SFAS 123. No compensation cost was recorded on the grant date of the options based on the provisions of that fair value based method. [B] Prior to the initial public offering, the Board of Trustees also 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 or our securities, the issuance of equivalent amounts of such security and options to purchase such security into which the Class B Common Shares are converted. Under the Trustees' Plan, we granted a nonqualified option for Class B Common Shares to our independent Trustees who were members of the Board on the effective date of the initial public offering. The exercise price of each such option is 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) we obtain 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. 60 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [7] STOCK OPTION PLANS [CONTINUED] 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 Securities Exchange Act of 1934, as amended, as that section and the 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). In January 1999, we issued options to purchase 34,000 Class B Common Shares under the Trustees' Plan with an exercise price of $6.00, subject to the price restrictions mentioned above. The following table summarizes information about stock options at December 31, 2002:
OUTSTANDING EXERCISABLE ----------------------------------- ------------------------ WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE REMAINING EXERCISE EXERCISE PRICE SHARES CONTRACTUAL LIFE PRICE SHARES PRICE - --------- ------- ---------------- ----------------- ------ ---------------- 6.00 534,000 1.08 $ 6.00 - -
The number of shares available at December 31, 2002 and 2001 for granting of options was 316,000. [8] DISCONTINUED OPERATIONS During 2002, we adopted the provisions of FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." On February 27, 2002, the Board of Trustees approved the sale of the Sleep Inn, Corapolis, Pennsylvania to some of our executive officers, trustees and their affiliates for $5,500, including the assumption of approximately $3,500 in indebtedness and the cancellation of 327,038 limited partnership units valued at approximately $2,000. We initially purchased this property from these executive officers, trustees and their affiliates as of October 1, 2000 for $5,500 including 327,038 limited partnership units. This transaction has been accounted for as of January 1, 2002. We did not recognize any gain or loss on the sale of this asset. On September 26, 2002, we sold the Clarion Suites, Philadelphia, PA to a third party for $6,300 less transfer costs that are estimated at $103. In order to complete the sale of this hotel, the Company is currently carrying $200 of seller financing that is due and payable on October 1, 2003. This financing was completed at an interest rate of 10%. The remaining proceeds from the sale were utilized to payoff $5,997 of the Company's line of credit balance. At the date of sale, the Company had $228 of goodwill associated with the property. We recognized a gain of $469 in the third quarter of 2002 on the sale of the property. 61 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [8] DISCONTINUED OPERATIONS [CONTINUED] The results of the operations from these hotels are classified as discontinued operations in the accompanying consolidated statements of operations for the year ended December 31, 2002. The previously reported 2001 and 2000 results of operations have been reclassified to reflect the classification of these hotels as discontinued operations. The following table sets forth the components of discontinued operations for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000 ----- ------ ------ Percentage Lease Revenue $ 528 $1,542 $1,200 Interest Expense 178 653 570 Property Taxes and Insurance 83 232 121 General and Administrative 8 20 13 Depreciation and Amortization 218 579 385 ----- ------ ------ INCOME FROM DISCONTINUING OPERATIONS $ 41 $ 58 $ 112 ===== ====== ======
[9] EARNINGS PER SHARE
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2000 ------------- ------------- ------------- Income before Minority Interest and Discontinued Operations $ 4,040 $ 3,118 $ 2,643 Add: Gain on Sale of Discontinued Operations 449 - - Add: Income from Discontinued Operations 41 58 112 Less: Minority Interest 3,238 2,342 1,908 ------------- ------------- ------------- NET INCOME FOR BASIC & DILUTED EARNINGS PER SHARE $ 1,292 $ 834 $ 847 - ------------------------------------------------- ============= ============= ============= Weighted Average Shares for Basic & Diluted Earnings Per Share 2,519,820 2,275,000 2,275,000
Options to purchase 534,000 shares of Class B common shares for each of the years ending December 31, 2002, 2001 and 2000, respectively, were outstanding but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. 62 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [9] EARNINGS PER SHARE [CONTINUED] Additionally, limited partnership units convertible into 5,099,722, 5,071,840 and 4,440,996 common shares on December 31, 2002, 2001 and 2000, respectively, as well as income allocated to these units of approximately $3,238, $2,342 and $1,908 for the years then ended were not included in the computation of diluted earnings per share as the effect would have been antidilutive. [10] CAPITAL STOCK The Priority Class A Common Shares have priority as to the payment of dividends until dividends equal $0.18 per share on a quarterly basis and participate equally in additional dividends after the Class B Common Shares have received $.18 per share in each quarterly period. The Priority Class A Common Shares carry a liquidation preference of $6.00 per share plus unpaid dividends and vote with the Class B Common Shares on a one vote per share basis. The priority period of the Class A Shares commenced on the date of the closing of the initial public offering and ends 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 closing bid price of the Priority Common Shares is at least $7 on each trading day during such 15-day period. Pursuant to the Hersha Hospitality Limited Partnership Agreement, the limited partners have certain redemption rights that enable them to cause the Partnership to redeem their units of limited partnership interest in exchange for Class B Common Shares or for cash at our election. There have never been any Class B Common Shares outstanding since our initial public offering on January 26, 1999. The conversion features of the Class B Common Shares into Priority Class A Common Shares are exactly the same as the conversion features of the Hersha Hospitality Limited Partnership (HHLP) Units into Priority Class A Common Shares. The Class B Common Shares are convertible into Priority Class A Common Shares upon the expiration of the Priority Period at follows: (i) five years after the initial public offering of the Priority Common Shares, or (ii) the date that is 15 trading days after the closing bid price of the Priority Common Shares is at least $7 on each trading day during such 15-day period. In the event the Class B Common Shares are converted into Priority Class A Common Shares prior to redemption of the units, the units will be redeemable by the Company for Priority Class A Common Shares. If we do not exercise our option to redeem the units for Class B Common Shares, then the limited partner may make a written demand that we redeem the units for Class B Common Shares. At December 31, 2002 and 2001, the aggregate number of Class B Common Shares issuable to the limited partners upon exercise of the redemption rights is 5,099,722 and 5,093,220, respectively. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidation or similar pro rata share transactions, that otherwise would have the effect of diluting the ownership interest of the limited partners or our shareholders. The Company's common shares are duly authorized, fully paid and non-assessable. Common shareholders are entitled to receive dividends if and when authorized and declared by the Board of Trustees of the Company out of assets legally available and to share ratably in the assets of the Company legally available for distribution to its shareholders in the event of its liquidation, dissolution or winding up after payment of, or adequate provision for, all known debts and liabilities of the Company. Each outstanding common share entitles the holder to one vote on all matters submitted to a vote of shareholders. See Note 4 for a discussion of the units issued and the redemption rights of minority interest shareholders with respect to 5,099,722 units that are redeemable on a one-for-one basis for shares of Class B Common Shares. None of the units discussed in Note 4 have been redeemed. 63 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [10] CAPITAL STOCK [CONTINUED] The holders of the Priority Common Shares will be entitled to a priority with respect to distributions and amounts payable upon liquidation [the "Priority Rights"] for a period [the "Priority Period"] beginning on January 26, 1999 and ending on the earlier of: (i) the date that is 15 trading days after the Company sends notice to the record holders of the Priority Common Shares that their Priority Rights will terminate in 15 trading days, provided that the closing bid price of the Priority Common Shares is at least $7.00 on each trading day during such 15-day period, or (ii) the fifth anniversary of the closing of the Offering. Upon liquidation of the Partnership during the Priority Period, after payment of, or adequate provision for, debts and obligations of the Partnership, including any partner loans, any remaining assets of the Partnership will be distributed in the following order of priority: (i) first, to us until we have received any unpaid Preferred Return plus an amount equal to $6.00 per Unit held by us, (ii) second, to the Limited Partners in accordance with their respective percentage interests in the Partnership until each Limited Partner has received an amount equal to any unpaid Preferred Return plus $6.00 per Unit held by such Limited Partner, and (iii) finally, to us and the Limited Partners with positive capital accounts. Upon liquidation of the Partnership after the Priority Period, after payment of, or adequate provision for, debts and obligations of the Partnership, including any partner loans, any remaining assets of the Partnership will be distributed to us and the Limited Partners with positive capital accounts in accordance with their respective positive capital account balances. Pursuant to the Partnership Agreement, the Limited Partners will receive the Redemption Rights, which will enable them to cause the Partnership to redeem their interests in the Partnership in exchange for cash or, at the option of the Company, Class B Common Shares on a one-for-one basis. In the event that the Class B Common Shares are converted into Priority Common Shares prior to redemption of the Subordinated Units, such outstanding Subordinated Units will be redeemable for Priority Common Shares. The holders of the Priority Common Shares and the Class B Common Shares have identical voting rights and will vote together as a single class. 64 ================================================================================ HERSHA HOSPITALITY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] ================================================================================ [11] SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ------------------------------ 1ST 2ND 3RD 4TH ------ ------ ------ ------ FISCAL 2002 Total Revenues $2,971 $4,039 $4,505 $2,993 Income Before Minority Interest and Discontinued Operations 314 1,272 1,957 497 Net income 310 308 297 377 Diluted Earnings Per Common Share and Units $ 0.04 $ 0.12 $ 0.12 $ 0.23 ====== ====== ====== ====== FISCAL 2001 Total Revenues $2,792 $3,424 $3,809 $2,520 Income Before Minority Interest 92 775 1,280 971 Net income 116 245 234 239 Diluted Earnings Per Common Share and Units $ 0.02 $ 0.11 $ 0.10 $ 0.14 ====== ====== ====== ====== FISCAL 2000 Total Revenues $2,353 $3,216 $3,687 $3,568 Income Before Minority Interest 322 769 993 671 Net income 294 207 269 77 Diluted Earnings Per Common Share and Units $ 0.05 $ 0.09 $ 0.12 $ 0.11 ====== ====== ====== ======
[12] SUBSEQUENT EVENTS On December 28, 2002 we declared a $0.18 per Class A Common Share dividend and a distribution of $0.18 per limited partnership unit that was paid on January 17, 2003. 65 ================================================================================ HERSHA HOSPITALITY TRUST SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2002 [IN THOUSANDS] ================================================================================
GROSS AMOUNTS AT WHICH COSTS CAPITALIZED CARRIED AT INITIAL COSTS SUBSEQUENT TO ACQUISITION CLOSE OF PERIOD ---------------------- ----------------------------- ----------------------- BUILDINGS AND BUILDINGS AND BUILDINGS AND DECRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL - -------------------- ------------- ------ -------------- ------------- -------------- ------- -------------- ------- Holiday Inn, Harrisburg, PA $ 3,347 $ 412 $ 1,234 $ - $ 3,499 $ 412 $ 3,968 $ 4,380 Holiday Inn Express, New Columbia, PA 1,772 94 2,510 66 665 160 3,175 3,335 Holiday Inn Express, Hershey, PA 4,626 426 2,645 410 3,049 836 5,694 6,530 Doubletree Club Jamaica, NY 8,519 1,550 8,793 - - 1,550 8,793 10,343 HIEXP & Suites, Harrisburg, PA - 213 1,934 81 967 294 2,901 3,195 Comfort Inn, Harrisburg, PA 2,362 - 2,720 214 1,036 214 3,756 3,970 Hampton Inn, Selinsgrove, PA 3,248 157 2,511 93 2,199 250 4,710 4,960 Hampton Inn, Carlisle, PA 3,885 300 3,109 200 2,068 500 5,177 5,677 Hampton Inn, Danville, PA 2,461 300 2,787 99 997 399 3,784 4,183 Hampton Inn, Hershey, PA 5,108 807 5,714 4 85 811 5,799 6,610 Hampton Inn, Newnan, GA 3,313 712 5,504 - - 712 5,504 6,216 Hampton Inn, Peachtree City, GA 2,195 394 3,054 - 8 394 3,062 3,456 Comfort Suites, Duluth, GA 3,189 432 4,343 - 2 432 4,345 4,777 Holiday Inn Express, Duluth, GA 2,645 470 2,912 - 21 470 2,933 3,403 Mainstay Suites Frederick, MD 2,978 262 1,049 171 2,891 433 3,940 4,373 Sleep/Mainstay KOP, PA 6,569 1,133 7,294 - 25 1,133 7,319 8,452 Holiday Inn Express, LI City, NY 5,321 1,500 6,300 - - 1,500 6,300 7,800 ------------- ------ -------------- ------------- -------------- ------- -------------- ------- $ 61,538 $9,162 $ 64,413 $ 1,338 $ 17,512 $10,500 $ 81,160 $91,660 ============= ====== ============== ============= ============== ======= ============== ======= LIFE ACCUMULATED NET UPON WHICH DEPRECIATION BOOK VALUE LATEST INCOME BUILDINGS AND BUILDINGS AND DATE OF STATEMENT IS DECRIPTION IMPROVEMENTS IMPROVEMENTS ACQUISITION COMPUTED - -------------------- -------------- -------------- ----------- ------------ Holiday Inn, Harrisburg, PA $ 941 $ 3,439 12/15/94 15 to 40 Holiday Inn Express, New Columbia, PA 390 2,945 12/01/97 15 to 40 Holiday Inn Express, Hershey, PA 619 5,911 10/01/97 15 to 40 Doubletree Club Jamaica, NY 55 10,288 11/01/02 15 to 40 HIEXP & Suites, Harrisburg, PA 261 2,934 03/06/98 15 to 40 Comfort Inn, Harrisburg, PA 392 3,578 05/15/98 15 to 40 Hampton Inn, Selinsgrove, PA 640 4,320 09/12/96 15 to 40 Hampton Inn, Carlisle, PA 595 5,082 06/01/97 15 to 40 Hampton Inn, Danville, PA 330 3,853 08/28/97 15 to 40 Hampton Inn, Hershey, PA 469 6,141 01/01/00 15 to 40 Hampton Inn, Newnan, GA 373 5,843 04/20/00 15 to 40 Hampton Inn, Peachtree City, GA 208 3,248 04/20/00 15 to 40 Comfort Suites, Duluth, GA 285 4,492 05/19/00 15 to 40 Holiday Inn Express, Duluth, GA 194 3,209 05/19/00 15 to 40 Mainstay Suites Frederick, MD 94 4,279 01/01/02 15 to 40 Sleep/Mainstay KOP, PA 282 8,170 06/01/01 15 to 40 Holiday Inn Express, LI City, NY 184 7,616 11/01/01 15 to 40 -------------- -------------- $ 6,312 $ 85,348 ============== ==============
66 ================================================================================ HERSHA HOSPITALITY TRUST SUBSIDIARIES NOTES TO SCHEDULE III [IN THOUSANDS] ================================================================================
2002 --------------- RECONCILIATION OF REAL ESTATE: Balance at Beginning of Year $ 84,748 Additions During Year 17,209 Deletions During Year 10,797 --------------- Balance at End of Year $ 91,160 =============== RECONCILIATION OF ACCUMULATED DEPRECIATION: Balance at Beginning of Year $ 5,222 Depreciation for the Year 1,823 Accumulated Depreciation on Deletions 733 --------------- Balance at End of Year $ 6,312 =============== The aggregate cost of land, buildings and improvements for federal income tax purposes is approximately $25,104 Depreciation is computed based upon the following useful lives: Buildings and Improvements 15 to 40 years
67 REPORT OF INDEPENDENT AUDITORS To the Partners of Hersha Hospitality Management L.P. New Cumberland, Pennsylvania We have audited the accompanying balance sheets of Hersha Hospitality Management L.P. as of December 31, 2002 and 2001, and the related statements of operations, partners' capital, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hersha Hospitality Management L.P. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. MOORE STEPHENS, P. C. Certified Public Accountants. New York, New York February 28, 2003 68
- ----------------------------------------------------------------------------------- HERSHA HOSPITALITY MANAGEMENT, L.P. BALANCE SHEETS [IN THOUSANDS] - ----------------------------------------------------------------------------------- DECEMBER 31, DECEMBER 31, -------------- -------------- CURRENT ASSETS: 2002 2001 -------------- -------------- Cash and Cash Equivalents $ 217 $ 222 Accounts Receivable, less allowance for doubtful accounts of $100 and $230 at December 31, 2002 and 2001, respectively 775 698 Prepaid Expenses 139 34 Due from Related Party - HHLP 259 63 Due from Related Parties 897 1,097 Other Assets 251 252 -------------- -------------- TOTAL CURRENT ASSETS 2,538 2,366 FRANCHISE LICENSES [NET OF ACCUMULATED AMORTIZATION OF $167 AND $149 AT DECEMBER 31, 2002 AND 2001, RESPECTIVELY] 276 293 CONSTRUCTION IN PROGRESS - 8 PROPERTY AND EQUIPMENT 863 1,079 -------------- -------------- TOTAL ASSETS $ 3,677 $ 3,746 ============== ============== LIABILITIES AND PARTNERS' CAPITAL: CURRENT LIABILITIES: Accounts Payable $ 1,134 $ 1,278 Accrued Expenses 377 268 Other Liabilities 5 - Due to Related Parties 182 310 Lease Payments Payable Related Party - HHLP 2,562 2,376 -------------- -------------- TOTAL CURRENT LIABILITIES 4,260 4,232 COMMITMENTS - - PARTNERS' CAPITAL (583) (486) -------------- -------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 3,677 $ 3,746 ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 69
- -------------------------------------------------------------------------------- HERSHA HOSPITALITY MANAGEMENT, L.P. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 20001 AND 2000 [IN THOUSANDS] - -------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2000 -------------- -------------- -------------- REVENUES FROM HOTEL OPERATIONS Room Revenue $ 24,711 $ 25,560 $ 26,903 Restaurant Revenue 2,445 1,880 1,875 Other revenue 2,782 1,843 1,340 -------------- -------------- -------------- TOTAL REVENUES FROM HOTEL OPERATIONS $ 29,938 $ 29,283 $ 30,118 EXPENSES: Hotel Operating Expenses 10,061 10,373 10,739 Restaurant Operating Expenses 1,971 1,593 1,743 Advertising and Marketing 2,061 2,086 1,754 Bad Debts 13 124 17 Depreciation and Amortization 250 229 192 General and Administrative 4,745 4,708 4,911 General and Admin. - Related Parties 21 126 141 Lease Expense - HHLP 11,433 10,396 9,933 Lease Expense - Other Related Parties - 703 798 -------------- -------------- -------------- TOTAL EXPENSES $ 30,555 $ 30,338 $ 30,228 -------------- -------------- -------------- Loss before Discontinued $ (617) $ (1,055) $ (110) Operations Loss from Discontinued $ (54) $ (49) $ (37) Operations NET LOSS $ (671) $ (1,104) $ (147) ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 70
- -------------------------------------------------------------------------------- HERSHA HOSPITALITY MANAGEMENT, L.P. STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 [IN THOUSANDS] - -------------------------------------------------------------------------------- GENERAL LIMITED PARTNER PARTNERS TOTAL --------- ---------- -------- Partners Capital - December 31, 1999 $ (4) $ 76 $ 72 Net Loss (1) (146) (147) --------- ---------- -------- Partners Capital - December 31, 2000 $ (5) $ (70) $ (75) Capital Contribution 6 710 716 Contributed Franchise Fee Write-Down (23) (23) Net Loss (11) (1,093) (1,104) --------- ---------- -------- Partners Capital - December 31, 2001 $ (10) $ (476) $ (486) Capital Contribution 6 568 574 Net Loss (7) (664) (671) --------- ---------- -------- Partners Capital - December 31, 2002 $ (11) $ (572) $ (583) ========= ========== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 71
- -------------------------------------------------------------------------------- HERSHA HOSPITALITY MANAGEMENT, L.P. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 [IN THOUSANDS] - -------------------------------------------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 2002 2001 2000 -------------- -------------- -------------- OPERATING ACTIVITIES: Net (Loss) $ (671) $ (1,104) $ (147) -------------- -------------- -------------- Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities: Depreciation and Amortization 257 243 207 Allowance for Doubtful Accounts 13 124 - Change in Assets and Liabilities: (Increase) Decrease in: Accounts Receivable (90) 69 (74) Prepaid Expenses (105) (21) 47 Other Assets (20) 27 (97) Due from Related Parties 64 620 (265) Increase (Decrease): Accounts Payable (144) (361) 285 Accounts Payable - Related Party - (60) 30 Lease Payments Payable - HHLP 186 (268) 528 Due to Related Parties (128) (21) (200) Accrued Expenses 109 (182) 18 Other Liabilities 5 (21) 21 -------------- -------------- -------------- Total Adjustments 147 149 500 -------------- -------------- -------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (524) (955) 353 INVESTING ACTIVITIES Purchase Property and Equipment (54) (123) (448) Sale of Property and Equipment - 5 - Purchase of Franchise Licenses (47) (68) - Sale of Franchise Licenses 46 24 (60) -------------- -------------- -------------- NET CASH USED IN INVESTING ACTIVITIES (55) (162) (508) FINANCING ACTIVITIES Capital Contributed by Partners 574 716 - -------------- -------------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 574 716 - NET (DECREASE) IN CASH AND CASH EQUIVALENTS (5) (401) (155) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 222 623 778 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 217 $ 222 $ 623 ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 72 - -------------------------------------------------------------------------------- HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] - -------------------------------------------------------------------------------- [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, principally in the Harrisburg and Central Pennsylvania area, from Hersha Hospitality Limited Partnership ["HHLP" or the "Partnership"]. The Lessee is owned by Mr. Hasu P. Shah and certain affiliates, [the "Hersha Affiliates"], some of whom have ownership interests in the Partnership. We also manage certain other properties owned by the Hersha Affiliates that are not owned by the Partnership. We commenced operations on January 1, 1999 and as of December 31, 2002 leased 14 hotel properties from the Partnership. [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of cash and certain highly liquid investments with a maturity of three months or less when purchased. We have no cash equivalents at December 31, 2002 or 2001. INVENTORIES - Inventories of $36 and $31, consisting primarily of food and beverages and which are included in other assets for the years ended December 31, 2002 and 2001, respectively, are stated at the lower of cost [generally, first-in, first-out] or market. ACCOUNTS RECEIVABLE - We are required to make certain estimates related to the allowances for uncollectible accounts. These estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary. PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation for financial reporting purposes is principally based upon the straight-line method. The estimated lives used to depreciate the property improvements and equipment are as follows: Property Improvements 15 years Furniture Fixtures and Equipment 5 to 7 years Software 3 years Automobiles 3 years FRANCHISE LICENSES - The franchise agreements have lives ranging from 10 to 20 years but may be terminated by either party on certain anniversary dates specified in the agreements. The franchise fees are amortized over their respective franchise lives utilizing the straight-line method. Amortization expense was $48, $41 and $39 for the years ended December 31, 2002, 2001 and 2000, respectively. REVENUE RECOGNITION - Revenue is recognized as earned when services are rendered. INCOME TAXES - As a partnership, we are not subject to federal and state income taxes, however, we must file informational income tax returns and the partners must take their respective portion of the items of income or loss into consideration when filing their respective returns. 73 - -------------------------------------------------------------------------------- HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] - -------------------------------------------------------------------------------- [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject us to concentrations of credit risk include cash and cash equivalents and accounts receivable arising from our normal business activities. We place our cash with high credit quality financial institutions. We do not require collateral to support our financial instruments. At December 31, 2002 and 2001 we did not maintain any monies in financial institutions that exceeded federally insured amounts. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires us 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. ADVERTISING AND MARKETING - Advertising and marketing costs are expensed as incurred and totaled $2,106, $2,155 and $1,856 for the years ended December 31, 2002, 2001 and 2000, respectively. In connection with our franchise agreements, a portion of the franchise fees paid is for marketing services. Payments under these agreements related to marketing services amounted to $530, $549 and $571 for the years ended December 31, 2002, 2001 and 2000, respectively. RECLASSIFICATION - Certain prior year numbers have been reclassified to conform to current year presentation. [3] COMMITMENTS AND RELATED PARTY TRANSACTIONS We have assumed the rights and obligations under the terms of existing franchise licenses relating to the 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. During the years ended December 31, 2002, 2001 and 2000 franchise fees totaling $1,427, $1,454 and $1,612 were charged to general and administrative expenses, respectively. We have entered into percentage leases with HHLP. Each percentage lease has an initial non-cancelable term of five years and may be extended for an additional five-year term at our option. Pursuant to the terms of the percentage leases, we are 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 hotel. The percentage rent for each hotel is comprised of (i) a percentage of room revenues up to a certain threshold amount for each hotel up to which we receive a certain percentage of room revenues as a component of percentage rent, (ii) a percentage of room revenues in excess of the threshold amount, but not more than a certain incentive threshold amount for each hotel in excess of the threshold amount up to which we receive a certain percentage of the room revenues in excess of the threshold amount as a component of percentage rent, (iii) a percentage of room revenues in excess of the incentive threshold amount and (iv) a percentage of revenues other than room revenues. For hotels with limited operating histories, the leases provide for the payment of an initial fixed rent for certain periods as specified in the leases and the greater of base rent or percentage rent thereafter. The leases commenced on January 26, 1999. 74 - -------------------------------------------------------------------------------- HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] - -------------------------------------------------------------------------------- [3] COMMITMENTS AND RELATED PARTY TRANSACTIONS [CONTINUED] Minimum future lease payments due during the non-cancellable portion of the leases as of December 31, 2002 are as follows: 2003 $ 6,770 2004 4,049 2005 2,759 2006 1,821 007 1,489 Thereafter 561 ---------- TOTAL $ 17,449 ========== For the years ended December 31, 2002, 2001 and 2000 we incurred initial fixed rents of $3,710, $4,403 and $6,045 and percentage rents of $8,251, $6,698 and $4,878, respectively. As of December 31, 2002 and 2001 the amount due to the Partnership for lease payments was $2,562 and $2,376, respectively. During the years ended December 31, 2002, 2001 and 2000, we provided for and were reimbursed for capital improvements totaling $1,421, $1,476 and $1,076 to the hotels that are the responsibility of HHLP. As of December 31, 2002 and 2001, $259 and $24, respectively, remain receivable and are recorded as Due from HHLP. We have entered into an Administrative Services Agreement (the "Agreement") with HHLP for us to provide accounting and securities reporting services to them. The terms of the agreement provide for a fixed annual fee of $80,000 with an additional fee of $10,000 per property per year (pro-rated from the time of acquisition) for each hotel added to their portfolio. Based upon a revision in pricing methodology, the administrative services agreement was reduced by $75,000 per year as of January 1, 2001. For the years ended December 31, 2002, 2001 and 2000, we have earned $175, $134 and $243, respectively for the services provided in accordance with the Agreement. These fees are included in Other Revenues. At December 31, 2002 and 2001, $0 and $39, respectively, remains receivable and are recorded as Due from HHLP. We paid to Mr. Jay H. Shah, son of Mr. Hasu P. Shah, certain legal fees aggregating $87, $34 and $39 during the years ended December 31, 2002, 2001 and 2000, respectively. For the years ended December 31, 2002, 2001 and 2000, we paid to Hersha Construction Company $4, $0, and $186, respectively, for construction work related to the renovation of hotel properties. For the years ended December 31, 2002, 2001 and 2000, we paid to Hersha Hotel Supply $925, $957 and $976, respectively, for hotel supplies of which $86 and $0 was in accounts payable at December 31, 2002 and 2001, respectively. These expenses are included in Hotel Operating Expenses and Restaurant Operating Expenses. We provide office space to various related entities. The total rent collected for the years ended December 31, 2002, 2001 and 2000 was $66, $66 and $99, respectively. 75 - -------------------------------------------------------------------------------- HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] - -------------------------------------------------------------------------------- [3] COMMITMENTS AND RELATED PARTY TRANSACTIONS [CONTINUED] During the years ended December 31, 2002, 2001 and 2000, we had advances to related parties of $72, $66 and $950, respectively. These advances were inclusive of repayments from related parties of $128, $685 and $473, respectively. Interest income of $0, $90 and $45, respectively, was recorded on these loans. [4] PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 2002 and 2001:
2002 2001 ------ ------ Property Improvements $ 693 $ 693 Furniture, Fixtures and Equipment 642 752 Software 43 30 Automobiles 119 118 ------ ------ Subtotal 1,497 1,593 Less Accumulated Depreciation 634 514 ------ ------ Total Property and Equipment $ 863 $1,079 ====== ======
Depreciation expense was $209, $202 and $168 for the years ended December 31, 2002, 2001 and 2000, respectively. [5] SHARE APPRECIATION RIGHTS PLAN ["SAR"] We have established a share appreciation rights plan ["SAR"] to provide incentive to our employees to improve the operations of our lessor, HHLP, and to associate our employee's interest with those of HHLP. Officers and employees of our company are eligible to participate in the SAR. The SAR entitles the holder to receive, with respect to each Class B Common Share encompassed by the exercise of such SAR, the amount determined by the administrator and specified in an agreement. A SAR granted under this Plan will be exercisable only if (i) the General Partner of HHLP, Hersha Hospitality Trust, obtains a per share closing price on the Class A Common Shares of $9.00 or higher for 20 consecutive trading days; and (ii) the closing price on the Class A Common Shares for the prior trading day was $9.00 or higher. The maximum period in which a SAR may be exercised shall be determined by the administrator on the date of grant, except that no SAR shall be exercisable after the expiration of five years from the date such SAR is granted. The administrator of the plan, Hersha Hospitality Management, Co. [HHMCO], selects the individuals who participate in the Option Plan. The maximum aggregate number of Class B 76 - -------------------------------------------------------------------------------- HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] - -------------------------------------------------------------------------------- [5] SHARE APPRECIATION RIGHTS PLAN ["SAR"] [CONTINUED] Common Shares with respect to which SARs may be granted under this Plan is 300,000. Hersha Hospitality Trust has issued 300,000 restricted share options for the express purpose of exercising SARs on their respective exercise dates. As of December 31, 2002 and 2001, we have issued 255,150 SARs to our employees, respectively. [6] EMPLOYEE BENEFIT PLANS We sponsor a defined contribution employee benefit plan (the "401K Plan"). Substantially all employees who are age 21 or older and have at least six months of service are eligible to participate in the 401K Plan. Employees may contribute up to 15% of their compensation to the 401K Plan, subject to certain annual limitations. Employer contributions to the 401K Plan are discretionary and we currently do not contribute to the Plan. We do absorb certain administrative expenses related to the maintenance of the 401K Plan. [7] DISCONTINUED OPERATIONS On September 26, 2002, Hersha Hospitality Limited Partnership ("HHLP") sold the Clarion Suites, Philadelphia, PA to a third party owner operator for $6,300 less transfer costs that are estimated at $103. We have terminated the lease with HHLP as of this date without any fees or penalties incurred by either party. Total revenues related to the asset of $1,795 and a loss from discontinued operations of $54 for the year ended December 31, 2002 is included in discontinued operations. Total revenues related to the asset of $2,088 and a loss from discontinued operations of $49 for the year ended December 31, 2001 is included in discontinued operations. Total revenues related to the asset of $2,710 and a loss from discontinued operations of $37 for the year ended December 31, 2000 is included in discontinued operations. [8] NEW AUTHORITATIVE PRONOUNCEMENTS - The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") of the FASB has set forth in EITF Issue No 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also included (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS No. 146 will be effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 had no impact on our results of operations or financial position for 2002. The FASB has issued SFAS No. 147, "Acquisitions of Certain Financial Institutions," which is effective for certain transactions arising on or after October 1, 2002. SFAS No. 147 will have no impact on us. 77 - -------------------------------------------------------------------------------- HERSHA HOSPITALITY MANAGEMENT, L.P. NOTES TO FINANCIAL STATEMENTS, [IN THOUSANDS] - -------------------------------------------------------------------------------- [8] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED] The FASB has issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure requirements of SFAS No. 148. The Company currently accounts for stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, the alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation mandated by SFAS No. 148 are not applicable to us at this time. FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," was issued in November 2002. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We have made the disclosures required by FIN 45. FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," was issued in January 2003. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. We will continue to monitor and evaluate the impact of FIN 46 on our financial statements. [9] FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 2002, financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and loans to related parties. The fair values of these instruments approximate carrying value because of their short-term nature. 78 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 Incorporated herein by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be held on May 28, 2003. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be held on May 28, 2003. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be held on May 28, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to our Annual Meeting of Shareholders to be held on May 28, 2003. ITEM 14. CONTROLS AND PROCEDURES Company management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 as of a date within 90 days of the filing of this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. 79 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements INDEX TO FINANCIAL STATEMENTS HERSHA HOSPITALITY TRUST AND SUBSIDIARIES Report of Independent Auditor. . . . . . . . . . . . . . . . . . . . . 37 Consolidated Balance Sheets as of December 31, 2002 and 2001 . . . . . 38 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . 39 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . 40 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . 41 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 46 Schedule III - Real Estate and Accumulated Depreciation for the year ended December 31, 2002 . . . . . . . . . . . . . . . . . . . . . 65 HERSHA HOSPITALITY MANAGEMENT, L.P. Report of Independent Auditor. . . . . . . . . . . . . . . . . . . . . 67 Balance Sheets as of December 31, 2002 and 2001. . . . . . . . . . . . 68 Statement of Operations for the years ended December 31, 2002,2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Statements of Partners' Capital for the years ended December 31, 2002, 2001 and 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . 72 (b) Reports on Form 8-K A Current Report on Form 8-K was filed by us (i) on October 1, 2002 reporting the acquisition of one hotel property, and (ii) on November 14, 2002 to file the certifications of our Chief Executive Officer and Chief Financial Officer required under Section 906 of the Sarbanes-Oxley Act of 2002. (c) 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 Amended and Restated Agreement of Limited Partnership of Hersha Hospitality Limited Partnership 10.2 Option Agreement dated as of June 3, 1998, among Hasu P. Shah, Jay H. Shah, Neil H, Shah, Bharat C. Mehta, K.D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and the Partnership 80 Exhibit Document - ------- -------- 10.3 Amendment to Option Agreement dated December 4, 1998 10.4 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 10.5 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 10.6 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 10.7 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror 10.8 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 10.9 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 10.10 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 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 10.12 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror 10.13 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 10.14 Contribution Agreement, dated June 3, 1998, between Shree Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror 10.15 Contribution Agreement, dated June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror 10.16 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 10.17 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 10.18 Contribution Agreement, dated June 3, 1998, between Shree Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror 10.19 Contribution Agreement, dated August 11, 1999, between Shree Associates, JSK II Associates, Shreeji Associates, Kunj Associates, Shanti III Associates, Neil H. Shah, David L. Desfor, Manish M. Patni and Shreenathji Enterprises, Ltd., collectively as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 26, 1999) 81 Exhibit Document - ------- -------- 10.20 Contribution Agreement, dated September 1, 1999, between 2844 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on August 26, 1999) 10.21 Purchase Agreement, dated September 1, 1999, between 2544 Associates, as Seller, and 3544 Associates, as Purchaser (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 14, 1999) 10.22 Contribution Agreement, dated January 1, 2000, between 1544 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on March 23, 2000) 10.23 Contribution Agreement, dated January 1, 2000, between 1844 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on March 23, 2000) 10.24 Contribution Agreement, dated January 1, 2000, between 3144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 23, 2000) 10.25 Contribution Agreement, dated October 1, 2000, between 1944 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 9, 2000) 10.26 Purchase Leaseback Agreement entered into as of May 19, 2000 between Hersha Hospitality Limited Partnership and each of Noble Investments Newnan, LLC, Millennium Two Investments Duluth, LLC, Noble Investments RMD, LLC and Embassy Investments Duluth, LLC, entities owned by Noble Investment Group, Ltd. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 5, 2000) 10.27 Form of Ground Lease 10.28 Form of Percentage Lease 10.29 Administrative Services Agreement, dated January 26, 1999, between Hersha Hospitality Trust and Hersha Hospitality Management, L.P. 10.30 Warrant Agreement, dated January 26, 1999, between Anderson & Strudwick, Inc. and Hersha Hospitality Trust 10.31 Warrant Agreement, dated June 3, 1999, between 2744 Associates, L.P. and Hersha Hospitality Limited Partnership 10.32 Hersha Hospitality Trust Option Plan 10.33 Hersha Hospitality Trust Non-Employee Trustees' Option Plan 10.34 Loan and Security Agreement between 1444 Associates and MEPS Associates and Sovereign Bank (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999) 10.35 Note executed by 1444 Associates and MEPS Associates in connection with the Loan and Security Agreement (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999) 10.36 Purchase Agreement, dated December 4, 2001, between Metro Two Hotel, LLC, as Seller, and HHLP Hunters Point, LLC, as Purchaser (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 7, 2001) 10.37 Purchase Agreement, dated December 4, 2001, between Hersha Hospitality Limited Partnership, as Seller, and Riverfront Hotel Associates, as Purchaser (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on December 7, 2001) 82 Exhibit Document - ------- -------- 10.38 Contribution Agreement, dated December 4, 2001, between Hersha Hospitality Limited Partnership and Hersha Hospitality, LLC, as Contributors, and Shree Associates, JSK II Associates, Shreeji Associates, Kunj Associates, Shanti III Associates, Devi Associates, Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as Acquirors (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed on December 7, 2001) 10.39 Contribution Agreement, dated December 4, 2001, between Hersha Hospitality Limited Partnership and Hersha Hospitality, LLC, as Contributors, and Shree Associates, JSK II Associates, Shreeji Associates, Kunj Associates, Shanti III Associates, Devi Associates, Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as Acquirors (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed on December 7, 2001) 10.40 Contribution Agreement, dated as of October 1, 2002 between Shree Associates, JSK II Associates, Shreeji Associates, Kunj Associates, Shanti III Associates, Devi Associates, Neil H. Shah, David L. Desfor, Madhusudan I. Patni and Shreenathji Enterprises, Ltd. as Contributors, and Hersha Hospitality Limited Partnership, a Virginia limited partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 15, 2002) 21.1* Subsidiaries of the Registrant 23.1* Consent of Moore Stephens, P.C. 99.1* Certification of Chief Executive Officer 99.2* Certification of Chief Financial Officer
- --------------- * Filed herewith (d) Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2001 included in Item 8 on page 66 hereof. 83 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 March 31, 2003 /s/ Hasu P. Shah --------------------------- Hasu P. Shah Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - -------------------------- --------------------------------------- -------------- /s/Hasu P. Shah Chairman of the Board and Chief March 31, 2003 - -------------------------- Executive Officer (Principal Executive Hasu P. Shah Officer) /s/Thomas S. Capello Trustee March 31, 2003 - -------------------------- Thomas S. Capello /s/L. McCarthy Downs, III Trustee March 31, 2003 - -------------------------- L. McCarthy Downs, III /s/Donald J. Landry Trustee March 31, 2003 - -------------------------- Donald J. Landry /s/William Lehr, Jr. Trustee March 31, 2003 - -------------------------- William Lehr, Jr. /s/Michael A. Leven Trustee March 31, 2003 - -------------------------- Michael A. Leven /s/K.D. Patel Trustee March 31, 2003 - -------------------------- K.D. Patel /s/Ashish R. Parikh Chief Financial Officer (Principal March 31, 2003 - -------------------------- Financial Officer) Ashish R. Parikh /s/David Desfor Controller (Principal Accounting March 31, 2003 - -------------------------- Officer) David Desfor
84 CERTIFICATION I, Hasu P. Shah, certify that: 1. I have reviewed this annual report on Form 10-K of Hersha Hospitality Trust; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have; a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Hasu P. Shah ------------------------------------------------- Chairman of the Board and Chief Executive Officer CERTIFICATION I, Ashish R. Parikh, certify that: 1. I have reviewed this annual report on Form 10-K of Hersha Hospitality Trust; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have; a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Ashish R. Parikh ----------------------------------- Chief Financial Officer List of 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 Amended and Restated Agreement of Limited Partnership of Hersha Hospitality Limited Partnership 10.2 Option Agreement dated as of June 3, 1998, among Hasu P. Shah, Jay H. Shah, Neil H, Shah, Bharat C. Mehta, K.D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and the Partnership 10.3 Amendment to Option Agreement dated December 4, 1998 10.4 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 10.5 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 10.6 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 10.7 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror 10.8 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 10.9 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 10.10 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 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 10.12 Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror 10.13 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 10.14 Contribution Agreement, dated June 3, 1998, between Shree Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror 10.15 Contribution Agreement, dated June 3, 1998, between 2144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror Exhibit Document - ------- -------- 10.16 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 10.17 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 10.18 Contribution Agreement, dated June 3, 1998, between Shree Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror 10.19 Contribution Agreement, dated August 11, 1999, between Shree Associates, JSK II Associates, Shreeji Associates, Kunj Associates, Shanti III Associates, Neil H. Shah, David L. Desfor, Manish M. Patni and Shreenathji Enterprises, Ltd., collectively as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 26, 1999) 10.20 Contribution Agreement, dated September 1, 1999, between 2844 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on August 26, 1999) 10.21 Purchase Agreement, dated September 1, 1999, between 2544 Associates, as Seller, and 3544 Associates, as Purchaser (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 14, 1999) 10.22 Contribution Agreement, dated January 1, 2000, between 1544 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on March 23, 2000) 10.23 Contribution Agreement, dated January 1, 2000, between 1844 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on March 23, 2000) 10.24 Contribution Agreement, dated January 1, 2000, between 3144 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 23, 2000) 10.25 Contribution Agreement, dated October 1, 2000, between 1944 Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 9, 2000) 10.26 Purchase Leaseback Agreement entered into as of May 19, 2000 between Hersha Hospitality Limited Partnership and each of Noble Investments Newnan, LLC, Millennium Two Investments Duluth, LLC, Noble Investments RMD, LLC and Embassy Investments Duluth, LLC, entities owned by Noble Investment Group, Ltd. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 5, 2000) 10.27 Form of Ground Lease 10.28 Form of Percentage Lease 10.29 Administrative Services Agreement, dated January 26, 1999, between Hersha Hospitality Trust and Hersha Hospitality Management, L.P. 10.30 Warrant Agreement, dated January 26, 1999, between Anderson & Strudwick, Inc. and Hersha Hospitality Trust 10.31 Warrant Agreement, dated June 3, 1999, between 2744 Associates, L.P. and Hersha Hospitality Limited Partnership 10.32 Hersha Hospitality Trust Option Plan 10.33 Hersha Hospitality Trust Non-Employee Trustees' Option Plan 10.34 Loan and Security Agreement between 1444 Associates and MEPS Associates and Sovereign Bank (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999) Exhibit Document - ------- -------- 10.35 Note executed by 1444 Associates and MEPS Associates in connection with the Loan and Security Agreement (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999) 10.36 Purchase Agreement, dated December 4, 2001, between Metro Two Hotel, LLC, as Seller, and HHLP Hunters Point, LLC, as Purchaser (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 7, 2001) 10.37 Purchase Agreement, dated December 4, 2001, between Hersha Hospitality Limited Partnership, as Seller, and Riverfront Hotel Associates, as Purchaser (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on December 7, 2001) 10.38 Contribution Agreement, dated December 4, 2001, between Hersha Hospitality Limited Partnership and Hersha Hospitality, LLC, as Contributors, and Shree Associates, JSK II Associates, Shreeji Associates, Kunj Associates, Shanti III Associates, Devi Associates, Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as Acquirors (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed on December 7, 2001) 10.39 Contribution Agreement, dated December 4, 2001, between Hersha Hospitality Limited Partnership and Hersha Hospitality, LLC, as Contributors, and Shree Associates, JSK II Associates, Shreeji Associates, Kunj Associates, Shanti III Associates, Devi Associates, Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as Acquirors (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed on December 7, 2001) 10.40 Contribution Agreement, dated as of October 1, 2002 between Shree Associates, JSK II Associates, Shreeji Associates, Kunj Associates, Shanti III Associates, Devi Associates, Neil H. Shah, David L. Desfor, Madhusudan I. Patni and Shreenathji Enterprises, Ltd. as Contributors, and Hersha Hospitality Limited Partnership, a Virginia limited partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 15, 2002) 21.1* Subsidiaries of the Registrant 23.1* Consent of Moore Stephens, P.C. 99.1* Certification of Chief Executive Officer 99.2* Certification of Chief Financial Officer
- --------------- * Filed herewith. EX-21.1 3 doc2.txt Exhibit 21.1 ------------ SUBSIDIARIES OF THE REGISTRANT: 1. 844 Associates, a Pennsylvania limited partnership 2. 944 Associates, a Pennsylvania limited partnership 3. 1244 Associates, a Pennsylvania limited partnership 4. 1444 Associates, a Pennsylvania limited partnership 5. MEPS Associates, a Pennsylvania limited partnership 6. 1644 Associates, a Pennsylvania limited partnership 7. 2244 Associates, a Pennsylvania limited partnership 8. 3444 Associates, a Pennsylvania limited partnership 9. 1544 Associate, a Pennsylvania limited partnership 10. 1844 Associates, a Pennsylvania limited partnership 11. 3144 Associates, a Pennsylvania limited partnership 12. 2844 Associates, a Pennsylvania limited partnership 13. Hersha Hospitality Limited Partnership, a Virginia limited partnership 14. 3144 Associates, a Pennsylvania limited partnership 15. 5644 Duluth I Associates, a Pennsylvania limited partnership 16. 5744 Duluth II Associates, a Pennsylvania limited partnership EX-23.1 4 doc3.txt Exhibit 23.1 ------------ CONSENT OF INDEPENDENT AUDITOR ------------------------------ We consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-82666) and related prospectus pertaining to the Dividend Reinvestment Plan of Hersha Hospitality Trust and Subsidiaries ("HHT") of our reports dated February 28, 2003, with respect to the financial statements and financial statement schedule of HHT and Hersha Hospitality Management LP included in this Annual Report on Form 10-K for the year ended December 31, 2002. MOORE STEPHENS, P.C. Certified Public Accountants New York, New York March 28, 2003 EX-99.1 5 doc4.txt Exhibit 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Hasu P. Shah, Chairman of the Board and Chief Executive Officer of Hersha Hospitality Trust, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Hersha Hospitality Trust on Form 10-K for the year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and result of operations of Hersha Hospitality Trust. March 31, 2003 By: /s/ Hasu P. Shah -------------------------------- Name: Hasu P. Shah Title: Chairman of the Board and Chief Executive Officer This certificate is being submitted in accordance with the procedure provided in Section III of SEC Release No. 33-8212, 34-47551, IC-25967 (March 21, 2003) for treatment as a document 'accompanying' the Annual Report on Form 10-K to which it is attached and not as a document 'filed' as a part of such Annual Report. This certificate shall not be deemed incorporated by reference into any of Hersha Hospitality Trust's Securities Act registration statements. A signed original of this written statement required by Section Sec. 906 has been provided to Hersha Hospitality Trust and will be retained by Hersha Hospitality Trust and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 6 doc5.txt Exhibit 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Ashish R. Parikh, Chief Financial Officer of Hersha Hospitality Trust, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Hersha Hospitality Trust on Form 10-K for the year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Form 10-K fairly presents, in all material respects, the financial condition and result of operations of Hersha Hospitality Trust. March 31, 2003 By: /s/ Ashish R. Parikh -------------------------------- Name: Ashish R. Parikh Title: Chief Financial Officer This certificate is being submitted in accordance with the procedure provided in Section III of SEC Release No. 33-8212, 34-47551, IC-25967 (March 21, 2003) for treatment as a document 'accompanying' the Annual Report on Form 10-K to which it is attached and not as a document 'filed' as a part of such Annual Report. This certificate shall not be deemed incorporated by reference into any of Hersha Hospitality Trust's Securities Act registration statements. A signed original of this written statement required by Section Sec. 906 has been provided to Hersha Hospitality Trust and will be retained by Hersha Hospitality Trust and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----