-----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, S3bYdPR0dhpJZH3o6HHMSmlJtLo/ZcpvHiLwoKy7E1rx8u2hz27TDliwKLc/sbwS H9Y9Qhx0xITsliV/SZgFdg== 0000908737-98-000411.txt : 19980417 0000908737-98-000411.hdr.sgml : 19980417 ACCESSION NUMBER: 0000908737-98-000411 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980415 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980416 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOSPITALITY PROPERTIES TRUST CENTRAL INDEX KEY: 0000945394 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043262075 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11527 FILM NUMBER: 98595452 BUSINESS ADDRESS: STREET 1: 400 CENTRE ST CITY: NEWTON STATE: MA ZIP: 02158 BUSINESS PHONE: 6179648389 MAIL ADDRESS: STREET 1: 400 CENTRE STREET CITY: NEWTON STATE: MA ZIP: 02158 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): April 15, 1998 HOSPITALITY PROPERTIES TRUST (Exact name of registrant as specified in charter) Maryland 1-11527 04-3262075 (State of other (Commission file (IRS employer jurisdiction of number) identification no.) incorporation) 400 Centre Street, Newton, Massachusetts 02158 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: 617-964-8389 THIS CURRENT REPORT CONTAINS FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED OR PROJECTED. INVESTORS ARE CUATIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE REGISTRANT UNDERTAKES NO OBLIGATION TO PUBLISH REVISED FORWARD-LOOKING STATEMENTS TO REFELCT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. Item 5. Other Events (a) NEW CREDIT FACILITY As previously reported, the Company entered into a Revolving Credit Agreement (the "Credit Agreement") dated as of March 19, 1998, with Dresdner Bank AG, New York Branch and Grand Cayman Branch, as agent for itself and the other lenders under such agreement, providing for an unsecured revolving credit facility (the "Credit Facility") of up to $250,000,000. The Company concurrently terminated its $200,000,000 secured revolving credit agreement with DLJ Mortgage Capital, Inc. Borrowings under the Credit Facility may be used to finance the purchase of hotels and for general business purposes. The Credit Facility terminates on March 19, 2002, which is the maturity date for any loans thereunder. Loans under the Credit Facility bear interest at an annual rate equal, at the option of the Company, to a base lending rate or LIBOR, in each case plus a spread based on the rating, if any, of the Company's senior unsecured debt by certain rating agencies or on the ratio of the Company's indebtedness to the value of certain of its assets. As of the closing of the Credit Facility, the spread on base rate loans was 0% and the spread on LIBOR loans was 1.125%. The Credit Agreement contains various customary conditions precedent to borrowings, and requires that the Company comply with certain financial tests and maintain certain financial ratios, including, without limitation, a requirement that the value of a designated unencumbered pool of qualified hotels be at least 200% times the outstanding borrowings under the Credit Facility and certain other debt. All subsidiaries of the Company that own hotels included in such unencumbered pool are required to be guarantors of the Credit Facility. The Credit Agreement contains a number of other covenants applicable to the Company and its subsidiaries, including limitations on the incurrence of certain indebtedness, liens, guaranties, dividends while the Company is in default under the Credit Facility or in amounts in excess of 100% of cash available for distribution or 95% of adjusted consolidated net income, investments, transactions with affiliates, negative pledges, certain mergers and dispositions of assets, and certain amendments of the Company's Declaration of Trust and certain other material agreements. The Credit Agreement includes various events of default including, payment and covenant defaults, material inaccuracy of material representations and warranties, dissolution, bankruptcy or insolvency of the Company, death of both of the Managing Trustees of the Company or their failure collectively to continue to hold, directly or indirectly, certain levels of voting shares of the Company, cross-defaults 2 to debt in excess of $10,000,000, invalidity of the loan documents, undischarged judgments in excess of $10,000,000, termination of the Advisory Agreement between the Company and REIT Management & Research, Inc., and the Company's failure to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended. The foregoing summary of certain material provisions of the Credit Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Credit Agreement, a copy of which has been filed as an exhibit to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1997, filed with the Securities and Exchange Commission. (b) ACQUISITION As previously reported, on March 20, 1998 the Company completed an acquisition of certain hotel properties (the "Acquired Properties"), as more fully described in the Company's press release included as Exhibit 99 to this Report. Financial statements of the acquired properties are included herein as indicated on the index on page F-1. The Company's investment in the Acquired Properties of $240 million amounts to 18.3 % of the Company's total assets as of December 31, 1997. (c) MARRIOTT SPIN OFF AND MERGER. As previously reported, the Company owns or has agreements to acquire 23 hotels which are or will be leased to subsidiaries of Marriott International, Inc. ("Marriott"). Certain obligations due to the Company under these purchase contracts and leases are guaranteed by Marriott. Marriott has reported the completion of a spin-off transaction which resulted, as expected, in the assumption of the guarantee obligations to the Company by the spun-off entity, which also assumed the name Marriott International, Inc. Item 7. Exhibits. 23 Consent of Ernst & Young LLP. 99 March 23, 1998 press release of the Company 3 Index to Combined Financial Statements SC Suites Summerfield Partnerships For the Years ended January 2, 1998, January 3, 1997 and December 29, 1995 Report of Independent Auditors............................................F-2 Combined Financial Statements Balance Sheets............................................................F-3 Statements of Operations..................................................F-5 Statements of Partners' Deficit...........................................F-6 Statements of Cash Flows..................................................F-7 Notes to Combined Financial Statements....................................F-9 F-1 Report of Independent Auditors The Partners SC Suites Summerfield Partnerships We have audited the accompanying combined balance sheets of SC Suites Summerfield Partnerships as of January 2, 1998 and January 3, 1997, and the related combined statements of operations, partners' deficit and cash flows for the three years in the period ended January 2, 1998. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of SC Suites Summerfield Partnerships at January 2, 1998 and January 3, 1997, and the combined results of their operations and their cash flows for the three years in the period ended January 2, 1998 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP February 3, 1998 F-2
SC Suites Summerfield Partnerships Combined Financial Statements Balance Sheets January 2, January 3, 1998 1997 ------------------------------ Assets Current assets: Cash $ 6,880,827 $ 6,247,374 Replacement fund 4,276,132 4,593,116 Accounts receivable 2,505,630 2,069,454 Prepaid expenses and other 458,486 436,887 ------------- ------------- Total current assets 14,121,075 13,346,831 Property and equipment, at cost: Land 41,836,426 41,836,426 Buildings and components 111,788,042 110,470,089 Furniture, fixtures and equipment 42,864,891 41,025,004 Construction in progress -- 1,057,956 ------------- ------------- 196,489,359 194,389,475 Less accumulated depreciation 55,773,815 50,127,841 ------------- ------------- Net property and equipment 140,715,544 144,261,634 Other assets: Organization costs, net of accumulated amortization of $17,881 ($13,674 at January 3, 1997) 3,156 7,363 Deferred loan costs, net of accumulated amortization of $5,204,045 ($4,536,044 at January 3, 1997) 45,792 713,793 Other, net of accumulated amortization of $330,628 ($291,000 at January 3, 1997) 631,552 656,825 Investment in Summerfield Safety Company 792,099 636,847 ------------- ------------- Total other assets 1,472,599 2,014,828 ------------- ------------- Total assets $ 156,309,218 $ 159,623,293 ============= ============= F-3 January 2, January 3, 1998 1997 ------------------------------ Liabilities and partners' deficit Current liabilities: Accounts payable, including $579,745 due to affiliate ($481,472 at January 3, 1997) $ 826,865 $ 765,867 Accrued interest, including $675,404 due to affiliate ($742,542 at January 3, 1997) 1,190,753 1,228,175 Accrued property taxes 420,811 399,066 Accrued payroll and taxes 734,354 490,858 Accrued sales and occupancy taxes 807,378 621,385 Accrued primary incentive management fee 648,164 591,936 Accrued secondary incentive management fee 560,000 383,389 Accrued expenses, including $316,188 due to affiliate ($295,262 at January 3, 1997) 1,361,072 1,359,145 Customer room deposits 194,582 205,310 Other 2,693 3,602 Current portion of obligations under capital lease 154,346 125,906 Current portion of mortgages payable 141,293,979 113,076,391 ------------- ------------- Total current liabilities 148,194,997 119,251,030 Mortgages payable -- 30,558,075 Subordinated loans 24,688,762 24,688,762 Obligations under capital lease 296,409 326,184 Partners' deficit: Partners' capital 12,167,511 19,553,740 Accumulated deficit (29,038,461) (34,754,498) ------------- ------------- Net partners' deficit (16,870,950) (15,200,758) ------------- ------------- Total liabilities and partners' deficit $ 156,309,218 $ 159,623,293 ============= =============
See accompanying notes. F-4
SC Suites Summerfield Partnerships Combined Financial Statements Statements of Operations Year ended ------------------------------------------ January 2, January 3, December 29, 1998 1997 1995 ------------------------------------------ Revenue: Suite revenue $ 63,090,559 $ 58,927,355 $ 53,069,047 Other revenue, net 3,083,887 3,247,174 3,299,434 ------------ ------------ ------------ Total revenue 66,174,446 62,174,529 56,368,481 Operating expenses: Rooms 14,082,497 13,217,647 11,723,034 General and administrative 5,075,212 5,201,529 4,908,423 Sales and promotion 3,598,887 3,483,684 3,445,174 Maintenance 2,605,897 2,631,817 2,463,785 Utilities 2,170,030 2,133,378 2,004,777 ------------ ------------ ------------ Total operating expenses 27,532,523 26,668,055 24,545,193 ------------ ------------ ------------ Gross operating profit 38,641,923 35,506,474 31,823,288 Other expenses: Management, franchise and accounting fees 9,089,626 9,061,316 7,967,447 Property taxes 2,436,628 2,266,391 2,106,128 Insurance 535,212 394,774 392,709 Other 387,694 263,837 289,487 Interest: Mortgage 9,434,545 10,053,244 10,790,323 Subordinated loan 2,575,323 2,624,848 2,575,323 Other 60,035 54,197 427,253 Loss on disposition of property and equipment 240,528 362,528 299,777 Depreciation 7,454,459 7,842,356 7,628,349 Amortization 711,836 799,093 875,704 ------------ ------------ ------------ Total other expenses 32,925,886 33,722,584 33,352,500 ------------ ------------ ------------ Net income (loss) $ 5,716,037 $ 1,783,890 $ (1,529,212) ============ ============ ============
See accompanying notes. F-5
SC Suites Summerfield Partnerships Combined Financial Statements Statements of Partners' Deficit General Partners Limited Partners ----------------------------- ----------------------------- Summerfield SF SC Suites Other Hotel Suites Holding Limited Company Corp. Corporation Partners L.P. Total --------------------------------------------------------------------------- Balance at December 30, 1994 $ (2,779,257) $ (8,620,079) $ (272,681) $ 1,049,866 $(10,622,151) Net loss (1,157,356) (361,260) (10,460) (136) (1,529,212) Contributions 1,785,183 23,802 -- 571,259 2,380,244 Distributions (4,020,489) (14,875) (647) (356,666) (4,392,677) ---------------------------------------------------------------------------- Balance at December 29, 1995 (6,171,919) (8,972,412) (283,788) 1,264,323 (14,163,796) Net income (loss) 1,424,377 (93,289) (16,740) 469,542 1,783,890 Contributions 1,785,182 23,803 -- 571,258 2,380,243 Distributions (4,586,438) (24,576) (47,173) (542,908) (5,201,095) ---------------------------------------------------------------------------- Balance at January 3, 1997 (7,548,798) (9,066,474) (347,701) 1,762,215 (15,200,758) Net income 4,475,180 224,163 67,238 949,456 5,716,037 Contributions 892,591 11,901 -- 285,629 1,190,121 Distributions (7,068,824) (60,292) (353,558) (1,093,676) (8,576,350) ---------------------------------------------------------------------------- Balance at January 2, 1998 $ (9,249,851) $ (8,890,702) $ (634,021) $ 1,903,624 $(16,870,950) ============================================================================
See accompanying notes. F-6
SC Suites Summerfield Partnerships Combined Financial Statements Statements of Cash Flows Year ended ---------------------------------------------- January 2, January 3, December 29, 1998 1997 1995 ----------------------------------------------- Operating activities Net income (loss) $ 5,716,037 $ 1,783,890 $ (1,529,212) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 8,166,295 8,641,449 8,504,053 Loss on disposition of property and equipment 240,528 362,528 299,777 Net change in operating assets and liabilities: Accounts receivable (436,176) (44,389) (153,975) Prepaid expenses and other (21,599) 55,634 (42,883) Accounts payable 60,998 544,919 (10,236) Accrued interest (37,422) (650,465) (564,091) Customer room deposits (10,728) 12,652 99,649 Other accrued expenses 685,091 (251,389) (307,487) Investment in Summerfield Safety Company, net (155,252) (335,085) (301,762) ------------------------------------------- Net cash provided by operating activities 14,207,772 10,119,744 5,993,833 Investing activities Net change in other assets (14,355) (13,780) 1,853,322 Increase in replacement fund (2,886,358) (2,684,379) (2,455,147) Withdrawals from replacement fund 3,203,342 4,412,010 1,496,224 Proceeds from disposition of property and equipment 41,782 43,661 84,238 Additions to property and equipment (4,058,199) (5,133,183) (2,122,901) ------------------------------------------- Net cash used in investing activities (3,713,788) (3,375,671) (1,144,264) Financing activities Payment of mortgage payable (2,340,487) (3,850,243) (3,159,243) Payment of capital lease (133,815) (113,210) (97,343) Capital contributions 1,190,121 2,380,243 2,380,244 Capital distributions (8,576,350) (5,201,095) (4,392,677) ------------------------------------------- Net cash used in financing activities (9,860,531) (6,784,305) (5,269,019) Increase (decrease) in cash and cash equivalents 633,453 (40,232) (419,450) Cash and cash equivalents at beginning of year 6,247,374 6,287,606 6,707,056 ------------------------------------------- Cash and cash equivalents at end of year $ 6,880,827 $ 6,247,374 $ 6,287,606 ===========================================
F-7
SC Suites Summerfield Partnerships Combined Financial Statements Statements of Cash Flows (continued) Year ended ----------------------------------------- January 2, January 3, December 29, 1998 1997 1995 ----------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the year for interest $12,105,688 $13,382,753 $14,356,998 Supplemental disclosure of non-cash activities: Capital lease obligation incurred for equipment $ 132,480 $ 67,280 $ 595,363
Disclosure of accounting policy For purposes of the statements of cash flows, the Partnerships consider cash and cash equivalents to include currency on hand, demand deposits and short-term investments with maturities of three months or less. Cash and cash equivalents do not include the replacement fund consisting primarily of an interest-bearing money market account since these funds are used primarily to replace or acquire capital assets. See accompanying notes. F-8 SC Suites Summerfield Partnerships Combined Financial Statements Notes to Combined Financial Statements Years ended January 2, 1998, January 3, 1997 and December 29, 1995 1. Significant Accounting Policies Organization The accompanying combined financial statements include the accounts of the following limited partnerships under common ownership with each majority-owned by SC Suites Corp.: Atlanta Buckhead Summerfield Associates, L.P. Atlanta Perimeter Summerfield Associates, L.P. Chatsworth Summerfield Associates, L.P. Dulles Summerfield Associates, L.P. Malvern Summerfield Associates, L.P. Orlando/Cypress Pointe Summerfield Associates, L.P. Orlando International Summerfield Associates, L.P. Princeton Summerfield Associates, L.P. San Bruno Summerfield Associates, L.P. San Jose Summerfield Associates, L.P. Schaumburg Summerfield Associates, L.P. Somerset Summerfield Associates, L.P. Sunnyvale Summerfield Associates, L.P. Torrance Summerfield Associates, L.P. Westport Summerfield Associates, L.P. The combined entities will hereinafter collectively be referred to as the Partnerships. All significant inter-partnership accounts and transactions have been eliminated. The Partnerships were formed at various dates ranging from December 19, 1988 to July 18, 1990 to develop, construct and operate all-suite temporary lodging facilities, throughout the country, known as Summerfield Suites Hotels (the Hotels). The Partnerships commenced operations on various dates ranging from September 15, 1989 to October 1, 1993. The original partners (sometimes referred to as Summerfield Partners) included Summerfield Suites Holding Corporation (Holding Corporation) as general partner, and SF Hotel Company, L.P. (SFHC) and various individuals as limited partners. On dates ranging from December 15, 1989 to January 28, 1993, the Partnerships amended and restated their limited partnership agreements (Partnership Agreements), and admitted SC Suites Corp. (SCS) as a general partner. F-9 SC Suites Summerfield Partnerships Combined Financial Statements Notes to Combined Financial Statements Years ended January 2, 1998, January 3, 1997 and December 29, 1995 1. Significant Accounting Policies (continued) Fiscal Year The Partnerships' fiscal year end is the Friday closest to December 31. The Partnerships' fiscal years ended January 2, 1998, January 3, 1997 and December 29, 1995 include 52, 53 and 52 weeks of operations, respectively. Concentration of Credit Risk The Partnerships' financial instruments exposed to concentration of credit risk consist primarily of cash, replacement funds and accounts receivable. The Partnerships provide credit to a large number of individual and corporate customers with no individual customer representing a significant portion of revenues or accounts receivable. The Partnerships do not require collateral or other security against accounts receivable. The Partnerships place their funds into high credit quality financial institutions, and at times, such funds may be in excess of the federal depository insurance limit. Replacement Fund Replacement funds, consisting of interest-bearing money market accounts, are maintained by the Partnerships for the primary purpose of funding the replacement of, and additions to, furniture, fixtures, equipment and other capital assets. An amount equal to 4% of the gross revenues of the Hotels, as defined, is required to be deposited into the replacement funds on an annual basis. Property and Equipment Depreciation is computed using both straight-line and accelerated methods over the estimated useful lives of the related assets. Useful lives are as follows: Buildings and components 31-39 years Furniture, fixtures and equipment 5-15 years Property and equipment include interest costs and property taxes incurred during the construction period as well as loan fees and closing costs directly related to the F-10 SC Suites Summerfield Partnerships Combined Financial Statements Notes to Combined Financial Statements Years ended January 2, 1998, January 3, 1997 and December 29, 1995 1. Significant Accounting Policies (continued) development and construction of the Hotels. Normal repairs and maintenance are charged to expense as incurred; betterments and replacements are capitalized. Deferred Loan Costs Loan fees, closing and other costs incurred in obtaining mortgage financing have been capitalized and are amortized over the term of the mortgages payable. Other Assets Other non-current assets consist primarily of purchased software which is amortized over a three-year period and long-term deposits. Income Taxes The accompanying financial statements do not include a provision for income taxes because the Partnerships are not taxpaying entities. Each partner includes its proportionate share of the Partnerships' taxable income or loss in its individual tax returns. Differences between income or loss reported for financial reporting and income tax purposes primarily result from certain costs capitalized for reporting purposes and expensed for tax purposes and certain costs capitalized for both reporting and tax purposes, but amortized using different methods and useful lives. Financial Instruments The Partnerships' financial instruments consist of cash, replacement fund, accounts receivable and notes payable for which the carrying values approximate fair values. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-11 SC Suites Summerfield Partnerships Combined Financial Statements Notes to Combined Financial Statements Years ended January 2, 1998, January 3, 1997 and December 29, 1995 2. Related Party Transactions The following represents related party expenses incurred during the years ended January 2, 1998, January 3, 1997 and December 29, 1995: Year Ended ----------------------------------------------- January 2, January 3, December 29, Related 1998 1997 1995 Party ----------------------------------------------- Management fees $2,718,573 $2,556,634 $2,326,815 SSMC Primary incentive management fees 2,410,255 2,240,990 1,994,324 SSMC Secondary incentive management fees 3,044,862 3,834,692 3,236,807 SSMC Accounting fees 443,625 429,000 409,501 SSMC Franchise fees 472,311 -- -- SSMC Marketing fees 1,577,263 1,405,431 1,257,727 SSMA Insurance 413,290 284,174 78,165 SSC Management Agreement The Partnerships have entered into separate management agreements with Summerfield Suites Management Company, L.P. (SSMC) to manage and operate the Hotels. As manager and operator, SSMC is to receive a base management fee equal to 4% of gross revenues of the Hotels. In addition, SSMC may receive incentive management fees (IMFs) with two components: (a) the "Primary IMF" and (b) the "Secondary IMF." These fees are equal to 7 1/2% of the net operating profit of the Hotels, as defined. SSMC's right to receive the fees shall be cumulative; however, the payment of the fees is subject to deferral as provided in the agreement. The Primary IMF is accrued as an expense on an annual basis as earned. The Secondary IMF is recorded as an expense in the period prior to which such amounts are expected to be paid or, at the time the Hotels are sold or refinanced, as payment of the Secondary IMF is contingent upon the Hotels attaining certain cash flow objectives. Payment of the Secondary IMF is to be made only after net available cash has been distributed to repay other priority payments as outlined in Note 5. During the years ended January 2, 1998, January 3, 1997 and December 29, 1995, the Partnerships incurred F-12 SC Suites Summerfield Partnerships Combined Financial Statements Notes to Combined Financial Statements Years ended January 2, 1998, January 3, 1997 and December 29, 1995 2. Related Party Transactions (continued) Secondary IMFs of $3,044,862, $3,834,692 and $3,236,807, respectively. At January 2, 1998 and January 3, 1997, SSMC had earned cumulative, unrecorded and unpaid Secondary IMFs of $1,699,329 and $2,333,935 respectively. These Secondary IMFs will be charged to expense in the future when the contingencies for payment have been substantially removed. Franchise Fees During 1997, the Partnerships entered into separate franchise agreements with SSMC which allow them to operate as "Summerfield Suites Hotels." Under the agreements, the Hotels pay SSMC a fee ranging from 1% to 4% of the gross suite revenues. Marketing Fees The Hotels pay a fee equal to 2 1/2% of their gross suite revenues to the Summerfield Suites Marketing Association (SSMA), which is administered by SSMC. SSMA provides general advertising and marketing services for all Summerfield Suites Hotels. Development Agreement Summerfield Suites Development Company, L.C. (SSDC), an affiliate, was responsible for managing the construction of an addition to the San Jose Summerfield Associates, L.P. Hotel (SJSA). For such services, SJSA agreed to pay SSDC a development fee of $117,600. As of January 2, 1998 and January 3, 1997, $117,600 and $88,200 of this fee has been earned and paid, respectively. This amount has been capitalized as property and equipment in the accompanying balance sheets. 3. Mortgages Payable The Partnerships entered into separate loan agreements with various lenders (primary lenders), which provide for maximum borrowings of $151,155,668. Pursuant to the agreements, the Partnerships have several options of selecting interest rates. The rates are defined in the agreements and essentially are determined by the primary lenders' applicable base rates for certificates of deposit, Eurodollar rates and Federal Funds rates. In addition, the Partnerships have the right to convert, from time to time, any portion F-13 SC Suites Summerfield Partnerships Combined Financial Statements Notes to Combined Financial Statements Years ended January 2, 1998, January 3, 1997 and December 29, 1995 3. Mortgages Payable (continued) or all of the loans to fixed rates as determined by the lenders at the time of the individual Partnership's election to convert such loan amounts. The election of interest rates may be for period intervals of one, three, six, or twelve months or three years, with the exception that once a fixed-rate election is effective, it will remain in effect until maturity. Interest (ranging from 6.99% to 7.19% at January 2, 1998, and from 6.45% to 6.52% at January 3, 1997) is payable monthly. The loans have maturities ranging from March 26, 1998 to September 30, 1998, and are secured by substantially all of the Partnerships' assets and contract rights. The Partnerships intend to refinance the full amount of the mortgages payable on a long-term basis during 1998. The Partnerships are currently reviewing various options for such refinancing but have not yet entered into any financing agreements. Accordingly, the mortgages payable balance has been classified in the accompanying balance sheets as a current liability. 4. Subordinated Loans SCS has provided subordinated loans aggregating $24,688,762 to the Partnerships, which remain outstanding at January 2, 1998. The individual Partnership Agreements provide the subordinated loan is repayable solely out of the proceeds of a sale, refinancing or liquidation of the Hotels, and interest payments shall be required only from the Partnerships' net available cash as outlined in Note 5. The subordinated loan agreements, as amended, provide the loans shall bear interest at the greater of the rate equal to the average interest rate accrued on the mortgages payable to the primary lenders (primary interest rate) or the preferred return rate (ranging from 10.0% to 10.5% at January 2, 1998, and January 3, 1997); however, the payment of such interest is subject to two different preference levels based on net available cash. The first level of interest (primary interest) is payable from the first priority of net available cash. The primary interest is generally paid on a monthly basis. The second level of interest (incremental interest), which represents the difference between the primary interest and the preferred return rate, stands behind the Primary IMF in order of payment priority. Interest on the subordinated loans is charged to expense as incurred based on the applicable rate in effect during the period. The subordinated loans are secured by substantially all of the Partnerships' assets and contract rights; however, their lien is subordinate to that of the primary lenders. F-14 5. Distribution to Partners The Partnerships' net available cash, as defined, will be distributed from time to time, generally in the following manner: o First, to pay any accrued and unpaid primary interest on the subordinated loans o next, any accrued and unpaid Primary IMFs o next, any unpaid incremental interest and preferred returns, as defined, o next, any accrued and unpaid interest and principal repayment in connection with special capital loans should they be required o next, any accrued and unpaid Secondary IMFs and o next, pari passu to the partners in proportion to their respective residual percentage interests. In the event of a sale, refinancing or liquidation of the Hotels, the distributions are generally the same as previously described except the unpaid minimum return amounts, subordinated loan amounts and unreturned capital contributions are to be repaid prior to any accrued and unpaid Secondary IMFs and any accrued and unpaid interest and principal repayment in connection with special capital loans. F-15 SC Suites Summerfield Partnerships Combined Financial Statements Notes to Combined Financial Statements Years ended January 2, 1998, January 3, 1997 and December 29, 1995 5. Distribution to Partners (continued) Unpaid and unaccrued minimum returns were as follows:
SC Suites Corp. ---------------------------- Subordinated Summerfield Loan Capital Partners ------------------------------------------ Unpaid and unaccrued minimum returns at December 29, 1995 $ 2,434,505 $ 6,806,900 $ 589,026 Minimum returns 3,011,354 3,976,795 444,729 Interest incurred (2,624,848) -- -- Distributions -- (4,554,539) (253,733) ----------- ----------- ----------- Unpaid and unaccrued minimum returns at January 3, 1997 2,821,011 6,229,156 780,022 Minimum returns 2,954,535 4,090,786 496,361 Interest incurred (2,575,323) -- -- Distributions -- (4,486,906) (370,748) ----------- ----------- ----------- Unpaid and unaccrued minimum returns at January 2, 1998 $ 3,200,223 $ 5,833,036 $ 905,635 =========== =========== ===========
At January 2, 1998 and January 3, 1997, the Partnerships had paid distributions to Summerfield Partners in excess of the minimum return by $1,611,788 and $475,010, respectively. In addition, at January 2, 1998 and January 3, 1997 the Partnerships had paid distributions to SC Suites Corp. in excess of the minimum return by $2,613,817 and $31,899, respectively. 6. Allocation of Income and Loss Income and loss are allocated among the partners in accordance with the provisions of the individual Partnership Agreements. In general, income and loss are allocated based on the respective residual percentage interests of the partners. However, the first priority for the allocation of income is in proportion to, and to the extent of, the amount by which the cumulative allocation of losses previously made to the partners plus certain distributions to the partners, which are in effect distributions of preference returns, exceed the cumulative income previously allocated to the partners. F-16 SC Suites Summerfield Partnerships Combined Financial Statements Notes to Combined Financial Statements Years ended January 2, 1998, January 3, 1997 and December 29, 1995 7. Investment in Summerfield Safety Company Each of the Partnerships are partners in Summerfield Safety Company (SSC). SSC was formed as a means to provide a form of self-funded workers' compensation program for its partners, all of which are direct or indirect affiliates of Summerfield Hotel Corporation (SHC). SSC provides a risk-sharing arrangement for its partners as it is responsible for paying all workers' compensation claims and related expenses for its partners. SSC maintains coverage for losses in excess of $250,000 per occurrence and $850,000 in aggregate. The Partnerships record their pro rata share of the losses incurred by SSC at the end of each four-week accounting period based on their proportionate share of SSC's total capital at the beginning of the measurement period. The losses are in substance expenses related to the management of the Partnerships' workers' compensation risks and, accordingly, are included in operating expenses in the accompanying combined statements of operations. The Partnerships make capital contributions to SSC on a formula basis which is based on the payments the Partnerships would be required to make if they were to be participants in local state workers' compensation pools. At January 2, 1998, and January 3, 1997, the Partnerships' pro rata investment interest in SSC was approximately 49.27% and 59.94%, respectively. An analysis of activity of the Partnerships' combined investment is as follows: January 2, January 3, 1998 1997 --------------------------- Balance at beginning of year $ 636,847 $ 301,762 Contributions 568,542 619,259 Share of loss allocation (413,290) (284,174) --------- --------- Balance at end of year $ 792,099 $ 636,847 ========= ========= The principal assets of SSC at January 2, 1998 and January 3, 1997 were cash and cash equivalents. F-17 SC Suites Summerfield Partnerships Combined Financial Statements Notes to Combined Financial Statements Years ended January 2, 1998, January 3, 1997 and December 29, 1995 8. Capital Leases The Partnerships have entered into agreements to lease certain guest transportation and entertainment equipment recorded as a capital leases. Property and equipment include the following property under capital leases:
January 2, 1998 January 3, 1997 ------------------------------------- Furniture, fixtures and equipment $ 757,779 $ 650,707 Less accumulated depreciation (426,649) (313,056) --------- --------- $ 331,130 $ 337,651 ========= =========
Depreciation expense for the property under capital leases for the years ended January 2, 1998, January 3, 1997 and December 29, 1995 was $132,862, $153,014 and $168,117, respectively. Following is a schedule of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments, as of January 2, 1998: 1998 $193,269 1999 164,908 2000 103,559 2001 57,791 2002 6,000 -------- Total remaining lease payments 525,527 Less amount representing interest 74,772 -------- Present value of net minimum lease payments 450,755 Less current portion 154,346 -------- Obligation under capital lease - noncurrent portion $296,409 ======== F-18 SIGNATURES Pursuant to the requirements 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. HOSPITALITY PROPERTIES TRUST Date: April 15, 1998 By: /s/Thomas M. O'Brien Thomas M. O'Brien, Treasurer and Chief Financial Officer EX-23 2 EXHIBIT 23 Consent of Independent Public Accountants We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-43573) of Hospitality Properties Trust and in the related Prospectus of our report dated February 3, 1998, with respect to the combined financial statements of SC Suites Summerfield Partnerships included in its Current Report on Form 8-K dated April 15, 1998, filed with the Securities and Exchange Commission. /s/Ernst & Young LLP Wichita, Kansas April 15, 1998 EX-99 3 Exhibit 99 March 23, 1998 FOR IMMEDIATE RELEASE For More Information Contact: John G. Murray, President or Thomas M. O'Brien, CFO (617) 964-8389 HPT Acquires 15 Summerfield Suites(R) Hotels for $240 Million Investment ------------------------------------------------------------------ Newton, MA: Hospitality Properties Trust (NYSE:HPT) today announced that it has completed the purchase and lease back of 15 Summerfield Suites(R) hotels from affiliates of Summerfield Hotel Corporation, Inc. ("Summerfield") for approximately $240 million. The 15 hotels contain a total of 1,822 suites (2,766 bedrooms, 1,822 living rooms and fully equipped kitchens) and are located in major metropolitan markets in the following eight states: California (5), Florida (2), Georgia (2), Illinois, Missouri, New Jersey (2), Pennsylvania and Virginia. Summerfield is a privately owned hotel company based in Wichita, KS which currently operates 38 hotels and has another 15 under development. Summerfield Suites(R) hotels are considered upper upscale hotels by Smith Travel Research. In 1997 these 15 hotels achieved an average occupancy of 81% and an average daily rate of $117.22. On average these hotels are only six (6) years old and have recently been fully renovated. These 15 hotels will initially continue to be operated by Summerfield under long-term leases. In a related transaction, Summerfield and Patriot American Hospitality (NYSE:PAH, "Patriot") have signed a definitive agreement under which Patriot will acquire Summerfield in a transaction expected to be completed later this year. Although HPT's acquisition was not contingent on the closing of the Patriot-Summerfield transaction, when and if it does close a Patriot subsidiary will be HPT's tenant and a subsidiary of Wyndham International will be the manager of this portfolio. The minimum rent payable by Summerfield to HPT is $25 million per year. In addition, the lease provides for additional rent equal to a percentage of gross revenue increases at these all suite hotels beginning in 1999. Like all of HPT's leases, the Summerfield lease is structured as a portfolio transaction so that each of the 15 hotels is subject to cross default with each other hotel, renewal options are exercisable on an all or none basis, and required refurbishment reserves may be used on a combined basis. HPT funded these acquisitions using cash on hand and borrowings under its line of credit. John Murray, president of Hospitality Properties Trust, commented: "HPT is pleased to be making this investment in Summerfield Suites(R) hotels and adding Summerfield as a Tenant. Summerfield Suites(R) hotels compete in the upscale, all suite and extended stay segments of the lodging industry and cater to business and leisure travelers. These are high quality, well managed one and two bedroom suite hotels in attractive locations in primary markets. This transaction increases our tenant and geographic diversity, while maintaining the brand strength and transaction structure which sets HPT apart from most other hotel REITs. HPT's hotel portfolio remains among the most modern, high quality grouping of hotels among all hotel REITs. We expect this transaction to have an immediate positive impact on cash available for distribution ("CAD")." HPT is a real estate investment trust headquartered in Newton, MA, which invests in hotels which are leased to unaffiliated hotel operating companies. Including the transaction described herein, HPT has investments and commitments exceeding $1.6 billion in 150 hotels located in 35 states. This press release contains forward looking statements which involve risks and uncertainties. Although HPT believes its expectations are based upon reasonable assumptions, no assurance can be provided that anticipated results will occur. (end) -----END PRIVACY-ENHANCED MESSAGE-----