UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 000-30491
APPLE SUITES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1933472
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
At May 1, 2001, there were outstanding 12,666,678 shares of common stock, no par
value, of the registrant.
APPLE SUITES, INC.
FORM 10-Q
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLE SUITES, INC.
Consolidated Balance Sheets - As of 3
March 31, 2001 and December 31, 2000
Consolidated Statement of Operations - 4
Three months ended March 31, 2001 and
March 31, 2000
Consolidated Statement of Shareholders' 5
Equity - Three months ended March 31, 2001
Consolidated Statement of Cash Flows - 6
Three months ended March 31, 2001 and
March 31, 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 12
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 17
about Market Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings (not applicable).
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities
(not applicable).
Item 4. Submission of Matters to a Vote of
Security Holders (not applicable).
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 19
2
APPLE SUITES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
2001 2000
-------------- --------------
ASSETS
Investment in hotel -net of accumulated depreciation of
$4,486,100 and $3,486,590, respectively $ 123,892,804 $ 124,576,257
Cash and cash equivalents 21,039,709 2,653,058
Restricted cash 104,937 263,686
Rent receivable from Apple Suites Management, Inc. - 1,872,832
Notes and other receivables from Apple Suites Management, Inc. - 1,774,684
Accounts receivable, net 1,671,550 -
Inventories 145,300 -
Capital improvement reserve 1,800,854 504,413
Prepaid expenses 191,100 256,773
Deferred financing costs, net 1,233,555 1,265,107
Deferred franchise fees 628,622 -
Other assets 252,550 907,038
-------------- --------------
Total Assets $ 150,960,981 $ 134,073,848
============== ==============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable-secured $ 49,753,072 $ 57,670,866
Interest payable - 19,988
Accounts payable 70,494 118,576
Accrued expenses 1,889,099 1,451,796
Due to third party manager 536,192 -
Account payable-affiliate 45,147 -
Distributions payable - 1,848,000
-------------- --------------
Total Liabilities 52,294,004 61,109,226
Shareholders' equity
Common stock, no par value, authorized 200,000,000
shares; issued and outstanding 11,496,163 shares and 8,666,348, respectively 100,662,447 75,223,218
Class B convertible stock, no par value, authorized 240,000 shares;
issued and outstanding 240,000 shares 24,000 24,000
Distributions (greater) less than net income (2,019,470) (2,282,596)
-------------- --------------
Total Shareholders' Equity 98,666,977 72,964,622
-------------- --------------
Total Liabilities and Shareholders' Equity $ 150,960,981 $ 134,073,848
============== ==============
See accompanying notes to consolidated financial statements.
3
APPLE SUITES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
March 31, March 31,
2001 2000
------------- ------------
REVENUES:
Suite revenue $ 10,062,514 -
Lease revenue - $ 3,406,678
Other revenue 495,191 -
Interest income 94,039 48,007
------------- ------------
Total revenues 10,651,744 3,454,685
EXPENSES:
Operating expenses 3,083,519 -
Hotel administrative expenses 803,205 -
Advertising and promotion 968,841 -
Utilities 454,896 -
Franchise fees 402,501 -
Management fees 411,060 -
Taxes, insurance and other 383,292 691,575
General and administrative 316,406 254,736
Depreciation of real estate owned 999,510 549,201
Interest 1,170,298 1,453,110
Ground lease 25,000 -
Management termination fees 1,370,090 -
------------- ------------
Total expenses 10,388,618 2,948,622
------------- ------------
Net income $ 263,126 $ 506,063
============= ============
Basic and diluted earnings per common share $ 0.03 $ 0.14
============= ============
See accompanying notes to consolidated financial statements.
4
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Distributions
Common Stock Class B Convertible Stock Greater Total
--------------------------------------------------------
Number Number Than Shareholders'
of Shares Amount of Shares Amount Net Income Equity
--------------------------------------------------------------------------------------------
Balance at December 31, 2000 8,666,348 $ 75,223,218 240,000 $24,000 $(2,282,596) $72,964,622
Net proceeds from the sale of
common shares 2,745,450 24,679,940 - - - 24,679,940
Net income - - - - 263,126 263,126
Common stock issued through
reinvestment of distributions 84,365 759,289 - - - 759,289
--------------------------------------------------------------------------------------------
Balance at March 31, 2001 11,496,163 $100,662,447 240,000 $24,000 $(2,019,470) $98,666,977
============================================================================================
See accompanying notes to consolidated financial statements.
5
APPLE SUITES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
2001 2000
----------------- ------------------
Cash flow from operating activities:
Net income $ 263,126 $ 506,063
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation of real estate owned 999,510 549,201
Amortization of deferred financing costs 34,744 -
Amortization of deferred franchise fees 9,414 -
Management termination fees (non-cash portion) 470,090 -
Changes in operating assets and liabilities
(excluding amounts acquired from Apple Suites
Management, Inc.):
Prepaid expenses 65,673 6,448
Rent and notes receivable from Apple Suites - (509,566)
Management, Inc.
Receivables (550,178) -
Other assets 1,059,212 (31,395)
Accounts payable (199,086) 96,044
Accounts payable-affiliates 45,147 (177,466)
Due to third party manager (164,156) -
Accrued expenses (336,917) (313,691)
Interest payable (19,988) (466,140)
-------------- -----------------
Net cash provided by (used in) operating activities 1,676,591 (340,502)
Cash flow from investing activities:
Cash assumed in the acquisition of Apple Suites 2,793,106 -
Management, Inc.
Net (increase) decrease in cash restricted for Property
and capital improvement reserve held with third party (1,137,692) 326,852
Capital improvements (316,057) (280,532)
Payments received on notes receivable - 13,739
Payments for pending acquisitions (300,000) (200,000)
-------------- ----------------
Net cash provided by (used in) investing activities 1,039,357 (139,941)
Cash flow from financing activities:
Repayment of secured notes payable (7,917,794) -
Payment of financing costs (3,192) -
Net proceeds from issuance of common stock 25,439,229 4,394,265
Cash distributions paid to shareholders (1,847,540) (713,244)
-------------- ----------------
Net cash provided by financing activities 15,670,703 3,681,021
Increase in cash and cash equivalents 18,386,651 3,200,578
Cash and cash equivalents, beginning of period 2,653,058 581,344
------------- ----------------
Cash and cash equivalents, end of period $21,039,709 $3,781,922
============= ================
Supplemental Information:
Non-cash transactions:
Apple Suites Management, Inc. acquisition
Operating assets acquired $ 2,009,431 -
Operating liabilities acquired 5,272,627 -
See accompanying notes to consolidated financial statements.
6
APPLE SUITES, INC
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001
(1) General Information and Summary of Significant Accounting Policies
------------------------------------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of Apple
Suites, Inc, (the "Company") have been prepared in accordance with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information required by generally accepted
accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months
ended March 31, 2001 are not necessarily indicative of the results that may
be expected for the period ended December 31, 2001. These consolidated
financial statements should be read in conjunction with the Company's
December 31, 2000 Annual Report on Form 10-K.
The REIT Modernization Act, effective January 1, 2001, permits REIT's to
establish taxable businesses to conduct certain previously disallowed
business activities. The Act also reduces the REIT distribution
requirement from 95% to 90% of its taxable income.
Effective January 1, 2001 (the effective date for the recently passed REIT
Modernization Act), the Company acquired Apple Suites Management, Inc. and
its subsidiaries (the "Lessee"). In 2000, the Company paid Mr. Glade M.
Knight, the Company's President and Chairman, a deposit of $900,000 in
exchange for all of the issued and outstanding stock of the Lessee. For
financial reporting purposes, the Company recorded the $900,000 of cash
plus the fair value of net liabilities of $470,090 in the Lessee as a
management termination fee (total of $1,370,090) in 2001, as the Lessee's
only business is its lease with the Company. Effective January 1, 2001,
all intercompany transactions, including lease revenue and rental expenses,
between the Company and the Lessee are eliminated in consolidation.
The Company leases to the Lessee all of its hotels acquired to date. Each
hotel is leased by the Company to the Lessee under a master hotel lease
agreement ("Percentage Lease"). The Lessee now operates as a taxable REIT
subsidiary under the same percentage lease agreements in place before the
management termination transaction.
Promus Hotels, Inc. ("Promus"), a wholly owned subsidiary of Hilton Hotels
Corporation ("Hilton") manages the Company's hotels under the terms of a
management agreement.
The Company did not have any items of comprehensive income requiring
separate reporting and disclosure for the periods presented.
Financial Accounting Standards Board Statement No. 138, "Accounting for
Derivative Instruments and Hedging Activities" (Statement 138) became
effective January 1, 2001. The Company currently does not have any
derivatives subject to this Statement.
7
Significant Account Policies of Lessee
--------------------------------------
The Company has not changed the accounting policies of the Lessee as
previously reported in the Lessee's financial statements included in the
Company's December 31, 2000 Annual Report of Form 10K.
(2) Investment in Hotels
--------------------
At March 31, 2001, the Company owned 13 hotels. Investment in hotels
consisted of the following:
March 31, December 31,
2001 2000
------------ ------------
Land $ 18,349,021 $ 18,374,917
Building 101,529,793 101,314,421
Furniture and equipment 8,500,090 8,373,509
------------ ------------
128,378,904 $128,062,847
Less accumulated depreciation (4,486,100) (3,486,590)
------------ ------------
$123,892,804 $124,576,257
------------ ------------
(3) Notes Payable
-------------
The Company placed a $50 million secured loan with a term of 10 years in
September 2000. The $50 million loan bears a fixed interest rate of 9% per
annum and is secured by 11 hotels. Prepayment penalties apply for early
retirement. Repayment will be made in monthly principal and interest
installments over the next 10 years. At March 31, 2001, the outstanding
balance was $49,753,072.
As of January 1, 2001, the Company's outstanding note payable to Hilton,
secured by our property in Boulder, Colorado, totaled $7,780,500 and bore a
fixed interest rate of 8.5%. During January and February 2001, the Company
paid Hilton the outstanding balance on the note from net equity proceeds.
(4) Shareholders' Equity
--------------------
The Company is raising equity capital through a "best-efforts" offering of
shares by David Lerner Associates, Inc. (the "Managing Dealer"), which will
receive selling commissions and a marketing expense allowance based on
proceeds of the shares sold. The Company received gross proceeds of
$28,298,153 and $4,935,083 from the sale of 2,829,815 and 493,509 shares,
including shares sold through the reinvestment of distributions for the
three month periods ended March 31, 2001 and 2000, respectively. The net
proceeds of the offering, after deducting selling commissions and other
offering costs for the three month periods ended March 31, 2001 and 2000
were $25,439,229 and $4,393,756, respectively.
8
(5) Commitments and Related Parties
-------------------------------
Prior to January 1, 2001, the Lessee operated as a separate entity and the
Company received rental income from the Lessee which incurred rent expense
under the Percentage Leases. Percentage rent is calculated by multiplying
fixed percentages by the total revenues with reference to specified
threshold amounts. Both the base rent and the revenue thresholds used in
computing percentage rents are subject to annual adjustments based on
changes in the Consumer Price Index ("CPI").
The Company is obligated to pay the costs of real estate and personal
property taxes, property insurance, maintenance of underground utilities
and structural elements of the hotels. The Company is committed under
management agreements to fund up to 5% of gross revenues for
capital expenditures to include periodic replacement or refurbishment of
furniture, fixtures, and equipment. At March 31, 2001 and 2000, $1,800,854
and $753,927, respectively, were held by Promus for these capital
improvement reserves. In addition, in accordance with the franchise
agreements, at March 31, 2001 and 2000, $104,937 and $696,869,
respectively, were held for the Property Improvement Plan with a financial
institution and treated as restricted cash.
There are license agreements with Promus to operate the hotels as Homewood
Suites(R) by Hilton properties. These agreements remain unchanged as a
result of the Company's acquisition of the Lessee. These agreements have
terms of 20 years and expire in 2019 and 2020. These agreements require,
among other things, payment of monthly franchise fees equal to 4% of suite
revenue. License and franchise agreements contain specific standards for,
and restrictions and limitations on, the operation and maintenance of the
hotels which are established by Promus to maintain uniformity in the system
for Homewood Suites(R) by Hilton. Such standards generally regulate the
appearance of the hotel, quality and type of goods and services offered,
signage, and protection of marks. Compliance with such standards may from
time to time require significant expenditures for capital improvements
which will be borne by the Company. In addition, the agreements provide
that Promus will manage the daily operations of the hotels and provide
advertising and promotion to include access to the reservation system for
Homewood Suites(R) by Hilton. Promus charges 4% of total revenue for
management fees and 4% of suite revenue for advertising and promotion fees.
The Company has contracted with Apple Suites Realty Group, Inc. ("ASRG") to
acquire and dispose of real estate assets for the Company. In accordance
with the contract, ASRG is to be paid a fee of 2% of the purchase price of
any acquisitions or sale price of any dispositions of real estate
investments, subject to certain conditions. No acquisitions were made in
the first quarter of 2001 and 2000.
The Company has contracted with Apple Suites Advisors, Inc. ("ASA") to
advise and provide day to day management services to the Company. In
accordance with the contract, the Company will pay ASA a fee equal to .1%
to .25% of total equity contributions received by the Company in addition
to certain reimbursable expenses. For the three months ended March 31,
2001 and 2000, ASA earned $63,896 and $22,533, respectively, under this
9
agreement.
ASRG and ASA are 100% owned by Glade M. Knight, Chairman and
President of the Company.
(6) Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted
earnings per share in accordance with FAS 128:
Three Months Three Months
Ended Ended
3/31/01 3/31/00
---------- ----------
Numerator:
Net Income $ 263,126 $ 506,063
Numerator for basic and
Diluted earnings $ 263,126 $ 506,063
Denominator:
Denominator for basic
earnings per share-weighted-
average shares 9,446,674 3,607,458
Effect of dilutive securities:
Stock options 2,200 2,200
- ---------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 9,448,874 3,609,658
Basic and diluted earnings per
- ---------------------------------------------------------------------------------------------------------------------------
common share $ .03 $ 0.14
- ---------------------------------------------------------------------------------------------------------------------------
(7) Acquisitions
------------
The following unaudited pro forma information for the three months ended
March 31, 2000 is presented as if the acquisition of the 2 hotels occurred
on January 1, 2000. The pro forma information does not purport to
represent what the Company's results of operations would actually have been
if such transactions, in fact, had occurred on January 1, 2000, nor does it
purport to represent the results of operations for future periods.
Three Months
Ended
3/31/00
-----------
Revenues $10,038,257
Net income 835,494
Net income per share-basic and diluted $ .17
10
The pro forma information reflects adjustments for actual revenues and
expenses of the 2 hotels acquired in 2000 for the respective period in 2000
prior to acquisition by the Company. Net income has been adjusted as
follows: (1) depreciation has been adjusted based on the Company's basis in
the hotels; (2) advisory expenses have been adjusted based on the Company's
contractual arrangements; (3) interest expense has been adjusted to
reflect the acquisition as of January 1, 2000; (4) common stock raised
during 2000 to purchase these hotels has been adjusted to reflect issuances
as of January 1, 2000; and (5) the acquisition of the Lessee was effective
January 1, 2000.
(8) Income Taxes
------------
The taxable REIT subsidiary is subject to federal and state income taxes.
The taxable REIT subsidiary incurred a loss during the period and as such
has no income tax liability at March 31, 2001. No operating loss benefit
has been recorded in the consolidated balance sheet since realization is
uncertain. At March 31, 2001, the taxable REIT subsidiary has $400,000 of
net operating loss carryforwards which expire in 2020.
(9) Subsequent Events
-----------------
In April, 2001 the Company distributed to its shareholders approximately
$2,439,757 ($.26 per share) of which approximately $1,091,639 was
reinvested in the purchase of additional shares. On April 17, 2001, the
Company closed its "best offering" upon the closing of the sale to
investors of 1,170,515 shares at $10 per share (including 109,164 common
shares through distributions reinvestment) representing net proceeds to the
Company of $10,534,633. The total gross proceeds raised were $125,000,000.
On April 26, 2001, the Company acquired a hotel in Buckhead (a suburb of
Atlanta), Georgia. The hotel was purchased for $12.8 million in cash. This
hotel will be leased by the Lessee and managed by Promus in substantially
the same manner as the other 13 Homewood Suites(R) hotels owned at March
31, 2001.
On April 19, 2001, the Company deposited $115,000 with First Union National
Bank which guarantees the Company a fixed interest rate at 8.15% on a $11.5
million mortgage loan with regard to one hotel until June 18, 2001.
11
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements involve known
and unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include the ability of the
Company to implement its acquisition strategy and operating strategy; the
Company's ability to manage planned growth; changes in economic cycles;
competitors within the extended-stay hotel industry; the ability to repay or
refinance debt as it becomes due; and the possibility that the acquisition of
Apple Suites Management, Inc. will not have the effects anticipated by the
Company . Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore there can be no assurance that
such statements included in this quarterly report will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
results or conditions described in such statements or the objectives and plans
of the Company will be achieved.
General
-------
The REIT Modernization Act, effective January 1, 2001, permits REIT's to
establish taxable businesses to conduct certain previously disallowed business
activities. The Act also reduces the REIT distribution requirement from 95% to
90% of its taxable income.
Effective January 1, 2001 (the effective date for the recently passed REIT
Modernization Act), the Company acquired Apple Suites Management, Inc. and
its subsidiaries (the "Lessee"). In 2000, the Company paid Mr. Glade M.
Knight, the Company's President and Chairman, a deposit of $900,000 in exchange
for all of the issued and outstanding stock of the Lessee. For financial
reporting purposes, the Company recorded the $900,000 of cash plus the fair
value of net liabilities of $470,090 in the Lessee as a management termination
fee (total of $1,370,090) in 2001, as the Lessee's only business is its lease
with the Company. Effective January 1, 2001, all intercompany transactions
including lease revenue and rental expenses, between the Company and the
Lessee are eliminated in consolidation.
The Company has acquired 13 hotels with 1,453 suites from Promus Hotels, Inc.
("Promus"), a wholly-owned subsidiary of Hilton Hotels Corporation ("Hilton").
We through our taxable REIT subsidiary hold the franchise and market
reservation agreement for each of the hotels, which are operated as Homewood
Suites(R) by Hilton. We through our taxable REIT subsidiary engage a third-
party manager, Promus, to operate the hotels. The Company is externally advised
and has contracted with Apple Suites Advisors, Inc. ("ASA") to manage its day-
to-day operations and make investment decisions. The Company has contracted
with Apple Suites Realty Group, Inc. ("ASRG") to provide brokerage and
12
acquisition services in connection with its hotel acquisitions. ASA, and ASRG
are all owned by Mr. Glade Knight, the Company's Chairman. (See Note 5 to the
unaudited consolidated financial statements of the Company for further
information on related-party transactions).
Results of Operations
---------------------
As discussed earlier, the Company purchased Apple Suites Management, Inc. on
January 1, 2001. The sole business of the Lessee was with the Company.
Therefore, for purposes of a meaningful comparison, we have compared revenue
and hotel operating expenses for the three months ended March 31, 2001 with
those of the Lessee for the three months ended March 31, 2000.
Revenues
--------
In 2001, operations of the hotels are included in the Company's consolidated
operations. Prior to January 1, 2001, the operations of the hotels were
included in the Lessee's operations. Total revenues consist primarily of suite
revenue. During the three months ended March 31, 2001, the Company had suite
and other revenues of $10,062,514 and $495,191, respectively. In 2000, the
Lessee had suite and other revenues of $7,682,355 and $420,816, respectively.
The increase is primarily due to a full quarter of operations in 2001 of the
two 2000 hotel acquisitions (in Colorado and Pennsylvania). In 2000, the
Company's lease revenue was derived from the Percentage Leases covering the
hotels in operations with the Lessee. The lease revenue earned by the Company
and the rent expense incurred by the Lessee are eliminated in consolidation in
2001.
For the three months ended March 31, 2001 and 2000 average occupancy rate was
75% and 78%, average daily rate ("ADR") was $102 and $89, and revenue per
available room ("REVPAR") was $77 and $69, respectively. The decrease in
average occupancy is primarily due to the increases in daily rental rates to
maximize revenues in 2001. The increases in ADR and REVPAR for the three months
ended March 31, 2001 over the same period in 2000 are due to a combination of
significant increases in daily rental rates and the full quarter effect of the
2000 hotel acquisition which had higher ADRs.
The Company's interest income consists of $94,039 and $32,732 earned from the
investments of its cash and cash reserves for the three months ended March 31,
2001 and 2000, respectively. In 2000, interest income was earned from the
promissory notes with the Lessee for franchise and hotel supplies. The
interest income to the Company and the interest expense to the Lessee relating
to the franchise, hotel supplies and working capital notes are eliminated in
consolidation in 2001.
Comparable Hotel Results
------------------------
The Company's comparable hotels consist of 11 Homewood Suites(R) by Hilton,
containing 1,218 suites that the Company has owned since January 1, 2000. For
the three months ended March 31, 2001, the hotels had a 8.7% increase in REVPAR
and a 10.1% increase in ADR over the same period in 2000. Average occupancy
for the first quarter of 2001 for these hotels decreased 1% from the first
quarter of 2000. These fluctuations are due to the factors described above.
13
Expenses
--------
Interest expense was $1,170,298 and $1,453,110 for the three months ended March
31, 2001 and 2000, respectively, and represented interest on short-term notes
payable to Hilton at an interest rate of 8.5% and amortization of deferred
financing costs in 2000 and 2001 and the $50 million secured debt in 2001.
Depreciation expense increased to $999,510 in 2001 from $549,201 in 2000, and
is directly attributable to a full quarter of depreciation of hotels acquired
in 2000 and the capital improvements made during 2000 and 2001.
Taxes, insurance, and other expenses were $383,292 or 4% of the Company's suite
revenue for the three months ended March 31, 2001. These expenses were
$691,575 or 9% of the Lessee's suite revenue for the same period in 2000. The
decrease is due to the Company's efforts to reduce tax assessments. As a
result, the expenses were lower than anticipated.
General and administrative expenses were $316,406 or 3% of the Company's suite
revenue in 2001. For the same period in 2000, these expenses were $254,736 or
3% of the Lessee's suite revenue. These expenses represent the administrative
expenses of the Company.
Hotel operating expenses totaled $6,124,022 for the three months ended March
31, 2001. For the three months ended March 31, 2000, hotel operating expenses,
excluding rent expense and interest expense for the franchise, hotel supplies
and working capital promissory notes, totaled $4,638,517. The increase is
primarily due to a full quarter of operations in 2001 of the two 2000
acquisitions. The rent and interest expense are excluded from 2000 since the
expenses are eliminated in consolidation in 2001.
Promus manages the day-to-day operations of the hotels. Promus charges fees of
4% of total revenue for these functions. Promus also charges a fee of 4% of
suite revenue for franchise licenses to operate as a Homewood Suites(R) by
Hilton and to participate in its reservation system. Total expenses for these
services were $1,238,694 and $937,354 for the three months ended March 31, 2001
and 2000, respectively. These expenses are included in the hotel operating
expenses above.
Liquidity and Capital Resources
-------------------------------
During the first quarter of 2001, the Company sold 2,829,815 shares of its
common stock to its investors (including 84,365 common shares sold through
distribution reinvestment), bringing the total number of shares outstanding to
11,496,163. The total gross proceeds from the shares sold were $28,298,153,
which netted $25,439,229 to the Company after the payment of selling
commissions and other offering costs.
On April 17, 2001, the Company closed its "best offering" upon the closing of
the sale to investors of 1,170,515 shares at $10 per share (including 109,164
common shares through distributions reinvestment) representing net proceeds to
the Company of $10,534,633. The total gross proceeds raised were $125,000,000.
14
Notes payable
-------------
The Company placed a $50 million secured loan with a term of 10 years in
September 2000. The $50 million loan bears a fixed interest rate of 9% per
annum and is secured by 11 of our hotels. Prepayment penalties apply for early
retirement. Repayment will be made in monthly principal and interest
installments over the next 10 years. At March 31, 2001, the outstanding
balance was $49,753,072.
As of January 1, 2001, the Company's outstanding note payable to Hilton,
secured by our property in Boulder, Colorado, totaled $7,780,500 and bore a
fixed interest rate of 8.5%. During January and February 2001, the Company
paid Hilton the outstanding balance on the note from net equity proceeds.
Cash and cash equivalents
-------------------------
Cash and cash equivalents totaled $21,039,709 at March 31, 2001.
Capital requirements
--------------------
The Company has an ongoing capital commitment to fund its capital improvements.
The Company through the Lessee is required under the management agreements with
Promus to make available to the Lessee for the repair, replacement, or
refurbishing of furniture, fixtures, and equipment an amount up to 5% of gross
revenue provided that such amount may be used for capital expenditures made by
the Company with respect to the hotels. The Company expects that this amount
will be adequate to fund the required repair, replacement, and refurbishments
and to maintain its hotels in a competitive condition.
At March 31, 2001, $1,800,854 was held by Hilton for these capital improvement
reserves. In addition, in accordance with the franchise agreements $104,937
was held for Property Improvement Plans with a financial institution and
treated as restricted cash. The Company capitalized improvements of $316,057 in
2001. The Company has one hotel undergoing renovations at March 31, 2001. The
Company plans to spend an additional $1.4 million in 2001.
The Company expects to acquire additional hotels during 2001. However, no
material commitments existed on May 1, 2001 for the purchase of additional
hotels. The Company had monthly equity closings through April 2001, when the
Company closed the offering. It is anticipated that the equity funds will be
invested in additional hotels and used to make principal payments on the notes
incurred in conjunction with the existing acquisitions.
Capital resources are expected to grow with the future sale of the Company's
common shares through the reinvestment of dividends. Approximately 41% of the
2001 common stock dividend distribution, or $759,289 was reinvested in
additional common shares. In general, the Company's liquidity and capital
resources are believed to be more than adequate to meet its cash requirements
during 2001, given current and anticipated financing arrangements.
Acquisition
-----------
On April 26, 2001, the Company acquired a hotel in Buckhead (a suburb of
Atlanta), Georgia. The hotel was purchased for $12.8 million in cash. This
hotel will be leased by the Lessee
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and managed by Promus in substantially the same manner as the other 13 Homewood
Suites(R) hotels owned at March 31, 2001. This acquisition brought the total
number of hotels to 14 and total suites owned to 1,545.
Seasonality
-----------
The hotel industry historically has been seasonal in nature, reflecting higher
occupancy rates primarily during the first three quarters of the year.
Seasonal variations in occupancy at the Company's hotels may cause quarterly
fluctuations in the Company's revenues, particularly during the fourth
quarter. To the extent that cash flow from operations is insufficient during
any quarter, due to temporary or seasonal fluctuations in revenue, the Company
expects to utilize cash on hand to make distributions.
Recent Accounting Pronouncements
--------------------------------
On January 1, 2001, Financial Accounting Standards Board Statement No. 138,
"Accounting for Derivative Instruments and Hedging Activities" became
effective. The Company currently does not have any financial instruments
subject to this statement.
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Item 3. Quantitative And Qualitative Disclosures About Market Risk
There have been no material changes since December 31, 2000. See the
information provided in the Company's Annual Report on Form 10-K under Item 7-
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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Part II, Item 2. Changes in Securities and Use of Proceeds
The following table set forth information concerning the Offering and the use of
proceeds from the Offering as of March 31, 2001:
Common Shares Registered:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
28,500,000.00 Common Shares $10 per Common Share $285,000,000
------------- ------------
Totals: 30,166,666.67 Common Shares
-------------
Common Shares Sold:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
9,829,496 Common Shares $10 per Common Share 98,294,852
-------------
Totals: 11,496,162.67 Common Shares $113,294,852
-------------
Expenses of Issuance and Distribution of Common Shares
1. Underwriting discounts and commissions 11,329,485
2. Expenses of underwriter -
3. Direct or indirect payments to directors or officers
of the Company or their associates, to ten percent
shareholders, or to affiliates of the Company -
4. Fees and expenses of third parties 1,302,920
------------
Total Expenses of Issuance and Distribution of
Common Shares 12,632,405
Net Proceeds to the Company $100,662,447
1. Purchase of real estate (including repayment of
Indebtedness incurred to purchase real estate) $ 64,129,134
2. Interest on indebtedness 9,027,058
3. Working capital 24,848,206
4. Fees to the following (all affiliates of officers of the Company):
a. Apple Suites Advisors, Inc. 222,049
b. Apple Suites Realty Group, Inc. 2,436,000
5. Fees and expenses of third parties: -
a. Legal -
b. Accounting -
6. Other (specify ________________) -
------------
Total of Application of Net Proceeds to the Company $100,662,447
Part II, Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27- Financial Data Schedule
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(b) Reports on Form 8-K
The following table lists the reports on Form 8-K filed by the Company
during the quarter ended March 31, 2001, the items reported and the
financial statements included in such filings.
None
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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.
Apple Suites, Inc.
------------------
(Registrant)
DATE: 5-14-01 BY: /s/ Glade M. Knight
----------------------- ------------------------------
Glade M. Knight
President
BY: /s/ Stanley J. Olander
-----------------------------------
Stanley J. Olander
Secretary and Treasurer
20