Filed Pursuant to Rule 424 (b)(3)
Registration No. 333-53984
To be used with Prospectus dated April 19, 2001
SUPPLEMENT NO. 2 DATED OCTOBER 19, 2001
TO PROSPECTUS DATED APRIL 19, 2001
APPLE HOSPITALITY TWO, INC.
The following information supplements the prospectus of Apple Hospitality
Two, Inc. dated April 19, 2001 and is part of the prospectus. This supplement
is cumulative and replaces the prior supplement. Prospective investors should
carefully review the prospectus and this Supplement No. 2.
TABLE OF CONTENTS FOR SUPPLEMENT NO. 2
Status of the Offering.......... S-2
Recent Developments............. S-2
Acquisitions and Related Matters S-4
Summary of Material Contracts... S-6
Our Properties.................. S-8
Selected Financial Data......... S-10
Experts......................... S-11
Index to Financial Statements... F-1
The prospectus, and each supplement, contains forward-looking statements
within the meaning of the federal securities laws, and such statements are
intended to be covered by the safe harbors created by those laws. These
forward-looking statements may involve our plans and objectives for future
operations, including future growth and availability of funds. These
forward-looking statements are based on current expectations, which are subject
to numerous risks and uncertainties. Assumptions relating to these statements
involve judgments with respect to, among other things, the continuation of our
offering of units, the future economic, competitive and market conditions and
future business decisions. All of these matters are difficult or impossible to
predict accurately and many of them are beyond our control. Although we believe
the assumptions relating to the forward-looking statements, and the statements
themselves, are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that these forward-looking statements will
prove to be accurate. In light of the significant uncertainties inherent in
these forward-looking statements, the inclusion of this information should not
be regarded as a representation by us or any other person that our objectives
and plans, which we consider to be reasonable, will be achieved.
STATUS OF THE OFFERING
We completed the minimum offering of units (each unit consisting of one
Common Share and one Series A Preferred Share) at $9.50 per unit on May 1,
2001. We are continuing the offering at $10 per unit in accordance with the
prospectus.
As of September 25, 2001, we had closed on the following sales of units:
Proceeds Net of Selling
Price Per Number of Gross Commissions and Marketing
Unit Units Sold Proceeds Expense Allowance
--------- ------------ ------------ -------------------------
$ 9.50 3,157,894.7 $ 30,000,000 $27,000,000
$10.00 7,771,503.0 77,715,030 69,943,527
------------ ------------ -----------
Total 10,929,397.7 $107,715,030 $96,943,527
============ ============ ===========
RECENT DEVELOPMENTS
Effective September 7, 2001, we acquired a limited partnership that, through
a subsidiary, owns 10 extended-stay hotels. Although the acquisition involved
the transfer of ownership interests in a limited partnership, the purpose and
result was our acquisition of the hotels. Each hotel operates as part of the
Residence Inn(R) by Marriott(R) franchise. The hotels are described in detail
in another section below. The sellers were Crestline Capital Corporation and
certain subsidiaries. No seller had any material relationship to us, our
affiliates, or our directors or officers (although we made a short-term loan to
Crestline Capital Corporation before the closing, as described below). The
total base purchase price for the acquisition was $119 million.
The purchase price, as subject to certain adjustments at closing, was paid
through a combination of transactions. In May 2001, we made a deposit of just
over $1 million, which was applied toward the purchase price at closing. On May
31, 2001, we provided a short-term secured loan to Crestline Capital
Corporation in the amount of $47 million. The loan amount, plus about $1.5
million in interest, also was applied toward the purchase price. In addition,
we made a cash payment of approximately $19.5 million at closing. Our source
for these funds, which consist of approximately $69 million in the aggregate,
was our ongoing registered public offering of units.
To satisfy the remainder of the purchase price, we received a credit at
closing equal to the unpaid balance of a long-term loan, which is secured by
the hotels, from Bank of America, N.A. The loan will continue to be an
obligation of the subsidiary that directly owns the hotels. Further details
about this loan are provided in the next section.
S-2
We also used the proceeds of our ongoing offering to pay 2% of the total
base purchase price, which equals $2,380,000, as a commission to Apple Suites
Realty Group, Inc. This entity is owned by Glade M. Knight, who is one of our
directors and our Chief Executive Officer.
The following map shows the general location of our hotels, which are
described in another section below:
[MAP]
Number Number
of of
General Location of Hotel Suites General Location of Hotel Suites
------------------------- ------ ------------------------- ------
Montgomery, Alabama..... 94 Atlanta, Georgia.......... 126
Bakersfield, California. 114 Boston, Massachusetts..... 130
Concord, California..... 126 Cincinnati, Ohio.......... 118
San Ramon, California... 106 Dallas, Texas............. 120
Meriden, Connecticut.... 106 Houston, Texas............ 110
-----
Total Suites........... 1,150
=====
S-3
ACQUISITIONS AND RELATED MATTERS
New Subsidiaries
We formed or acquired new subsidiaries to obtain the 10 hotels.
Specifically, we formed two direct wholly-owned subsidiaries. One of these
subsidiaries, AHT Res III GP, Inc., acquired the entire general partnership
interest in Marriott Residence Inn USA Limited Partnership and now holds a 1%
interest as its sole general partner. The other newly-formed subsidiary, AHT
Res III LP, Inc., acquired the entire limited partnership interest in that
partnership and now holds a 99% interest as its sole limited partner. The
partnership owns 100% of the equity in Residence Inn III LLC, which directly
owns all of the hotels. We also acquired 100% of the stock in Crestline Res III
Corporation, which serves as the independent managing member of Residence Inn
III LLC (without having any equity interest).
Loan Secured By Hotels
Residence Inn III LLC, the direct owner of the hotels, is also the borrower
under a loan from Bank of America, N.A. in the original principal amount of
$55,588,000. On September 28, 2001, the unpaid principal balance was
$53,256,408. The loan is secured by a mortgage on the hotels and by related
liens on their rents and profits, but is generally non-recourse to Residence
Inn III LLC, as the borrower. As a result, the lender generally is required to
enforce its liens on the hotels, and their rents and profits, instead of taking
any actions against the borrower. The lender will have recourse against the
borrower upon certain events, such as a violation by the borrower of its
covenant not to (a) sell or transfer any of the hotels, or (b) permit other
liens on the hotels or on their rents or profits.
The loan is evidenced by a promissory note dated December 29, 1999. The
promissory note has a stated annual interest rate of 8.08% and requires monthly
payments of $489,067.76. The maturity date is January 1, 2010. A balloon
payment in the amount of approximately $35.4 million is scheduled to be due at
maturity.
At the request of the lender, we have agreed, in our capacity as a principal
of the borrower, that the limited recourse provisions of the promissory note
also will apply to us. The same agreement has been made by Apple Suites
Advisors, Inc., which is owned by Glade M. Knight, who is one of our directors
and our Chief Executive Officer. Apple Suites Advisors, Inc. will be released
from the promissory note, however, if the debt service coverage ratio for the
loan reaches a specified target. These agreements by us and by Apple Suites
Advisors, Inc. were executed in connection with a consent agreement, which is
one of the material contracts described in the next section.
We expect that revenues from the hotels will be sufficient to make monthly
payments under the promissory note. If hotel revenues are not sufficient, we
could lose the hotels through foreclosure. In addition, if our non-recourse
protection is not available under the terms of the promissory note, we may be
required to use the proceeds from our ongoing offering (or other funds
available to us) to make payments to the lender.
S-4
While the loan remains outstanding, certain covenants apply to Residence Inn
III LLC, as the borrower. Among other things, these covenants (a) prohibit the
borrower from engaging in any business that is not related to the hotels or the
loan, (b) require the borrower to maintain a separate legal identity, (c)
restrict the transfer of ownership interests in the borrower or the hotels, and
(d) limit the extent to which the organizational documents of the borrower may
be modified. In addition, the lender has required us to appoint two independent
directors for Crestline Res III Corporation, which is the independent managing
member of the borrower.
Other Actions
The hotels have been leased by their direct owner, Residence Inn III LLC, to
Apple Hospitality Management, Inc., which is one of our wholly-owned
subsidiaries. The hotels are being managed by Residence Inn By Marriott, Inc.
These actions were taken in accordance with a master hotel lease agreement and
an amended management agreement, which are among the material contracts
described in the next section.
S-5
SUMMARY OF MATERIAL CONTRACTS
Amended Purchase Agreement
The acquisition described above was the result of an amended purchase
agreement. The original agreement was dated as of May 18, 2001 and was modified
by amendments dated as of July 30, 2001 and August 31, 2001. In particular, the
last amendment provided for our acquisition of Marriott Residence Inn USA
Limited Partnership, which occurred effective September 7, 2001. This structure
was different than the one reflected in the original agreement and the prior
supplement, which described a potential acquisition of the hotels themselves.
The prior supplement is entirely superseded and replaced by this supplement.
Consent Agreement and Environmental Indemnity
By acquiring Marriott Residence Inn USA Limited Partnership, we acquired
control of Residence Inn III LLC, which is the borrower under a loan from Bank
of America, N.A., as described above. Consent to the acquisition and change of
control was granted on behalf of the lender in a consent and amendment
agreement with release dated as of September 28, 2001. In return, we and Apple
Suites Advisors, Inc. agreed to the limited recourse provisions of the
promissory note involved.
In a separate environmental indemnity agreement dated as of September 28,
2001, we and Apple Suites Advisors, Inc. agreed to indemnify the lender and
related parties against the presence or release of hazardous materials at the
hotels. Payments of indemnification, if any, are due on demand and will accrue
interest at the rate provided in the promissory note, plus 4%, if not paid
within 30 days of the demand.
Master Hotel Lease Agreement
One of our wholly-owned subsidiaries, Apple Hospitality Management, Inc., a
qualified taxable REIT subsidiary, has leased the hotels from their direct
owner, Residence Inn III LLC, under a master hotel lease agreement dated as of
September 28, 2001. The agreement provides for an initial term of 10 years.
Apple Hospitality Management, Inc. has the option to extend the lease term for
two additional five-year periods, provided it is not in default at the end of
the prior term or at the time the option is exercised. The master hotel lease
agreement provides that Apple Hospitality Management, Inc. will pay an annual
base rent, a quarterly percentage rent and a quarterly sundry rent. Each type
of rent is explained below.
Annual base rent is payable in advance in equal monthly installments. The
base rent will be adjusted each year in proportion to the Consumer Price Index
(based on the U.S. City Average). The lease commencement date for the
properties is deemed to be as of September 7, 2001. The base rents for the
hotels range from $443,102 to $1,183,831.
Percentage rent is payable quarterly. Percentage rent depends on a formula
that compares fixed "suite revenue breakpoints" with a portion of "suite
revenue," which is equal to gross revenue from suite rentals less sales and
room taxes, credit card fees and sundry rent (as described below). The suite
revenue breakpoints will be adjusted each year in proportion to the Consumer
Price Index (based on the U.S. City Average). Specifically, the percentage rent
is equal to the sum of (a) 17% of all year-to-date suite revenue, up to the
applicable suite revenue breakpoint; plus (b) 55% of the year-to-date suite
revenue in excess of the applicable suite revenue breakpoint, as reduced by
base rent and the percentage rent paid year to date.
The sundry rent is payable quarterly and equals 55% of all sundry revenue,
which consists of revenue other than suite revenue, less the amount of sundry
rent paid year-to-date.
Amended Management Agreement
Our hotels are being managed by Residence Inn by Marriott, Inc. under an
amended and restated management agreement, dated as of September 28, 2001, with
Apple Hospitality Management, Inc. The amended management agreement is similar
to the management agreement that applied to the hotels before our acquisition
occurred. Management services include supervising the operation of the hotels
and collecting revenues from their operation for the benefit of Apple
Hospitality Management, Inc.
S-6
The initial term of the amended management agreement will continue until
December 30, 2011. The term will be renewed for five periods of ten years each,
provided that an event of default by the manager, Residence Inn by Marriott,
Inc., has not occurred. The manager may elect not to renew for an additional
term by giving notice to Apple Hospitality Management, Inc. at least 18 months
before the expiration of the current term. Such non-renewal by the manager may
apply to one or more of the hotels.
Apple Hospitality Management, Inc. may terminate the amended management
agreement with respect to all of the hotels if the total operating profit for
any consecutive period of two fiscal years does not reach a specified minimum
amount. Written notice of any such termination must be delivered to the manager
no later than 60 days after the receipt by Apple Hospitality Management, Inc.
of the annual accounting for the second fiscal year. The manager has the option
to avoid such termination by advancing the amount of any deficiency in
operating profit to Apple Hospitality Management, Inc. within 60 days after the
manager's receipt of the termination notice.
The manager will receive a management fee for its services. The total
management fee consists of (a) a base management fee calculated on the basis of
gross revenues, (b) a Residence Inn system fee calculated on the basis of suite
revenues, and (c) an incentive management fee calculated on the basis of
operating profit. The formulas for these fees are complex and are the result of
arms-length negotiations.
The manager also has a right of first refusal for any purchase or lease of
the hotels. If Residence Inn III LLC, as the direct owner of the hotels,
receives a bona fide written purchase or lease offer for any one or more of
them, Apple Hospitality Management, Inc. must cause Residence Inn III LLC to
give prior notice to the manager, who will then have 30 days in which to
exercise its right of first refusal. Any such purchase or lease of the hotels
by the manager would occur on the terms and conditions set forth in the bona
fide offer. The amended management agreement would remain in effect as to any
other hotels.
Owner Agreement
In an owner agreement dated as of September 28, 2001, the manager under the
amended management agreement granted its consent to the master hotel lease
agreement. In addition, Residence Inn III LLC, as the direct owner of the
hotels, agreed to guaranty the performance of the obligations, including
monetary obligations, of Apple Hospitality Management, Inc. under the amended
management agreement.
Non-Disturbance Agreement
A non-disturbance agreement and consent of manager, dated as of September
28, 2001, was entered into by Apple Hospitality Management, Inc., Residence Inn
III LLC (as the direct owner of the hotels and the borrower under the loan
described above), Residence Inn by Marriott, Inc. (as the manager under the
amended management agreement) and a representative of the lender for the loan
described above. This agreement generally provides that the amended management
agreement is subordinate to the loan documents. For example, if an event of
default occurs under the loan documents, the lender has the right to receive
(a) an assignment of all rights of Apple Hospitality Management, Inc. in the
amended management agreement, and (b) all rents, profits and other revenues
collected by the manager and otherwise payable to Apple Hospitality Management,
Inc. under the amended management agreement.
S-6
OUR PROPERTIES
All of our hotels are part of the Residence Inn(R) by Marriott(R) franchise.
Each hotel offers one and two room suites with the amenities generally offered
by upscale extended-stay hotels. Business travel is responsible for a
significant portion of the occupancy at the hotels. The effects that the
terrorist attacks in the United States on September 11, 2001 and related
military action may have on business travel in general and our hotels in
particular cannot be determined at this time. We do not know how these events
will affect economic conditions in general or in our primary market areas in
particular, nor how they will affect the travel industry in general or in our
primary market areas in particular. The hotels are located in developed areas
in competitive markets. We believe the hotels are well-positioned to compete in
these markets based on their location, amenities, rate structure and franchise
affiliation. In the opinion of management, all of the hotels are adequately
covered by insurance. Further information about the hotels is presented below.
TABLE 1. Summary
Number Average Daily
of Rate per Suite
Hotel (1) State Suites in 2001 (2)
--------- ------------- ------ --------------
Montgomery............... Alabama 94 $ 83.54
Bakersfield.............. California 114 91.57
Concord-Pleasant Hill.... California 126 135.63
San Ramon................ California 106 154.56
Meriden.................. Connecticut 106 108.34
Atlanta Airport-Hapeville Georgia 126 103.84
Boston-Tewksbury......... Massachusetts 130 117.01
Cincinnati-Blue Ash...... Ohio 118 89.43
Dallas-Las Colinas....... Texas 120 105.65
Houston-Clear Lake....... Texas 110 89.26
----- -------
Total.................... 1,150 $107.88
Notes for Table 1:
(1)Hotel names are shown as they appear on the Residence Inn(R) website at
www.residenceinn.com. The hotels opened during 1989 or 1990.
(2)Amounts are based on operations from January 1, 2001 through August 10,
2001. Rates for the entire year will not necessarily be comparable. The
total average is not adjusted for the varying number of suites per hotel.
S-8
TABLE 2. Tax and Improvement Information
Real 2002 Budgeted 2002 Budgeted Depreciation -
Real Prop. Property Improvement Prop. Tax on Federal
Hotel Tax Rate (1) Tax Cost (2) Improv. (3) Tax Basis (4)
----- ------------ -------- ------------- ------------- --------------
Montgomery............... 0.0345 $ 53,845 $175,800 $1,213 $ 5,442,558
Bakersfield*............. 0.01149189 83,224 207,900 2,516 7,742,287
Concord-Pleasant Hill*... 0.010065 83,169 146,300 1,565 15,465,301
San Ramon................ 0.010314 130,073 164,500 1,958 14,085,687
Meriden.................. 0.04040001 105,065 88,800 2,513 6,946,870
Atlanta Airport-Hapeville 0.04409 143,790 283,100 4,983 7,710,287
Boston-Tewksbury......... 0.02123 188,552 220,000 4,664 11,458,812
Cincinnati-Blue Ash*..... 0.06050035 166,225 155,000 3,286 5,668,490
Dallas-Las Colinas*...... 0.0266737 212,856 220,800 5,895 6,863,088
Houston-Clear Lake*...... 0.0333386 197,564 197,500 6,577 6,283,657
Notes for Table 2:
(1)Property tax rate for each hotel is an aggregate figure for county, city and
other local taxing authorities (as applicable). Information is for calendar
year 2001, although properties with asterisks in the first column have
estimated values based on 2000 taxes. Levies and bonds were added to real
property taxes in 2000 as follows: for Bakersfield--$4,588.44, for San
Ramon--$19,930.24, and for Pleasant Hill--$4,915.55 and $17,817.34.
(2)Improvement costs are based on operating budgets for 2002.
(3)Tax amount shown is based on a portion of the indicated improvement. The
percentage needed to determine the taxable portion varies by state and
locality.
(4)Amounts are for the depreciable real property component of the hotel. The
depreciable life is 39 years (or less, as may be permitted by federal tax
laws) using the straight-line method. The modified accelerated cost recovery
system will be used for the personal property component of the hotel.
TABLE 3. Operating Information
Avg. Daily Occupancy Rates (%) (1) Revenue per Available Suite ($) (2)
---------------------------------- ---------------------------------------
Hotel 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001
----- ---- ---- ---- ---- ---- ------- ------- ------- ------- -------
Montgomery............... 84.7 82.4 78.8 81.4 87.7 $ 68.11 $ 67.53 $ 65.41 $ 66.73 $ 73.23
Bakersfield.............. 83.2 85.6 83.3 86.0 88.1 68.13 73.38 71.57 73.70 80.64
Concord-Pleasant Hill.... 90.0 86.5 90.2 91.7 86.5 91.05 94.43 97.92 108.49 117.29
San Ramon................ 92.1 87.8 90.2 89.9 84.6 109.99 116.27 112.30 118.64 130.72
Meriden.................. 86.5 85.8 87.9 85.8 81.7 76.23 81.74 89.76 93.30 88.48
Atlanta Airport-Hapeville 82.0 88.4 85.2 87.6 88.0 69.46 79.49 80.63 83.97 91.34
Boston-Tewksbury......... 91.1 87.2 91.7 88.0 82.1 96.16 89.44 101.49 108.38 96.08
Cincinnati-Blue Ash...... 87.9 86.1 85.9 76.2 68.9 69.16 72.02 87.34 74.49 61.65
Dallas-Las Colinas....... 88.5 88.5 81.3 84.6 82.8 83.16 86.38 83.76 85.91 87.44
Houston-Clear Lake....... 90.0 87.4 85.7 87.2 93.5 84.03 84.61 80.33 79.12 83.46
Notes for Table 3:
(1)Percentage for 2001 is based on occupancy from January 1, 2001 through
August 10, 2001. Occupancy rates for the entire year will not necessarily be
comparable.
(2)Amounts for 2001 are annualized based on revenue from January 1, 2001
through August 10, 2001.
S-9
SELECTED FINANCIAL DATA
Apple Hospitality Two, Inc.
January 17, 2001 to June 30, 2001 (b)
--------------------------------------------------------------------------------
Revenues:
Interest income.................................. $ 635,526
Expenses:
General and administrative....................... $ 53,298
------------
Net income....................................... $ 582,228
----------------------------------------------------------------
Per Share
Earnings per share--basic and diluted............ $ 0.36
Weighted average common shares outstanding--basic 1,627,712
----------------------------------------------------------------
Balance Sheet Data at June 30, 2001:
Cash and cash equivalents..................... $ 11,047,830
Total assets.................................. $ 59,787,902
Shareholders' equity.......................... $ 59,642,099
Common shares outstanding..................... 6,781,348
Other data:
Cash flow from:
Operating activities.......................... $ (11,041)
Investing activities.......................... $(48,001,000)
Financing activities.......................... $ 59,059,771
Number of hotels owned at end of period.......... --
----------------------------------------------------------------
Funds From Operations Calculation
Funds from Operation (a)......................... $ 582,228
----------------------------------------------------------------
(a)Funds from operations (FFO) is defined as net income (computed in accordance
with generally accepted accounting principles-GAAP) excluding gains and
losses from sales of depreciable property, plus depreciation and
amortization. The Company considers FFO in evaluating property acquisitions
and its operating performance and believes that FFO should be considered
along with, but not as an alternative to, net income and cash flows as a
measure of the Company's activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs.
(b)The Company was initially capitalized on January 17, 2001; however,
operations did not commence until May 1, 2001.
S-10
EXPERTS
The financial statements for Marriott Residence Inn USA Limited Partnership
and for Residence Inn III LLC included herein have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing in giving said reports.
In December 1999, Marriott Residence Inn USA Limited Partnership contributed
the assets and liabilities represented by 10 of its 11 hotels to Residence Inn
III LLC. In February 2000, that partnership sold the one remaining hotel not
contributed to Residence Inn III LLC. On September 28, 2001, all assets and
liabilities of Marriott Residence Inn USA Limited Partnership were held in
Residence Inn III LLC. The audited financial statements of Marriott Residence
Inn USA Limited Partnership included herein for the year ended December 31,
1998 reflect the results of operations of the 11 original hotels, and the
audited financial statements of Residence Inn III LLC for the years ended
December 31, 2000 and 1999 and the unaudited financial statements for the
period ended June 15, 2001 reflect the results of operations of the 10 hotels
acquired by us.
(Remainder of Page is Intentionally Blank)
S-11
INDEX TO FINANCIAL STATEMENTS
Residence Inn III LLC
Condensed Balance Sheet as of June 15, 2001 (unaudited)............................ F-2
Condensed Statement of Operations and Member's Equity
For the Twenty-Four Weeks Ended June 15, 2001 (unaudited).......................... F-3
Condensed Statement of Cash Flows
For the Twenty-Four Weeks Ended June 15, 2001 (unaudited).......................... F-4
Notes to Condensed Financial Statements (unaudited)................................ F-5
Report of Independent Public Accountants........................................... F-6
Balance Sheets as of December 29, 2000 and December 31, 1999....................... F-7
Statements of Operations and Member's Equity
For the Fiscal Years Ended December 29, 2000 and December 31, 1999................. F-8
Statements of Cash Flows
For the Fiscal Years Ended December 29, 2000 and December 31, 1999................. F-9
Notes to Financial Statements...................................................... F-10
Marriott Residence Inn USA Limited Partnership
Report of Independent Public Accountants........................................... F-15
Statement of Operations For the Year Ended December 31, 1998....................... F-16
Statement of Changes in Partners' Capital
For the Year Ended December 31, 1998............................................... F-17
Statement of Cash Flows For the Year Ended December 31, 1998....................... F-18
Notes to Financial Statements...................................................... F-19
Apple Hospitality Two, Inc.
Pro Forma Condensed Consolidated Balance Sheet As of June 30, 2001 (unaudited)..... F-25
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited)................ F-26
Pro Forma Condensed Consolidated Statements of Operations
For the Year Ended December 31, 2000 and the Period Ended June 30, 2001 (unaudited) F-27
Notes to Pro Forma Condensed Consolidated Statement of Operations (unaudited)...... F-29
F-1
RESIDENCE INN III LLC
CONDENSED BALANCE SHEET
As of June 15, 2001
(unaudited, in thousands)
ASSETS
Property and equipment, net.............. $87,151
Mortgage escrow reserves................. 4,096
Due from Residence Inn by Marriott, Inc.. 1,623
Other assets............................. 1,492
Cash and cash equivalents................ 3,722
-------
Total assets.......................... $98,084
=======
LIABILITIES AND MEMBER'S EQUITY
Accounts payable and accrued expenses.... $ 563
Deferred incentive management fees....... 1,486
Mortgage debt............................ 53,619
-------
Total liabilities..................... 55,668
-------
Member's equity.......................... 42,416
-------
Total liabilities and member's equity. $98,084
=======
The accompanying notes are an integral part of these financial statements.
F-3
RESIDENCE INN III LLC
CONDENSED STATEMENT OF OPERATIONS AND MEMBER'S EQUITY
Twenty-Four Weeks Ended June 15, 2001
(unaudited, in thousands)
REVENUES
Suites................................................ $17,504
Other operating departments........................... 767
-------
Total revenues................................. 18,271
-------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses.....................
Suites............................................ 3,579
Other operating departments....................... 372
Other operating expenses.......................... 4,577
-------
Total property-level costs and expenses........ 8,528
Depreciation and amortization......................... 1,973
Residence Inn system fee.............................. 700
Property taxes........................................ 738
Incentive management fee.............................. 571
Base management fee................................... 365
Equipment rent and other.............................. 340
-------
Total operating costs and expenses............. 13,215
-------
OPERATING PROFIT......................................... 5,056
Interest expense...................................... (2,090)
Interest income....................................... 148
General and administrative expenses................... (139)
-------
NET INCOME............................................... 2,975
Beginning member's equity................................ 35,148
Capital contributions.................................... 11,571
Distributions to member.................................. (7,278)
-------
Ending member's equity................................... $42,416
=======
The accompanying notes are an integral part of these financial statements.
F-4
RESIDENCE INN III LLC
CONDENSED STATEMENT OF CASH FLOWS
Twenty-Four Weeks Ended June 15, 2001
(unaudited, in thousands)
CASH FLOW FROM OPERATIONS......................... $ 8,663
-------
INVESTING ACTIVITIES
Additions to property and equipment............ (1,116)
Change in property improvement mortgage escrow. (287)
-------
Cash used in investing activities.......... (1,403)
-------
FINANCING ACTIVITIES
Distributions.................................. (7,278)
Repayments of debt............................. (616)
-------
Cash used in financing activities.......... (7,894)
-------
DECREASE IN CASH AND CASH EQUIVALENTS............. (634)
CASH AND CASH EQUIVALENTS, beginning of period.... 4,356
-------
CASH AND CASH EQUIVALENTS, end of period.......... $ 3,722
=======
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Push-down of Crestline Capital's basis......... $ 7,885
=======
The accompanying notes are an integral part of these financial statements.
F-5
RESIDENCE INN III LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Residence Inn III LLC (the "Company"), a Delaware limited liability company,
is a wholly owned subsidiary of Marriott Residence Inn USA Limited
Partnership (the "Partnership"). Crestline Capital Corporation ("Crestline
Capital") indirectly owns all of the partnership interests in the
Partnership.
The Company is the owner of ten Residence Inn hotels that are located in
seven states and have a total of 1,150 suites. The inns are managed by
Residence Inn by Marriott, Inc., a wholly owned subsidiary of Marriott
International, Inc.
The accompanying condensed financial statements of the Company have been
prepared by the Company without audit. Certain information and footnote
disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been condensed
or omitted. The Company believes the disclosures made are adequate to make
the information presented not misleading. However, the condensed financial
statements should be read in conjunction with the annual audited financial
statements and notes thereto for the fiscal year ended December 29, 2000.
In the opinion of the Company, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal and
recurring adjustments) necessary to present fairly the financial position of
the Company as of June 15, 2001 and the results of operations and cash flows
for the twenty-four weeks ended June 15, 2001. Interim results are not
necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations.
2. On March 23, 2001, Crestline Capital indirectly acquired the remaining 18%
limited partnership interest in the Partnership for $11.4 million plus
closing costs of $171,000. The purchase price of the limited partnership
interests approximated fair value, and accordingly, no portion of the
purchase price has been expensed. The purchase price of the limited
partnership interests by Crestline Capital were pushed down to these
financial statements resulting in a step-up in the assets to fair value.
3. During the second quarter, Crestline Capital entered into an agreement to
sell the Partnership's membership interest in the Company to Apple
Hospitality Two, Inc. (the "Buyer") for total consideration of $119 million,
including approximately $54 million of debt that will be assumed by the
Buyer. The transaction is expected to close in the third quarter of 2001 and
is subject to customary closing conditions. The Buyer made a $47 million
loan to Crestline Capital during the second quarter. The loan bears interest
at 12% and is due upon the earlier of the closing of the transaction or
August 31, 2001.
F-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Residence Inn III LLC:
We have audited the accompanying balance sheets of Residence Inn III LLC, a
Delaware limited liability company, as of December 29, 2000 and December 31,
1999, and the related statements of operations and member's equity and cash
flows for the fiscal years then ended. These financial statements are the
responsibility of Residence Inn III LLC'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. Those standards require that we plan and perform
the audits 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 Residence Inn III LLC as of
December 29, 2000 and December 31, 1999 and the results of its operations and
its cash flows for the fiscal years then ended in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
February 23, 2001
F-7
RESIDENCE INN III LLC
BALANCE SHEETS
As of December 29, 2000 and December 31, 1999
(in thousands)
ASSETS
2000 1999
------- -------
Property and equipment, net...................... $80,123 $81,085
Property improvement fund........................ -- 1,486
Mortgage escrow reserves......................... 4,042 2,393
Due from Residence Inn by Marriott, Inc.......... 1,389 1,202
Other assets..................................... 1,623 1,563
Cash and cash equivalents........................ 4,356 --
------- -------
Total assets.............................. $91,533 $87,729
======= =======
LIABILITIES AND MEMBER'S EQUITY
Accounts payable and accrued expenses............ $ 761 $ 232
Deferred incentive management fees............... 1,389 1,269
Mortgage debt.................................... 54,235 55,588
------- -------
Total liabilities......................... 56,385 57,089
------- -------
Member's equity.................................. 35,148 30,640
------- -------
Total liabilities and member's equity..... $91,533 $87,729
======= =======
The accompanying notes are an integral part of these financial statements.
F-8
RESIDENCE INN III LLC
STATEMENTS OF OPERATIONS AND MEMBER'S EQUITY
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
------- -------
REVENUES
Suites................................................ $37,595 $36,235
Other operating departments........................... 1,770 1,768
------- -------
Total revenues................................. 39,365 38,003
------- -------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses.....................
Suites............................................ 7,846 7,466
Other operating departments....................... 873 800
Other operating expenses.......................... 9,724 9,573
------- -------
Total property-level costs and expenses........ 18,443 17,839
Depreciation and amortization......................... 3,906 3,402
Residence Inn system fee.............................. 1,504 1,449
Property taxes........................................ 1,409 1,383
Incentive management fee.............................. 1,209 1,107
Base management fee................................... 787 760
Equipment rent and other.............................. 343 265
------- -------
Total operating costs and expenses............. 27,601 26,205
------- -------
OPERATING PROFIT......................................... 11,764 11,798
Interest expense...................................... (4,604) (4,709)
Interest income....................................... 395 347
General and administrative expenses................... (150) (222)
------- -------
NET INCOME............................................... 7,405 7,214
Beginning member's equity................................ 30,640 23,426
Capital contributions.................................... 1,892 --
Distributions to member.................................. (4,789) --
------- -------
Ending member's equity................................... $35,148 $30,640
======= =======
The accompanying notes are an integral part of these financial statements.
F-9
RESIDENCE INN III LLC
STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
------- --------
OPERATING ACTIVITIES
Net income....................................... $ 7,405 $ 7,214
Noncash items:
Depreciation and amortization................ 3,906 3,402
Amortization of deferred financing costs..... 113 89
Working capital changes:
Due from Residence Inn by Marriott, Inc...... (187) 22
Other assets................................. (409) (590)
Accounts payable and accrued expenses........ 529 218
Deferred incentive management fees........... 120 201
------- --------
Cash provided by operations............... 11,477 10,556
------- --------
INVESTING ACTIVITIES
Additions to property and equipment.............. (2,901) (1,671)
Changes in property improvement fund, net........ 1,486 (1,298)
Change in property improvement mortgage escrow... (1,283) --
------- --------
Cash used in investing activities............ (2,698) (2,969)
------- --------
FINANCING ACTIVITIES
Capital contributions............................ 1,892 --
Distributions.................................... (4,789) --
Payment of financing costs....................... (173) (959)
Change in financing reserves..................... -- (978)
Repayment of mortgage principal.................. (1,353) (54,628)
Issuances of debt................................ -- 55,588
Cash advances to parent.......................... -- (6,610)
------- --------
Cash used in financing activities............ (4,423) (7,587)
------- --------
INCREASE IN CASH AND CASH EQUIVALENTS............... 4,356 --
CASH AND CASH EQUIVALENTS, beginning of year........ -- --
------- --------
CASH AND CASH EQUIVALENTS, end of year.............. $ 4,356 $ --
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest........................... $ 4,516 $ 4,685
======= ========
The accompanying notes are an integral part of these financial statements.
F-10
RESIDENCE INN III LLC
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization
Residence Inn III LLC (the "Company"), a Delaware limited liability company,
is a wholly owned subsidiary of Marriott Residence Inn USA Limited Partnership
(the "Partnership"). The Company was formed on December 10, 1999 as a special
purpose entity to facilitate the refinancing of the Partnership's debt. The
Partnership was the owner of 11 Residence Inn hotels. On December 29, 1999, the
Partnership contributed the assets and liabilities of ten of its Residence Inn
hotels (the "Inns") to the Company in conjunction with the Company entering
into a new loan agreement. The proceeds from the Company's loan financing were
used to repay the existing loan of the Partnership.
The Company's Inns are located in seven states and have a total of 1,150
suites. The Inns are managed by Residence Inn by Marriott, Inc. (the
"Manager"), a wholly owned subsidiary of Marriott International, Inc.
The Partnership's contribution of the Inns to the Company was recorded in a
manner similar to a pooling of interests whereby the historical basis of the
assets and liabilities and the operating accounts of the Partnership are
reflected in the Company's financial statements.
On December 29, 1998, Host Marriott Corporation ("Host Marriott") completed
its plan of reorganizing its business to qualify as a real estate investment
trust ("REIT") by spinning-off to its shareholders its wholly owned subsidiary,
Crestline Capital Corporation ("Crestline Capital"). On March 26, 1999, CCRI
USA, LLC, a wholly owned subsidiary of Crestline Capital, purchased a 74%
limited partner interest in the Partnership from a limited partner for
$34,365,000 in cash. On May 12, 1999, CCRI USA, LLC purchased an additional 3%
limited partnership interest from a limited partner for $1,600,000 in cash. On
August 23, 1999, CC USAGP, LLC (the "General Partner"), a wholly owned
subsidiary of Crestline Capital, purchased the 5% general partner interest in
the Partnership from Host Marriott for $2,720,000 in cash.
The acquisition by Crestline Capital of its interest in the Partnership has
been accounted for by the purchase method of accounting in Crestline Capital's
financial statements by allocating its purchase price to the assets purchased
and liabilities assumed based on their fair values on the date of acquisition.
In accordance with generally accepted accounting principles, the Partnership
became substantially owned by Crestline Capital on August 23, 1999, the date
Crestline Capital purchased the general partnership interest and increased its
ownership percentage in the Partnership to over 80%. On that date, Crestline
Capital's basis in the Partnership's assets and liabilities was pushed down to
these financial statements resulting in a step-up in the assets to fair value.
On February 18, 2000, the Partnership sold its one remaining hotel, the
Raleigh Residence Inn, that was not contributed to the Company. Net proceeds
from the sale approximated $6.2 million.
Note 2. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Friday nearest December 31.
Basis of Accounting
The records are maintained on the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the
F-11
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows:
Buildings and improvements 40 years
Furniture and equipment... 4-10 years
Impairment of real estate properties is based on whether estimated
undiscounted future cash flows from such properties on an individual property
basis will be less than their net book value. If a property is impaired, its
basis is adjusted to fair market value.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt and amendments and are amortized using the
straight-line method, which approximates the effective interest method, over
the term of the loan.
Income Taxes
No provision is made for federal and state income taxes since the member
reports its share of the Company's taxable income, gains, losses, deductions
and credits on its income tax returns and the Company has no obligation to pay
the Partnership for its share of income taxes.
Note 3. Property and Equipment
Property and equipment consists of the following (in thousands):
2000 1999
------- -------
Land and improvements........ $14,082 $13,928
Building and improvements.... 58,455 56,676
Furniture and equipment...... 14,085 13,210
------- -------
86,622 83,814
Less accumulated depreciation (6,499) (2,729)
------- -------
$80,123 $81,085
======= =======
Note 4. Debt
Term Loan
On December 30, 1991, the Partnership entered into a loan agreement with a
life insurance company to provide $58,000,000 of non-recourse debt (the "Term
Loan"). The Term Loan was amortized on the basis of a 25-year amortization
schedule which commenced in March 1994 and matured on December 31, 1998. The
Term Loan was evidenced by (i) promissory notes aggregating $31,000,000 (the
"Fixed Rate Notes") which bore interest at a fixed rate of 9.66% per annum and
(ii) promissory notes aggregating $27,000,000 (the "Floating Rate Notes") which
bore interest at 1.85 percentage points over the three-month London Interbank
Offered Rate ("LIBOR").
F-12
On December 31, 1998, the Term Loan was amended such that its maturity date
was extended from December 31, 1998 to December 29, 1999. As a result of the
Amendment, the Fixed Rate Notes and Floating Rate Notes were consolidated into
a single indebtedness in the principal amount of $54,628,029 (the "Amended Term
Loan"). The Amended Term Loan bore interest at 330 basis points over the
three-month LIBOR (the "Contract Rate"). Beginning February 1, 1999, monthly
principal payments of $75,000 were made on the Amended Term Loan, in addition
to monthly interest payments calculated on the basis of the Contract Rate and
the outstanding principal balance. All unpaid principal and interest was due at
the maturity of the Amended Term Loan on December 29, 1999.
The Amended Term Loan was secured by first mortgages on the fee or leasehold
interest in the Inns, a security interest in all personal property associated
with the Inns and an assignment of the Partnership's rights under the
management agreement.
On December 29, 1999 the Company entered into a new loan agreement (the "New
Loan") with a financial institution to provide $55,588,000 of fixed rate,
non-recourse debt financing with the proceeds from the issuance used to repay
the Amended Term Loan and refinancing costs. The New Loan bears interest at
8.08% and has a scheduled maturity of January 1, 2010.
The New Loan is secured by first mortgages on the fee or leasehold interest
in the Inns, a security interest in all personal property associated with the
Inns and assignment of the Company's rights under the management agreement.
In connection with entering into the New Loan, the Company incurred
$1,132,000 of financing costs which were capitalized and will be amortized over
the term of the New Loan. As of December 29, 2000 and December 31, 1999,
deferred financing costs totaled $1,019,000 and $959,000, respectively, net of
accumulated amortization of $113,000 as of December 29, 2000 and were included
in other assets on the accompanying balance sheets.
Debt maturities at December 29, 2000 are as follows (in thousands):
2001...... $ 1,360
2002...... 1,597
2003...... 1,732
2004...... 1,868
2005...... 2,039
Thereafter 45,639
-------
$54,235
=======
Note 5. Mortgage Escrow Reserves
The mortgage escrow and property improvement reserves consist of the
following as of December 29, 2000 and December 31, 1999 (in thousands):
2000 1999
------ ------
Debt service reserves.................................. $1,029 $ 978
Fixed asset reserves................................... 2,030 796
Real estate tax reserves............................... 983 619
------ ------
4,042 2,393
Property improvement fund.............................. -- 1,486
------ ------
Total mortgage escrow and property improvement reserves $4,042 $3,879
====== ======
The debt service, fixed asset and real estate tax reserves consist of cash
transferred into segregated escrow accounts out of revenues generated by the
Company's Inns, pursuant to the Company's secured debt agreements. Funds from
these reserves are periodically disbursed by the collateral agent to pay for
debt service, capital expenditures and real estate taxes relating to the Inns.
F-13
Note 6. Estimated Fair Value of Financial Instruments
The fair value of the mortgage debt is shown below (in thousands):
2000 1999
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ------- -------- -------
$54,235. $57,699 $55,588 $55,588
The fair value of the mortgage debt is based on the expected future debt
service discounted at a risk-adjusted rate. The fair value of all other
financial assets and liabilities are assumed to equal their carrying amounts.
Note 7. Management Agreement
Prior to the formation of the Company, the Inns were managed by the Manager
pursuant to a management agreement between the Partnership and the Manager. In
connection with the Partnership's contribution of the Company's Inns, the
Company entered into a new management agreement on December 29, 1999 with the
Manager for the ten Inns under terms substantially similar to the prior
management agreement. The management agreement has an initial term expiring on
December 30, 2011, and the Manager has the option to extend the agreement on
one or more Inns for up to five 10-year terms. The Manager earns a base
management fee equal to 2% of gross revenues. The Manager is also entitled to
an incentive management fee equal to 20% of operating profit, as defined in the
management agreement, in excess of $8,780,000 for each calendar year. The
incentive management fee is payable out of 50% of cash flow from operations
remaining after payment of debt service, provision for administrative expenses,
retention by the Company of an owner's priority equal to 11% of the owner's
investment, and payments of amounts due pursuant to any loans from the Company
or the Manager or their affiliates. For fiscal years 2000 and 1999, $787,000
and $760,000, respectively, of base management fees and $1,209,000 and
$1,107,000, respectively, of incentive management fees, respectively, were
earned by the Manager for the Company's Inns. As of December 29, 2000 and
December 31, 1999, $1,389,000 and $1,269,000, respectively, of incentive
management fees were deferred.
The management agreement also provides for a Residence Inn system fee equal
to 4% of suite revenues. In addition, the Manager is reimbursed for each Inn's
pro rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. As franchiser of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional and public relations materials and
programs and the operation of a toll-free reservation system. Each Inn
contributes 2.5% of suite revenues to the marketing fund. For fiscal years 2000
and 1999, Residence Inn system fees totaled $1,504,000 and $1,449,000,
respectively, reimbursements of Chain Services totaled $846,000 and $859,000,
respectively, and contributions to the marketing fund totaled $940,000 and
$906,000, respectively, for the Inns. The Company is also required to provide
the Manager with working capital to meet the operating needs of the Inns. As of
December 29, 2000 and December 31, 1999, $571,000 and $584,000, respectively,
had been advanced to the Manager for working capital and is included in the due
from Residence Inn by Marriott, Inc. on the accompanying balance sheets.
The management agreement also provides for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are equal to 5% of gross revenues of each Inn. For fiscal years 2000 and 1999,
contributions to the property improvement fund totaled $1,968,000 and
$1,900,000, respectively.
Note 8. Meriden Ground Lease
One of the Inns, the Meriden Residence Inn, is subject to a ground lease.
The initial term of the ground lease will expire on August 14, 2013. The
Company will have the option to extend the term thereof for up to ten
consecutive periods of five years each . Rent for the initial term was prepaid
and is amortized on a straight-line
F-14
basis over the initial term of the lease. Rent after the initial term will be
prepaid in varying amounts at the beginning of each applicable extended term.
As of December 29, 2000 and December 31, 1999, prepaid ground rent, which is
included in other assets on the accompanying balance sheets, was $559,000 and
$604,000, respectively, net of the accumulated amortization of $641,000 and
$596,000, respectively.
Note 9. Related Party Transactions
The Company reimburses Crestline Capital for general and administrative
costs incurred on behalf of the Company which amount to $113,000 and $112,000
in 2000 and 1999, respectively. These amounts are charged based on direct costs
incurred by Crestline Capital on behalf of the Company or on level efforts
performed by Crestline Capital employees for accounting and administrative
services provided to the Company. As of December 29, 2000 and December 31,
1999, amounts due to Crestline Capital totaled $342,000 and $59,000, which is
included in accounts payable and accrued expenses on the accompanying balance
sheets.
Note 10. Subsequent Event
On March 23, 2001, CCRI USA, LLC purchased the remaining 18% limited
partnership interest in the Partnership for $11,400,000. As a result of that
transaction, Crestline Capital, through its wholly owned subsidiaries, owns
100% of the Partnership.
Note 11. Sale of the Inns (unaudited), Subsequent to Date of Auditor's Report
On September 28, 2001, the Company sold the remaining Residence Inn hotels
for a purchase price of approximately $119 million.
F-15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Limited Partners of Marriott Residence Inn USA Limited Partnership:
We have audited the accompanying statements of operations, changes in
partners' capital and cash flows of Marriott Residence Inn USA Limited
Partnership (a Delaware limited partnership) for the year ended December 31,
1998. These financial statements are the responsibility of the General
Partner's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and its cash flows of
Marriott Residence Inn USA Limited Partnership for the year ended December 31,
1998 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Partnership has
given retroactive effect to the change to include property-level revenues and
operating expenses of its inns in the statement of operations.
ARTHUR ANDERSEN LLP
Washington, D.C.
May 18, 1999
F-15
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
1998
-----------
REVENUES
Suites................................................ $38,766,657
Other operating departments........................... 1,997,330
-----------
Total revenues................................. 40,763,987
-----------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Suites............................................ 8,020,529
Other operating departments....................... 972,812
Other Inn operating expenses...................... 10,515,512
-----------
Total property-level costs and expenses........ 19,508,853
Depreciation and amortization......................... 4,293,394
Residence Inn system fee.............................. 1,550,666
Property taxes........................................ 1,514,981
Incentive management fee.............................. 1,081,786
Base management fee................................... 815,280
Equipment rent and other.............................. 680,167
-----------
Total operating costs and expenses............. 29,445,127
-----------
OPERATING PROFIT......................................... 11,318,860
Interest expense...................................... (5,697,301)
Interest income....................................... 264,737
-----------
NET INCOME............................................... $ 5,886,296
===========
ALLOCATION OF NET INCOME
General Partner....................................... 294,315
Limited Partners...................................... 5,591,981
-----------
$ 5,886,296
===========
NET INCOME PER LIMITED PARTNER UNIT
(608 Units)........................................... $ 9,197
===========
The accompanying notes are an integral part of this financial statement.
F-16
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
For the Year Ended December 31, 1998
General Limited
Partner Partners Total
---------- ----------- -----------
Balance, December 31, 1997 $3,423,423 $26,016,472 $29,439,895
Capital distributions.. (416,000) (4,438,405) (4,854,405)
Net Income............. 294,315 5,591,981 5,886,296
---------- ----------- -----------
Balance, December 31, 1998 $3,301,738 $27,170,048 $30,471,786
========== =========== ===========
The accompanying notes are an integral part of this financial statement.
F-18
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
1998
-----------
OPERATING ACTIVITIES
Net Income.............................................................. $ 5,886,296
Noncash items:
Depreciation and amortization....................................... 4,293,394
Amortization of deferred financing costs as interest expense........ 385,678
Working capital changes:
Due from Residence Inn by Marriott, Inc................................. (308,700)
Accounts payable and accrued expenses................................... 177,369
-----------
Cash provided by operations...................................... 10,434,037
-----------
INVESTING ACTIVITIES
Additions to property and equipment..................................... (1,442,258)
Change in restricted cash............................................... --
Changes in property improvement fund, net............................... (439,106)
-----------
Cash (used in) provided by investing activities.................. (1,881,364)
-----------
FINANCING ACTIVITIES
Capital distributions................................................... (4,854,405)
Payment of financing costs.............................................. (88,782)
Repayment of mortgage principal......................................... (837,013)
(Repayments of) proceeds from note payable to Host Marriott Corporation. --
-----------
Cash used in financing activities................................ (5,780,200)
-----------
INCREASE IN CASH AND CASH EQUIVALENTS...................................... 2,772,473
CASH AND CASH EQUIVALENTS, Beginning of year............................... 3,701,029
-----------
CASH AND CASH EQUIVALENTS, end of year..................................... $ 6,473,502
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.............................................. $ 5,758,000
===========
The accompanying notes are an integral part of this financial statement.
F-19
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1. The Partnership
Description of the Partnership
Marriott Residence Inn USA Limited Partnership (the "Partnership"), a
Delaware limited partnership, was formed to acquire, own and operate 11
Residence Inn by Marriott hotels (the "Inns"). The Inns are located in eight
states and have a total of 1,294 suites. The Inns are managed by Residence Inn
by Marriott, Inc. (the "Manager"), a wholly-owned subsidiary of Marriott
International, Inc. ("MII"), as part of the Residence Inn by Marriott hotel
system.
The Partnership was formed on August 21, 1991 and operations commenced on
December 30, 1991 (the "Closing Date"). On the Closing Date, the Inns were
contributed to the Partnership pursuant to the terms of a contribution
agreement between Host Marriott, the Manager, several wholly-owned subsidiaries
of Host Marriott (collectively, the "Contributing Limited Partners") and the
Partnership. In consideration for their contribution, the Contributing Limited
Partners received 608 limited partner interests ("Units"), representing a 95%
interest, and the proceeds of a $58,000,000 mortgage loan (see Note 5). The
General Partner contributed $3,200,000 for a 5% interest in the Partnership.
On June 30, 1992 (the "Initial Equity Closing Date"), the Contributing
Limited Partners transferred 170 Units to non-Host Marriott investors. All
remaining Units were transferred between December 31, 1992 and December 2,
1994. For U.S. Federal income tax reporting purposes (IRC Section
708(b)(1)(B)), a termination of the Partnership occurred on March 15, 1993 (the
"Remeasurement Date") as a result of the sale of 50% of the interests in the
Partnership's capital and profits in the previous twelve months. As a result of
the termination, for tax purposes, the Partnership was treated as distributing
its properties to the partners who immediately thereafter contributed the
properties to a new partnership. There were no adjustments made to these
financial statements as a result of this termination. However, on a tax basis,
under applicable U.S. Federal income tax regulations, the carrying value of the
property and equipment were adjusted to reflect its fair market value on the
Remeasurement Date.
On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the parent
of RIBM Three LLC, the sole general partner of the partnership (the "General
Partner"), announced that its Board of Directors authorized the Company to
reorganize its business operations to qualify as a real estate investment trust
("REIT") to become effective as of January 1, 1999 (the "REIT Conversion"). On
December 29, 1998, Host Marriott announced that it had completed substantially
all the steps necessary to complete the REIT Conversion, including spinning off
Crestline Capital Corporation, to the shareholders of Host Marriott,
("Crestline Capital") and expected to qualify as a REIT under the applicable
Federal income tax laws beginning January 1, 1999. Subsequent to the REIT
Conversion, Host Marriott is referred to as Host REIT. In connection with the
REIT Conversion, Host REIT contributed substantially all of its hotel assets to
a newly formed partnership, Host Marriott L.P. ("Host LP").
On December 24, 1998, in connection with Host Marriott's conversion to a
real estate investment trust (the "Conversion"), the name of the general
partner changed from Marriott RIBM Three Corporation to RIBM Three LLC. Prior
to the Conversion, the General Partner was a wholly-owned subsidiary of Host
Marriott. Pursuant to the Conversion, Host Marriott contributed a 1% Class A
managing interest in the General Partner to Host Marriott L.P., and a 99% Class
B interest in the General Partner to Rockledge Hotel Properties, Inc., a non-
controlled subsidiary of Host Marriott L.P. In March 1999, Crestline Capital
purchased a 74% limited partner interest in the Partnership for $34.4 million
from the limited partners.
F-20
Partnership Allocations and Distributions
Pursuant to the terms of the partnership agreement, Partnership allocations,
for U.S. Federal income tax purposes, and distributions subsequent to the
Initial Equity Closing Date are generally made as follows:
a. Cash available for distribution will generally be distributed (i) first,
100% to the limited partners, until the limited partners have received,
with respect to such year, an amount equal to 11% of their average daily
outstanding Net Invested Capital, defined as the excess of capital
contributions over cumulative distributions of net refinancing and/or
sales proceeds ("Capital Receipts"); (ii) second, 100% to the General
Partner until the General Partner has received, with respect to such
year, an amount equal to 11% of Net Invested Capital; (iii) third, 5% to
the General Partner and 95% to the limited partners, until the partners
have received cumulative distributions of Capital Receipts equal to the
partners' capital contributions; and (iv) thereafter, 15% to the General
Partner and 85% to the limited partners.
b. Capital Receipts not retained by the Partnership will be distributed (i)
first, 100% to the limited partners until the limited partners have
received an amount equal to the unpaid portion of a 14% return on Net
Invested Capital; (ii) second, 100% to the limited partners until the
partners have received cumulative distributions of Capital Receipts
equal to their capital contributions; (iii) third, 100% to the General
Partner until the General Partner has received an amount equal to the
unpaid portion of a 14% return on Net Invested Capital; (iv) fourth,
100% to the General Partner until the General Partner has received
cumulative distributions of Capital Receipts equal to its capital
contribution; and (v) thereafter, 15% to the General Partner and 85% to
the limited partners.
c. Proceeds from the sale of substantially all of the assets of the
Partnership will be distributed to the partners in accordance with their
capital account balances as adjusted to take into account gain or loss
resulting from such sale.
d. Net profits will generally be allocated to the partners in proportion to
the distributions of cash available for distribution; however, the
General Partner will not be allocated less than 1%.
e. Net losses will generally be allocated 5% to the General Partner and 95%
to the limited partners.
f. Gain recognized by the Partnership will generally be allocated (i)
first, to all partners whose capital accounts have negative balances
until such balances are brought to zero; (ii) next, to all partners in
the amount necessary to bring their respective capital account balances
to an amount equal to their Net Invested Capital plus a 14% return on
Net Invested Capital; and (iii) thereafter, in amounts necessary to
bring the ratio of the General Partner and limited partners' capital
account balances in excess of capital priority amounts, as defined, to
15% and 85%, respectively.
g. Losses recognized by the Partnership will generally be allocated (i)
first, 85% to limited partners and 15% to the General Partner until
positive capital account balances in excess of capital priority amounts,
as defined, have been eliminated; (ii) next, to all partners whose
capital accounts have positive balances until such balances have been
eliminated; and (iii) thereafter, 100% to the General Partner.
For financial reporting purposes, net profits and losses are allocated among
partners based upon their stated interests in cash available for distributions.
Note 2. Summary of Significant Accounting Policies
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-21
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.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash equivalents.
Property and Equipment
Property and equipment is recorded at cost. Property and equipment
contributed by Host Marriott and its affiliates has been recorded at its
carryover basis. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets as follows:
Buildings and improvements 40 years
Furniture and equipment... 4-10 years
All property and equipment is pledged as security for the mortgage debt
described in Note 3.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual property basis will be less than their net book value. If a property
is impaired, its basis is adjusted to fair market value.
Restricted Cash Reserve
A restricted cash reserve was available to support distributions to the
limited partners if, and to the extent, cash distributions for any year through
1996 otherwise would be insufficient to provide the limited partners an
annualized return on the limited partners' capital contributions equal to 11%
for 1996 and 10.75% for 1995. The remaining balance in the restricted cash
reserve at February 15, 1997 became part of the Partnership's general working
capital and was used to repay the note payable due to Host Marriott.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt and amendments and are amortized using the
straight-line method, which approximates the effective interest method, over
the term of the loan. The Partnership paid $88,782 in financing costs during
the year ended December 31, 1998 in connection with the extension of the
mortgage debt.
Revenues and Expenses
Revenues primarily represent gross revenues generated by the Inns.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board ("FASB") reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership assessed the impact of EITF 97-2 on its financial statements
and determined that EITF 97-2 requires the Partnership to include
property-level revenues and operating expenses of its Inns in its Statement of
F-21
Operations. The Partnership has given retroactive effect to the adoption of
EITF 97-2 in the accompanying statement of operations. Application of EITF 97-2
to the financial statements for the year ended December 31, 1998 increased both
revenues and operating expenses by approximately $19.5 million, and had no
impact on operating profit or net income.
Interest Rate Swap Agreement
The Partnership entered into an interest rate swap agreement to convert
certain portions of its variable rate debt to a fixed rate basis. The interest
rate differential to be paid or received on the interest rate swap agreement is
accrued as interest rates change and is recognized as an adjustment to interest
expense.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives for the assets,
differences in the timing of recognition of certain fees and straight-line rent
adjustments. As a result of these differences, the excess of the tax basis in
Partnership net liabilities over the Partnership net liabilities reported in
the accompanying financial statements is $7,218,000 as of December 31, 1998.
Note 3. Debt
Term Loan
On the Closing Date, the Partnership entered into a loan agreement with a
life insurance company, as lead lender and servicer, to provide $58,000,000 of
non-recourse debt (the "Term Loan"). The Term Loan was amortized on the basis
of a 25-year amortization schedule which commenced in March 1994 and matured on
December 31, 1998.
The Term Loan was evidenced by (i) promissory notes aggregating $31,000,000
(the "Fixed Rate Notes") which bore interest at a fixed rate of 9.66% per annum
and (ii) promissory notes aggregating $27,000,000 (the "Floating Rate Notes")
which bore interest at 1.85 percentage points over the three-month London
Interbank Offered Rate. On the Closing Date, the Partnership entered into an
interest rate swap agreement (the "Swap Agreement") with a third party to
effectively fix the interest rate on the Floating Rate Notes at 9.66% per annum
until maturity of the Term Loan. The counterparty's obligations under the Swap
Agreement were guaranteed by the parent company of the counterparty, a national
investment banking institution. There was no nonperformance by the counterparty
during the term of the agreement. The Partnership's obligations under the Swap
Agreement were secured by a pledge of collateral by the General Partner. The
Swap Agreement expired on December 31, 1998.
On December 31, 1998, the Term Loan was amended such that its maturity date
was extended from December 31, 1998 to December 31, 1999. The Term Loan was
extended for only one year in anticipation of a possible sale of the
Partnership's hotels in 1999. As a result of the Amendment, the Fixed Rate
Notes and Floating Rate Notes were consolidated into a single indebtedness in
the principal amount of $54,628,029 (the "Amended Term Loan"). The Amended Term
Loan bears interest at 3.3 percentage points over the three-month LIBOR (the
"Contract Rate"). The Contract Rate in effect on December 31, 1998 was 8.6%. On
the Amendment date, the Partnership made the following payments: (1) $529,740
in interest due and payable on the Term Loan, (2) a $50,000 underwriting fee
payable in connection with the Amendment, and (3) $38,782 in legal fees.
Beginning February 1, 1999, monthly principal payments of $75,000 will be made
on the Amended Term Loan, in addition to monthly interest payments calculated
on the basis of the Contract Rate and the outstanding principal balance. All
unpaid principal and interest is due at the maturity of the Amended Term Loan
on December 31, 1999.
F-22
The Amended Term Loan is secured by first mortgages on the Partnership's fee
or leasehold interest in ten of the Inns (the "Term Loan Inns"), a security
interest in all personal property associated with the Term Loan Inns including
furniture and equipment, inventory, contracts and other general intangibles,
and an assignment of the Partnership's rights under the management agreement.
Raleigh Mortgage Loan
On the Closing Date, the Partnership assumed one of the Contributing Limited
Partner's obligations under a nonrecourse mortgage loan in the original
principal amount of $5,900,000 with respect to the Raleigh Inn. The loan
carried a fixed interest rate of 10.25% and required monthly payments of
interest and principal, based on a 30-year amortization schedule, until
maturity on July 1, 1996. On July 1, 1996, the Raleigh Mortgage Loan was fully
repaid with proceeds advanced under a loan from Host Marriott.
Note Payable to Host Marriott
On July 1, 1996, the Raleigh Mortgage Loan was repaid in full with proceeds
of a $5,392,667 unsecured nonrecourse loan from Host Marriott. Interest on the
loan accrues at prime plus one percent. The loan matured on April 30, 1997 with
the entire balance due at that time. The Partnership repaid the loan with funds
released from the restricted cash reserve and cash from Partnership operating
activity.
Note 4. Management Agreement
The Manager operates the Inns pursuant to a long-term management agreement
with an initial term expiring December 30, 2011. The Manager has the option to
extend the agreement on one or more Inns for up to five 10-year terms. The
Manager earns a base management fee equal to 2% of the Inns' gross revenues,
which is subordinate to payment of qualifying debt service payments, a
provision for Partnership administrative expenses and retention by the
Partnership of annual cash flow from operations of $7,040,000. The Manager is
also entitled to an incentive management fee equal to 20% of operating profit,
as defined, in excess of $9,500,000 for each calendar year. The incentive
management fee is payable out of 50% of cash flow from operations remaining
after payment of debt service, provision for Partnership administrative
expenses, retention by the Partnership of annual cash flow from operations of
$7,040,000, payment of current base management fees, payment of amounts due
pursuant to any loans from Host Marriott and deferred base management fees.
Through December 31, 1996, base and incentive management fees not paid
currently were waived by the Manager. Subsequent to December 31, 1996, any base
and incentive management fees not paid are earned by the Manager and have been
accrued by the Partnership. For the years ended December 31, 1998, $815,280 of
base management fees and $436,798 of incentive management fees, respectively,
were paid to the Manager. As of December 31, 1998, $1,068,122 in incentive
management fees were deferred.
The management agreement also provides for a Residence Inn system fee equal
to 4% of suite revenues. In addition, the Manager is reimbursed for each Inn's
pro rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. As franchiser of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional and public relations materials and
programs and the operation of a toll-free reservation system. Each Inn
contributes 2.5% of suite revenues to the marketing fund. For the years ended
December 31, 1998, the Partnership paid Residence Inn system fees of
$1,550,666, reimbursed the Manager for $962,145 of Chain Services and
contributed $969,166 to the marketing fund. The Partnership is required to
provide the Manager with working capital to meet the operating needs of the
Inns.
The management agreement also provides for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are equal to 5% of gross revenues of each Inn. During 1998, the Partnership
contributed $2,038,199 to the property improvement fund.
F-24
Note 5. Meriden Ground Lease
On the Closing Date, the Partnership assumed all of Host Marriott's rights
and obligations as tenant under the ground lease with respect to the land on
which the Meriden Inn is located. The initial term of the ground lease will
expire on August 14, 2013. The Partnership will have the option to extend the
term thereof for up to ten consecutive periods of five years each. Rent for the
initial term in the amount of $1,200,000 was prepaid by Host Marriott and is
amortized on a straight-line basis over the initial term of the lease. Rent
after the initial term will be prepaid in varying amounts at the beginning of
each applicable extended term.
Note 6. Sale of the Inns (unaudited), Subsequent to Date of Auditor's Report
On September 28, 2001, ten of the Residence Inns owned by the Partnership
were sold for a purchase price of approximately $119 million.
(Remainder of Page is Intentionally Blank)
F-25
Apple Hospitality Two, Inc.
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2001 (unaudited)
The following unaudited Pro Forma Condensed Consolidated Balance Sheet of
Apple Hospitality Two, Inc. (the "Company) is presented as if the purchase of
Marriott Residence Inn USA Limited Partnership (the "Partnership) from
Crestline Capital Corporation ("Crestline") for $119 million had occurred on
June 30, 2001. All of the assets and liabilties of the Partnership at June 30,
2001 were held by Residence Inn III LLC. Residence Inn III LLC consists of 10
Residence Inn(R) by Marriott(R) franchised hotels. The historical balance sheet
of Residence Inn III LLC is as of June 15, 2001.
Such information is based in part upon the consolidated balance sheet of the
Company, and the historical balance sheet of Residence Inn III LLC. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Balance Sheet is
not necessarily indicative of what the actual financial position would have
been assuming such transactions had been completed as of June 30, 2001 nor does
it purport to represent the future financial position of the Company.
Acquisition Residence
Historical Historical Closing Inn
Balance Residence Adjustments Acquisition Total
Sheet Inn III LLC (A) Adjustments Proforma
----------- ----------- ----------- ------------ ------------
ASSETS
Investment in hotel properties.......... -- $87,151,000 -- $ 33,536,000(C) $120,687,000
Cash and cash equivalents............... $11,047,830 3,722,000 (3,722,000) (10,901,983)(B) 145,847
Mortgage escrow reserves................ -- 4,096,000 (1,791,000) 1,791,000(D) 4,096,000
Due from Residence Inn by Marriott, Inc. -- 1,623,000 (1,623,000) 571,000(E) 571,000
Notes receivable........................ 47,000,000 -- -- (47,000,000)(B) --
Interest receivable..................... 470,000 -- -- (470,000)(B) --
Prepaid expenses........................ 85,051 -- -- -- 85,051
Other assets............................ 1,185,021 1,492,000 -- (1,001,000)(B) --
-- -- -- (962,000)(F) 714,021
----------- ----------- ----------- ------------ ------------
Total Assets............................ $59,787,902 $98,084,000 $(7,136,000) $(24,436,983) $126,298,919
=========== =========== =========== ============ ============
LIABILITIES and SHAREHOLDERS'
EQUITY
Liabilities
Mortgage notes payable.................. -- $53,619,000 -- -- $ 53,619,000
Accounts payable--affiliate............. $ 25,429 -- -- -- 25,429
Accounts payable and accrued expenses... 120,374 563,000 -- -- 683,374
Deferred incentive management fees...... -- 1,486,000 -- $ (1,486,000)(B) --
----------- ----------- ----------- ------------ ------------
Total Liabilities....................... 145,803 55,668,000 -- (1,486,000) 54,327,803
Shareholders' equity
Member's equity......................... -- 42,416,000 (7,136,000) (35,280,000)(F) --
Common stock, no par value, authorized
200,000,000 shares; issued and
outstanding 6,781,348 shares........... 59,035,871 -- -- 12,329,017(B)(D)(E) 71,364,888
Class B convertible stock, no par value,
authorized 240,000 shares; issued and
outstanding 240,000 shares............. 24,000 -- -- -- 24,000
Net income greater than distributions... 582,228 -- -- -- 582,228
----------- ----------- ----------- ------------ ------------
Total Shareholders' Equity.............. 59,642,099 42,416,000 (7,136,000) (22,950,983) 71,971,116
----------- ----------- ----------- ------------ ------------
Total Liabilities and Shareholders'
Equity................................. $59,787,902 $98,084,000 $(7,136,000) $(24,436,983) $126,298,919
=========== =========== =========== ============ ============
F-25
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited)
(A)Represents the reduction of balances retained by the prior owner of the
Partnership. In accordance with the Purchase Agreement, the prior owner will
retain its cash, receivables from Marriott, and debt service and real estate
tax reserves.
(B)Total purchase price consists of the following:
Purchase price per contract............................................................... $119,000,000
Fair value of deferred incentive management fee liability assumed, net of $750,000 credit. 736,000
Fair value of liability assumed........................................................... 563,000
------------
Sub-total............................................................................. 120,299,000
Acquisition fee payable to ASRG........................................................... 2,380,000
Additional closing costs.................................................................. 843,000
------------
Total purchase price.................................................................. $123,522,000
============
The purchase price was satisfied by the following:
Cash:
-on hand................................................................. $ 10,901,983
-net proceeds received from sale of common stock subsequent to 6/30/01... 9,967,017
------------
20,869,000
Assumption of mortgage loan................................................ 53,619,000
Assumption of liabilities.................................................. 563,000
Application of note receivable from Crestline.............................. 47,000,000
Application of interest on note receivable from Crestline.................. 470,000
Application of escrow deposit.............................................. 1,001,000
------------
$123,522,000
============
(C)Allocation of purchase price (see Note B above) to assets acquired at fair
value are as follows:
Purchase price (See Note B)........................ $123,522,000
Less:
Restricted cash--FF&E reserves................. 2,305,000
Other assets and prepaids...................... 530,000
------------
Amount allocated to investment in hotel properties. 120,687,000
Net book value of investment in hotel properties... 87,151,000
------------
Net increase in book value of investment in hotels. $ 33,536,000
============
(D)Represents funding of debt service and real estate capital reserves through
net proceeds from the sale of common stock subsequent to 6/30/01
(E)Represents funding of working capital reserve through net proceeds from the
sale of common stock subsequent to 6/30/01.
(F)Represents elimination of historical member's equity and deferred financing
costs associated with prior owner.
F-26
Apple Hospitality Two, Inc.
Pro Forma Condensed Consolidated Statements of Operations
For the year ended December 31, 2000 and the period ended June 30, 2001
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Hospitality Two, Inc. (the "Company") are presented as if
the purchase of Marriott Residence Inn USA Limited Partnership (the
"Partnership") from Crestline Capital Corporation ("Crestline") for $119
million had occurred at the beginning of the periods presented prior to
acquisition by the Company and all of the hotels had been leased to Apple
Hospitality Management, Inc., our wholly owned taxable purchased subsidiary
pursuant to master hotel lease agreements. All of the assets and liabilities of
the Partnership were held by Residence Inn III LLC. Residence Inn III LLC
consists of 10 Residence Inn(R) by Marriott(R) hotels. Marriott will continue
to manage the hotels under agreements not materially different from historical
contractual arrangements. Such pro forma information is based in part upon the
historical Consolidated Statements of Operations of the Company, and the
historical Statements of Operation of Residence Inn III LLC.In management's
opinion, all adjustments necessary to reflect the effects of these transactions
have been made. The reporting periods for the hotels acquired will reflect
twelve weeks of operations for the first three quarters and sixteen weeks for
the fourth quarter.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the periods presented are not necessarily indicative of what
actual results of operations of the Company would have been assuming such
transactions had been completed as of the beginning of the periods presented,
nor does it purport to represent the results of operations for future periods.
For the year ended December 31, 2000 (unaudited)
Historical Historical
Statement of Residence Pro Forma Total
Operations Inn III LLC(A) Adjustments Pro Forma
------------ -------------- ----------- -----------
Revenue:
Suite revenue.................... -- $37,595,000 -- $37,595,000
Other operating revenue.......... -- 1,770,000 -- 1,770,000
Interest income.................. -- 395,000 $ (395,000)(B) --
-- ----------- ----------- -----------
Total revenue..................... -- 39,760,000 (395,000) 39,365,000
Expenses:
Operating expenses............... -- 18,786,000 -- 18,786,000
General and administrative....... -- 150,000 (150,000)(C)
811,658 (D) 811,658
Franchise fees................... -- 1,504,000 -- 1,504,000
Management fees.................. -- 787,000 -- 787,000
Incentive management fees........ -- 1,209,000 -- 1,209,000
Taxes, insurance and other....... -- 1,409,000 -- 1,409,000
Depreciation of real estate owned -- 3,906,000 (3,906,000)(E)
2,985,315 (F) 2,985,315
Interest......................... -- 4,604,000 (4,604,000)(G)
4,407,415 (H) 4,407,415
-- ----------- ----------- -----------
Total expenses.................... -- 32,355,000 (455,612) 31,899,388
Income tax expense................ -- -- 125,716 (K) 125,716
-- ----------- ----------- -----------
Net income........................ -- $ 7,405,000 $ (65,104) $ 7,339,896
== =========== =========== ===========
Earnings per common share:
Basic and Diluted................ -- $ 0.95
== ===========
Basic and diluted weighted average
common shares outstanding....... -- 7,728,948 (I) 7,728,948
== ===========
F-27
For the period ended June 30, 2001 (unaudited)
Historical Historical
Statement of Residence Pro Forma Total
Operations Inn III LLC(A) Adjustments Pro Forma
------------ -------------- ----------- -----------
Revenue:
Suite revenue.................... -- $17,504,000 -- $17,504,000
Other operating revenue.......... -- 767,000 -- 767,000
Interest income and other revenue $ 635,526 148,000 $ (635,526)(J)
(148,000)(B) --
---------- ----------- ----------- -----------
Total revenue..................... 635,526 18,419,000 (783,526) 18,271,000
Expenses:
Operating expenses............... -- 8,868,000 -- 8,868,000
General and administrative....... 53,298 139,000 352,532(D)
-- -- (139,000)(C) 405,830
Franchise fees................... -- 700,000 -- 700,000
Base management fees............. -- 365,000 -- 365,000
Incentive management fees........ -- 571,000 -- 571,000
Taxes, insurance and other....... -- 738,000 -- 738,000
Depreciation of real estate owned -- 1,973,000 (1,973,000)(E)
-- -- 1,492,657(F) 1,492,657
Interest......................... -- 2,090,000 (2,090,000)(G)
-- -- 2,203,708(H) 2,203,708
---------- ----------- ----------- -----------
Total expenses.................... 53,298 15,444,000 (153,103) 15,344,195
Income tax expense................ -- -- 44,317(K) 44,317
---------- ----------- ----------- -----------
Net income........................ $ 582,228 $ 2,975,000 $ (674,740) $ 2,882,488
========== =========== =========== ===========
Earnings per common share:
Basic and Diluted................ $ 0.36 $ 0.37
========== ===========
Basic and diluted weighted average
common shares outstanding....... 1,627,712 6,101,236(I) 7,728,948
========== ===========
F-28
Notes to Pro Forma Condensed Consolidated Statements of Operations (unaudited):
(A)Represents results of operations for the hotels acquired on a pro forma
basis as if the Partnership was owned by the Company at the beginning of the
periods presented for the respective periods prior to acquisition by the
Company. The historical financials of the Partnership reflect the operations
for the 24 weeks ended June 15, 2001.
(B)Represents the elimination of historical interest income recorded by the
prior owner.
(C)Represents the elimination of the historical general and administrative
expense allocated to the hotels by the prior owner, which will not be
incurred by the Company.
(D)Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company plus anticipated legal and accounting fees, employee costs, salaries
and other costs of operating as a public company of $811,658 and $352,531
for the year ended December 31, 2000, and the six months ended June 30,
2001, respectively.
(E)Represents the elimination of the historical depreciation expense recorded
by the prior owner.
(F)Represents the depreciation on the hotels acquired based on the purchase
price allocation of $98 million to depreciable property. The weighted
average lives of the depreciable assets are 39 years for building and 7
years for FF&E. The estimated useful lives are based on management's
knowledge of the properties and the hotel industry in general.
(G)Represents the elimination of the historical interest expense recorded by
the prior owner.
(H)Represents the interest expense for the hotel acquisitions for the period in
which the hotels were not owned. Interest was computed using the interest
rates of 8.08% on the mortgage debt of $53,619,000, including amortization
of deferred financing costs.
(I)Represents additional common shares assuming the Partnership was acquired at
the beginning of the periods presented with $68 million of the gross
proceeds from the "best efforts" offering of $9.50 per share (net $8.50 per
share) for the first $30 million and $10 per share (net $8.95 per share) for
the remainder.
(J)Represents the elimination of the interest income recorded on the $47
million promissory note with Crestline, as the related note receivable was
used to purchase the Partnership.
(K)Represents the combined state and federal income tax expense of our wholly
owned taxable REIT subsidiary estimated on a combined rate of 40%, based on
rental income computed under contractual arrangements between the Company
and our wholly-owned taxable REIT subsidiary.
F-29