SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File Number 000-30491
APPLE SUITES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1933472
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
10 SOUTH THIRD STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
(804) 344-8121
(Registrant's telephone number, including area code)
306 E. MAIN STREET
RICHMOND, VIRGINIA
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
At November 1, 2001, there were outstanding 12,666,678 shares of common stock,
no par value, of the registrant.
APPLE SUITES, INC.
FORM 10-Q
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - As of 3
September 30, 2001 and December 31, 2000
Consolidated Statement of Operations - 4
Three months ended September 30, 2001 and
September 30, 2000
Nine months ended September 30, 2001 and September 30, 2000
Consolidated Statement of Shareholders' 5
Equity - Nine months ended September 30, 2001
Consolidated Statement of Cash Flows - 6
Nine months ended September 30, 2001 and September 30, 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 12
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 18
about Market Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings (not applicable).
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities
(not applicable).
Item 4. Submission of Matters to a Vote of
Security Holders (not applicable).
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 20
APPLE SUITES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Investment in hotels -net of accumulated depreciation of
$6,930,126 and $3,486,590, respectively $ 171,154,981 $ 124,576,257
Cash and cash equivalents 6,028,132 2,653,058
Restricted cash 41,653 263,686
Rent receivable from Apple Suites Management, Inc. -- 1,872,832
Notes and other receivables from Apple Suites Management, Inc. -- 1,774,684
Accounts receivable, net 1,699,616 --
Inventories 145,300 --
Capital improvement reserve 1,072,994 504,413
Prepaid expenses 568,659 256,773
Deferred financing costs, net 1,281,688 1,265,107
Deferred franchise fees 807,332 --
Other assets 958,874 907,038
------------- -------------
Total Assets $ 183,759,229 $ 134,073,848
============= =============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable-secured $ 73,536,555 $ 57,670,866
Interest payable 34,833 19,988
Accounts payable 99,273 118,576
Accrued expenses 2,422,934 1,451,796
Due to third party manager 418,548 --
Account payable-affiliate 78,126 --
Distributions payable -- 1,848,000
------------- -------------
Total Liabilities 76,590,269 61,109,226
Shareholders' equity
Common stock, no par value, authorized 200,000,000
shares; issued and outstanding 12,666,678 shares and 8,666,348, respectively 111,124,085 75,223,218
Class B convertible stock, no par value, authorized 240,000 shares;
issued and outstanding 240,000 shares 24,000 24,000
Distributions greater than net income (3,979,125) (2,282,596)
------------- -------------
Total Shareholders' Equity 107,168,960 72,964,622
------------- -------------
Total Liabilities and Shareholders' Equity $ 183,759,229 $ 134,073,848
============= =============
See accompanying notes to consolidated financial statements.
3
APPLE SUITES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
REVENUES:
Suite revenue $12,147,379 $ -- $33,066,948 $ --
Lease revenue -- 4,587,021 -- 11,829,752
Other revenue 591,509 -- 1,611,219 --
Interest income 32,955 75,815 341,395 222,504
EXPENSES:
Operating expenses 3,949,478 -- 10,204,592 --
Hotel administrative expenses 945,152 -- 2,598,604 --
Advertising and promotion 1,193,716 -- 3,140,092 --
Utilities 608,250 -- 1,451,925 --
Franchise fees 485,895 -- 1,318,578 --
Management fees 334,296 -- 1,157,852 --
Taxes, insurance and other 605,131 408,385 1,490,905 1,610,940
General and administrative 180,532 131,241 688,039 843,363
Depreciation of real estate owned 1,296,841 800,496 3,443,536 2,019,742
Interest 1,704,559 1,963,591 4,123,584 5,023,329
Ground lease 25,000 -- 75,000 --
Management termination fees -- -- 1,413,520 --
----------- ----------- ----------- -----------
Total expenses 11,328,850 3,303,713 31,106,227 9,497,374
----------- ----------- ----------- -----------
Net income $ 1,442,993 $ 1,359,123 $ 3,913,335 $ 2,554,882
=========== =========== =========== ===========
Basic and diluted earnings per common share $ 0.11 $ 0.25 $ 0.34 $ 0.58
=========== =========== =========== ===========
Distributions per common share $ 0.26 $ 0.26 $ 0.77 $ 0.76
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Common Stock Class B Convertible Stock Distributions
--------------------------------------------------- Greater Total
Number Number Than Shareholders'
of Shares Amount of Shares Amount Net Income Equity
-----------------------------------------------------------------------------------
<s>
Balance at December 31, 2000 8,666,348 $ 75,223,218 240,000 $ 24,000 $ (2,282,596) $ 72,964,622
Net proceeds from the sale of common shares 3,806,801 34,159,103 -- -- -- 34,159,103
Net income -- -- -- -- 3,913,335 3,913,335
Cash distributions declared to
common shareholders ($.77 per share) -- -- -- -- (5,609,864) (5,609,864)
Common stock issued through reinvestment
of distributions 193,529 1,741,764 -- -- -- 1,741,764
-----------------------------------------------------------------------------------
Balance at September 30, 2001 12,666,678 $ 111,124,085 240,000 $ 24,000 $ (3,979,125) $ 107,168,960
====================================================================================
See accompanying notes to consolidated financial statements.
5
APPLE SUITES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30, September 30,
2001 2000
------------- -------------
Cash flow from operating activities:
Net income $ 3,913,335 $ 2,554,882
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation of real estate owned 3,443,536 2,019,742
Amortization of deferred financing costs 108,024 90,983
Amortization of deferred franchise fees 25,704 --
Management termination fees (non-cash portion) 470,090 --
Changes in operating assets and liabilities (excludes amounts
acquired from Apple Suites Management, Inc.)
Prepaid expenses (311,886) 15,082
Rent and notes receivable from Apple Suites Management, Inc. -- (1,326,259)
Receivables (578,244) --
Other assets (142,114) 215,499
Accounts payable (170,307) 189,906
Accounts payable-affiliates 78,126 (607,660)
Due to third party manager (281,800) --
Accrued expenses 197,380 169,996
Interest payable 14,845 (243,598)
------------- -------------
Net cash provided by operating activities 6,766,689 3,078,573
Cash flow from investing activities:
Cash paid for acquisitions of hotels (31,099,671) (8,741,849)
Cash assumed in the acquisition of Apple Suites Management, Inc. 2,793,106 --
Net decrease in cash restricted for Property Improvement Plan
and capital improvement reserve held with third party (346,548) (724,300)
Capital improvements (2,422,589) --
Payments received on notes receivable -- 64,845
------------- -------------
Net cash used in investing activities (31,075,702) (9,401,304)
Cash flow from financing activities:
Repayment of secured notes payable (18,834,311) (75,069,500)
Proceeds from secured notes payable 18,200,000 60,000,000
Payment of financing costs (124,605) (1,319,320)
Net proceeds from issuance of common stock 35,900,867 27,148,596
Cash distributions paid to shareholders (7,457,864) (2,704,293)
------------- -------------
Net cash provided by financing activities 27,684,087 8,055,483
Increase in cash and cash equivalents 3,375,074 1,732,752
Cash and cash equivalents, beginning of period 2,653,058 581,344
------------- -------------
Cash and cash equivalents, end of period $ 6,028,132 $ 2,314,096
============= =============
Supplemental Information:
Non-cash transactions:
Apple Suites Management, Inc. acquisition
Operating assets acquired $ 2,009,431 --
Operating liabilities acquired 5,272,627 --
Notes payable-secured issued to seller in connection
with hotel acqusitions 16,500,000 22,780,500
See accompanying notes to consolidated financial statements.
6
APPLE SUITES, INC
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2001
(1) General Information and Summary of Significant Accounting Policies
------------------------------------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of Apple
Suites, Inc., (the "Company") have been prepared in accordance with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information required by generally accepted
accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months
ended September 30, 2001 are not necessarily indicative of the results that
may be expected for the period ended December 31, 2001. These consolidated
financial statements should be read in conjunction with the Company's
December 31, 2000 Annual Report on Form 10-K.
The REIT Modernization Act, effective January 1, 2001, permits REIT's to
establish taxable businesses to conduct certain previously disallowed
business activities. The Act also reduces the REIT distribution requirement
from 95% to 90% of its taxable income.
Effective January 1, 2001 (the effective date for the recently passed REIT
Modernization Act), the Company acquired Apple Suites Management, Inc. and
its subsidiaries (the "Lessee"). In 2000, the Company paid Mr. Glade M.
Knight, the Company's President and Chairman, a deposit of $900,000 in
exchange for all of the issued and outstanding stock of the Lessee. For
financial reporting purposes, the Company recorded the $900,000 of cash
plus the fair value of net liabilities of $513,520 in the Lessee as a
management termination fee (total of $1,413,520) in 2001, as the Lessee's
only business is its lease with the Company. Effective January 1, 2001, all
intercompany transactions, including lease revenue and rental expenses,
between the Company and the Lessee are eliminated in consolidation.
The Company leases to the Lessee all of its hotels acquired to date. Each
hotel is leased by the Company to the Lessee under a master hotel lease
agreement ("Percentage Lease"). The Lessee now operates as a taxable REIT
subsidiary under the same percentage lease agreements in place before the
management termination transaction.
Promus Hotels, Inc. ("Promus"), a wholly owned subsidiary of Hilton Hotels
Corporation ("Hilton") manages the Company's hotels under the terms of a
management agreement.
The Company did not have any items of comprehensive income requiring
separate reporting and disclosure for the periods presented.
Financial Accounting Standards Board Statement No. 138, "Accounting for
Derivative Instruments and Hedging Activities" (Statement 138) became
effective January 1, 2001. The Company currently does not have any
derivatives subject to this Statement.
In August 2001, the FASB issued Statement 144, "Accounting for the
Impairment or Disposal
7
of Long-Lived Assets" ("SFAS No. 144"). The Statement supercedes Statement
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" and APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for segments of a business to be disposed of. SFAS No. 144
retains the requirements of Statement 121 relating to recognition and
measurement of an impairment loss and resolves certain implementation
issues resulting from Statement 121. This Statement is effective for fiscal
years beginning after December 15, 2001. We are currently assessing the
impact of this statement on the Company, however, we do not anticipate this
statement to have a material impact on the consolidated financial position
or results of operations of the Company.
(2) Investment in Hotels
--------------------
At September 30, 2001, the Company owned 17 hotels. Investment in hotels
consisted of the following :
September 30, December 31,
2001 2000
------------ ------------
Land $ 29,896,619 $ 18,374,917
Building 138,461,020 101,314,421
Furniture and equipment 9,727,468 8,373,509
------------ ------------
$178,085,107 $128,062,847
Less accumulated depreciation (6,930,126) (3,486,590)
------------ ------------
$171,154,981 124,576,257
------------ ------------
Using proceeds from the sale of common shares and executing two short-term
notes totaling $16,500,000, the Company acquired 4 hotels for an aggregate
purchase price of $47,550,000 during 2001. These acquisitions brought the
total number of hotels to 17 and total suites to 1,922. The hotels acquired
in 2001 are located in Atlanta, Georgia; St. Louis, Missouri; Portland,
Oregon; and Herndon, Virginia. All of the Company's hotels are leased by
the Lessee and managed by Promus.
(3) Notes Payable
-------------
On August 15, 2001, the Company placed $7.5 million of secured debt. The
loan bears interest at a fixed interest rate of 8.14% per annum with a
maturity date of September 2011. The loan is payable in monthly
installments, including principal and interest, and is secured by one
hotel. At September 30, 2001, the outstanding balance was $7,492,292. A
portion of the proceeds were used to reduce the outstanding balance of the
Hilton notes.
On June 1, 2001, the Company placed $10.7 million of secured debt. The loan
bears interest at a fixed interest rate of 8.15% per annum with a maturity
date of June 2011. The loan is payable in monthly installments, including
principal and interest, and is secured by one hotel. At September 30, 2001,
the outstanding balance was $10,660,520.
In connection with the purchase of the hotels in Missouri and Oregon, notes
were executed by the Company payable to the order of Hilton in the amount
of $16,500,000. The notes are
8
secured by these 2 hotels and bear a fixed interest rate of 8.5% per annum.
In August and September 2001, the Company repaid the $8.625 million note on
the Missouri hotel and paid $2 million towards the principal on the Oregon
hotel. At September 30, 2001, the remaining note totaled $5.875 million.
Interest payments are due monthly. The note matures on December 28, 2001.
As of January 1, 2001, the Company's outstanding note payable to Hilton,
secured by our property in Boulder, Colorado, totaled $7,780,500 and bore a
fixed interest rate of 8.5%. During January and February 2001, the Company
paid Hilton the outstanding balance on the note from net equity proceeds.
(4) Shareholders' Equity
--------------------
On April 17, 2001, the Company closed its "best-efforts" offering of
shares. The total gross proceeds raised for the "best efforts" offering
were $125,000,000. The number of shares sold during the nine month periods
ended September 30, 2001 and 2000 was 4,000,330 and 3,061,471 shares,
respectively, including shares sold through the reinvestment of
distributions. The Company received gross proceeds of $40,003,301 and
$30,614,698 from the sale of these shares. The net proceeds of the
offering, after deducting selling commissions and other offering costs for
the nine month periods ended September 30, 2001 and 2000 were $35,900,867
and $27,148,596, respectively.
(5) Commitments and Related Parties
-------------------------------
The Company is obligated to pay the costs of real estate and personal
property taxes, property insurance, maintenance of underground utilities
and structural elements of the hotels. The Company is committed under
management agreements to fund up to 5% of gross revenues for capital
expenditures to include periodic replacement or refurbishment of furniture,
fixtures, and equipment. At September 30, 2001 and 2000, $1,072,994 and
$388,467, respectively, were held by Promus for these capital improvement
reserves. In addition, in accordance with the franchise agreements, at
September 30, 2001 and 2000, $41,653 and $294,873, respectively, were held
for the Property Improvement Plan with a financial institution and treated
as restricted cash.
The Company has contracted with Apple Suites Realty Group, Inc. ("ASRG") to
acquire and dispose of real estate assets for the Company. In accordance
with the contract, ASRG is to be paid a fee of 2% of the purchase price of
any acquisitions or sale price of any dispositions of real estate
investments, subject to certain conditions. For the nine months ended
September 30, 2001 and 2000, ASRG was paid $951,000 and $607,480,
respectively under this agreement.
The Company has contracted with Apple Suites Advisors, Inc. ("ASA") to
advise and provide day to day management services to the Company. In
accordance with the contract, the Company will pay ASA a fee equal to .1%
to .25% of total equity contributions received by the Company in addition
to certain reimbursable expenses. For the nine months ended September 30,
2001 and 2000, ASA had earned $220,148 and $86,122, respectively, under
this agreement.
ASRG and ASA are 100% owned by Glade M. Knight, Chairman and President of
the Company.
9
(6) Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted
earnings per share in accordance with FAS 128:
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/01 9/30/00 9/30/01 9/30/00
----------- ---------- ----------- ----------
Numerator:
Net income and numerator for basic and diluted
earnings $ 1,442,993 $1,359,123 $ 3,913,335 $2,554,882
Denominator:
Denominator for basic
earnings per share-weighted-average shares 12,666,678 5,426,002 11,463,285 4,419,681
Effect of dilutive securities:
Stock options 2,200 2,200 2,200 2,200
- ----------------------------------------------------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 12,668,878 5,428,202 11,465,485 4,421,881
- ----------------------------------------------------------------------------------------------------------
Basic and diluted earnings per common share $ .11 $ .25 $ .34 $ .58
- --------------------------------------------------------------------------------------------------------
(7) Acquisitions
------------
The following unaudited pro forma information for the nine months ended
September 30, 2001 and 2000 is presented as if the acquisition of 5 of the
6 hotels occurred on January 1, 2000. The pro forma information does not
purport to represent what the Company's results of operations would
actually have been if such transactions, in fact, had occurred on January
1, 2000, nor does it purport to represent the results of operations for
future periods.
10
Nine Nine
Months Months
Ended Ended
9/30/01 9/30/00
----------- -----------
Total revenues $38,681,226 $37,789,822
Net income 5,300,470 5,292,903
Net income per share-basic and diluted $ .42 $ .44
The pro forma information reflects adjustments for actual revenues and
expenses of the 2 hotels acquired in 2000 and 3 of the 4 hotels acquired in
2001 for the respective period in 2000 prior to acquisition by the Company.
Net income has been adjusted as follows: (1) depreciation has been adjusted
based on the Company's basis in the hotels; (2) advisory expenses have been
adjusted based on the Company's contractual arrangements; (3) interest
expense has been adjusted to reflect the acquisition as of January 1, 2000;
(4) common stock raised during 2000 and 2001 to purchase these hotels has
been adjusted to reflect issuances as of January 1, 2000; and (5) the
acquisition of the Lessee was effective January 1, 2000 and the management
termination fees have been eliminated in 2001 since it will not have an on-
going impact.
(8) Income Taxes
------------
The taxable REIT subsidiary is subject to federal and state income taxes.
The taxable REIT subsidiary incurred a loss during 2001 and as such has no
income tax liability at September 30, 2001. No operating loss benefit has
been recorded in the consolidated balance sheet since realization is
uncertain.
11
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1993, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance, or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include the ability of the Company to
implement its acquisition strategy and operating strategy; the Company's ability
to manage planned growth; changes in economic cycles; competitors within the
extended-stay hotel industry; the ability to repay or refinance debt as it
becomes due; and the possibility that the acquisition of Apple Suites
Management, Inc. will not have the effects anticipated by the Company. Although
the Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore there can be no assurance that such statements
included in this quarterly report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the results or conditions
described in such statements or the objectives and plans of the Company will be
achieved.
General
- -------
The REIT Modernization Act, effective January 1, 2001, permits REIT's to
establish taxable businesses to conduct certain previously disallowed business
activities. The Act also reduces the REIT distribution requirement from 95% to
90% of its taxable income.
Effective January 1, 2001 (the effective date for the recently passed REIT
Modernization Act), the Company acquired Apple Suites Management, Inc. and its
subsidiaries (the "Lessee"). In 2000, the Company paid Mr. Glade M. Knight, the
Company's President and Chairman, a deposit of $900,000 in exchange for all of
the issued and outstanding stock of the Lessee. For financial reporting
purposes, the Company recorded the $900,000 of cash plus the fair value of net
liabilities of $513,520 in the Lessee as a management termination fee (total of
$1,413,520) in 2001, as the Lessee's only business is its lease with the
Company. Effective January 1, 2001, all intercompany transactions including
lease revenue and rental expenses, between the Company and the Lessee are
eliminated in consolidation.
The Company has acquired 17 hotels with 1,922 suites which are managed by Promus
Hotels, Inc. ("Promus"), a wholly-owned subsidiary of Hilton Hotels Corporation
("Hilton").
The Company, through its taxable REIT subsidiary, holds the franchise and market
reservation agreement for each of the hotels, which are operated as Homewood
Suites(R) by Hilton. The Company, through its taxable REIT subsidiary, engages a
third-party manager, Promus, to operate the hotels. The Company is externally
advised and has contracted with Apple Suites Advisors, Inc. ("ASA") to manage
its day-to-day operations and make investment decisions. The Company has
contracted with Apple Suites Realty Group, Inc. ("ASRG") to provide brokerage
and acquisition services in connection with its hotel acquisitions. ASA and ASRG
are all owned by Mr. Glade Knight, the Company's Chairman.
12
(See Note 5 to the unaudited consolidated financial statements of the Company
for further information on related-party transactions).
Recent Events
- -------------
As a result of the September 11, 2001 terrorist attacks in the United States,
occupancy levels declined significantly during the month of September. We do
not anticipate that this performance will be indicative of the remaining year,
assuming terrorist activities of a similar scope do not recur, and subject to
that assumption, we anticipate a gradual return to normal business levels. As
such, we do not anticipate a dividend reduction at this time. Hotel occupancy
for the month of October returned to 71%, up from the September occupancy rate
of 59%. Revenue per available room ("REVPAR") increased from $57 in September to
$68 in October.
Results of Operations
- ---------------------
As discussed earlier, the Company purchased Apple Suites Management, Inc. on
January 1, 2001. The sole business of the Lessee was with the Company.
Therefore, for purposes of a meaningful comparison, we have compared revenue and
hotel operating expenses for the nine and three months ended September 30, 2001
with those of the Lessee for the nine and three months ended September 30, 2000.
Revenues
- --------
In 2001, operations of the hotels are included in the Company's consolidated
operations. Prior to January 1, 2001, the operations of the hotels were included
in the Lessee's operations. Total revenues consist primarily of suite revenue.
During the nine months ended September 30, 2001, the Company had suite and other
revenues of $33,066,948 and $1,611,219, respectively. For the same period in
2000, the Lessee had suite and other revenues of $26,274,917 and $1,431,358,
respectively. During the three months ended September 30, 2001, the Company had
suite and other revenues of $12,147,379 and $591,509, respectively. The Lessee
had suite and other revenues of $10,112,731 and $539,807, respectively, for the
same period in 2000. The increases are primarily attributed to the operations of
the 4 hotels acquired in 2001 since their acquisition dates. In 2000, the
Company's lease revenue was derived from the Percentage Leases covering the
hotels in operations with the Lessee. The lease revenue earned by the Company
and the rent expense incurred by the Lessee are eliminated in consolidation in
2001.
For the nine months ended September 30, 2001 and 2000, the average occupancy
rate was 73% and 78%, the average daily rate ("ADR") was $101 and $93, and
revenue per available room ("REVPAR") was $73 and $73, respectively. For the
three months ended September 30, 2001 and 2000 average occupancy rate was 69%
and 78%, ADR was $100 and $96, and REVPAR was $69 and $75, respectively. The
decrease in average occupancy is primarily due to the continued overall weakness
in the economy and the impact of the terrorist attacks noted above. The
increase in ADR is due to the full three quarters effect of the 2000 hotel
acquisitions and the 2001 hotel acquisitions since their acquisition dates which
had higher ADRs.
The Company's interest income consists of $341,395 and $136,862 earned from the
investments of its cash and cash reserves for the nine months ended September
30, 2001 and 2000, respectively. The Company's interest income consists of
$32,955 and $35,701 for the three months ended September 30, 2001 and 2000,
respectively. The year-to-date increase is due to the investment of the offering
proceeds pending acquisition closings in 2001, which was mitigated in part by
declines
13
in average interest rates during 2001. In 2000, interest income of $85,642 and
$40,114 for the nine and three months ended September 30, 2000, respectively,
was earned from the promissory notes with the Lessee for franchise and hotel
supplies. The interest income to the Company and the interest expense to the
Lessee relating to the franchise, hotel supplies and working capital notes are
eliminated in consolidation in 2001.
Comparable Hotel Results
- ------------------------
The Company's comparable hotels consist of 11 Homewood Suites(R) by Hilton,
containing 1,218 suites that the Company has owned since January 1, 2000. For
the nine months ended September 30, 2001, the hotels had a 1.2% increase in
REVPAR and a 6.8% increase in ADR over the same period in 2000. Average
occupancy for the first nine months of 2001 for these hotels decreased 4.1% from
the first nine months of 2000. For the three months ended September 30, 2001,
the hotels had a 8.5% decrease in REVPAR and a 4.4% increase in ADR over the
same period in 2000. Average occupancy for the third quarter of 2001 for these
hotels decreased 9.7% from the third quarter of 2000. These fluctuations are
due to the factors described above.
Expenses
- --------
Interest expense was $4,123,584 and $5,023,329 for the nine months ended
September 30, 2001 and 2000, respectively. For the third quarter of 2001 and
2000, interest expense was $1,704,559 and $1,963,591, respectively. Interest in
2000 related to short-term notes payable to Hilton at an interest rate of 8.5%
and amortization of deferred financing costs. Interest in 2001 represented
interest on short-term notes with Hilton, $67.7 million in long-term secured
debt (see Notes Payable below), and amortization of deferred financing costs.
Year-to-date interest expense has decreased due to a lower average outstanding
debt balance and decreasing interest rates in 2001 compared to 2000.
Depreciation expense for the first nine months increased to $3,443,536 in 2001
from $2,019,742 in 2000. For the third quarter of 2001 and 2000 depreciation
expense was $1,296,841 and $800,496, respectively. The increase is directly
attributable to the acquisition of hotels in 2000 and 2001 and the capital
improvements made during 2000 and 2001.
Taxes, insurance, and other expenses for the first nine months were $1,490,905
or 5% of the Company's suite revenue in 2001 and $1,610,940 or 6% of the
Lessee's suite revenue in 2000. The decrease is due to the Company's efforts to
reduce tax assessments. As a result, the expenses were lower than anticipated.
For the third quarter of 2001 these expenses were $605,131 or 5% of the
Company's suite revenue. These expenses were $408,385 or 4% of the Lessee's
suite revenue for the same period in 2000. The third quarter increase is
primarily due to the 2001 acquisitions.
General and administrative expenses for the first nine months were $688,039 or
2% of the Company's suite revenue in 2001 and $843,363 or 3% of the Lessee's
suite revenue in 2000. For the third quarter of 2001, these expenses were
$180,532 or 1% of the Company's suite revenue. For the same period in 2000 these
expenses were $131,241 or 1% of the Lessee's suite revenue. These expenses
represent the administrative expenses of the Company as distinguished from the
hotel operations.
Hotel operating expenses totaled $19,871,643 and $7,516,787 for the nine and
three months ended September 30, 2001, respectively. For the nine and three
months ended September 30, 2000, hotel operating expenses incurred by the
Lessee, excluding rent expense and interest expense for the franchise, hotel
supplies and working capital promissory notes, totaled $15,894,575 and
$6,112,727, respectively. The increases are primarily due to a full nine months
of operations in 2001 of the two
14
2000 hotel acquisitions and the 4 hotels acquired in 2001 since their
acquisition dates. The rent and interest expense are excluded from 2000 since
the expenses are eliminated in consolidation in 2001.
Promus manages the day-to-day operations of the hotels. Promus charges fees of
4% of total revenue for these functions for the hotels acquired prior to 2001.
For the 4 hotels acquired in 2001, Promus charges a base management fee of 2% of
total revenue for 2 of the hotels. For the other 2 hotels, Promus charges 2% in
the first year which increases to 3% in the second year and to 4% in the third
year and thereafter. Promus also charges a fee of 4% of suite revenue for
franchise licenses to operate as a Homewood Suites(R) by Hilton and to
participate in its reservation system. Total expenses for these services were
$3,800,292 and $3,157,281 for the nine months ended September 30, 2001 and 2000,
respectively. For the third quarter of 2001 and 2000 these expenses were
$1,306,086 and $1,186,965. These expenses are included in the hotel operating
expenses above.
Liquidity and Capital Resources
- -------------------------------
On April 17, 2001, the Company closed its "best-efforts" offering of shares. The
total gross proceeds raised for the "best efforts" offering were $125,000,000.
The Company received gross proceeds of $40,003,301 and $30,614,698 from the sale
of 4,000,330 and 3,061,471 shares, including shares sold through the
reinvestment of distributions for the nine month periods ended September 30,
2001 and 2000, respectively. The net proceeds of the offering, after deducting
selling commissions and other offering costs for the nine month periods ended
September 30, 2001 and 2000 were $35,900,867 and $27,148,596, respectively.
Notes payable
- -------------
On August 15, 2001, the Company placed $7.5 million of secured debt. The loan
bears interest at a fixed interest rate of 8.14% per annum with a maturity date
of September 2011. The loan is payable in monthly installments, including
principal and interest, and is secured by one hotel. At September 30, 2001, the
outstanding balance was $7,492,292. A portion of the proceeds were used to
reduce the outstanding balance of the Hilton notes.
On June 1, 2001, the Company placed $10.7 million of secured debt. The loan
bears interest at a fixed interest rate of 8.15% per annum with a maturity date
of June 2011. The loan is payable in monthly installments, including principal
and interest, and is secured by one hotel. At September 30, 2001, the
outstanding balance was 10,660,520.
In connection with the purchase of 2 hotels, notes were executed by the Company
payable to the order of Hilton in the amount of $16,500,000. The notes are
secured by our two hotels in Missouri and Oregon and bear a fixed interest rate
of 8.5% per annum. In August and September 2001, the Company repaid the $8.625
million note on the Missouri hotel and paid $2 million towards the principal on
the Oregon hotel. At September 30, 2001, the remaining note totaled $5.875
million. Interest payments are due monthly. The note matures on December 28,
2001.
As of January 1, 2001, the Company's outstanding note payable to Hilton, secured
by our property in Boulder, Colorado, totaled $7,780,500 and bore a fixed
interest rate of 8.5%. During January and February 2001, the Company paid Hilton
the outstanding balance on the note from net equity proceeds.
15
Cash and cash equivalents
- -------------------------
Cash and cash equivalents totaled $6,028,132 at September 30, 2001.
Capital requirements
- --------------------
At September 30, 2001, $1,072,994 was held by Hilton for these capital
improvement reserves. In addition, in accordance with the franchise agreements
$41,653 was held for Property Improvement Plans with a financial institution and
treated as restricted cash. The Company capitalized improvements of $1,520,595
for the first nine months of 2001. The Company expects that the remaining
capital improvement reserves will be adequate to fund the required repair,
replacement, and refurbishments and to maintain its hotels in a competitive
condition through the end of 2001.
It is anticipated that the revenues generated from the hotels and the remaining
equity funds will be used to meet normal hotel operating expenses, payment
of distributions and monthly debt service. The Company will seek to obtain
additional financing as needed to meet its objectives. Given the Company's
current debt level, the Company believes that it will be able to obtain debt
financing. In general, the Company's liquidity and capital resources are
believed to be adequate to meet its cash requirements during 2001, given current
and anticipated financing arrangements.
The reinvestment of distributions in common stock ended in April 2001, upon the
closing of its "best-efforts" offering of shares.
Acquisitions
- ------------
Using proceeds from the sale of common shares and executing two short-term notes
totaling $16,500,000, the Company acquired 4 hotels for an aggregate purchase
price of $47,550,000 during 2001. These acquisitions brought the total number
of hotels to 17 and total suites to 1,922. The hotels are located in Atlanta,
Georgia; St. Louis, Missouri; Portland, Oregon; and Herndon, Virginia. All the
Company's hotels are leased by the Lessee and managed by Promus.
Inflation
- ---------
Operators of hotels, in general, possess the ability to adjust room rates daily
to reflect the effects of inflation. Competitive pressures may, however, limit
the operator's ability to raise room rates.
Seasonality
- -----------
The hotel industry historically has been seasonal in nature, reflecting higher
occupancy rates primarily during the first three quarters of the year. Seasonal
variations in occupancy at the Company's hotels may cause quarterly fluctuations
in the Company's revenues, particularly during the fourth quarter. To the extent
that cash flow from operations is insufficient during any quarter, due to
temporary or seasonal fluctuations in revenue, the Company expects to utilize
cash on hand to make distributions.
Recent Accounting Pronouncements
- --------------------------------
On January 1, 2001, Financial Accounting Standards Board Statement No. 138,
"Accounting for Derivative Instruments and Hedging Activities" became effective.
The Company currently does not have any financial instruments subject to this
statement.
16
In August 2001, the FASB issued Statement 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). The Statement supercedes
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed of" and APB Opinion No. 30, "Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
segments of a business to be disposed of. SFAS No. 144 retains the requirements
of Statement 121 relating to recognition and measurement of an impairment loss
and resolves certain implementation issues resulting from Statement 121. This
Statement is effective for fiscal years beginning after December 15, 2001. We
are currently assessing the impact of this statement on the Company, however, we
do not anticipate this statement to have a material impact on the consolidated
financial position or results of operations of the Company.
17
Item 3. Quantitative And Qualitative Disclosures About Market Risk
In connection with the acquisition of 2 hotels, the Company incurred
$16,500,000 of short-term borrowings at a fixed interest rate of 8.5%.
In addition, the Company secured 2 hotels with $18.2 million of secured debt
with an average fixed interest rate of 8.15%.
Since these borrowings are at a fixed rate of interest, changes in market rate
will not have a direct impact on the Company's results of operations.
There have been no other material changes since December 31, 2000. See the
information provided in the Company's Annual Report on Form 10-K under Item 7-
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
18
Part II, Item 2. Changes in Securities and Use of Proceeds
The following table set forth information concerning the Offering and the use of
proceeds from the Offering as of September 30, 2001:
Common Shares Registered:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
28,500,000.00 Common Shares $10 per Common Share $285,000,000
--------------- ------------
Totals: 30,166,666.67 Common Shares $300,000,000
---------------
Common Shares
Sold:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
11,000,011.00 Common Shares $10 per Common Share 110,000,000
--------------- ------------
Totals: 12,666,677.67 Common Shares $125,000,000
---------------
Expenses of Issuance and Distribution of
Common Shares
1. Underwriting discounts and commissions 12,500,000
2. Expenses of underwriter --
3. Direct or indirect payments to directors or officers
of the Company or their associates, to ten percent
shareholders, or to affiliates of the Company --
4. Fees and expenses of third parties 1,375,915
------------
Total Expenses of Issuance and Distribution of
Common Shares 13,875,915
Net Proceeds to the Company $111,124,085
1. Purchase of real estate (including repayment of
Indebtedness incurred to purchase real estate) $ 95,815,206
2. Interest on indebtedness 11,980,345
3. Working capital (436,767)
4. Fees to the following (all affiliates of officers of the Company):
a. Apple Suites Advisors, Inc. 378,301
b. Apple Suites Realty Group, Inc. 3,387,000
5. Fees and expenses of third parties:
a. Legal --
b. Accounting --
6. Other (specify ________________) --
Total of Application of Net
------------
Proceeds to the Company $111,124,085
19
Part II, Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
3.1 Articles of Incorporation of the Registrant. (Incorporated
by reference to the Exhibit of the same number to Form S-11
filed by Apple Suites, Inc.; SEC File No. 333-77055).
3.2 Amended and Restated Bylaws of the Registrant.
(Incorporated by reference to the Exhibit of the same
number to Form S-11 filed by Apple Suites, Inc.; SEC File
No. 333-77055).
(b) Reports on Form 8-K
The following table lists the reports on Form 8-K filed by the Company
during the quarter ended September 30, 2001, the items reported and the
financial statements included in such filings.
Type and Date
of Reports Items Reported Financials Statements Filed
Form 8-K dated 2 and 7 None
June 15, 2001 and filed
July 2, 2001
Form 8-K/A dated 7(a), (b) Historical Balance Sheet of December 31,
June 15, 2001 and filed 2000; Historical Income Statement for the year
September 4, 2001 ended December 31, 2000; Historical Statement
of Cash Flows for the year ended December 31, 2000;
and Historical Statements of Members' Equity for the year
ended December 31, 2000.
20
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Apple Suites, Inc.
------------------
(Registrant)
DATE: 11-14-01 BY: /s/ Glade M. Knight
--------------- -------------------------------
Glade M. Knight
President
BY: /s/ Kristian M. Gathright
--------------------------
Kristian M. Gathright
Chief Accounting Officer
21