UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 333-77055
APPLE SUITES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1933472
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
At November 1, 1999, there were outstanding 2,868,771 shares of common stock, no
par value, of the registrant.
APPLE SUITES, INC.
FORM 10-Q
INDEX
Page Number
PART I. FINANCIAL INFORMATION -----------
Item 1. Financial Statements (Unaudited)
APPLE SUITES, INC.
Consolidated Balance Sheets - 4
As of September 30, 1999 and March 26, 1999
Consolidated Statement of Operations - 5
Three months ended September 30, 1999
Consolidated Statement of Cash Flows - 6
Three months ended September 30, 1999
Notes to Consolidated Financial Statements 7
APPLE SUITES MANAGEMENT, INC. ("LESSEE")
Consolidated Balance Sheet - 13
As of September 30, 1999
Consolidated Statement of Operations- 14
Three months ended September 30, 1999
Consolidated Statement of Cash Flows- 15
Three months ended September 30, 1999
Notes to Consolidated Financial Statements 16
Item 2. Management's Discussion and Analysis 19
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 24
about Market Risk
2
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings (not applicable).
Item 2. Changes in Securities and Use of Proceeds 25
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 26
3
APPLE SUITES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, March 26,
1999 1999
------------- ------------
ASSETS
Investment in hotel properties-net of
accumulated depreciation of $97,510 $ 36,292,592 -
Cash and cash equivalents 10,924,786 $ 100
Rent receivable from Apple Suites
Management, Inc. 417,306 -
Due from Apple Suites Management, Inc. 301,636 -
Prepaid expenses 4,522 -
Other assets 48,577 -
--------------- ------------
Total Assets $ 47,989,419 $ 100
=============== ============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable $ 26,625,000 -
Accounts payable 8,303 -
Accrued expenses 664,082 -
--------------- ------------
Total Liabilities 27,297,385 -
Shareholders' equity
Common stock, no par value, authorized
200,000,000 shares; issued and
outstanding 2,532,147 shares 20,629,326 $ 100
Class B convertible stock, no par value,
authorized 240,000 shares; issued and
outstanding 240,000 shares 24,000 -
Net income greater than distributions 38,708 -
--------------- ------------
Total Shareholders' Equity 20,692,034 100
--------------- ------------
Total Liabilities and Shareholders' Equity $ 47,989,419 $ 100
=============== ============
See accompanying notes to consolidated financial statements.
4
APPLE SUITES INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended
September 30,
1999
----------------
REVENUES:
Percentage lease revenue $ 417,306
Interest income and other revenue 64,370
EXPENSES:
Taxes, insurance and other 79,729
General and administrative 36,028
Depreciation 97,510
Interest expense 229,701
----------------
Total expenses 442,968
----------------
Net income $ 38,708
================
Basic and diluted earnings per common share $ 0.02
================
Distributions per common share $ -
================
See accompanying notes to consolidated financial statements.
5
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended
September 30,
1999
--------------------
Cash flow from operating activities:
Net income $38,708
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 97,510
Changes in operating assets and liabilities:
Prepaid expenses (4,522)
Due from Apple Suites Management, Inc. (455,592)
Other assets (48,577)
Accounts payable 8,303
Accrued expenses 153,281
-----------------
Net cash used in operating activities (210,889)
Cash flow from investing activities:
Loan to Apple Suites Management, Inc. (263,350)
Acquisitions of hotel properties, net of
liabilities assumed and debt incurred (9,254,301)
-----------------
Net cash used in investing activities (9,517,651)
Cash flow from financing activities:
Payment from officer-shareholder for Class B shares 24,000
Net proceeds from issuance of common shares 20,629,226
-----------------
Net cash provided by financing activities 20,653,226
Increase in cash and cash equivalents 10,924,686
Cash and cash equivalents, beginning of period 100
-----------------
Cash and cash equivalents, end of period $10,924,786
=================
See accompanying notes to consolidated financial statements.
6
APPLE SUITES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
(1) General Information and Summary of Significant Accounting Policies
------------------------------------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information required by generally accepted accounting principles. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended September
30, 1999 are not necessarily indicative of the results that may be
expected for the period ended December 31, 1999. These consolidated
financial statements should be read in conjunction with the audited
balance sheet dated March 26, 1999, included in the Company's currently
effective Form S-11 filed with the Securities and Exchange Commission.
Organization
------------
Apple Suites, Inc. (the "Company"), a Virginia corporation, was formed
on March 5, 1999, the first investor closing was on August 23, 1999,
and the first hotel acquisition was effective September 1, 1999 and,
therefore, no statement of operations and cash flows are presented
prior to the three month period ended September 30, 1999. The
consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
The Company operates in one defined business segment consisting of
extended-stay hotel properties. At September 30, 1999, the Company
leased to Apple Suites Management, Inc. (the "Lessee") its four hotel
properties acquired effective September 1, 1999. The hotel properties
operate as Homewood Suites(R) Hotels.
The Lessee has entered into management agreements pursuant to which the
four hotel properties leased by it are managed by Promus Hotels, Inc.
("Promus").
Relationship with Lessee
------------------------
The Company must rely solely on the Lessee to generate sufficient cash
flow from operation of the hotel properties to enable the Lessee to
meet its substantial rent obligation to the Company under the
Percentage Leases. At September 30, 1999, the Lessee's rent payable to
the Company amounted to $417,306. The ability of the Lessee to fund its
daily operations and continue to remain current on its substantial rent
obligation to the Company is a result of the original terms under the
Percentage Leases, for the payment of rent to the Company, which allow
monthly base rent to be paid in arrears and quarterly percentage rent
to be paid 15 days following the quarter-end. The Company's management
will continue to evaluate the financial condition of the Lessee and
continue to evaluate other factors regarding the relationship between
the Company and the Lessee.
7
The Company did not have any items of comprehensive income requiring
separate reporting and disclosure for the periods presented.
Start-up Costs
--------------
Start-up costs are expensed as incurred.
Cash and Cash Equivalents
-------------------------
Cash equivalents include highly liquid investments with original
maturities of three months or less. The fair market value of cash and
cash equivalents approximate their carrying value.
Investment in Hotel Properties
------------------------------
The hotel properties are stated at cost, net of depreciation, and
includes real estate brokerage commissions paid to Apple Suites Realty
Group, Inc., a related party (see Note 5). Repairs and maintenance
costs are expensed as incurred while significant improvements,
renovations, and replacements are capitalized. Depreciation is computed
using the straight-line method over estimated useful lives of the
assets, which are 27.5 years for buildings and major improvements and 5
to 7 years for furniture and equipment.
The carrying values of each hotel property are evaluated periodically
to determine if circumstances exist indicating an impairment in the
carrying value of the investment in the hotel and the estimated
undiscounted cash flows are less than their carrying amount.
Adjustments are made based on fair value of the underlying property if
impairment is indicated. No impairment losses have been recorded to
date.
Revenue Recognition
-------------------
Percentage lease revenue is reported as income over the lease term as
it becomes due from the Lessee according to the provisions of the
Percentage Lease agreements. The Lessee is in compliance with their
rental obligations under the Percentage Leases.
Earnings Per Common Share
-------------------------
Basic and diluted earnings per common share are calculated in
accordance with FASB Statement No. 128 "Earnings Per Share." Basic
earnings per common share is computed based upon the weighted average
number of shares outstanding during the year. Diluted earnings per
share is calculated after giving effect to all potential common shares
that were dilutive and outstanding for the year.
8
Income Taxes
------------
The Company has elected to be treated as a REIT under Section 856 to
860 of the Internal Revenue Code. Accordingly, no provision for federal
income taxes has been reflected in the financial statements. Earnings
and profits, which will determine the taxability of distributions to
shareholders, will differ from income reported for financial reporting
purposes primarily due to the differences for federal income tax
purposes in the estimated useful lives used to compute depreciation.
Use of Estimates
----------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
Seasonality
-----------
The hotel industry is seasonal in nature. Seasonal variations in
revenues at the Company's hotels may cause quarterly fluctuations in
the Company's lease revenues.
(2) Investment in Hotels
--------------------
Investment in hotels at September 30, 1999 consist of the following:
Land $ 6,402,444
Building 29,509,658
Furniture and equipment 478,000
------------
$36,390,102
Less accumulated depreciation (97,510)
------------
$36,292,592
Three of the hotel properties are located in Texas and one hotel
property is located in Virginia and are subject to the Percentage
Leases as described in Note 5.
(3) Notes Payable
-------------
On April 20, 1999, the Company obtained a line of credit in a principal
amount of $1 million with a commercial bank. The line required interest
at LIBOR plus 1.50%. Interest was payable monthly and the principal
balance and all accrued interest were paid in full by September 30,
1999. Glade M. Knight, President and Chairman, guaranteed repayment of
the loan.
In conjunction with purchase of four hotel properties, a note was
executed by the Company made payable to the order of Promus in the
amount of $26,625,000. The note bears a fixed interest rate of 8.5% per
annum. Interest payments are due monthly and the maturity date is
October 1, 2000. Principal payments are to be made to the extent of
net equity proceeds from the offering of common shares.
9
(4) Shareholders' Equity
--------------------
The Company is raising equity capital through a "best-efforts" offering
of shares by David Lerner Associates, Inc. (the "Managing Dealer"),
which will receive selling commissions and a marketing expense
allowance based on proceeds of the shares sold. The Company received
gross proceeds of $23,654,701 from the sale of 1,666,667 shares at $9
per share and 865,470 shares at $10 per share during the three month
period ended September 30, 1999. The net proceeds of the offering,
after deducting selling commissions and other offering costs were
$20,629,226.
(5) Commitments and Related Parties
-------------------------------
The Company receives rental income from the Lessee under the Percentage
Leases which expire in 2009, subject to earlier termination on the
occurrence of certain contingencies. The Leases contain an optional
five-year extension. The rent due under the Percentage Lease is the sum
of base rent and percentage rent. Percentage rent is calculated by
multiplying fixed percentages by the total amounts of suite revenues
with reference to specified threshold amounts. Both the base rent and
the revenue thresholds used in computing percentage rents are subject
to annual adjustments based on increases in the Consumer Price Index
("CPI"). The Company earned rents of $417,306 for the three month
period ended September 30, 1999.
Minimum future rental income (i.e. base rents) payable to the Company
under the Percentage Leases in effect at September 30, 1999 are as
follows:
Remainder of 1999 $ 659,670
2000 2,638,680
2001 2,638,680
2002 2,638,680
2003 2,638,680
Thereafter 14,952,520
----------
$ 26,166,910
============
Under the Percentage Leases, 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
hotel properties. The Company is also committed to fund certain capital
expenditures required for the retention of the franchise licenses with
respect of the hotels.
The Lessee engages a third-party manager (Promus) to operate the hotel
properties leased by it and pays the manager a base management fee of
4% of adjusted gross revenues. During the first two years of the
management agreement, a portion of the management fee equal to 1% of
adjusted gross revenues is subordinated to the Lessee's receipt of a
return equal to 11% of the purchase price of each hotel. The Lessee
pays the manager a franchise fee and a marketing fee, each equal to 4%
of gross revenues, respectively.
On September 17, 1999, the Company entered into two debt agreements
with the Lessee. The Company loaned the Lessee $215,550 for franchise
fees and $47,800 for hotel supplies for the four hotel properties. The
debt agreements are evidenced by two promissory notes bearing interest
at a rate of 9% per annum. Principal and interest payments are due
monthly. The entire balance of principal and interest is due on October
1, 2009 for the franchise fees note and October 1, 2004 for the hotel
supply note.
10
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, in addition to
certain reimbursable expenses. For the three months ended September 30,
1999, the Company paid ASRG $710,000 under the 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. At September 30, 1999, the
Company had paid ASA $4,928 under this agreement.
ASRG and ASA are 100% owned by Glade M. Knight, Chairman and President
of the Company. ASRG and ASA may purchase in the "best efforts"
offering up to 2.5% of the total number of shares of the Company sold
in the offering.
(6) Earnings Per Share
------------------
The following table sets forth the computation of basic and diluted
earnings per share in accordance with FAS 128:
Three Months
Ended
September 30, 1999
------------------
Numerator:
Net income and
numerator for basic and
diluted earnings $ 38,708
Denominator:
Denominator for basic
earnings per share-weighted-
average shares 2,286,052
Effect of dilutive securities:
Stock options -
--------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 2,286,052
--------------------------------------------------------------
Basic and diluted earnings per
common share $ .02
-------------------------------------------------------------
11
(7) Acquisitions
------------
The following unaudited pro forma information for the nine months ended
September 30, 1999 is presented as if the acquisition of the five hotel
properties (including the hotel property acquired effective October 1,
1999; see Note 8) occurred on January 1, 1999. 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, 1999, nor does it purport to represent the
results of operations for future periods.
Nine months
Ended
9/30/99
Percentage lease revenue $4,407,032
Net income 26,115
Net income per share-basic and diluted $ .01
The pro forma information reflects adjustments for actual lease revenue
and expenses of the five hotel properties acquired in 1999 for the
respective period in 1999 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; and (3)
interest expense has been adjusted to reflect the acquisition as of the
beginning of the period.
(8) Subsequent Events
-----------------
On October 29, 1999, the Company distributed to its shareholders
approximately $169,990 ($.08 per share) of which approximately $92,540
was reinvested in the purchase of additional shares. On October 26,
1999, the Company closed the sale to investors of 327,340 shares at $10
per share representing net proceeds to the Company of $2,946,060.
Effective October 1, 1999, the Company acquired a Homewood Suites(R)
hotel property in Atlanta, Georgia for $9,800,000. The hotel property
was purchased through a combination of equity proceeds from the equity
offering and a note in the amount of $7,350,000 made payable to the
order of Promus. The note bears a fixed interest rate of 8.5% per
annum. Interest payments are due monthly and the maturity date is
October 1, 2000. This hotel will be leased by the Lessee and managed
by Promus in substantially the same manner as the other four Homewood
Suites(R) hotels owned at September 30, 1999.
12
APPLE SUITES MANAGEMENT, INC
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30,
1999
---------------------
Current assets
Cash and cash equivalents $ 840,445
Receivables 454,004
Inventories 64,164
---------------------
Total Current Assets 1,358,613
Long-term assets
Prepaid franchise fees 216,521
---------------------
Total Assets $ 1,575,134
=====================
Liabilities and Shareholders' Equity
Current liabilities
Account payable $ 15,915
Rent payable to Apple Suites, Inc. 417,306
Due to affiliates 38,286
Accrued expenses 813,131
Current portion of long-term notes payable
to Apple Suites, Inc. 19,961
---------------------
Total Current liabilities 1,304,599
Long-term liabilities
Long-term notes payable to Apple Suites, Inc. 243,389
---------------------
Total Liabilities 1,547,988
Shareholders' Equity
Common Stock, no par value, 5,000 authorized;
10 shares issued and outstanding 100
Retained earnings 27,046
---------------------
Total Shareholders' Equity 27,146
---------------------
Total Liabilities and Shareholders' Equity $ 1,575,134
=====================
See accompanying notes to financial statements.
13
APPLE SUITES MANAGEMENT, INC
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months
Ended
September 30, 1999
--------------------------
REVENUE
Suite revenue $ 961,604
Other revenue 59,548
------------
Total revenue 1,021,152
EXPENSES
Operating expense 259,098
General and administrative 85,676
Advertising and promotion 93,237
Utilities 26,101
Franchise fees 38,464
Management fees 40,769
Rent expense-Apple Suites, Inc. 417,306
Other 15,425
------------
Total expenses 976,076
Income before income taxes 45,076
Income tax expense 18,030
------------
Net income $ 27,046
=============
See accompanying notes to consolidated financial statements.
14
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended
September 30,
1999
-----------------
Cash flow from operating activities:
Net income $ 27,046
Adjustments to reconcile net income to net cash
provided by operating activities
Changes in operating assets and liabilities:
Receivables (454,004)
Inventories (64,164)
Other assets (216,521)
Rent payable to Apple Suites, Inc. 417,306
Accounts payable 15,915
Accrued expenses 851,417
--------------
Net cash provided by operating activities 576,995
Cash flow from financing activities:
Proceeds from sale of common stock 100
Proceeds from promissory notes 263,350
--------------
Net cash provided by financing activities 263,450
Increase in cash and cash equivalents 840,445
Cash and cash equivalents, beginning of period -
--------------
Cash and cash equivalents, end of period $ 840,445
==============
See accompanying notes to consolidated financial statements.
15
APPLE SUITES MANAGEMENT, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
(1) General Information and Summary of Significant Accounting Policies
------------------------------------------------------------------
Organization
------------
Apple Suites Management, Inc. (the "Lessee") was formed on March 11,
1999 and is owned 100% by Glade M. Knight. Mr. Knight also serves as
the Chairman and President of the Company. The Lessee commenced
operations effective September 1, 1999 with the acquisition of the
four hotel properties by Apple Suites Inc, (the "Company").
Each hotel is leased by the Company to the Lessee under a Percentage
Lease agreement that includes a noncancelable term of ten years,
subject to earlier termination upon certain events, and an optional
five year extension. The lease requires a base rent payments to be made
to the Company on a monthly basis and additional quarterly payments to
be made based upon percentages of suite revenue.
The accompanying unaudited financial statements reflect, in the opinion
of management, all adjustments necessary for a fair presentation of the
interim financial statements. All such adjustments are of a normal and
recurring nature.
Cash and cash equivalents
-------------------------
Cash equivalents include highly liquid investments with original
maturities of three months or less. The fair market value of cash and
cash equivalents approximate their carrying value.
Inventories
-----------
Inventories, consisting primarily of food and beverages and hotel
supplies are stated at the lower of cost or market, with cost
determined on a method that approximates first-in, first-out basis.
Revenue Recognition
-------------------
Revenue is recognized as earned, which is generally defined as the date
upon which a guest occupies a room or utilizes the hotel's services.
Advertising and Promotion Costs
-------------------------------
Advertising and promotion costs are expensed when incurred. Advertising
and promotion costs represent the expense for franchise advertising and
reservation systems under the terms of the hotel franchise agreements
and general and administrative expenses that are directly attributable
to advertising and promotion.
16
Income Taxes
------------
The Company provides for income taxes under the provisions of SFAS No.
109 "Accounting for Income Taxes". SFAS No. 109 requires an asset and
liability based approach in accounting for income taxes. Current tax
liability is included in accrued expenses on the balance sheet.
Use of Estimates
----------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
Seasonality
-----------
The hotel industry is seasonal in nature. Seasonal variations in
revenues at the hotels under lease may cause quarterly fluctuations in
the Company's revenues.
(2) Commitments and Related Party Transactions
------------------------------------------
The Percentage Leases expire in 2009, subject to earlier termination on
the occurrence of certain contingencies. The Percentage Leases contain
an optional five-year entension. The rent due under the Percentage
Lease is the sum of base rent and percentage rent. Percentage rent is
calculated by multiplying fixed percentages by the total amounts of
suite revenues with reference to specified threshold amounts. Both the
base rent and the revenue thresholds used in computing percentage rents
are subject to annual adjustments based on increases in the Consumer
Price Index ("CPI").
The Lessee's future commitments to the Company under the Percentage
Leases in effect at September 30, 1999 are as follows:
Remainder of 1999 $ 659,670
2000 2,638,680
2001 2,638,680
2002 2,638,680
2003 2,638,680
Thereafter 14,952,520
----------
$26,166,910
At September 30, 1999, all rent payments due the Company are current.
Under the terms of the Percentage Leases, base rent is payable to the
Company in arrears and percentage rent is payable 15 days following a
quarter-end. At September 30, 1999, rent payable was $417,306.
On September 17, 1999, the Lessee entered into two debt agreements with
the Company. The Lessee borrowed from the Company $215,550 for
franchise fees and $47,800 for hotel supplies. The promissory notes
relating to these debt agreements bear interest at a rate of 9% per
annum. Principal and interest payments are due monthly. The entire
principal balance and interest of the hotel supply note is due October
1, 2004 and the franchise fee note is due October 1, 2009.
(3) Shareholders' Equity
--------------------
The Lessee requires or may require funds to capitalize its business to
satisfy its obligations under Master Hotel Lease Agreements with the
Company, dated September 17, 1999.
The Lessee has two funding commitments (together "Payor") of $1 million
each from Mr. Knight and Apple Suite Realty Group, Inc., respectively.
The funding commitments are contractual obligations of the Payor to pay
funds to the Lessee. Funds paid to the Lessee under the commitments are
intended to represent contributions to the capital reserves of the
Lessee, does not represent any indebtedness, and are not subject to
interest. The funding commitments terminate upon the expiration of the
Master Hotel Lease agreements, written agreement between the Payor and
the Lessee, or repayment of all amounts to the Payor. As of September
30, 1999, no contributions have been made by the Payor to the Lessee.
17
(4) Subsequent Events
-----------------
Effective October 1, 1999, the Company acquired a hotel property in
Atlanta, Georgia. This hotel will be leased by the Lessee and managed
by Promus in substantially the same manner as the other four Homewood
Suites(R) hotels.
18
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 achievement 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 industry; the liquidity of the Lessee and Year 2000
issues. 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
-------
Apple Suites, Inc. (the "Company") owns extended-stay hotel properties.
As of September 30, 1999, the Company owned four hotel properties with
478 rooms. All of the Company's hotel properties are leased to Apple
Suites Management, Inc. (the "Lessee") pursuant to Percentage Leases.
Each Percentage Lease obligates the Lessee to pay rent equal to the sum
of a base rent and a percentage rent based on suite revenues of each
hotel property. The Lessee's ability to make payments to the Company
pursuant to the Percentage Leases is dependent primarily upon the
operations of the hotel properties.
The Lessee holds the franchise and market reservation agreement for
each of the hotel properties, which are operated as Homewood Suites(R)
hotels. The Lessee engages a third-party manager (Promus Hotels, Inc.)
to operate the hotel properties.
RESULTS OF OPERATIONS
- ---------------------
THE COMPANY-Apple Suites, Inc.
Revenues
As operations of the Company began effective September 1, 1999, a
comparison to 1998 is not possible. During September 1999, the Company
had revenues of $417,306. All of the Company's percentage lease revenue
19
is derived from the Percentage Leases covering the hotel properties in
operations with the Lessee.
The Company's other income consists of $64,370 of interest income
earned from the investments of its cash and cash reserves.
Expenses
The expenses of the Company consist of property taxes, insurance,
general and administrative expenses, interest on notes payable and
depreciation on the hotel properties. Total expenses, exclusive of
interest and depreciaton, for the three month period ended September
30, 1999 were $115,757 or 24% of total revenue.
Interest expense was $229,701 for the three month period ended
September 30, 1999 or 48% of total revenue.
Depreciation expense was $97,510 for the three month period ended
September 30, 1999.
Taxes, insurance, and other was $79,729 for the three month period
ended September 30, 1999 or 17% of total revenue.
General and administrative expense totaled 7% of total revenues. These
expenses represent the administrative expenses of the Company.
THE HOTELS - Apple Suites Management, Inc.
Revenues
As operations began effective September 1, 1999, a comparison to 1998
is not possible. Total revenues were $1,021,152. Total revenues consist
primarily of suite revenue, which was $961,604 for the three month
period ended September 30, 1999.
For the three month period ended September 30, 1999 the average
occupancy rate was 80%, average daily rate ("ADR") was $84, and revenue
per available room ("REVPAR") was $67.
Expenses
Total expenses for the three month period ended September 30, 1999 were
$976,076 or 95% of total revenues. Percentage Lease expense represents
$417,306 or 41% of total revenue.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
There was a significant change in the Company's liquidity during the
three month period ended September 30, 1999, as the Company commenced
operations effective September 1, 1999 with the acquisition of four
hotel properties using a combination of proceeds from the Company's
offering and debt. During August and September 1999, the Company sold
2,532,137 shares (1,666,667 shares at $9 per share and 865,471 shares
at $10 per share) of its common stock to its investors. The total gross
proceeds from the shares sold were $23,654,701, which netted
$20,629,226 to the Company after the payment of selling commissions and
other offering costs.
20
Using a combination of proceeds from the sale of common shares and
debt, the Company acquired four hotels with a total purchase price of
$35,500,000. In conjunction with this acquisition, the Company executed
a $26,625,000 note. In addition, the Company purchased a hotel in
October 1999 with a purchase price of $9,800,000. A note in the amount
of $7,350,000 was executed by the Company in conjunction with this
acquisition.
The Lessee's obligations under the Percentage Leases are unsecured. The
Lessee has limited capital resources, and, accordingly its ability to
make lease payments under the Percentage Leases is substantially
dependent on the ability of the Lessee to generate sufficient cash flow
from operations of the hotel properties.
Notes payable
-------------
On April 20, 1999, the Company obtained a line of credit in a principal
amount of $1 million with a commercial bank. The line required interest
at LIBOR plus 1.50%. Interest was payable monthly and the principal
balance and all accrued interest were paid in full by September 30,
1999. Glade M. Knight, President and Chairman, guaranteed repayment of
the loan.
In conjunction with purchase of four hotel properties, a note was
executed by the Company made payable to the order of Promus Hotels,
Inc. in the amount of $26,625,000. The note bears an effective interest
rate of 8.5% per annum. Interest payments are due monthly and the
maturity date is October, 2000. Principal payments are to be made from
the extent of net proceeds from the offering of common shares.
Cash and cash equivalents
-------------------------
Cash and cash equivalents totaled $10,924,786 at September 30, 1999.
Capital requirements
--------------------
While the Company is always assessing potential acquisitions of hotel
properties, no material definitive commitments existed for the purchase
of additional hotel properties on November 1, 1999. The potential
sources to fund the renovations and acquisitions include additional
equity and cash reserves.
No renovations were completed as of September 30, 1999. The Company
expects to spend approximately $1,200,000 on renovation expenditures of
its existing hotel properties during the next 12 months, which are
expected to be funded through existing cash reserves.
Inflation
---------
Operators of hotel properties, in general, possess the ability to
adjust room rates daily to reflect the effects of inflation.
Competitive pressures may, however, limit the third party manager's
ability to raise room rates.
Seasonality
-----------
The hotel industry is seasonal in nature. Seasonal variations in
occupancy at the Company's hotels may cause quarterly fluctuations in
the Company's lease revenues. To the extent the cash flow from
21
operations is insufficient during any quarter, due to temporary or
seasonal fluctuations in lease revenue, the Company expects to utilize
cash on hand or funds from equity raised to make its quarterly
distributions.
Impact of Year 2000
-------------------
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive
software or embedded chips may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
As of September 30, 1999, approximately 95% of the Company's computer
systems have been upgraded and deemed to be year 2000 compliant. The
Company's accounting and payroll applications have been upgraded and
are currently being tested by the Company which is scheduled to be
completed in the fourth quarter of 1999.
As of September 30, 1999, the Lessee's computer systems have been
upgraded and deemed to be year 2000 compliant.
The Company is dependent on Promus for year 2000 compliance with
respect to computer systems to manage the hotels including personal
computers, property management computer software and the central
reservation systems. The Company has received information from Promus
as to the status of their year 2000 readiness. Promus has indicated it
believes its personal computers and property management systems to be
year 2000 compliant with verification of compliance expected to be
completed by November 30, 1999. Promus has indicated that its central
reservation systems are year 2000 compliant.
The Company, Lessee, and Promus are also exposed to the risk that one
or more of its vendors or service providers could experience year 2000
problems that impact the ability of such vendor or service provider to
provide goods and services. Though this is not considered as
significant a risk with respect to the suppliers of goods, due to the
availability of alternative suppliers, the disruption of certain
services, such as utilities, airlines and credit card companies, could,
depending upon the extent of the disruption, have a material adverse
impact on the Company's operations. To date, the Company is not aware
of any vendor or service provider year 2000 issue that management
believes would have a material adverse impact on the Company's
operations. However, the Company has no means of ensuring that its
vendors or service providers will be year 2000-ready. The inability of
vendors or service providers to complete their year 2000 resolution
process in a timely fashion could have an adverse impact on the
Company. The effect on non-compliance by vendors or services providers
could disrupt service or cause potential hotel quests to postpone or
cancel their travel plans, causing a disruption of business.
The hotels contain embedded computer chips to perform functions
relating to the operation of, including elevators, automated room key
systems, HVAC, and fire and safety system. In particular, year 2000
problems such systems at the hotels could disrupt operations at the
affected hotels.
22
Additionally, many of these systems, which operate automatically, can
be operated manually and consequently in the event these systems
experience a failure as a result to the year 2000 problem, the
disruption caused by such failure could be manually overridden.
Failure to correct a material year 2000 problem could result in an
interruption, in or a failure of, certain normal business activities or
operations. The Company believes that, with the implementation of new
or upgraded business systems and completion of the year 2000 project as
scheduled, and information from Promus that the systems are compliant,
the possibility of significant interruptions of normal operations due
to the failure of those systems will be reduced. However, the Company
is also dependent upon the power and telecommunications infrastructure
within the United States. The most reasonable likely worst-case
scenario would be that the Company may experience disruption in its
operations if any of these third-party suppliers reported a system
failure. Although the Company's year 2000 project will reduce the level
of uncertainty about the compliance and readiness of its material
third-party providers, due to the general uncertainty over year 2000
readiness of these third-party suppliers, the Company is unable to
determine at this time whether the consequences of year 2000 failures
wll have a material impact.
The Company has contingency plans for certain critical applications.
These contingency plans involve, among other actions, manual
workarounds and contracting with vendors capable of providing services.
The Company and the Lessee believe they are devoting the resources
necessary to achieve year 2000 readiness in a timely manner. Costs
associated with any year 2000 readiness projects are not expected to be
material to the Company or Lessee
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In connection with the acquisition of the four hotel properties, the
Company incurred $26,625,000 of short-term borrowings at a fixed
interest rate of 8.5%. The Company has repricing risk associated with
any re-financing of this debt which is due on October 1, 2000, however,
the Company intends to repay the entire balance of the obligation from
proceeds from its "best efforts" common stock offering.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosure regarding market risks applicable to the
Company are incorporated herein by reference to the discussion in Item
2-Management's Discussion and Analysis of Financial Condition and
Results of Operations contained elsewhere in this Quarterly Report on
Form 10-Q.
24
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, 1999:
Common Shares Registered:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
28,500,000.00 Common Shares $10 per Common Share $ 285,000,000
-------------
Totals: 30,166,666.67 Common Shares
-------------
Common Shares Sold:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
865,470.00 Common Shares $10 per Common Share $ 8,654,700
------------- ---------
Totals: 2,532,136.67 Common Shares $ 23,654,700
-------------
Expenses of Issuance and Distribution of Common Shares
1. Underwriting discounts and commissions $ 2,365,470
2. Expenses of underwriters $ -
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 $ 660,005
--------
Total Expenses of Issuance and Distribution of
Common Shares $ 3,025,475
Net Proceeds to the Company $ 20,629,225
1. Purchase of real estate (including repayment of
indebtedness incurred to purchase real estate) $ 8,875,000
2. Interest on indebtedness $ 229,701
3. Working capital $ 10,809,596
4. Fees to the following (all affiliates of officers of
the Company):
a. Apple Suites Advisors, Inc. $ 4,928
b. Apple Suites Realty Group, Inc. $ 710 000
5. Fees and expenses of third parties $ -
a. Legal $ -
b. Accounting $ -
6. Other (specify ) $ -
-----------
Total of Application of Net Proceeds to the
Company $ 20,629,225
25
Part II, Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27- Financial Data Schedule
(b) Reports on Form 8-K
None
26
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: 11-15-99 BY: /s/ Glade M. Knight
--------------- --------------------
Glade M. Knight
President
BY: /s/ Stanley J. Olander
----------------------
Stanley J. Olander
Secretary