Filed Pursuant to Rule 424(B)(3)
Registration Number 333-53984
SUPPLEMENT NO. 5 DATED APRIL 17, 2002
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
No. 5 updates the information presented in Supplement No. 4, Supplement No. 3
and in Supplement No. 2, which incorporated and replaced Supplement No. 1.
Prospective investors should carefully review the prospectus, Supplement No.
2, Supplement No. 3, Supplement No. 4 and this Supplement.
TABLE OF CONTENTS FOR SUPPLEMENT NO. 5
Status of the Offering.......... S-2
Recent Developments............. S-2
Acquisitions and Related Matters S-3
Summary of Material Contracts... S-5
Our Properties.................. S-7
Experts......................... S-10
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, future economic, competitive and market conditions and
future business decisions, together with local, national and international
events (including, without limitation, acts of terrorism or war, and their
direct and indirect effects on travel and the economy). 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.
S-1
STATUS OF THE OFFERING
We completed the minimum offering of units (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 March 25, 2002, we had closed on the following sales of units:
Proceeds Net of Selling
Number of Commissions and Marketing
Price Per Unit Units Sold Gross Proceeds Expense Allowance
-------------- ------------- -------------- -------------------------
$ 9.50... 3,157,894.70 $ 30,000,000 $ 27,000,000
$10.00..... 14,149,375.00 141,493,750 127,344,375
------------- ------------ ------------
Total.. 17,307,269.70 $171,493,750 $154,344,375
============= ============ ============
RECENT DEVELOPMENTS
On March 29, 2002, we acquired, through our subsidiaries, Marriott Residence
Inn Limited Partnership, which owns 15 extended-stay hotels. For simplicity,
this entity will be referred to as the "Partnership." Although the acquisition
was conducted through a merger in which our subsidiaries acquired the
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 system.
The hotels are described in another section below.
The total base purchase price for the acquisition was approximately $133.4
million. The purchase price, as subject to certain adjustments at closing, was
paid through a combination of transactions, as described below. In November
2001, we made a deposit of $35 million, which was applied toward the purchase
price at closing. In addition, we made a cash payment of approximately $7
million at closing. Our source for these funds was our ongoing and 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 existing loans,
which are secured by the hotels.
The secured loans will continue to be an obligation of the Partnership,
which continues to own the hotels. Further details about the secured loans are
provided in the next section. We also used the proceeds of our ongoing offering
to pay 2% of the total base purchase price for these 15 hotels, which equals
$2,667,052, 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.
S-2
As a result of this acquisition, we now own a total of 25 hotels, which are
located in 11 states, as shown in the map below:
[GRAPHIC -- Map of US]
ACQUISITIONS AND RELATED MATTERS
New Subsidiaries
We formed new subsidiaries to acquire the Partnership and its 15 hotels.
Specifically, we formed two direct wholly-owned subsidiaries. One of these
subsidiaries, AHT Res I GP, Inc., acquired the entire general partnership
interest in the Partnership and now holds a 1% interest as its sole general
partner. The other newly-formed and directly-owned subsidiary, AHT Res I LP,
Inc., acquired the entire limited partnership interest in the Partnership and
now holds a 99% interest as its sole limited partner. The Partnership directly
owns all of the hotels.
We also formed new subsidiaries in connection with the leasing of the hotels
from the Partnership under a master hotel lease agreement, which is one of the
material contracts summarized in another section below. Specifically, we formed
AHM Res I GP, Inc. and AHM Res I LP, Inc., to serve as the sole general partner
and sole limited partner, respectively, of AHM Res I Limited Partnership. This
limited partnership was formed as one of our indirect, wholly-owned
subsidiaries to lease the hotels and will be referred to, for simplicity, as
the "Lessee."
Loans Secured By Hotels
The Partnership, the direct owner of the hotels, is also the borrower under
secured loans from two lenders (with one being the senior lender and the other
being the subordinate lender). The senior lender is LaSalle Bank National
Association as Trustee for Mortgage Pass-Through Certificates Series 1996-2.
The senior lender holds separate loans for each hotel in the aggregate original
principal amount of $100 million. Each loan held by the senior lender is
secured by a first mortgage on the hotel involved and by a related first
priority security interest in the rents, revenues and other personal property
of such hotel. On March 29, 2002, the aggregate unpaid principal balance of
these senior loans was $70,868,403. Each senior loan bears interest at an
annual rate of 8.60% and has a maturity date of September 30, 2002. The
aggregate monthly payment under the senior loans is $874,163. An aggregate
balloon payment in the amount of approximately $69 million is scheduled to be
due at maturity.
S-3
The subordinate lender is LaSalle Bank National Association, as Indenture
Trustee for Benefit of the Holders of iStar Asset Receivables Trust
Collaterialized Mortgage Bonds Series 2000-1. The subordinate lender holds a
loan in the original principal amount of $30 million. The subordinate loan is
secured by a subordinate mortgage on the hotels and by related second priority
security interests in the rents, revenues and other personal property of the
hotels. On March 29, 2002, the unpaid principal balance of the subordinate loan
was $20,734,191. The subordinate loan bears interest at an annual rate of
15.25% and requires monthly payments of $400,590. The maturity date is
September 30, 2002. A balloon payment in the amount of approximately $20
million is scheduled to be due at maturity.
We expect that revenues from the hotels will be sufficient to make monthly
payments under the secured loans described in the above paragraphs. If hotel
revenues are not sufficient and other sources of funds are not available, we
could lose the hotels through foreclosure. While the secured loans remain
outstanding, certain covenants apply to the Partnership, as the borrower, and
its general partner. Among other things, these covenants (a) prohibit the
borrower and its general partner from engaging in any business that is not
related to the hotels or the secured loans, (b) require the borrower and its
general partner to each maintain a separate legal identity and an arms-length
relationship with affiliates, (c) restrict the transfer of ownership interests
in the borrower, its general partner or the hotels, (d) limit the extent to
which modifications may be made to the organizational documents of the borrower
or its general partner, or to the master hotel lease agreement or the amendment
and restatement of management agreement, and (e) require the general partner of
the borrower to maintain a net worth of at least $6,600,000, which has been
funded through an inter-company transfer.
Currently, we plan to pay the balloon payments due September 30, 2002 under
the secured loans by using proceeds from new financing provided by a suitable
lender. However, we have not yet obtained any commitment for such financing and
the terms of any such financing, including the interest rate and maturity date,
cannot be predicted. We would expect, however, that the financing would be
secured by the hotels and would have other terms and conditions customary for a
large secured commercial loan transaction. Although we think secured financing
will be available to provide funds sufficient to repay the loan obligations due
on September 30, 2002, if for any reason such secured financing cannot be
obtained, we would either have to locate an alternative funding source (which
could be difficult, if not essentially impossible), or sell some or all of the
hotels, or we could lose the hotels through foreclosure.
Other Actions
The hotels are being managed by Residence Inn By Marriott, Inc., which will
be referred to, for simplicity, as the "Manager." Such management is being
undertaken in accordance with an amendment and restatement of management
agreement, which is among the material contracts described in the next section.
S-4
SUMMARY OF MATERIAL CONTRACTS
Agreement and Plan of Merger
The acquisition of the Partnership and the 15 hotels occurred in accordance
with an agreement and plan of merger dated as of November 28, 2001. The closing
occurred on March 29, 2002 after a number of required conditions to closing
were satisfied.
Master Hotel Lease Agreement
The Lessee is one of our indirect, wholly-owned subsidiaries and is leasing
the 15 hotels from the Partnership under a master hotel lease agreement dated
as of March 29, 2002. For simplicity, this agreement will be referred to as the
"Master Lease." The Master Lease provides for an initial term of 15 years. The
Lessee has the option to extend the Master 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 Lease provides that the
Lessee 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 each of the
hotels is March 29, 2002. The base rents for the hotels range from $406,223 to
$4,231,315. 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.
Amendment and Restatement of Management Agreement
The Manager has agreed to manage the hotels under an amendment and
restatement of management agreement with the Lessee dated as of March 29, 2002.
For simplicity, this agreement will be referred to as the "Management
Agreement." The Management Agreement is similar to the prior management
agreement for the hotels, which had been executed in 1988. Management services
under the Management Agreement include supervising the operation of the hotels
and collecting revenues from their operation for the benefit of the Lessee.
The initial term of the Management Agreement will continue until December
28, 2007. The Manager may renew the term of the Management Agreement for five
periods of 10 years each, provided that an event of default by the Manager has
not occurred and provided that the Manager exercises its renewal option with
respect to at least 80% of the hotels that either meet the then-current brand
standards for Residence Inn(R) by Marriott(R) or are subject to property
improvement programs reasonably required by the Manager. The Manager may elect
to renew for an additional term by giving notice to the Lessee at least 18
months before the expiration of the then current term. Such renewal may apply
to all or only some of the hotels. The Lessee may terminate the Management
Agreement with respect to all of the hotels if the total operating profit for
any specified period of time 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 the Lessee of the pertinent annual accounting. The
Manager has the option to avoid such termination by advancing the amount of any
deficiency in operating profit to the Lessee within 60 days after the Manager's
receipt of the termination notice.
S-5
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(R) 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 were the result
of prior negotiations between the Partnership and the Manager, but were not
materially modified in connection with our acquisition of the Partnership.
The Manager also may exercise a right of first refusal if the Partnership,
as the direct owner of the hotels, receives a bona fide written offer from a
third party for the purchase or lease of any one or more of the hotels or for
the purchase of a "controlling interest" (generally, a majority interest) in
the Partnership or the Lessee or the general partner of either of them. In such
an event, the Lessee must cause the Partnership to give prior notice to the
Manager, which will then have 30 days in which to exercise its right of first
refusal. Any such purchase, lease or other acquisition of the hotels by the
Manager would occur on the same terms and conditions as those set forth in the
bona fide offer. The Management Agreement would remain in effect as to any
other hotels not involved in such sale, lease or other disposition.
Owner Agreement
In an owner agreement dated as of March 29, 2002, the Manager granted its
consent to our acquisition of the Partnership and to the Master Lease. In
return, the Partnership, as the direct owner of the hotels, agreed to guarantee
the performance of the obligations, including monetary obligations, of the
Lessee under the Management Agreement.
Agreements with Lenders
The two secured lenders granted their consent to our acquisition of the
Partnership and to the leasing of the hotels to the Lessee by separate consents
to merger agreement, each dated as of March 29, 2002.
In two separate loan modification agreements, each dated as of March 29,
2002, the Partnership, its general partner, the Lessee and the secured lenders
agreed to modify the secured loans to reflect the transactions described above,
including our acquisition of the Partnership.
In a first amendment to four party agreement dated as of March 29, 2002, the
Partnership, the Lessee, the secured lenders and the Manager amended an earlier
agreement among such parties (or their predecessors) to reflect the transaction
and, in essence, to agree that upon the occurrence of a default under the
secured loans, the Manager would pay monies otherwise payable to the
Partnership or the Lessee to a cash collateral account benefiting the secured
lenders.
In separate environmental liability indemnity agreements, each dated as of
March 29, 2002, the subsidiary we formed to serve as the new general partner of
the Partnership and the Lessee jointly and severally agreed to indemnify the
secured lenders and related parties against the presence or release of
hazardous materials at the hotels.
In separate security agreements and separate assignments of rents and
revenues, each dated as of March 29, 2002, the Lessee granted security
interests to the secured lenders in the personal property at the hotels and in
the rents and revenues from the operation of the hotels.
S-6
OUR PROPERTIES
All of our hotels are part of the Residence Inn(R) by Marriott(R) franchise
system. Each hotel was in operation when acquired. Each hotel offers one and
two room suites with the amenities generally offered by upscale extended-stay
hotels. 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
Average Daily
Rate (price) per Suite
----------------------
Number
Hotel (a) State of Suites 2001 (b) 2002 (c)
--------- ------------- --------- -------- --------
Montgomery............... Alabama 94 $ 85.87 $ 86.06
Bakersfield.............. California 114 90.89 89.23
Concord-Pleasant Hill.... California 126 133.50 130.86
Costa Mesa............... California 144 112.53 94.51
La Jolla................. California 287 119.45 108.02
Long Beach............... California 216 113.54 105.30
San Ramon................ California 106 152.80 154.80
Boulder.................. Colorado 128 124.58 116.39
Meriden.................. Connecticut 106 107.91 99.38
Atlanta Airport-Hapeville Georgia 126 100.83 96.25
Atlanta-Buckhead......... Georgia 136 101.75 95.78
Atlanta-Dunwoody......... Georgia 144 81.61 83.02
Atlanta-Cumberland....... Georgia 130 86.26 81.51
Chicago-Lombard.......... Illinois 144 99.46 90.01
Boston-Tewksbury......... Massachusetts 130 111.52 89.22
Southfield............... Michigan 144 97.23 86.21
St. Louis-Chesterfield... Missouri 104 81.83 79.59
St. Louis-Galleria....... Missouri 152 96.79 91.70
Cincinnati-Sharonville... Ohio 144 76.04 69.14
Cincinnati-Blue Ash...... Ohio 118 85.17 78.35
Columbus................. Ohio 96 80.24 74.55
Dayton North............. Ohio 64 84.63 78.41
Dayton South............. Ohio 96 84.65 78.02
Dallas-Irving............ Texas 120 104.07 94.81
Houston-Clear Lake....... Texas 110 88.96 90.32
----- ------- -------
Total............. 3,279 $100.08 $ 93.66
===== ======= =======
- --------
Notes for Table 1:
(a) The hotels first began operations during the period from 1984 through 1990.
Results of operations for the period before the effective dates of our
hotel acquisitions were provided by the sellers of the hotels.
(b) Amounts are based on operations from December 30, 2000 through December 28,
2001.
(c) Amounts are based on operations from December 29, 2001 through March 22,
2002.
S-7
TABLE 2. Tax and Improvement Information
2001 Real 2002 Budgeted 2002 Budgeted
Property Tax 2001 Real Improvement Prop. Tax on Depreciation-Federal
Hotel Rate (a) Property Tax Cost (b) Improv. (c) Tax Basis (d)
- ----- ------------ ------------ ------------- ------------- --------------------
Montgomery............... 0.00909499 $ 49,500 $ 155,500 $ 1,414 $ 5,442,558
Bakersfield.............. 0.01222606 92,227 153,600 1,878 7,543,477
Concord-Pleasant Hill.... 0.01173768 178,076 1,090,000 12,794 15,171,316
Costa Mesa............... 0.01109190 93,688 209,500 2,327 8,433,378
La Jolla................. 0.01128900 350,643 4,814,500 53,580 31,507,442
Long Beach............... 0.01093163 258,288 226,900 2,480 23,627,618
San Ramon................ 0.01212396 152,899 158,800 1,925 12,611,312
Boulder.................. 0.02181600 248,870 2,126,000 46,381 11,407,700
Meriden.................. 0.01410379 97,977 116,200 1,639 6,946,870
Atlanta Airport-Hapeville 0.02011547 137,691 162,800 3,275 6,845,040
Atlanta-Buckhead......... 0.01720710 154,507 267,700 4,607 8,978,800
Atlanta-Dunwoody......... 0.01490400 109,251 1,270,300 18,933 7,330,315
Atlanta-Cumberland....... 0.01472790 123,858 250,300 3,686 8,409,753
Chicago-Lombard.......... 0.02152167 177,874 296,900 6,390 8,264,880
Boston-Tewksbury......... 0.02195740 195,012 156,900 3,445 8,881,400
Southfield............... 0.02695070 140,298 294,100 7,926 5,205,740
St. Louis-Chesterfield... 0.02765728 97,304 186,500 5,158 3,518,190
St. Louis-Galleria....... 0.02610000 194,590 2,631,500 68,682 7,455,540
Cincinnati-Sharonville... 0.01485522 100,732 2,492,800 37,031 6,780,914
Cincinnati-Blue Ash...... 0.02771091 157,079 105,000 2,910 5,668,490
Columbus................. 0.01846574 94,176 121,800 2,249 5,100,029
Dayton North............. 0.01696585 53,377 150,900 2,560 3,146,143
Dayton South............. 0.02105633 118,801 1,929,800 40,634 5,642,057
Dallas-Irving............ 0.02788849 238,375 103,400 2,884 8,547,420
Houston-Clear Lake....... 0.03334717 197,600 119,200 3,975 5,925,540
- --------
Notes for Table 2:
(a) 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.
(b) Improvement costs are based on operating budgets for 2002.
(c) 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.
(d) 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.
S-8
TABLE 3. Operating Information
Avg. Daily Occupancy Rates (%) (a) Revenue per Available Suite ($) (b)
---------------------------------- ---------------------------------------
Hotel 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002
- ----- ---- ---- ---- ---- ---- ------- ------- ------- ------- -------
Montgomery............... 82.4 78.8 81.4 81.4 79.7 $ 67.53 $ 65.41 $ 66.73 $ 69.90 $ 68.58
Bakersfield.............. 85.6 83.3 86.0 88.1 83.7 73.38 71.57 73.70 80.03 74.71
Concord-Pleasant Hill.... 86.5 90.2 91.7 84.7 86.0 94.43 97.92 108.49 113.10 112.51
Costa Mesa............... 83.3 83.1 84.6 77.0 72.1 87.20 86.97 96.59 98.68 68.18
La Jolla................. 90.1 81.5 84.0 82.8 85.4 105.70 98.03 104.57 101.20 92.30
Long Beach............... 90.5 86.4 90.1 83.2 79.1 89.93 89.11 99.58 105.73 83.31
San Ramon................ 87.8 90.2 89.9 82.1 73.4 116.27 112.30 118.64 125.49 113.60
Boulder.................. 80.0 80.2 85.7 75.2 50.7 94.94 98.24 106.13 97.64 59.03
Meriden.................. 85.8 87.9 85.8 81.6 73.6 81.74 89.76 93.30 88.00 73.19
Atlanta Airport-Hapeville 88.4 85.2 87.6 86.3 87.1 79.49 80.63 83.97 87.04 83.87
Atlanta-Buckhead......... 80.4 81.1 81.6 75.3 73.5 79.42 83.15 87.77 92.10 70.39
Atlanta-Dunwoody......... 82.5 76.5 69.5 74.6 55.9 65.15 62.60 57.37 61.93 45.56
Atlanta-Cumberland....... 83.1 82.8 83.7 71.9 60.5 64.97 66.03 67.64 67.85 50.22
Chicago-Lombard.......... 87.3 83.8 87.2 85.4 71.1 82.55 81.43 88.89 86.59 63.97
Boston-Tewksbury......... 87.2 91.7 88.0 78.0 66.1 89.44 101.49 108.38 87.00 58.99
Southfield............... 85.9 89.2 88.3 83.6 77.5 81.21 88.34 89.62 87.01 66.82
St. Louis-Chesterfield... 82.6 81.6 79.2 86.0 79.0 75.21 70.05 69.37 59.20 62.88
St. Louis-Galleria....... 81.0 86.1 90.8 88.0 81.8 70.82 78.42 83.88 78.01 74.99
Cincinnati-Sharonville... 81.1 81.2 77.0 68.1 61.6 65.63 65.90 65.01 47.56 42.61
Cincinnati-Blue Ash...... 86.1 85.9 76.2 71.1 58.1 72.02 87.34 74.49 60.58 45.54
Columbus................. 84.2 81.2 81.1 72.8 60.1 71.32 68.85 67.49 60.16 44.81
Dayton North............. 84.5 85.7 83.8 81.0 83.0 80.12 78.80 76.55 62.26 65.08
Dayton South............. 87.3 84.9 86.0 79.5 70.2 73.31 70.54 72.07 71.71 54.80
Dallas-Irving............ 88.5 81.3 84.6 73.2 73.5 86.38 83.76 85.91 76.15 69.65
Houston-Clear Lake....... 87.4 85.7 87.2 90.6 87.3 84.61 80.33 79.12 80.57 78.84
- --------
Notes for Table 3:
(a) Percentages for 2002 are based on occupancy from December 29, 2001 through
March 22, 2002. Occupancy rates for the entire year will not necessarily be
comparable.
(b) Amounts for 2002 are for the period from December 29, 2001 through March
22, 2002, and have not been annualized. Amounts for the entire year will
not necessarily be comparable.
Five of our hotels are located in the same markets as extended-stay hotels
owned by Apple Suites, Inc. (These hotels are the ones located in Boulder,
Atlanta-Buckhead, Atlanta-Cumberland, St. Louis-Chesterfield, and
Dallas-Irving). As discussed elsewhere in this prospectus, day-to-day operation
of our hotels is contracted to Residence Inn by Marriott, Inc. and our hotels
operate under the Residence Inn(R) by Marriott(R) brand. The hotels owned by
Apple Suites, Inc. are operated on a day-to-day basis by a separate management
company and operate under the Homewood Suites(R) by Hilton brand. We may in the
future acquire additional hotels located in the same markets as hotels owned by
Apple Suites, Inc. Our Chairman and President, Glade M. Knight, is also
Chairman and President of Apple Suites, Inc.
S-9
EXPERTS
The financial statements for the Partnership included herein have been
audited by Arthur Andersen LLP ("Andersen"), 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.
Andersen has provided a representation letter dated April 12, 2002 with
respect to its audit of the consolidated financial statements of the
Partnership. In such letter, Andersen represented that (i) the audit was
subject to Andersen's quality control system for the U.S. accounting and
auditing practice to provide reasonable assurance that the engagement was
conducted in compliance with professional standards, (ii) there was appropriate
continuity of Andersen personnel working on the audit, and (iii) there was
availability of national office consultation. The Partnership has no foreign
affiliates, so assurances from Andersen as to foreign affiliates was not
relevant or applicable.
S-10
INDEX TO FINANCIAL STATEMENTS
Financial Statements of Businesses Acquired
Marriott Residence Inn Limited Partnership
Page
----
Report of Independent Public Accountants................................................ F-2
Balance Sheets as of December 31, 2001 and 2000......................................... F-3
Statements of Operations for the Fiscal Years Ended December 31, 2001, 2000 and 1999.... F-4
Statements of Changes in Partners' Capital for the Fiscal Years Ended December 31, 2001,
2000 and 1999......................................................................... F-5
Statements of Cash Flows for the Fiscal Years Ended December 31, 2001, 2000 and 1999.... F-6
Notes to Financial Statements........................................................... F-7
Pro Forma Financial Information
Apple Hospitality Two, Inc.
Pro Forma Condensed Consolidated Balance Sheet As of December 31, 2001 (unaudited) F-12
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited)............... F-13
Pro Forma Condensed Consolidated Statements of Operations For the Year Ended
December 31, 2001 (unaudited)................................................... F-15
Notes to Pro Forma Condensed Consolidated Statements of Operations (unaudited).... F-17
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP:
We have audited the accompanying balance sheets of Marriott Residence Inn
Limited Partnership (a Delaware limited partnership) as of December 31, 2001
and 2000, and the related statements of operations, changes in partners'
capital and cash flows for each of the three fiscal years in the period ended
December 31, 2001. 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 audits in accordance with auditing standards generally
accepted in the United States. 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 financial position of Marriott Residence Inn
Limited Partnership as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
April 1, 2002
F-2
BALANCE SHEETS
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
DECEMBER 31, 2001 AND 2000
(in thousands)
2001 2000
-------- ---------
ASSETS
Property and equipment, net........................................ $134,121 $137,497
Due from Residence Inn by Marriott, Inc............................ 2,142 2,160
Property improvement fund.......................................... 4,249 2,889
Deferred financing costs, net of accumulated amortization.......... 363 835
Cash and cash equivalents.......................................... 16,238 10,755
-------- ---------
$157,113 .$154,136
======== =========
LIABILITIES and PARTNERS' CAPITAL
LIABILITIES
Mortgage debt................................................... $ 92,596 $ 98,213
Incentive management fees due to Residence Inn by Marriott, Inc. 6,713 3,626
Accounts payable and accrued expenses........................... 379 277
-------- ---------
Total Liabilities........................................... 99,688 102,116
-------- ---------
PARTNERS' CAPITAL
General Partner
Capital contribution............................................ 663 663
Capital distributions........................................... (436) (436)
Cumulative net income........................................... 424 370
-------- ---------
651 597
-------- ---------
Limited Partners
Capital contribution............................................ 58,050 58,050
Capital distributions........................................... (43,233) (43,233)
Cumulative net income........................................... 41,957 36,606
-------- ---------
56,774 51,423
-------- ---------
Total Partners' Capital..................................... 57,425 52,020
-------- ---------
$157,113 $154,136
======== =========
The accompanying notes are an integral part of these financial statements.
F-3
STATEMENTS OF OPERATIONS
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
For the Fiscal Years Ended December 31, 2001, 2000 and 1999
(in thousands, except per Unit amounts)
2001 2000 1999
-------- -------- --------
REVENUES
Suites................................................................ $ 61,423 $ 66,044 $ 63,112
Other operating departments........................................... 2,621 3,154 3,086
-------- -------- --------
Total revenues...................................................... 64,044 69,198 66,198
-------- -------- --------
OPERATING COSTS AND EXPENSES
Suites................................................................ 13,084 14,529 14,078
Other department costs and expenses................................... 1,455 1,790 2,889
Selling, administrative and other..................................... 16,668 17,362 15,290
Depreciation.......................................................... 6,479 6,362 6,952
Incentive management fee.............................................. 3,375 4,892 3,521
Residence Inn system fee.............................................. 2,457 2,642 2,524
Property taxes........................................................ 2,460 2,460 2,230
Base management fee................................................... 1,281 1,384 1,324
Equipment rent and other.............................................. 1,892 1,128 913
-------- -------- --------
49,151 52,549 49,721
-------- -------- --------
OPERATING PROFIT....................................................... 14,893 16,649 16,477
Interest expense...................................................... (10,152) (10,700) (11,315)
Interest income....................................................... 664 690 304
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS...................................... 5,405 6,639 5,466
Extraordinary gain on the forgiveness of deferred incentive management
fees................................................................ -- 29,781 --
-------- -------- --------
NET INCOME............................................................. $ 5,405 $ 36,420 $ 5,466
======== ======== ========
ALLOCATION OF NET INCOME
General Partner....................................................... $ 54 $ 364 $ 55
Limited Partners...................................................... 5,351 36,056 5,411
-------- -------- --------
$ 5,405 $ 36,420 $ 5,466
======== ======== ========
NET INCOME PER LIMITED PARTNER UNIT (65,600 Units)..................... $ 82 $ 550 $ 83
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
For the Fiscal Years Ended December 31, 2001, 2000 and 1999
(in thousands)
General Limited
Partner Partners Total
------- -------- -------
Balance, December 31, 1998 $178 $ 9,956 $10,134
Net income............. 55 5,411 5,466
---- ------- -------
Balance, December 31, 1999 233 15,367 15,600
Net income............. 364 36,056 36,420
---- ------- -------
Balance, December 31, 2000 597 51,423 52,020
Net income............. 54 5,351 5,405
---- ------- -------
Balance, December 31, 2001 $651 $56,774 $57,425
==== ======= =======
The accompanying notes are an integral part of these financial statements.
F-5
STATEMENTS OF CASH FLOWS
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
For the Fiscal Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
------- -------- -------
OPERATING ACTIVITIES
Net income.................................................. $ 5,405 $ 36,420 $ 5,466
Extraordinary gain on the forgiveness of deferred incentive
management fees........................................... -- (29,781) --
Depreciation................................................ 6,479 6,362 6,952
Deferral of incentive management fees due to
Residence Inn by Marriott, Inc............................ 3,087 3,626 2,752
Amortization of deferred financing costs as interest........ 472 472 472
Loss on dispositions of property and equipment.............. 1 8 14
Changes in operating accounts:
Due from Residence Inn by Marriott, Inc................. 18 (176) 57
Accounts payable and accrued expenses................... 102 (35) (794)
------- -------- -------
Cash provided by operating activities.......................... 15,564 16,896 14,919
------- -------- -------
INVESTING ACTIVITIES
Additions to property and equipment......................... (3,104) (5,075) (5,475)
Change in property improvement fund......................... (1,360) (2,022) (644)
------- -------- -------
Cash used in investing activities.............................. (4,464) (7,097) (6,119)
------- -------- -------
FINANCING ACTIVITIES
Principal payments on mortgage debt......................... (5,617) (5,069) (6,802)
------- -------- -------
Cash used in financing activities.............................. (5,617) (5,069) (6,802)
------- -------- -------
INCREASE IN CASH AND CASH EQUIVALENTS.......................... 5,483 4,730 1,998
CASH AND CASH EQUIVALENTS at beginning of year................. 10,755 6,025 4,027
------- -------- -------
CASH AND CASH EQUIVALENTS at end of year....................... $16,238 $ 10,755 $ 6,025
======= ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest............................. $ 9,680 $ 10,228 $11,770
======= ======== =======
The accompanying notes are an integral part of these financial statements.
F-6
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Partnership
Description of the Partnership
Marriott Residence Inn Limited Partnership, a Delaware limited partnership,
was formed on March 29, 1988 to acquire, own and operate 15 Residence Inn by
Marriott hotels and the land on which the Inns are located. The Inns are
located in seven states in the United States: four in Ohio, three in
California, three in Georgia, two in Missouri and one in each of Illinois,
Colorado and Michigan, and as of December 31, 2001, have a total of 2,130
suites. The Inns are managed by Residence Inn by Marriott, Inc. (the
"Manager"), a wholly-owned subsidiary of Marriott International, Inc.
("Marriott International"), as part of the Residence Inn by Marriott hotel
system.
The partnership was formed through a public offering of 65,600 limited
partnership units in 1988. The sole general partner, with a 1% interest, is
RIBM One LLC (the "General Partner"), a Delaware single member limited
liability company, which is owned directly and indirectly by Host Marriott,
L.P. ("Host LP") as of December 31, 2001. See Note 8 Subsequent Events for
other changes in ownership.
Partnership Allocations and Distributions
Net profits for Federal income tax purposes are generally allocated to the
partners in proportion to the distributions of cash available for distribution.
The partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the general partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Net Capital Investment, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts"); (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the general partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
(b) 85% to the limited partners and 15% to the general partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their
original capital contributions; or
(c) 70% to the limited partners and 30% to the general partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
Losses and net losses are allocated 99% to the limited partners and 1% to
the general partner.
Capital Receipts not retained by the partnership will generally be
distributed (i) first, 99% to the limited partners and 1% to the general
partner until the partners have received cumulative distributions from all
sources equal to a cumulative simple return of 12% per annum on their Net
Capital Investment, as defined, and an amount equal to their contributed
capital, payable only from Capital Receipts; (ii) next, if the Capital Receipts
are from a sale, 100% to the general partner until it has received 2% of the
gross proceeds from the sale; and (iii) thereafter, 70% to the limited partners
and 30% to the general partner.
Gains will generally be allocated (i) first, to those partners whose capital
accounts have negative balances until such negative balances are brought to
zero; (ii) second, to all partners in amounts necessary to bring each of their
respective capital account balances equal to their Invested Capital, as
defined, plus a 12% return on such Invested Capital; (iii) next, to the general
partner in an amount necessary to bring the general partner's capital account
balance to an amount which is equal to 2% of the gross proceeds from the sale;
and (iv) thereafter, 70% to the limited partners and 30% to the general partner.
F-7
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the gain or loss resulting from such
sale.
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
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 in the Preparation of Financial Statements
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 reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows:
Land improvements......... 40 years
Buildings and improvements 40 years
Furniture and equipment... 3 to 10 years
All property and equipment is pledged as security for the mortgage debt.
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 the net book value of the property.
If a property is impaired, its basis is adjusted to fair market value. There
were no such adjustments required at December 31, 2001 or 2000.
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 partners. Significant
differences exist between the net income or loss for financial reporting
purposes and the net income or loss reported in the partnership's tax return.
These differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the assets
and differences in the timing of the recognition of base and incentive
management fees. As a result of these differences, the partnership's net assets
reported in the accompanying financial statements is less than the tax basis of
such net assets by $409,000 as of December 31, 2001. As of December 31, 2000,
the tax basis of net assets was less than the net assets reported in the
accompanying financial statements by $3,675,000.
F-8
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with the
mortgage debt refinancing and are amortized using the straight-line method over
the term of the loan. At December 31, 2001 and 2000, deferred financing costs,
net of accumulated amortization, totaled $363,000 and $835,000, respectively.
Amortization of deferred financing costs totaled $472,000 in both 2001 and 2000.
Cash and Cash Equivalents
The partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Reclassifications
Certain reclassifications were made to the prior year financial statements
to conform to the 2001 presentation.
Application of New Accounting Standards
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets SFAS
No. 121" to determine when a long-lived asset should be classified as held for
sale, among other things. Those criteria specify that the asset must be
available for immediate sale in its present condition, subject only to terms
that are usual and customary for sales of such assets, and the sale of the
asset must be probable, and its transfer expected to qualify for recognition as
a completed sale, within one year. This Statement is effective for fiscal years
beginning after December 15, 2001. The Partnership does not believe
implementation of the standard will have a material effect on the Partnership.
Note 3. Litigation Settlement
In September 2000, the general partner, Marriott International, Inc., and
related defendants closed on the settlement of a lawsuit filed by limited
partners from seven limited partnerships, including the partnership's limited
partners ("Litigation Settlement"). In accordance with the terms of the
settlement, the defendants made cash payments of approximately $152 per unit to
the limited partners, in exchange for dismissal of the litigation and a
complete release of all claims. In addition to these cash payments, the Manager
agreed to forgive $29.8 million of deferred incentive management fees payable
by the partnership, which is reflected as an extraordinary gain in the
statement of operations for the year ended December 31, 2000.
Note 4. Property And Equipment
Property and equipment consists of the following as of December 31 (in
thousands):
2001 2000
-------- --------
Land and improvements........ $ 46,441 $ 46,441
Buildings and improvements... 126,717 123,898
Furniture and equipment...... 31,119 29,429
Construction in progress..... 800 2,273
-------- --------
205,077 202,041
Less accumulated depreciation (70,956) (64,544)
-------- --------
$134,121 $137,497
======== ========
F-9
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Estimated Fair Values Of Financial Instruments
The estimated fair values of financial instruments are shown below (in
thousands). The fair value of financial instruments not included in this table
are estimated to be equal to their carrying amounts.
As of December 31, 2001 As of December 31, 2000
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Senior mortgage debt $71,593 $70,997 $75,731 $76,796
Second mortgage debt $21,003 $21,772 $22,482 $25,080
The estimated fair values of debt obligations are based on the expected
future debt service payments discounted at risk adjusted rates.
Note 6. Mortgage Debt
The partnership's mortgage debt is comprised of a $100 million note (the
"Senior Mortgage") which bears interest at a fixed rate of 8.6% and a $30
million note (the "Second Mortgage") which bears interest at a fixed rate of
15.25% for a blended interest rate of 10.13%. Both the Senior Mortgage and
Second Mortgage require monthly payments of principal and interest and mature
on September 30, 2002. During 2001 and 2000, the partnership made principal
payments of $4.1 million and $3.8 million on the Senior Mortgage and $1.5
million and $1.3 million on the Second Mortgage, respectively. At December 31,
2001, the outstanding principal balance of the Senior Mortgage was $71.6
million and the outstanding principal balance of the Second Mortgage was $21.0
million. At December 31, 2000, the outstanding principal balance of the Senior
Mortgage was $75.7 million and the outstanding principal balance of the Second
Mortgage was $22.5 million.
The mortgage debt is expected to be refinanced at maturity by the
partnership.
Both the Senior Mortgage and the Second Mortgage are secured by the Inns,
the land on which they are located, a security interest in all personal
property associated with the Inns including furniture and equipment, inventory,
contracts and other general intangibles and an assignment of the partnership's
rights under the management agreement.
Note 7. Management Agreement
The Manager operates the Inns pursuant to a long-term management agreement
with an initial term expiring December 28, 2007. The Manager has the option to
extend the agreement on one or more of the Inns for up to five 10-year terms.
The partnership may terminate the management agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
partnership the amount by which the minimum operating results were not
achieved. The Manager earns a base management fee equal to 2% of gross sales.
Base management fees are paid currently.
In addition, the Manager is entitled to an incentive management fee equal to
15% of operating profit, as defined (20% in any year in which operating profit
is equal to or greater than $23.5 million). In 2001 and 1999, incentive
management fees were calculated as 15% of operating profit. However, in 2000,
incentive management fees were calculated as 20% of operating profit. The
incentive management fee is payable out of 50% of cash flow from operations
remaining after payments of qualifying debt service, retention by the
partnership of annual cash flow from operations of $6,626,263 and the deferred
base management fee. If the partnership retains an
F-10
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
additional 5% return, the incentive management fee is payable out of 75% of the
remaining cash flow from operations. Incentive management fees earned are
payable in the future from operating cash flow, as defined. Unpaid incentive
management fees are paid from cash flow available for incentive management fees
following payment of the then current incentive management fees. For the years
ended December 31, 2001, 2000, and 1999, $3.4 million, $4.9 million and $3.5
million, respectively, in incentive management fees were earned, of which $0.3
million, $1.3 million and $.8 million, respectively, were paid. As of December
31, 2001 and 2000, deferred incentive management fees were $6.7 million and
$3.6 million, respectively. In connection with the Litigation Settlement, the
Manager waived $29.8 million of deferred incentive management fees, which was
recognized as an extraordinary gain during 2000.
The management agreement also provides for annual payments of the Residence
Inn system fee equal to 4% of gross suite sales from the Inns. In addition, the
Manager is reimbursed for each inn's pro rata share of the actual costs and
expenses incurred by the Manager in providing certain 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 operating a toll-free
reservation system. Each inn contributes 2.5% of suite sales to the marketing
fund. For the years ended December 31, 2001, 2000 and 1999, respectively, the
partnership paid a Residence Inn system fee of $2.5 million, $2.6 million and
$2.5 million, reimbursed the Manager $1.2 million, $1.3 million and $1.3
million for chain services, and contributed $1.5 million, $1.7 million and $1.6
million to the marketing fund.
In addition, the Inns participate in Marriott International's Marriott's
Rewards Program ("MRP"). The costs of this program are based upon the MRP sales
at each hotel. MRP costs were $221,000, $283,000 and $224,000 in 2001, 2000,
and 1999, respectively. Chain services, contributions to the marketing fund and
MRP costs are included in selling, administrative and other expenses in the
accompanying statement of operations.
The partnership is required to provide the Manager with working capital to
meet the operating needs of the Inns. The Manager converts cash advanced by the
partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables that are
maintained and controlled by the Manager. Upon termination of the management
agreement, the working capital will be returned to the partnership. The
individual components of working capital controlled by the Manager are not
reflected in the partnership's balance sheet. As of December 31, 2001 and 2000,
$775,000 has been
advanced to the Manager for working capital and is included in Due from
Residence Inn by Marriott, Inc. on the accompanying balance sheets.
The management agreement provides for the establishment of a property
improvement fund to provide for the replacement of furniture, fixtures and
equipment ("FF&E") at the Inns. Total contributions during 2001, 2000 and 1999
were $3.5 million, $5.0 million and $5.1 million, respectively. Based on
capital budgets, it was determined that the property improvement fund was
insufficient beginning in 1998, primarily due to the need to complete total
suite refurbishments at the majority of the Inns in the next several years. To
reduce this shortfall, the partnership increased the contribution rate to the
property improvement fund beginning in 1999 to 5.5% of gross Inn revenues. In
2000 and 1999, the contributions include additional cash contributions provided
by the partnership of $1,200,000 and $1,450,000, respectively.
Note 8. Subsequent Events
Pursuant to an Agreement and Plan of Merger dated as of November 28, 2001,
the general partner of the partnership and others agreed upon a merger between
the partnership and a subsidiary of Apple Hospitality Two, Inc. that would, in
essence, effect Apple Hospitality Two Inc.'s acquisition, through subsidiaries,
of the partnership. There were a number of conditions to the transaction,
including approval by the holders of a majority of the limited partnership
interests of the partnership. All conditions were met, and the transaction
closed on March 29, 2002. The partnership is now a wholly-owned, indirect
subsidiary of Apple Hospitality Two, Inc.
F-11
APPLE HOSPITALITY TWO, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 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 Limited Partnership (the "Partnership") from Host
Marriott Corporation ("Host") containing 15 Residence Inn(R) by Marriott(R)
hotels, for approximately $133.4 million had occurred on December 31, 2001.
Marriott will continue to manage the hotels under the agreements not
materially different from historical contractual arrangements.
Such information is based in part upon the consolidated balance sheet of the
Company, and the historical balance sheet of the Partnership. 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 December 31, 2001 nor
does it purport to represent the future financial position of the Company.
Historical
Company Marriott Residence
Historical Residence Inn Acquisition Inn
Balance Limited Closing Acquisition Total
Sheet Partnership Adjustments (A) Adjustments Pro forma
------------ ------------- --------------- ------------ ------------
ASSETS
Investment in hotel properties...... $121,078,235 $134,121,000 -- $ (5,913,328)(C) $249,285,907
Cash and cash equivalents........... 15,468,841 16,238,000 (11,009,000) -- 20,697,841
Deposit for acquisition............. 35,000,000 -- -- (35,000,000)(B) --
FF&E reserve........................ 2,254,674 4,249,000 -- -- 6,503,674
Due from Residence Inn by
Marriott, Inc...................... 860,229 2,142,000 (2,142,000) -- 860,229
Deferred financing costs, net of
accumulated depreciation........... -- 363,000 -- (363,000)(D) --
Other assets........................ 3,719,308 -- -- -- 3,719,308
------------ ------------ ------------ ------------ ------------
Total Assets..................... $178,381,287 $157,113,000 $(13,151,000) $(41,276,328) $281,066,959
============ ============ ============ ============ ============
LIABILITIES and SHAREHOLDERS'
EQUITY
Liabilities
Mortgage notes payable.............. $ 52,874,346 $ 92,596,000 (994,000) -- $144,476,346
Accounts payable--affiliate......... 261,330 -- -- -- 261,330
Accounts payable and accrued
expenses........................... 934,198 379,000 -- 1,621,000(B) 2,934,198
Capital lease obligations........... 276,135 -- -- -- 276,135
Interest payable.................... 367,888 -- -- -- 367,888
Distributions payable............... 3,001,721 -- -- -- 3,001,721
Deferred incentive management fees.. 204,698 6,713,000 -- $ (6,713,000)(E) 204,698
------------ ------------ ------------ ------------ ------------
Total Liabilities................ 57,920,316 99,688,000 (994,000) (5,092,000) 151,522,316
(Balance Sheet continued on next page)
F-12
Historical
Company Marriott Residence
Historical Residence Inn Acquisition Inn
Balance Limited Closing Acquisition Total
Sheet Partnership Adjustments (A) Adjustments Pro forma
------------ ------------- --------------- ------------ ------------
Shareholders' equity/Partners' Capital
Partnership capital........................ -- 57,425,000 (12,157,000) (45,268,000)(F) --
Common stock, no par value, authorized
200,000,000 shares; issued and outstanding
13,907,733 shares......................... 122,889,057 -- -- 9,083,672(G) 131,972,729
Series B preferred convertible stock, no
par value authorized 240,000 shares;
issued and outstanding 240,000 shares..... 24,000 -- -- -- 24,000
Net income greater than distributions...... (2,452,086) -- -- -- (2,452,086)
------------ ------------ ------------ ------------ ------------
Total Shareholders' Equity........... 120,460,971 57,425,000 (12,157,000) (36,184,328) 129,544,643
------------ ------------ ------------ ------------ ------------
Total Liabilities and
Shareholders' Equity............. $178,381,287 $157,113,000 $(13,151,000) $(41,276,328) $281,066,959
============ ============ ============ ============ ============
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 a portion of its cash, its receivables from Marriott. The
$994,000 represents payments by the prior owner on the mortgage notes
assumed at closing.
(B) Total purchase price consists of the following:
Purchase price per contract....................... $133,352,600
Liability assumed................................. 379,000
------------
Sub-total...................................... 133,731,600
Acquisition fee payable to ASRG................... 2,667,052
Cash assumed...................................... (5,229,774)
Additional closing costs.......................... 1,621,000
------------
Total purchase price........................... $132,789,878
============
The purchase price was satisfied by the following:
Cash:
-paid as a deposit in 2001..................... $ 35,000,000
-on hand....................................... 6,187,878
------------
41,187,878
Assumption of mortgage notes...................... 91,602,000
------------
$132,789,878
============
(C) Allocation of purchase price (see Note B above) to assets acquired at fair value are as
follows:
Purchase price (See Note B)............................................................. $132,789,878
Less:
Restricted cash--FF&E reserves...................................................... 4,249,000
Prepaids and other assets........................................................... 333,206
------------
Amount allocated to investment in hotel properties...................................... 128,207,672
Net book value of investment in hotel properties........................................ 134,121,000
------------
Net increase in book value of investment in hotels...................................... $ (5,913,328)
============
F-13
(D) Represents elimination of historical deferred financing costs associated
with prior owner.
(E) Represents elimination of deferred incentive management fees associated
with prior owner, not assumed by the Company.
(F) Represents elimination of partnership equity associated with the prior
owner.
(G) Represents additional capital raised in 2002 necessary to fund the cash
portion of the acquisition.
F-14
APPLE HOSPITALITY TWO, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the year ended December 31, 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 Limited Partnership (the "Partnership"),
containing 15 Residence Inn(R) by Marriott(R) hotels, from Host Marriott
Corporation ("Host") for approximately $133.4 million had occurred on January
1, 2001.
In addition, the unaudited Pro Forma Condensed Consolidated Statements of
Operations include the purchase of 10 Residence Inn(R) by Marriott(R) hotels
from a subsidiary of Crestline Capital Corporation (Residence Inn III LLC) in
September 2001, for an aggregate purchase price of $123.5 million, as if the
transaction had occurred on January 1, 2001. The results of operations
subsequent to our purchase are included in the historical statement of
operations of the Company.
These unaudited Pro Forma Statements of Operations also assume all of the
hotels had been leased to Apple Hospitality Management, Inc., our wholly owned
taxable REIT subsidiary pursuant to master hotel lease agreements. 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
Operations of the Marriott Residence Inn Limited Partnership and 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 Statements of
Operations of the Company are not necessarily indicative of what actual results
of operations of the Company would have been assuming such transactions had
been completed on January 1, 2001, nor does it purport to represent the results
of operations for future periods.
F-15
For the year ended December 31, 2001 (unaudited)
----------------------------------------------------------------------------------------------------
Pro Forma
Before
Company Acquisition Historical
Historical Historical of Marriott Marriott
Statement of Residence Residence Residence Inn
Operations Inn III LLC Pro Forma Inn Limited Limited Pro Forma Total Pro
(May 1-Dec. 31) (A) Adjustments Partnership Partnership(A) Adjustments Forma
--------------- ----------- ----------- ----------- -------------- ------------ ------------
Revenue:
Suite revenue........ $10,022,272 $27,564,918 $ -- $37,587,190 $61,423,000 -- $ 99,010,190
Other operating
revenue............. 414,493 -- -- 414,493 2,621,000 -- 3,035,493
Interest income...... 2,005,006 -- (1,827,669)(B) 177,337 664,000 $ (664,000)(B) 177,337
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total revenue...... 12,441,771 27,564,918 (1,827,669) 38,179,020 64,708,000 (664,000) 102,223,020
Expenses:
Operating expenses... 4,516,264 12,288,306 -- 16,804,570 28,116,000 -- 44,920,570
General and
administrative...... 491,009 -- 372,897( C) 863,906 1,636,000 (1,636,000)(C) 1,304,743
440,837(D)
Franchise fees
(Residence Inn
System Fee)......... 400,888 1,055,127 -- 1,456,015 2,457,000 -- 3,913,015
Management fees...... 208,736 551,298 -- 760,034 1,281,000 -- 2,041,034
Permits, Licenses &
Lease Payments...... -- 128,688 -- 128,688 -- -- 128,688
Chain Services....... 233,643 552,449 -- 786,092 -- -- 786,092
Incentive
management
fees............... 265,305 841,983 -- 1,107,288 3,375,000 -- 4,482,288
Taxes, insurance and
other............... 552,734 1,322,418 -- 1,875,152 5,807,000 -- 7,682,152
Depreciation of real
estate owned........ 1,084,933 -- 2,019,336(D) 3,104,269 6,479,000 (6,479,000)(E) 6,111,234
3,006,965(F)
Interest............. 1,371,540 -- 2,868,745(E) 4,240,285 10,152,000 (10,152,000)(G) 13,610,970
9,370,685(H)
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total expenses..... 9,125,052 16,740,269 5,260,978 31,126,299 59,303,000 (5,448,514) 84,980,786
Income tax expense..... -- -- -- (F) -- -- -- (I) --
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net income............. $ 3,316,719 $10,824,649 $(7,088,646) $ 7,052,722 $ 5,405,000 $ 4,784,514 $ 17,242,234
=========== =========== =========== =========== =========== ============ ============
Earnings per common
share:
Basic and Diluted.... $ 0.52 $ 0.75 $ 1.15
=========== =========== ============
Basic and diluted
weighted average
common shares
outstanding......... 6,334,168 3,038,590(G) 9,372,758 5,603,630(J) 14,976,388
=========== =========== =========== ============ ============
F-16
Notes to Pro Forma Condensed Consolidated Statements of Operations (unaudited)
for Residence Inn III LLC:
(A) Represents results of operations for the hotels acquired on a pro forma
basis as if the hotels were owned by the Company at January 1, 2001 for the
respective periods prior to acquisition by the Company in September 2001.
(B) Represents the elimination of the interest income recorded on the $47
million promissory note with Crestline, as the note receivable was used to
purchase the Partnership.
(C) 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 $814,377 and
$372,896 for the year ended December 31, 2000, and the period ended
December 31, 2001, respectively.
(D) 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.
(E) 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 million.
(F) Represents the combined state and federal income tax expense of our wholly
owned taxable REIT subsidiary estimated based on the contractual agreements
put in place between the Company and our lessee based on a combined federal
and state income tax rate of 40%. Based on the terms of the lease
agreements our taxable subsidiary would have incurred a loss. No operating
loss benefit has been recorded as realization is not certain.
(G) Represents the number of shares assuming Residence Inn III LLC was acquired
at the beginning of the period presented.
Notes to Pro Forma Condensed Consolidated Statements of Operations (unaudited)
for Marriott Residence Inn Limited Partnership:
(A) Represents results of operations for the hotels acquired on a pro forma
basis as if the Partnership was owned by the Company on January 1, 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. The amount indicated for general and
administrative expense of $1,636,000 was extracted from the Partnership's
historical statement based on an estimate.
(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 $330,628 for
the year ended December 31, 2001.
(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. 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 8.6% on the mortgage debt of $70.9 million and 15.6% on
the mortgage debt of $20.7 million.
(I) Represents the combined state and federal income tax expense of our wholly
owned taxable REIT subsidiary estimated based on the contractual agreements
put in place between the Company and our lessee based on a combined federal
and state income tax rate of 40%. Based on the terms of the lease
agreements our taxable subsidiary would have incurred a loss. No operating
loss benefit has been recorded as realization is not certain.
(J) Represents additional common shares assuming the Partnership was acquired
at the beginning of the period presented.
F-17