UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): September 28, 2001
APPLE HOSPITALITY TWO, INC.
(Exact name of registrant as specified in its charter)
Virginia 333-53984 54-2010305
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
10 South Third Street, Richmond, VA 23219
(Address of principal executive offices) (Zip Code)
(804) 344-8121
(Registrant's telephone number, including area code)
Item 2. Acquisition or Disposition of Assets
Apple Hospitality Two, Inc. (which is referred to below as the "Company" or
as "we," "us" or "our") is filing this report pursuant to Item 2 of Form 8-K.
This report describes certain acquisitions involving a "significant amount" of
assets within the meaning of the General Instructions to Form 8-K. Certain
related matters also are reported below.
Overview
On September 28, 2001, we acquired a limited partnership that, through a
subsidiary, owns 10 extended-stay hotels. Although the acquisition involved the
transfer of ownership interests in a limited partnership, the purpose and result
was our acquisition of the hotels. Each hotel operates as part of the Residence
Inn(R) by Marriott(R) franchise. The hotels are described in detail in another
section below. The sellers were Crestline Capital Corporation and certain
subsidiaries. No seller has any material relationship to us, our affiliates, or
our directors or officers (although we made a short-term loan to Crestline
Capital Corporation before the closing, as described below). The total base
purchase price for the acquisition was $119 million.
The purchase price, as subject to certain adjustments at closing, was paid
through a combination of transactions. In May 2001, we made a deposit of just
over $1 million, which was applied toward the purchase price at closing. On May
31, 2001, we provided a short-term secured loan to Crestline Capital Corporation
in the amount of $47 million. The loan amount, plus about $1.5 million in
interest, also was applied toward the purchase price. In addition, we made a
cash payment of approximately $19.5 million at closing. Our source for these
funds, which consist of approximately $69 million in the aggregate, was our
ongoing and registered public offering of units (with each unit consisting of
one Common Share and one Series A Preferred Share).
To satisfy the remainder of the purchase price, we received a credit at
closing equal to the unpaid balance of a long-term loan, which is secured by the
hotels, from Bank of America, N.A. The loan will continue to be an obligation
of the subsidiary that directly owns the hotels. Further details about this
loan are provided in the next section.
We also used the proceeds of our ongoing offering to pay 2% of the total
base purchase price, which equals $2,380,000, as a commission to Apple Suites
Realty Group, Inc. This entity is owned by Glade M. Knight, who is one of our
directors and our Chief Executive Officer.
Acquisitions and Related Matters
New Subsidiaries
----------------
We formed or acquired new subsidiaries to obtain the 10 hotels.
Specifically, we formed two direct wholly-owned subsidiaries. One of these
subsidiaries, AHT Res III GP, Inc., acquired the entire general partnership
interest in Marriott Residence Inn USA Limited Partnership and now holds a 1%
interest as its sole general partner. The other newly-formed subsidiary, AHT
Res III LP, Inc., acquired the entire limited partnership interest in that
partnership and now holds a 99% interest as its sole limited partner. The
partnership owns 100% of the equity in Residence Inn III LLC, which directly
owns all of the hotels. We also acquired 100% of the stock in Crestline Res III
Corporation, which serves as the independent managing member of Residence Inn
III LLC (without having any equity interest).
Certain Accounting Matters
--------------------------
In December 1999, Marriott Residence Inn USA Limited Partnership
contributed the assets and liabilities represented by 10 of its 11 hotels to
Residence Inn III LLC. In February 2000, that partnership sold the one remaining
hotel not contributed to Residence Inn III LLC. On September 28, 2001, all
assets and liabilities of Marriott Residence Inn USA Limited Partnership were
held in Residence Inn III LLC. The audited financial statements of Marriott
Residence Inn USA Limited Partnership included herein for the year ended
December 31, 1998 reflect the results of operations of the 11 original hotels,
and the audited financial statements of Residence Inn III LLC for the years
ended December 31, 2000 and 1999 and the unaudited financial statements for the
period ended June 15, 2001 reflect the results of operations of the 10 hotels
acquired by us.
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Loan Secured By Hotels
----------------------
Residence Inn III LLC, the direct owner of the hotels, is also the borrower
under a loan from Bank of America, N.A. in the original principal amount of
$55,588,000. On September 28, 2001, the unpaid principal balance was
$53,256,408. The loan is secured by a mortgage on the hotels and by related
liens on their rents and profits, but is generally non-recourse to Residence Inn
III LLC, as the borrower. As a result, the lender generally is required to
enforce its liens on the hotels, and their rents and profits, instead of taking
any actions against the borrower. The lender will have recourse against the
borrower upon certain events, such as a violation by the borrower of its
covenant not to (a) sell or transfer any of the hotels, or (b) permit other
liens on the hotels or on their rents or profits.
The loan is evidenced by a promissory note dated December 29, 1999. The
promissory note has a stated annual interest rate of 8.08% and requires monthly
payments of $489,067.76. The maturity date is January 1, 2010. A balloon
payment in the amount of approximately $35.4 million is scheduled to be due at
maturity.
At the request of the lender, we have agreed, in our capacity as a
principal of the borrower, that the limited recourse provisions of the
promissory note also will apply to us. The same agreement has been made by
Apple Suites Advisors, Inc., which is owned by Glade M. Knight, who is one of
our directors and our Chief Executive Officer. Apple Suites Advisors, Inc. will
be released from the promissory note, however, if the debt service coverage
ratio for the loan reaches a specified target. These agreements by us and by
Apple Suites Advisors, Inc. were executed in connection with a consent and
release, which is one of the material contracts described in the next section.
We expect that revenues from the hotels will be sufficient to make monthly
payments under the promissory note. If hotel revenues are not sufficient, we
could lose the hotels through foreclosure. In addition, if our non-recourse
protection is not available under the terms of the promissory note, we may be
required to use the proceeds from our ongoing offering to make payments to the
lender.
While the loan remains outstanding, certain covenants apply to Residence
Inn III LLC, as the borrower. Among other things, these covenants (a) prohibit
the borrower from engaging in any business that is not related to the hotels or
the loan, (b) require the borrower to maintain a separate legal identity, (c)
restrict the transfer of ownership interests in the borrower or the hotels, and
(d) limit the extent to which the organizational documents of the borrower may
be modified. In addition, the lender has required us to appoint two independent
directors for Crestline Res III Corporation, which is the independent managing
member of the borrower.
Other Actions
-------------
The hotels have been leased by their direct owner, Residence Inn III LLC,
to Apple Hospitality Management, Inc., which is one of our wholly-owned
subsidiaries. The hotels are being managed by Residence Inn By Marriott, Inc.
These actions were taken in accordance with
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a master hotel lease agreement and an amended management agreement, which are
among the material contracts described in the next section.
Summary of Material Contract
Amended Purchase Agreement
--------------------------
The acquisition described above was the result of an amended purchase
agreement. The original agreement was dated as of May 18, 2001 and was modified
by amendments dated as of July 30, 2001 and August 31, 2001. In particular, the
last amendment provided for our acquisition of Marriott Residence Inn USA
Limited Partnership, which occurred on September 28, 2001. This structure was
different than the one reflected in the original agreement, which contemplated
an acquisition of the hotels themselves.
Consent Agreement and Environmental Indemnity
---------------------------------------------
By acquiring Marriott Residence Inn USA Limited Partnership, we
acquired control of Residence Inn III LLC, which is the borrower under a loan
from Bank of America, N.A., as described above. Consent to the acquisition and
change of control was granted on behalf of the lender in a consent and amendment
agreement with release dated as of September 28, 2001. In return, we and Apple
Suites Advisors, Inc. agreed to the limited recourse provisions of the
promissory note involved.
In a separate environmental indemnity agreement dated as of September
28, 2001, we and Apple Suites Advisors, Inc. agreed to indemnify the lender and
related parties against the presence or release of hazardous materials at the
hotels. Payments of indemnification, if any, are due on demand and will accrue
interest at the rate provided in the promissory note, plus 4%, if not paid
within 30 days of the demand.
Master Hotel Lease Agreement
----------------------------
One of our wholly-owned subsidiaries, Apple Hospitality Management,
Inc., has leased the hotels from their direct owner, Residence Inn III LLC,
under a master hotel lease agreement dated as of September 28, 2001. The
agreement provides for an initial term of 10 years. Apple Hospitality
Management, Inc. has the option to extend the lease term for two additional
five-year periods, provided it is not in default at the end of the prior term or
at the time the option is exercised. The master hotel lease agreement provides
that Apple Hospitality Management, Inc. will pay an annual base rent, a
quarterly percentage rent and a quarterly sundry rent. Each type of rent is
explained below.
Annual base rent is payable in advance in equal monthly installments.
The base rent will be adjusted each year in proportion to the Consumer Price
Index (based on the U.S. City Average). The lease commencement date for the
properties is deemed to be as of September 7, 2001. The base rents range from
$443,102 to $1,256,224.
Percentage rent is payable quarterly. Percentage rent depends on a
formula that compares fixed "suite revenue breakpoints" with a portion of "suite
revenue," which is equal to gross revenue from suite rentals less sales and room
taxes, credit card fees and sundry rent (as described below). The suite revenue
breakpoints will be adjusted each year in proportion to the Consumer Price Index
(based on the U.S. City Average). Specifically, the percentage rent is equal to
the sum of (a) 17% of all year-to-date suite revenue, up to the applicable suite
revenue breakpoint; plus (b) 55% of the year-to-date suite revenue in excess of
the applicable suite revenue breakpoint, as reduced by base rent and the
percentage rent paid year to date.
The sundry rent is payable quarterly and equals 55% of all sundry
revenue, which consists of revenue other than suite revenue, less the amount of
sundry rent paid year-to-date.
Amended Management Agreement
----------------------------
Our hotels are being managed by Residence Inn by Marriott, Inc. under
an amended and restated management agreement, dated as of September 28, 2001,
with Apple Hospitality Management, Inc. The amended management agreement is
similar to the management agreement that applied to the hotels before our
acquisition occurred. Management services include supervising the operation of
the hotels and collecting revenues from their operation for the benefit of Apple
Hospitality Management, Inc.
The initial term of the amended management agreement will continue
until December 30, 2011. The term will be renewed for five periods of ten years
each, provided that an event of default by the manager has not occurred. The
manager may elect not to renew for an additional term by giving notice to Apple
Hospitality Management, Inc. at least 18 months before the expiration of the
current term. Such non-renewal by the manager may apply to one or more of the
hotels.
Apple Hospitality Management, Inc. may terminate the amended management
agreement with respect to all of the hotels if the total operating profit for
any consecutive period of two fiscal years does not reach a specified minimum
amount. Written notice of any such termination must be delivered to the manager
no later than 60 days after the receipt by Apple Hospitality Management, Inc. of
the annual accounting for the second fiscal year. The manager has the option to
avoid such termination by advancing the amount of any deficiency in operating
profit to Apple Hospitality Management, Inc. within 60 days after the manager's
receipt of the termination notice.
The manager will receive a management fee for its services. The total
management fee consists of (a) a base management fee calculated on the basis of
gross revenues, (b) a Residence Inn system fee calculated on the basis of suite
revenues, and (c) an incentive management fee calculated on the basis of
operating profit. The formulas for these fees are complex and are the result of
arms-length negotiations.
The manager also has a right of first refusal for any purchase or lease
of the hotels. If Residence Inn III LLC, as the direct owner of the hotels,
receives a bona fide written purchase or lease offer for any one or more of
them, Apple Hospitality Management, Inc. must cause Residence Inn III LLC to
give prior notice to the manager, who will then have 30 days in which to
exercise its right of first refusal. Any such purchase or lease of the hotels by
the manager would occur on the same terms and conditions as those set forth in
the bona fide offer. The amended management agreement would remain in effect as
to any other hotels.LLC.
Owner Agreement
----------------
In an owner agreement dated as of September 28, 2001, the manager under
the amended management agreement granted its consent to the master hotel lease
agreement. In addition, Residence Inn III LLC, as the direct owner of the
hotels, agreed to guaranty the performance of the obligations, including
monetary obligations, of Apple Hospitality Management, Inc. under the amended
management agreement.
Non-Disturbance Agreement
-------------------------
A non-disturbance agreement and consent of manager, dated as of
September 28, 2001, was entered into by Apple Hospitality Management, Inc.,
Residence Inn III LLC (as the direct owner of the hotels and the borrower under
the loan described above), Residence Inn by Marriott, Inc. (as the manager under
the amended management agreement) and a representative of the lender for the
loan described above. This agreement generally provides that the amended
management agreement is subordinate to the loan documents. If an event of
default occurs under the loan documents, the lender has the right to receive (a)
an assignment of all rights of Apple Hospitality Management, Inc. in the amended
management agreement, and (b) all rents, profits and other revenues collected by
the manager and otherwise payable to Apple Hospitality Management, Inc. under
the amended management agreement.
Our Properties
All of our hotels are part of the Residence Inn(R) by Marriott(R)
franchise. Each hotel offers one and two room suites with the amenities
generally offered by upscale extended-stay hotels. Business travel is
responsible for a significant portion of the occupancy at the hotels. The
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.
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TABLE 1. Summary
Average Daily
Number Rate per Suite
Hotel (1) State of Suites in 2001 (2)
-------------------------------------------------------------------------------
Montgomery................. Alabama 94 $ 83.54
Bakersfield................ California 114 91.57
Concord-Pleasant Hill...... California 126 135.63
San Ramon.................. California 106 154.56
Meriden.................... Connecticut 106 108.34
Atlanta Airport-Hapeville.. Georgia 126 103.84
Boston-Tewksbury........... Massachusetts 130 117.01
Cincinnati-Blue Ash........ Ohio 118 89.43
Dallas-Las Colinas......... Texas 120 105.65
Houston-Clear Lake......... Texas 110 89.26
----- -------
Total 1,150 $107.88
Notes for Table 1:
(1) Hotel names are shown as they appear on the Residence Inn(R)
website at www.residenceinn.com. The hotels opened during 1989
or 1990.
(2) Amounts are based on operations from January 1, 2001 through
August 10, 2001. Rates for the entire year will not necessarily
be comparable. The total average is not adjusted for the varying
number of suites per hotel.
TABLE 2. Tax and Improvement Information
Real Prop. Real Expected Expected Prop. Depreciation -
Tax Property Improvement Tax on Federal
Hotel Rate (1) Tax Cost (2) Improv. (3) Tax Basis (4)
--------------------------------------------------------------------------------------------------------------
Montgomery.................... 0.0345 $ 53,845 $175,800 $1,213 $ 5,442,558
Bakersfield*.................. 0.01149189 83,224 207,900 2,516 7,742,287
Concord-Pleasant Hill*........ 0.010065 83,169 146,300 1,565 15,465,301
San Ramon..................... 0.010314 130,073 164,500 1,958 14,085,687
Meriden....................... 0.04040001 105,065 88,800 2,513 6,946,870
Atlanta Airport-Hapeville..... 0.04409 143,790 283,100 4,983 7,710,287
Boston-Tewksbury.............. 0.02123 188,552 220,000 4,664 11,458,812
Cincinnati-Blue Ash*.......... 0.06050035 166,225 155,000 3,286 5,668,490
Dallas-Las Colinas*........... 0.0266737 212,856 220,800 5,895 6,863,088
Houston-Clear Lake*........... 0.0333386 197,564 197,500 6,577 6,283,657
-5-
Notes for Table 2:
(1) Property tax rate for each hotel is an aggregate figure for county, city
and other local taxing authorities (as applicable). Information is for
calendar year 2001, although properties with asterisks in the first column
have estimated values based on 2000 taxes. Levies and bonds were added to
real property taxes in 2000 as follows: for Bakersfield--$4,588.44, for San
Ramon--$19,930.24, and for Pleasant Hill--$4,915.55 and $17,817.34.
(2) Expected improvement costs are based on operating budgets for 2002.
(3) Tax amount shown is based on a portion of the indicated improvement. The
percentage needed to determine the taxable portion varies by state and
locality.
(4) Amounts are for the depreciable real property component of the hotel. The
depreciable life is 39 years (or less, as may be permitted by federal tax
laws) using the straight-line method. The modified accelerated cost
recovery system will be used for the personal property component of the
hotel.
TABLE 3. Operating Information
Avg. Daily Occupancy Rates (%) (1) Revenue per Available Suite ($) (2)
Hotel 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001
---------------------------------------------------------------------------- ---------------------------------------------------
Montgomery................... 84.7 82.4 78.8 81.4 87.7 $ 68.11 $ 67.53 $ 65.41 $ 66.73 $ 73.23
Bakersfield.................. 83.2 85.6 83.3 86.0 88.1 68.13 73.38 71.57 73.70 80.64
Concord-Pleasant Hill........ 90.0 86.5 90.2 91.7 86.5 91.05 94.43 97.92 108.49 117.29
San Ramon.................... 92.1 87.8 90.2 89.9 84.6 109.99 116.27 112.30 118.64 130.72
Meriden...................... 86.5 85.8 87.9 85.8 81.7 76.23 81.74 89.76 93.30 88.48
Atlanta Airport-Hapeville.... 82.0 88.4 85.2 87.6 88.0 69.46 79.49 80.63 83.97 91.34
Boston-Tewksbury............. 91.1 87.2 91.7 88.0 82.1 96.16 89.44 101.49 108.38 96.08
Cincinnati-Blue Ash.......... 87.9 86.1 85.9 76.2 68.9 69.16 72.02 87.34 74.49 61.65
Dallas-Las Colinas........... 88.5 88.5 81.3 84.6 82.8 83.16 86.38 83.76 85.91 87.44
Houston-Clear Lake........... 90.0 87.4 85.7 87.2 93.5 84.03 84.61 80.33 79.12 83.46
Notes for Table 3:
(1) Percentage for 2001 is based on occupancy from January 1, 2001 through
August 10, 2001. Occupancy rates for the entire year will not necessarily
be comparable.
(2) Amounts for 2001 are annualized based on revenue from January 1, 2001
through August 10, 2001.
-6-
Item 7. Financial Statements and Exhibits
(Financial statements are included. Exhibits not included herein are to be filed
by amendment as soon as practicable)
a. Financial Statements of Businesses Acquired:
RESIDENCE INN III LLC
Condensed Balance Sheet as of June 15, 2001 (unaudited).............................. 9
Condensed Statement of Operations and Member's Equity
For the Twenty-Four Weeks Ended June 15, 2001 (unaudited)............................ 10
Condensed Statement of Cash Flows
For the Twenty-Four Weeks Ended June 15, 2001 (unaudited)............................ 11
Notes to Condensed Financial Statements (unaudited).................................. 12
Report of Independent Public Accountants............................................. 13
Balance Sheets as of December 29, 2000 and December 31, 1999......................... 14
Statements of Operations and Member's Equity
For the Fiscal Years Ended December 29, 2000 and December 31, 1999................... 15
Statements of Cash Flows
For the Fiscal Years Ended December 29, 2000 and December 31, 1999................... 16
Notes to Financial Statements........................................................ 17
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
Report of Independent Public Accountants............................................. 23
Statement of Operations For the Year Ended December 31, 1998......................... 24
Statement of Changes in Partners' Capital
For the Year Ended December 31, 1998................................................. 25
Statement of Cash Flows For the Year Ended December 31, 1998......................... 26
Notes to Financial Statements........................................................ 27
-7-
b. Pro Forma Financial Information:
APPLE HOSPITALITY TWO, INC.
Pro Forma Condensed Consolidated Balance Sheet As of June 30, 2001 (unaudited)....... 36
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited).................. 37
Pro Forma Condensed Consolidated Statements of Operations
For the Year Ended December 31, 2000 and the Period Ended June 30, 2001 (unaudited).. 38
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited).................. 40
-8-
RESIDENCE INN III LLC
CONDENSED BALANCE SHEET
As of June 15, 2001
(unaudited, in thousands)
ASSETS
Property and equipment, net........................... $87,151
Mortgage escrow reserves.............................. 4,096
Due from Residence Inn by Marriott, Inc............... 1,623
Other assets.......................................... 1,492
Cash and cash equivalents............................. 3,722
-------
Total assets.......................................... $98,084
=======
LIABILITIES AND MEMBER'S EQUITY
Accounts payable and accrued expenses................. $ 563
Deferred incentive management fees.................... 1,486
Mortgage debt......................................... 53,619
-------
Total liabilities.................................. 55,668
-------
Member's equity....................................... 42,416
-------
Total liabilities and member's equity............... $98,084
=======
The accompanying notes are an integral part of these financial statements.
-9-
RESIDENCE INN III LLC
CONDENSED STATEMENT OF OPERATIONS AND MEMBER'S EQUITY
Twenty-Four Weeks Ended June 15, 2001
(unaudited, in thousands)
REVENUES
Suites.............................................. $17,504
Other operating departments......................... 767
-------
Total revenues..................................... 18,271
-------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Suites............................................. 3,579
Other operating departments........................ 372
Other operating expenses........................... 4,577
-------
Total property-level costs and expenses.......... 8,528
Depreciation and amortization....................... 1,973
Residence Inn system fee............................ 700
Property taxes...................................... 738
Incentive management fee............................ 571
Base management fee................................. 365
Equipment rent and other............................ 340
-------
Total operating costs and expenses............... 13,215
-------
OPERATING PROFIT...................................... 5,056
Interest expense.................................... (2,090)
Interest income..................................... 148
General and administrative expenses................. (139)
-------
NET INCOME............................................ 2,975
Beginning member's equity............................. 35,148
Capital contributions................................. 11,571
Distributions to member............................... (7,278)
-------
Ending member's equity................................ $42,416
=======
The accompanying notes are an integral part of these financial statements.
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RESIDENCE INN III LLC
CONDENSED STATEMENT OF CASH FLOWS
Twenty-Four Weeks Ended June 15, 2001
(unaudited, in thousands)
CASH FLOW FROM OPERATIONS $8,663
------
INVESTING ACTIVITIES
Additions to property and equipment..................... (1,116)
Change in property improvement mortgage escrow.......... (287)
-------
Cash used in investing activities...................... (1,403)
-------
FINANCING ACTIVITIES
Distributions........................................... (7,278)
Repayments of debt...................................... (616)
-------
Cash used in financing activities.................... (7,894)
-------
DECREASE IN CASH AND CASH EQUIVALENTS..................... (634)
CASH AND CASH EQUIVALENTS, beginning of period............ 4,356
-------
CASH AND CASH EQUIVALENTS, end of period.................. $ 3,722
=======
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Push-down of Crestline Capital's basis.................. $ 7,885
=======
The accompanying notes are an integral part of these financial statements.
-11-
RESIDENCE INN III LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Residence Inn III LLC (the "Company"), a Delaware limited liability
company, is a wholly owned subsidiary of Marriott Residence Inn USA Limited
Partnership (the "Partnership"). Crestline Capital Corporation ("Crestline
Capital") indirectly owns all of the partnership interests in the
Partnership.
The Company is the owner of ten Residence Inn hotels that are located in
seven states and have a total of 1,150 suites. The inns are managed by
Residence Inn by Marriott, Inc., a wholly owned subsidiary of Marriott
International, Inc.
The accompanying condensed financial statements of the Company have been
prepared by the Company without audit. Certain information and footnote
disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the disclosures made are
adequate to make the information presented not misleading. However, the
condensed financial statements should be read in conjunction with the
annual audited financial statements and notes thereto for the fiscal year
ended December 29, 2000.
In the opinion of the Company, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal and
recurring adjustments) necessary to present fairly the financial position
of the Company as of June 15, 2001 and the results of operations and cash
flows for the twenty-four weeks ended June 15, 2001. Interim results are
not necessarily indicative of fiscal year performance because of the impact
of seasonal and short-term variations.
2. On March 23, 2001, Crestline Capital indirectly acquired the remaining 18%
limited partnership interest in the Partnership for $11.4 million plus
closing costs of $171,000. The purchase price of the limited partnership
interests approximated fair value, and accordingly, no portion of the
purchase price has been expensed. The purchase price of the limited
partnership interests by Crestline Capital were pushed down to these
financial statements resulting in a step-up in the assets to fair value.
3. During the second quarter, Crestline Capital entered into an agreement to
sell the Partnership's membership interest in the Company to Apple
Hospitality Two, Inc. (the "Buyer") for total consideration of $119 million,
including approximately $54 million of debt that will be assumed by the
Buyer. The transaction is expected to close in the third quarter of 2001 and
is subject to customary closing conditions. The Buyer made a $47 million
loan to Crestline Capital during the second quarter. The loan bears interest
at 12% and is due upon the earlier of the closing of the transaction or
August 31, 2001.
-12-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Residence Inn III LLC:
We have audited the accompanying balance sheets of Residence Inn III LLC, a
Delaware limited liability company, as of December 29, 2000 and December 31,
1999, and the related statements of operations and member's equity and cash
flows for the fiscal years then ended. These financial statements are the
responsibility of Residence Inn III LLC's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Residence Inn III LLC as of
December 29, 2000 and December 31, 1999 and the results of its operations and
its cash flows for the fiscal years then ended in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Vienna, Virginia
February 23, 2001
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RESIDENCE INN III LLC
BALANCE SHEETS
As of December 29, 2000 and December 31, 1999
(in thousands)
ASSETS
2000 1999
---- ----
Property and equipment, net............... $80,123 $81,085
Property improvement fund................. - 1,486
Mortgage escrow reserves.................. 4,042 2,393
Due from Residence Inn by Marriott, Inc... 1,389 1,202
Other assets.............................. 1,623 1,563
Cash and cash equivalents................. 4,356 -
------- -------
Total assets............................. $91,533 $87,729
======= =======
LIABILITIES AND MEMBER'S EQUITY
Accounts payable and accrued expenses..... $ 761 $ 232
Deferred incentive management fees........ 1,389 1,269
Mortgage debt............................. 54,235 55,588
------- -------
Total liabilities........................ 56,385 57,089
------- -------
Member's equity........................... 35,148 30,640
------- -------
Total liabilities and member's equity.... $91,533 $87,729
======= =======
The accompanying notes are an integral part of these financial statements.
-14-
RESIDENCE INN III LLC
STATEMENTS OF OPERATIONS AND MEMBER'S EQUITY
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
---- ----
REVENUES
Suites..................................... $37,595 $36,235
Other operating departments................ 1,770 1,768
------- -------
Total revenues............................ 39,365 38,003
------- -------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Suites.................................... 7,846 7,466
Other operating departments............... 873 800
Other operating expenses.................. 9,724 9,573
------- -------
Total property-level costs and expenses.. 18,443 17,839
Depreciation and amortization.............. 3,906 3,402
Residence Inn system fee................... 1,504 1,449
Property taxes............................. 1,409 1,383
Incentive management fee................... 1,209 1,107
Base management fee........................ 787 760
Equipment rent and other................... 343 265
------- -------
Total operating costs and expenses....... 27,601 26,205
------- -------
OPERATING PROFIT............................ 11,764 11,798
Interest expense........................... (4,604) (4,709)
Interest income............................ 395 347
General and administrative expenses........ (150) (222)
------- -------
NET INCOME.................................. 7,405 7,214
Beginning member's equity................... 30,640 23,426
Capital contributions....................... 1,892 -
Distributions to member..................... (4,789) -
------- -------
Ending member's equity...................... $35,148 $30,640
======= =======
The accompanying notes are an integral part of these financial statements.
-15-
RESIDENCE INN III LLC
STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
---- ----
OPERATING ACTIVITIES
Net income...................................... $ 7,405 $ 7,214
Noncash items:
Depreciation and amortization.................. 3,906 3,402
Amortization of deferred financing costs....... 113 89
Working capital changes:
Due from Residence Inn by Marriott, Inc........ (187) 22
Other assets................................... (409) (590)
Accounts payable and accrued expenses.......... 529 218
Deferred incentive management fees............. 120 201
------- --------
Cash provided by operations................... 11,477 10,556
------- --------
INVESTING ACTIVITIES
Additions to property and equipment............. (2,901) (1,671)
Changes in property improvement fund, net....... 1,486 (1,298)
Change in property improvement mortgage escrow.. (1,283) -
------- --------
Cash used in investing activities.............. (2,698) (2,969)
------- --------
FINANCING ACTIVITIES
Capital contributions........................... 1,892 -
Distributions................................... (4,789) -
Payment of financing costs...................... (173) (959)
Change in financing reserves.................... - (978)
Repayment of mortgage principal................. (1,353) (54,628)
Issuances of debt............................... - 55,588
Cash advances to parent......................... - (6,610)
------- --------
Cash used in financing activities............. (4,423) (7,587)
------- --------
INCREASE IN CASH AND CASH EQUIVALENTS............. 4,356 -
CASH AND CASH EQUIVALENTS, beginning of year...... - -
------- --------
CASH AND CASH EQUIVALENTS, end of year............ $ 4,356 $ -
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.......................... $ 4,516 $ 4,685
======= ========
The accompanying notes are an integral part of these financial statements.
-16-
RESIDENCE INN III LLC
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization
Residence Inn III LLC (the "Company"), a Delaware limited liability
company, is a wholly owned subsidiary of Marriott Residence Inn USA Limited
Partnership (the "Partnership"). The Company was formed on December 10, 1999 as
a special purpose entity to facilitate the refinancing of the Partnership's
debt. The Partnership was the owner of 11 Residence Inn hotels. On December 29,
1999, the Partnership contributed the assets and liabilities of ten of its
Residence Inn hotels (the "Inns") to the Company in conjunction with the Company
entering into a new loan agreement. The proceeds from the Company's loan
financing were used to repay the existing loan of the Partnership.
The Company's Inns are located in seven states and have a total of 1,150
suites. The Inns are managed by Residence Inn by Marriott, Inc. (the "Manager"),
a wholly owned subsidiary of Marriott International, Inc.
The Partnership's contribution of the Inns to the Company was recorded in a
manner similar to a pooling of interests whereby the historical basis of the
assets and liabilities and the operating accounts of the Partnership are
reflected in the Company's financial statements.
On December 29, 1998, Host Marriott Corporation ("Host Marriott") completed
its plan of reorganizing its business to qualify as a real estate investment
trust ("REIT") by spinning-off to its shareholders its wholly owned subsidiary,
Crestline Capital Corporation ("Crestline Capital"). On March 26, 1999, CCRI
USA, LLC, a wholly owned subsidiary of Crestline Capital, purchased a 74%
limited partner interest in the Partnership from a limited partner for
$34,365,000 in cash. On May 12, 1999, CCRI USA, LLC purchased an additional 3%
limited partnership interest from a limited partner for $1,600,000 in cash. On
August 23, 1999, CC USAGP, LLC (the "General Partner"), a wholly owned
subsidiary of Crestline Capital, purchased the 5% general partner interest in
the Partnership from Host Marriott for $2,720,000 in cash.
The acquisition by Crestline Capital of its interest in the Partnership has
been accounted for by the purchase method of accounting in Crestline Capital's
financial statements by allocating its purchase price to the assets purchased
and liabilities assumed based on their fair values on the date of acquisition.
In accordance with generally accepted accounting principles, the Partnership
became substantially owned by Crestline Capital on August 23, 1999, the date
Crestline Capital purchased the general partnership interest and increased its
ownership percentage in the Partnership to over 80%. On that date, Crestline
Capital's basis in the Partnership's assets and liabilities was pushed down to
these financial statements resulting in a step-up in the assets to fair value.
-17-
On February 18, 2000, the Partnership sold its one remaining hotel, the
Raleigh Residence Inn, that was not contributed to the Company. Net proceeds
from the sale approximated $6.2 million.
Note 2. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Friday nearest December 31.
Basis of Accounting
The records are maintained on the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets as
follows:
Buildings and improvements................................... 40 years
Furniture and equipment...................................... 4-10 years
Impairment of real estate properties is based on whether estimated
undiscounted future cash flows from such properties on an individual property
basis will be less than their net book value. If a property is impaired, its
basis is adjusted to fair market value.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt and amendments and are amortized using the straight-
line method, which approximates the effective interest method, over the term of
the loan.
Income Taxes
No provision is made for federal and state income taxes since the member
reports its share of the Company's taxable income, gains, losses, deductions and
credits on its income tax returns and the Company has no obligation to pay the
Partnership for its share of income taxes.
-18-
Note 3. Property and Equipment
Property and equipment consists of the following (in thousands):
2000 1999
---- ----
Land and improvements............................. $14,082 $13,928
Building and improvements......................... 58,455 56,676
Furniture and equipment........................... 14,085 13,210
------- -------
86,622 83,814
Less accumulated depreciation..................... (6,499) (2,729)
------- -------
$80,123 $81,085
======= =======
Note 4. Debt
Term Loan
On December 30, 1991, the Partnership entered into a loan agreement with a
life insurance company to provide $58,000,000 of non-recourse debt (the "Term
Loan"). The Term Loan was amortized on the basis of a 25-year amortization
schedule which commenced in March 1994 and matured on December 31, 1998. The
Term Loan was evidenced by (i) promissory notes aggregating $31,000,000 (the
"Fixed Rate Notes") which bore interest at a fixed rate of 9.66% per annum and
(ii) promissory notes aggregating $27,000,000 (the "Floating Rate Notes") which
bore interest at 1.85 percentage points over the three-month London Interbank
Offered Rate ("LIBOR").
On December 31, 1998, the Term Loan was amended such that its maturity date
was extended from December 31, 1998 to December 29, 1999. As a result of the
Amendment, the Fixed Rate Notes and Floating Rate Notes were consolidated into a
single indebtedness in the principal amount of $54,628,029 (the "Amended Term
Loan"). The Amended Term Loan bore interest at 330 basis points over the three-
month LIBOR (the "Contract Rate"). Beginning February 1, 1999, monthly principal
payments of $75,000 were made on the Amended Term Loan, in addition to monthly
interest payments calculated on the basis of the Contract Rate and the
outstanding principal balance. All unpaid principal and interest was due at the
maturity of the Amended Term Loan on December 29, 1999.
The Amended Term Loan was secured by first mortgages on the fee or
leasehold interest in the Inns, a security interest in all personal property
associated with the Inns and an assignment of the Partnership's rights under the
management agreement.
On December 29, 1999 the Company entered into a new loan agreement (the
"New Loan") with a financial institution to provide $55,588,000 of fixed rate,
non-recourse debt financing with the proceeds from the issuance used to repay
the Amended Term Loan and refinancing costs. The New Loan bears interest at
8.08% and has a scheduled maturity of January 1, 2010.
-19-
The New Loan is secured by first mortgages on the fee or leasehold interest
in the Inns, a security interest in all personal property associated with the
Inns and assignment of the Company's rights under the management agreement.
In connection with entering into the New Loan, the Company incurred
$1,132,000 of financing costs which were capitalized and will be amortized over
the term of the New Loan. As of December 29, 2000 and December 31, 1999,
deferred financing costs totaled $1,019,000 and $959,000, respectively, net of
accumulated amortization of $113,000 as of December 29, 2000 and were included
in other assets on the accompanying balance sheets.
Debt maturities at December 29, 2000 are as follows (in thousands):
2001...................................................... $ 1,360
2002...................................................... 1,597
2003...................................................... 1,732
2004...................................................... 1,868
2005...................................................... 2,039
Thereafter................................................ 45,639
-------
$54,235
=======
Note 5. Mortgage Escrow Reserves
The mortgage escrow and property improvement reserves consist of the
following as of December 29, 2000 and December 31, 1999 (in thousands):
2000 1999
---- ----
Debt service reserves.................................... $1,029 $ 978
Fixed asset reserves..................................... 2,030 796
Real estate tax reserves................................. 983 619
------ ------
4,042 2,393
Property improvement fund................................ - 1,486
------ ------
Total mortgage escrow and property improvement reserves $4,042 $3,879
====== ======
The debt service, fixed asset and real estate tax reserves consist of cash
transferred into segregated escrow accounts out of revenues generated by the
Company's Inns, pursuant to the Company's secured debt agreements. Funds from
these reserves are periodically disbursed by the collateral agent to pay for
debt service, capital expenditures and real estate taxes relating to the Inns.
-20-
Note 6. Estimated Fair Value of Financial Instruments
The fair value of the mortgage debt is shown below (in thousands):
2000 1999
---------------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
$54,235 $57,699 $55,588 $55,588
The fair value of the mortgage debt is based on the expected future debt
service discounted at a risk-adjusted rate. The fair value of all other
financial assets and liabilities are assumed to equal their carrying amounts.
Note 7. Management Agreement
Prior to the formation of the Company, the Inns were managed by the Manager
pursuant to a management agreement between the Partnership and the Manager. In
connection with the Partnership's contribution of the Company's Inns, the
Company entered into a new management agreement on December 29, 1999 with the
Manager for the ten Inns under terms substantially similar to the prior
management agreement. The management agreement has an initial term expiring on
December 30, 2011, and the Manager has the option to extend the agreement on one
or more Inns for up to five 10-year terms. The Manager earns a base management
fee equal to 2% of gross revenues. The Manager is also entitled to an incentive
management fee equal to 20% of operating profit, as defined in the management
agreement, in excess of $8,780,000 for each calendar year. The incentive
management fee is payable out of 50% of cash flow from operations remaining
after payment of debt service, provision for administrative expenses, retention
by the Company of an owner's priority equal to 11% of the owner's investment,
and payments of amounts due pursuant to any loans from the Company or the
Manager or their affiliates. For fiscal years 2000 and 1999, $787,000 and
$760,000, respectively, of base management fees and $1,209,000 and $1,107,000,
respectively, of incentive management fees, respectively, were earned by the
Manager for the Company's Inns. As of December 29, 2000 and December 31, 1999,
$1,389,000 and $1,269,000, respectively, of incentive management fees were
deferred.
The management agreement also provides for a Residence Inn system fee equal
to 4% of suite revenues. In addition, the Manager is reimbursed for each Inn's
pro rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. As franchiser of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional and public relations materials and programs
and the operation of a toll-free reservation system. Each Inn contributes 2.5%
of suite revenues to the marketing fund. For fiscal years 2000 and 1999,
Residence Inn system fees totaled $1,504,000 and $1,449,000, respectively,
reimbursements of Chain Services totaled $846,000 and $859,000,
-21-
respectively, and contributions to the marketing fund totaled $940,000 and
$906,000, respectively, for the Inns. The Company is also required to provide
the Manager with working capital to meet the operating needs of the Inns. As of
December 29, 2000 and December 31, 1999, $571,000 and $584,000, respectively,
had been advanced to the Manager for working capital and is included in the due
from Residence Inn by Marriott, Inc. on the accompanying balance sheets.
The management agreement also provides for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are equal to 5% of gross revenues of each Inn. For fiscal years 2000 and 1999,
contributions to the property improvement fund totaled $1,968,000 and
$1,900,000, respectively.
Note 8. Meriden Ground Lease
One of the Inns, the Meriden Residence Inn, is subject to a ground lease.
The initial term of the ground lease will expire on August 14, 2013. The
Company will have the option to extend the term thereof for up to ten
consecutive periods of five years each . Rent for the initial term was prepaid
and is amortized on a straight-line basis over the initial term of the lease.
Rent after the initial term will be prepaid in varying amounts at the beginning
of each applicable extended term. As of December 29, 2000 and December 31,
1999, prepaid ground rent, which is included in other assets on the accompanying
balance sheets, was $559,000 and $604,000, respectively, net of the accumulated
amortization of $641,000 and $596,000, respectively.
Note 9. Related Party Transactions
The Company reimburses Crestline Capital for general and administrative
costs incurred on behalf of the Company which amount to $113,000 and $112,000 in
2000 and 1999, respectively. These amounts are charged based on direct costs
incurred by Crestline Capital on behalf of the Company or on level efforts
performed by Crestline Capital employees for accounting and administrative
services provided to the Company. As of December 29, 2000 and December 31,
1999, amounts due to Crestline Capital totaled $342,000 and $59,000, which is
included in accounts payable and accrued expenses on the accompanying balance
sheets.
Note 10. Subsequent Event
On March 23, 2001, CCRI USA, LLC purchased the remaining 18% limited
partnership interest in the Partnership for $11,400,000. As a result of that
transaction, Crestline Capital, through its wholly owned subsidiaries, owns 100%
of the Partnership.
Note 11. Sale of the Inns (unaudited), Subsequent to Date of Auditor's Report
On September 28, 2001, the Company sold the remaining Residence Inn hotels
for a purchase price of approximately $119 million.
-22-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Limited Partners of Marriott Residence Inn USA Limited Partnership:
We have audited the accompanying statements of operations, changes in
partners' capital and cash flows of Marriott Residence Inn USA Limited
Partnership (a Delaware limited partnership) for the year ended December 31,
1998. These financial statements are the responsibility of the General Partner's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Marriott
Residence Inn USA Limited Partnership for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Partnership has
given retroactive effect to the change to include property-level revenues and
operating expenses of its inns in the statement of operations.
Arthur Andersen LLP
Washington, D.C.
May 18, 1999
-23-
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
1998
----
REVENUES
Suites...................................................... $38,766,657
Other operating departments................................. 1,997,330
-----------
Total revenues....................................... 40,763,987
-----------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Suites.................................................... 8,020,529
Other operating departments............................... 972,812
Other Inn operating expenses.............................. 10,515,512
-----------
Total property-level costs and expenses.............. 19,508,853
Depreciation and amortization............................... 4,293,394
Residence Inn system fee.................................... 1,550,666
Property taxes.............................................. 1,514,981
Incentive management fee.................................... 1,081,786
Base management fee......................................... 815,280
Equipment rent and other.................................... 680,167
-----------
Total operating costs and expenses................... 29,445,127
-----------
OPERATING PROFIT.............................................. 11,318,860
Interest expense............................................ (5,697,301)
Interest income............................................. 264,737
-----------
NET INCOME.................................................... $ 5,886,296
===========
ALLOCATION OF NET INCOME
General Partner............................................. 294,315
Limited Partners............................................ 5,591,981
-----------
$ 5,886,296
===========
NET INCOME PER LIMITED PARTNER UNIT
(608 Units).................................................. $ 9,197
===========
The accompanying notes are an integral part of this financial statement.
-24-
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
For the Year Ended December 31, 1998
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1997............................. $3,423,423 $26,016,472 $29,439,895
Capital distributions................................ (416,000) (4,438,405) (4,854,405)
Net Income........................................... 294,315 5,591,981 5,886,296
---------- ----------- -----------
Balance, December 31, 1998............................. $3,301,738 $27,170,048 $30,471,786
========== =========== ===========
The accompanying notes are an integral part of this financial statement.
-25-
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
1998
----
OPERATING ACTIVITIES
Net Income...................................................... $ 5,886,296
Noncash items:
Depreciation and amortization................................ 4,293,394
Amortization of deferred financing
costs as interest expense................................ 385,678
Working capital changes:
Due from Residence Inn by Marriott, Inc...................... (308,700)
Accounts payable and accrued expenses........................ 177,369
-----------
Cash provided by operations............................. 10,434,037
-----------
INVESTING ACTIVITIES
Additions to property and equipment............................. (1,442,258)
Change in restricted cash....................................... --
Changes in property improvement fund, net....................... (439,106)
-----------
Cash (used in) provided by investing activities.............. (1,881,364)
-----------
FINANCING ACTIVITIES
Capital distributions........................................... (4,854,405)
Payment of financing costs...................................... (88,782)
Repayment of mortgage principal................................. (837,013)
(Repayments of) proceeds from note payable
to Host Marriott Corporation................................. --
-----------
Cash used in financing activities........................... (5,780,200)
-----------
INCREASE IN CASH AND CASH EQUIVALENTS............................. 2,772,473
CASH AND CASH EQUIVALENTS,
Beginning of year............................................. 3,701,029
-----------
CASH AND CASH EQUIVALENTS, end of year............................ $ 6,473,502
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest...................................... $ 5,758,000
===========
The accompanying notes are an integral part of this financial statement.
-26-
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1. The Partnership
Description of the Partnership
Marriott Residence Inn USA Limited Partnership (the "Partnership"), a
Delaware limited partnership, was formed to acquire, own and operate 11
Residence Inn by Marriott hotels (the "Inns"). The Inns are located in eight
states and have a total of 1,294 suites. The Inns are managed by Residence Inn
by Marriott, Inc. (the "Manager"), a wholly-owned subsidiary of Marriott
International, Inc. ("MII"), as part of the Residence Inn by Marriott hotel
system.
The Partnership was formed on August 21, 1991 and operations commenced on
December 30, 1991 (the "Closing Date"). On the Closing Date, the Inns were
contributed to the Partnership pursuant to the terms of a contribution agreement
between Host Marriott, the Manager, several wholly-owned subsidiaries of Host
Marriott (collectively, the "Contributing Limited Partners") and the
Partnership. In consideration for their contribution, the Contributing Limited
Partners received 608 limited partner interests ("Units"), representing a 95%
interest, and the proceeds of a $58,000,000 mortgage loan (see Note 5). The
General Partner contributed $3,200,000 for a 5% interest in the Partnership.
On June 30, 1992 (the "Initial Equity Closing Date"), the Contributing
Limited Partners transferred 170 Units to non-Host Marriott investors. All
remaining Units were transferred between December 31, 1992 and December 2, 1994.
For U.S. Federal income tax reporting purposes (IRC Section 708(b)(1)(B)), a
termination of the Partnership occurred on March 15, 1993 (the "Remeasurement
Date") as a result of the sale of 50% of the interests in the Partnership's
capital and profits in the previous twelve months. As a result of the
termination, for tax purposes, the Partnership was treated as distributing its
properties to the partners who immediately thereafter contributed the properties
to a new partnership. There were no adjustments made to these financial
statements as a result of this termination. However, on a tax basis, under
applicable U.S. Federal income tax regulations, the carrying value of the
property and equipment were adjusted to reflect its fair market value on the
Remeasurement Date.
On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the
parent of RIBM Three LLC, the sole general partner of the partnership (the
"General Partner"), announced that its Board of Directors authorized the Company
to reorganize its business operations to qualify as a real estate investment
trust ("REIT") to become effective as of January 1, 1999 (the "REIT
Conversion"). On December 29, 1998, Host Marriott announced that it had
completed substantially all the steps necessary to complete the REIT Conversion,
including spinning off Crestline Capital Corporation, to the shareholders of
Host Marriott, ("Crestline Capital") and expected to qualify as a REIT under the
applicable Federal income tax laws beginning January 1, 1999. Subsequent to the
REIT Conversion, Host Marriott is referred to as Host REIT. In
-27-
connection with the REIT Conversion, Host REIT contributed substantially all of
its hotel assets to a newly formed partnership, Host Marriott L.P. ("Host LP").
On December 24, 1998, in connection with Host Marriott's conversion to a
real estate investment trust (the "Conversion"), the name of the general partner
changed from Marriott RIBM Three Corporation to RIBM Three LLC. Prior to the
Conversion, the General Partner was a wholly-owned subsidiary of Host Marriott.
Pursuant to the Conversion, Host Marriott contributed a 1% Class A managing
interest in the General Partner to Host Marriott L.P., and a 99% Class B
interest in the General Partner to Rockledge Hotel Properties, Inc., a non-
controlled subsidiary of Host Marriott L.P. In March 1999, Crestline Capital
purchased a 74% limited partner interest in the Partnership for $34.4 million
from the limited partners.
Partnership Allocations and Distributions
Pursuant to the terms of the partnership agreement, Partnership
allocations, for U.S. Federal income tax purposes, and distributions subsequent
to the Initial Equity Closing Date are generally made as follows:
a. Cash available for distribution will generally be distributed (i)
first, 100% to the limited partners, until the limited partners have received,
with respect to such year, an amount equal to 11% of their average daily
outstanding Net Invested Capital, defined as the excess of capital contributions
over cumulative distributions of net refinancing and/or sales proceeds ("Capital
Receipts"); (ii) second, 100% to the General Partner until the General Partner
has received, with respect to such year, an amount equal to 11% of Net Invested
Capital; (iii) third, 5% to the General Partner and 95% to the limited partners,
until the partners have received cumulative distributions of Capital Receipts
equal to the partners' capital contributions; and (iv) thereafter, 15% to the
General Partner and 85% to the limited partners.
b. Capital Receipts not retained by the Partnership will be distributed
(i) first, 100% to the limited partners until the limited partners have received
an amount equal to the unpaid portion of a 14% return on Net Invested Capital;
(ii) second, 100% to the limited partners until the partners have received
cumulative distributions of Capital Receipts equal to their capital
contributions; (iii) third, 100% to the General Partner until the General
Partner has received an amount equal to the unpaid portion of a 14% return on
Net Invested Capital; (iv) fourth, 100% to the General Partner until the General
Partner has received cumulative distributions of Capital Receipts equal to its
capital contribution; and (v) thereafter, 15% to the General Partner and 85% to
the limited partners.
c. Proceeds from the sale of substantially all of the assets of the
Partnership will be distributed to the partners in accordance with their capital
account balances as adjusted to take into account gain or loss resulting from
such sale.
-28-
d. Net profits will generally be allocated to the partners in proportion
to the distributions of cash available for distribution; however, the
General Partner will not be allocated less than 1%.
e. Net losses will generally be allocated 5% to the General Partner and
95% to the limited partners.
f. Gain recognized by the Partnership will generally be allocated (i)
first, to all partners whose capital accounts have negative balances
until such balances are brought to zero; (ii) next, to all partners in
the amount necessary to bring their respective capital account
balances to an amount equal to their Net Invested Capital plus a 14%
return on Net Invested Capital; and (iii) thereafter, in amounts
necessary to bring the ratio of the General Partner and limited
partners' capital account balances in excess of capital priority
amounts, as defined, to 15% and 85%, respectively.
g. Losses recognized by the Partnership will generally be allocated (i)
first, 85% to limited partners and 15% to the General Partner until
positive capital account balances in excess of capital priority
amounts, as defined, have been eliminated; (ii) next, to all partners
whose capital accounts have positive balances until such balances have
been eliminated; and (iii) thereafter, 100% to the General Partner.
For financial reporting purposes, net profits and losses are allocated
among partners based upon their stated interests in cash available for
distributions.
Note 2. Summary of Significant Accounting Policies
Basis of Accounting
The Partnership's records are maintained on the accrual basis of
accounting and its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash equivalents.
-29-
Property and Equipment
Property and equipment is recorded at cost. Property and equipment
contributed by Host Marriott and its affiliates has been recorded at its
carryover basis. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets as follows:
Buildings and improvements.................................... 40 years
Furniture and equipment....................................... 4-10 years
All property and equipment is pledged as security for the mortgage debt
described in Note 3.
The Partnership assesses impairment of its real estate properties based
on whether estimated undiscounted future cash flows from such properties on an
individual property basis will be less than their net book value. If a property
is impaired, its basis is adjusted to fair market value.
Restricted Cash Reserve
A restricted cash reserve was available to support distributions to the
limited partners if, and to the extent, cash distributions for any year through
1996 otherwise would be insufficient to provide the limited partners an
annualized return on the limited partners' capital contributions equal to 11%
for 1996 and 10.75% for 1995. The remaining balance in the restricted cash
reserve at February 15, 1997 became part of the Partnership's general working
capital and was used to repay the note payable due to Host Marriott.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt and amendments and are amortized using the straight-
line method, which approximates the effective interest method, over the term of
the loan. The Partnership paid $88,782 in financing costs during the year ended
December 31, 1998 in connection with the extension of the mortgage debt.
Revenues and Expenses
Revenues primarily represent gross revenues generated by the Inns.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board ("FASB") reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
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Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership assessed the impact of EITF 97-2 on its financial
statements and determined that EITF 97-2 requires the Partnership to include
property-level revenues and operating expenses of its Inns in its Statement of
Operations. The Partnership has given retroactive effect to the adoption of EITF
97-2 in the accompanying statement of operations. Application of EITF 97-2 to
the financial statements for the year ended December 31, 1998 increased both
revenues and operating expenses by approximately $19.5 million, and had no
impact on operating profit or net income.
Interest Rate Swap Agreement
The Partnership entered into an interest rate swap agreement to convert
certain portions of its variable rate debt to a fixed rate basis. The interest
rate differential to be paid or received on the interest rate swap agreement is
accrued as interest rates change and is recognized as an adjustment to interest
expense.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives for the assets,
differences in the timing of recognition of certain fees and straight-line rent
adjustments. As a result of these differences, the excess of the tax basis in
Partnership net liabilities over the Partnership net liabilities reported in the
accompanying financial statements is $7,218,000 as of December 31, 1998.
-31-
Note 3. Debt
Term Loan
On the Closing Date, the Partnership entered into a loan agreement with a
life insurance company, as lead lender and servicer, to provide $58,000,000 of
non-recourse debt (the "Term Loan"). The Term Loan was amortized on the basis of
a 25-year amortization schedule which commenced in March 1994 and matured on
December 31, 1998.
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The Term Loan was evidenced by (i) promissory notes aggregating
$31,000,000 (the "Fixed Rate Notes") which bore interest at a fixed rate of
9.66% per annum and (ii) promissory notes aggregating $27,000,000 (the "Floating
Rate Notes") which bore interest at 1.85 percentage points over the three-month
London Interbank Offered Rate. On the Closing Date, the Partnership entered into
an interest rate swap agreement (the "Swap Agreement") with a third party to
effectively fix the interest rate on the Floating Rate Notes at 9.66% per annum
until maturity of the Term Loan. The counterparty's obligations under the Swap
Agreement were guaranteed by the parent company of the counterparty, a national
investment banking institution. There was no nonperformance by the counterparty
during the term of the agreement. The Partnership's obligations under the Swap
Agreement were secured by a pledge of collateral by the General Partner. The
Swap Agreement expired on December 31, 1998.
On December 31, 1998, the Term Loan was amended such that its maturity
date was extended from December 31, 1998 to December 31, 1999. The Term Loan was
extended for only one year in anticipation of a possible sale of the
Partnership's hotels in 1999. As a result of the Amendment, the Fixed Rate Notes
and Floating Rate Notes were consolidated into a single indebtedness in the
principal amount of $54,628,029 (the "Amended Term Loan"). The Amended Term Loan
bears interest at 3.3 percentage points over the three-month LIBOR (the
"Contract Rate"). The Contract Rate in effect on December 31, 1998 was 8.6%. On
the Amendment date, the Partnership made the following payments: (1) $529,740 in
interest due and payable on the Term Loan, (2) a $50,000 underwriting fee
payable in connection with the Amendment, and (3) $38,782 in legal fees.
Beginning February 1, 1999, monthly principal payments of $75,000 will be made
on the Amended Term Loan, in addition to monthly interest payments calculated on
the basis of the Contract Rate and the outstanding principal balance. All unpaid
principal and interest is due at the maturity of the Amended Term Loan on
December 31, 1999.
The Amended Term Loan is secured by first mortgages on the Partnership's
fee or leasehold interest in ten of the Inns (the "Term Loan Inns"), a security
interest in all personal property associated with the Term Loan Inns including
furniture and equipment, inventory, contracts and other general intangibles, and
an assignment of the Partnership's rights under the management agreement.
Raleigh Mortgage Loan
On the Closing Date, the Partnership assumed one of the Contributing
Limited Partner's obligations under a nonrecourse mortgage loan in the original
principal amount of $5,900,000 with respect to the Raleigh Inn. The loan carried
a fixed interest rate of 10.25% and required monthly payments of interest and
principal, based on a 30-year amortization schedule, until maturity on July 1,
1996. On July 1, 1996, the Raleigh Mortgage Loan was fully repaid with proceeds
advanced under a loan from Host Marriott.
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Note Payable to Host Marriott
On July 1, 1996, the Raleigh Mortgage Loan was repaid in full with
proceeds of a $5,392,667 unsecured nonrecourse loan from Host Marriott. Interest
on the loan accrues at prime plus one percent. The loan matured on April 30,
1997 with the entire balance due at that time. The Partnership repaid the loan
with funds released from the restricted cash reserve and cash from Partnership
operating activity.
Note 4. Management Agreement
The Manager operates the Inns pursuant to a long-term management
agreement with an initial term expiring December 30, 2011. The Manager has the
option to extend the agreement on one or more Inns for up to five 10-year terms.
The Manager earns a base management fee equal to 2% of the Inns' gross revenues,
which is subordinate to payment of qualifying debt service payments, a provision
for Partnership administrative expenses and retention by the Partnership of
annual cash flow from operations of $7,040,000. The Manager is also entitled to
an incentive management fee equal to 20% of operating profit, as defined, in
excess of $9,500,000 for each calendar year. The incentive management fee is
payable out of 50% of cash flow from operations remaining after payment of debt
service, provision for Partnership administrative expenses, retention by the
Partnership of annual cash flow from operations of $7,040,000, payment of
current base management fees, payment of amounts due pursuant to any loans from
Host Marriott and deferred base management fees. Through December 31, 1996, base
and incentive management fees not paid currently were waived by the Manager.
Subsequent to December 31, 1996, any base and incentive management fees not paid
are earned by the Manager and, have been accrued by the Partnership. For the
year ended December 31, 1998, $815,280 of base management fees and $436,798 of
incentive management fees, respectively, were paid to the Manager. As of
December 31, 1998, $1,068,122 in incentive management fees were deferred.
The management agreement also provides for a Residence Inn system fee
equal to 4% of suite revenues. In addition, the Manager is reimbursed for each
Inn's pro rata share of the actual costs and expenses incurred in providing
certain services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. As franchiser of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional and public relations materials and programs
and the operation of a toll-free reservation system. Each Inn contributes 2.5%
of suite revenues to the marketing fund. For the year ended December 31, 1998,
the Partnership paid Residence Inn system fees of $1,550,666, reimbursed the
Manager for $962,145 of Chain Services and contributed $969,166 to the marketing
fund. The Partnership is required to provide the Manager with working capital to
meet the operating needs of the Inns.
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The management agreement also provides for the establishment of a
property improvement fund for the Inns. Contributions to the property
improvement fund are equal to 5% of gross revenues of each Inn. During 1998, the
Partnership contributed $2,038,199 to the property improvement fund.
Note 5. Meriden Ground Lease
On the Closing Date, the Partnership assumed all of Host Marriott's
rights and obligations as tenant under the ground lease with respect to the land
on which the Meriden Inn is located. The initial term of the ground lease will
expire on August 14, 2013. The Partnership will have the option to extend the
term thereof for up to ten consecutive periods of five years each. Rent for the
initial term in the amount of $1,200,000 was prepaid by Host Marriott and is
amortized on a straight-line basis over the initial term of the lease. Rent
after the initial term will be prepaid in varying amounts at the beginning of
each applicable extended term.
Note 6. Sale of the Inns (unaudited), Subsequent to Date of Auditor's Report
On September 28, 2001, ten of the Residence Inns owned by the Partnership
were sold for a purchase price of approximately $119 million.
(Remainder of Page is Intentionally Blank)
-35-
Apple Hospitality Two, Inc.
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2001 (unaudited)
The following unaudited Pro Forma Condensed Consolidated Balance Sheet of Apple
Hospitality Two, Inc. (the "Company") is presented as if the purchase of
Marriott Residence Inn USA Limited Partnership (the "Partnership") from
Crestline Capital Corporation ("Crestline") for $119 million had occurred on
June 30, 2001. All of the assets and liabilties of the Partnership at June 30,
2001 were held by Residence Inn III LLC. Residence Inn III LLC consists of 10
Residence Inn (R) by Marriott (R) franchised hotels. The historical balance
sheet of Residence Inn III LLC is as of June 15, 2001.
Such information is based in part upon the consolidated balance sheet of the
Company, and the historical balance sheet of Residence Inn III LLC. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been
assuming such transactions had been completed as of June 30, 2001 nor does it
purport to represent the future financial position of the Company.
Residence
Historical Historical Acquisition Inn
Balance Residence Closing Acquisition Total
Sheet Inn III LLC Adjustments (A) Adjustments Proforma
----------------------------------------------------------------------------------
ASSETS
Investment in hotel properties - $ 87,151,000 - $ 33,536,000 (C) $120,687,000
Cash and cash equivalents $ 11,047,830 3,722,000 (3,722,000) (10,901,983) (B) 145,847
Mortgage escrow reserves - 4,096,000 (1,791,000) 1,791,000 (D) 4,096,000
Due from Residence Inn by Marriott, Inc. - 1,623,000 (1,623,000) 571,000 (E) 571,000
Notes receivable 47,000,000 - - (47,000,000) (B) -
Interest receivable 470,000 - - (470,000) (B) -
Prepaid expenses 85,051 - - - 85,051
Other assets 1,185,021 1,492,000 - (1,001,000) (B)
- - - (962,000) (F) 714,021
----------------------------------------------------------------------------------
Total Assets $ 59,787,902 $ 98,084,000 $ (7,136,000) $(24,436,983) $126,298,919
==================================================================================
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable - $ 53,619,000 - - $ 53,619,000
Accounts payable - affiliate $ 25,429 - - - 25,429
Accounts payable and accrued expenses 120,374 563,000 - - 683,374
Deferred incentive management fees - 1,486,000 - $ (1,486,000) (B) -
---------------------------------------------------------- -------------
Total Liabilities 145,803 55,668,000 - (1,486,000) 54,327,803
Shareholders' equity
Member's equity - 42,416,000 (7,136,000) (35,280,000) -
Common stock, no par value, authorized
200,000,000 shares; issued and outstanding
6,781,348 shares 59,035,871 - - 12,329,017 (B)/(D)/(E) 71,364,888
Class B convertible stock, no par value,
authorized 240,000 shares; issued and
outstanding 240,000 shares 24,000 - - - 24,000
Net income greater than distributions 582,228 - - - 582,228
----------------------------------------------------------------------------------
Total Shareholders' Equity 59,642,099 42,416,000 (7,136,000) (22,950,983) 71,971,116
----------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 59,787,902 $ 98,084,000 $ (7,136,000) $(24,436,983) $126,298,919
==================================================================================
-36-
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited)
(A) Represents the reduction of balances retained by the prior owner of the
Partnership. In accordance with the Purchase Agreement, the prior owner will
retain its cash, receivables from Marriott, and debt service and real estate
tax reserves.
(B) Total purchase price consists of the following:
Purchase price per contract $119,000,000
Fair value of deferred incentive
management fee liability assumed,
net of $750,000 credit 736,000
Fair value of liability assumed 563,000
------------
Sub-total 120,299,000
Acquisition fee payable to ASRG 2,380,000
Additional closing costs 843,000
------------
Total purchase price $123,522,000
============
The purchase price was satisfied by the following:
Cash:
-on hand $ 10,901,983
-net proceeds received from sale of
commom stock subsequent to 6/30/01 9,967,017
------------
20,869,000
Assumption of mortgage loan 53,619,000
Assumption of liabilities 563,000
Application of note receivable from Crestline 47,000,000
Application of interest on note receivable
from Crestline 470,000
Application of escrow deposit 1,001,000
------------
$123,522,000
============
(C) Allocation of purchase price (see Note B above) to assets acquired at fair
value are as follows:
Purchase price (See Note B) $123,522,000
Less:
Restricted cash - FF&E reserves 2,305,000
Other assets and prepaids 530,000
------------
Amount allocated to investment in hotel
properties 120,687,000
Net book value of investment in hotel
properties 87,151,000
------------
Net increase in book value of investment
in hotels $ 33,536,000
============
(D) Represents funding of debt service and real estate capital reserves through
net proceeds from the sale of common stock subsequent to 6/30/01..
(E) Represents funding of working capital reserve through net proceeds from the
sale of common stock subsequent to 6/30/01..
(F) Represents elimination of historical deferred financing costs associated
with prior owner.
-37-
Apple Hospitality Two, Inc.
Pro Forma Condensed Consolidated Statements of Operations
For the year ended December 31, 2000 and the period ended June 30, 2001
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Hospitality Two, Inc. (the "Company") are presented as if
the purchase of Marriott Residence Inn USA Limited Partnership (the
"Partnership") from Crestline Capital Corporation ("Crestline") for $119 million
had occurred at the beginning of the periods presented prior to acquisition by
the Company and all of the hotels had been leased to Apple Hospitality
Management, Inc., our wholly owned taxable purchased subsidiary pursuant to
master hotel lease agreements. All of the assets and liabilities of the
Partnership were held by Residence Inn III LLC. Residence Inn III LLC consists
of 10 Residence Inn (R) by Marriott (R) hotels. Marriott will continue to manage
the hotels under agreements not materially different from historical contractual
arrangements. Such pro forma information is based in part upon the historical
Consolidated Statements of Operations of the Company, and the historical
Statements of Operation of Residence Inn III LLC. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made. The reporting periods for the hotels acquired will reflect twelve weeks of
operations for the first three quarters and sixteen weeks for the fourth
quarter.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the periods presented are not necessarily indicative of what
actual results of operations of the Company would have been assuming such
transactions had been completed as of the beginning of the periods presented,
nor does it purport to represent the results of operations for future periods.
For the year ended December 31, 2000 (unaudited)
Historical Historical
Statement of Residence Pro Forma Total
Operations Inn III LLC (A) Adjustments Pro Forma
--------------------------------------------------------------------------------------
Revenue:
Suite revenue - $ 37,595,000 - $ 37,595,000
Other operating revenue - 1,770,000 - 1,770,000
Interest income - 395,000 $ (395,000) (B) -
---------------------------------------- ---------------- ------------------
Total revenue - 39,760,000 (395,000) 39,365,000
Expenses:
Operating expenses - 18,786,000 - 18,786,000
General and administrative - 150,000 (150,000) (C)
811,658 (D) 811,658
Franchise fees - 1,504,000 - 1,504,000
Management fees - 787,000 - 787,000
Incentive management fees - 1,209,000 - 1,209,000
Taxes, insurance and other - 1,409,000 - 1,409,000
Depreciation of real estate owned - 3,906,000 (3,906,000) (E)
2,985,315 (F) 2,985,315
Interest - 4,604,000 (4,604,000) (G)
4,407,415 (H) 4,407,415
--------------------------------------------------------------------------------------
Total expenses - 32,355,000 (455,612) 31,899,388
Income tax expense - - 125,716 (K) 125,716
--------------------------------------------------------------------------------------
Net income - $ 7,405,000 $ (65,104) $ 7,339,896
======================================================================================
Earnings per common share:
Basic and Diluted - $ 0.95
============= ==================
Basic and diluted weighted average
common shares outstanding - 7,728,948 (I) 7,728,948
============= ==================
-38-
For the period ended June 30, 2001 (unaudited)
Historical Historical
Statement of Residence Pro Forma Total
Operations Inn III LLC (A) Adjustments Pro Forma
--------------------------------------------------------------------
Revenue:
Suite revenue - $ 17,504,000 - $ 17,504,000
Other operating revenue - 767,000 - 767,000
Interest income and other revenue $ 635,526 148,000 $ (635,526) (J)
(148,000) (B) -
----------------------------- -----------------------------------
Total revenue 635,526 18,419,000 (783,526) 18,271,000
Expenses:
Operating expenses - 8,868,000 - 8,868,000
General and administrative 53,298 139,000 352,532 (D)
- - (139,000) (C) 405,830
Franchise fees - 700,000 - 700,000
Base management fees - 365,000 - 365,000
Incentive management fees - 571,000 - 571,000
Taxes, insurance and other - 738,000 - 738,000
Depreciation of real estate owned - 1,973,000 (1,973,000) (E)
- - 1,492,657 (F) 1,492,657
Interest - 2,090,000 (2,090,000) (G)
- - 2,203,708 (H) 2,203,708
--------------------------------------------------------------------
Total expenses 53,298 15,444,000 (153,103) 15,344,195
Income tax expense - - 44,317 (K) 44,317
--------------------------------------------------------------------
Net income $ 582,228 $ 2,975,000 $ (674,740) $ 2,882,488
====================================================================
Earnings per common share:
Basic and Diluted $ 0.36 $ 0.37
========== ============
Basic and diluted weighted average common shares outstanding 1,627,712 6,101,236 (I) 7,728,948
========== ============
-39-
Notes to Pro Forma Condensed Consolidated Statements of Operations (unaudited):
(A) Represents results of operations for the hotels acquired on a pro forma
basis as if the Partnership was owned by the Company at the beginning of
the periods presented for the respective periods prior to acquisition by
the Company. The historical financials of the Partnership reflect the
operations for the 24 weeks ended June 15, 2001.
(B) Represents the elimination of historical interest income recorded by the
prior owner.
(C) Represents the elimination of the historical general and administrative
expense allocated to the hotels by the prior owner, which will not be
incurred by the Company.
(D) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company plus anticipated legal and accounting fees, employee costs,
salaries and other costs of operating as a public company of $811,658 and
$352,531 for the year ended December 31, 2000, and the six months ended
June 30, 2001, respectively.
(E) Represents the elimination of the historical depreciation expense recorded
by the prior owner.
(F) Represents the depreciation on the hotels acquired based on the purchase
price allocation of $98 million to depreciable property. The weighted
average lives of the depreciable assets are 39 years for building and 7
years for FF&E. The estimated useful lives are based on management's
knowledge of the properties and the hotel industry in general.
(G) Represents the elimination of the historical interest expense recorded by
the prior owner.
(H) Represents the interest expense for the hotel acquisitions for the period
in which the hotels were not owned. Interest was computed using the
interest rates of 8.08% on the mortgage debt of $53,619,000, including
amortization of deferred financing costs.
(I) Represents additional common shares assuming the Partnership was acquired
at the beginning of the periods presented with $68 million of the gross
proceeds from the "best efforts" offering of $9.50 per share (net $8.50 per
share) for the first $30 million and $10 per share (net $8.95 per share)
for the remainder.
(J) Represents the elimination of the interest income recorded on the $47
million promissory note with Crestline, as the related note receivable was
used to purchase the Partnership.
(K) Represents the combined state and federal income tax expense of our wholly
owned taxable REIT subsidiary estimated on a combined rate of 40%.
-40-
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 hereunto duly authorized.
Apple Hospitality Two, Inc.
By: /s/ Glade M. Knight
---------------------------
Glade M. Knight, President
October 15, 2001
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