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): December 22, 1999
APPLE SUITES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 333-77055 54-1933472
(State of (Commission (IRS Employer
incorporation) File Number) Identification No.)
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(804) 643-1761
APPLE SUITES, INC.
FORM 8-K
Index
Page No.
Item 2. Acquisition or Disposition of Assets 6
Item 7. Financial Statements and Exhibits
a. Financial Statements
Jackson, Mississippi
1. Property Financial Statements
Independent Auditors Report 18
Balance Sheets - December 31, 1998 and December 31, 1997 19
Statements of Shareholders' Equity - Years ended December 31, 1997
and December 31, 1998 21
Income Statements - Years ended December 31, 1998 and
December 31, 1997 22
Statements of Cash Flows - Years ended December 31, 1998 and December
31, 1997 23
Notes to the Financial Statements - December 31, 1998 and
December 31, 1997 24
* * *
Balance Sheet - August 31, 1999 (unaudited) 27
Statement of Shareholders' Equity - For the Period January 1, 1999
through August 31, 1999 (unaudited) 29
Income Statement - For the Period January 1, 1999 through August 31,
1999 (unaudited) 30
Statement of Cash Flows - For the Period January 1, 1999 through
August 31, 1999 (unaudited) 31
2
Notes to the Financial Statements - For the Period January 1, 1999
through August 31, 1999 (unaudited) 32
2. Pro Forma Financial Statements
Apple Suites, Inc.--Pro Forma Condensed Consolidated Balance Sheet as
of September 30, 1999 (unaudited) 35
Apple Suites, Inc.--Pro Forma Condensed Consolidated Statements of
Operations for the Year Ended December 31, 1998 and the
Nine Months Ended September 30, 1999 (unaudited) 37
Apple Suites Management, Inc.--Pro Forma Condensed Consolidated
Statements of Operations for the Year Ended December 31, 1998
and the Nine Months Ended September 30, 1999 (unaudited) 40
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b. Exhibits
4.1 Note dated December 22, 1999 in the principal amount
of $ 4,384,500 made payable by Apple Suites, Inc. to
the order of Promus Hotels, Inc.
4.2 Fee and Leasehold Deed of Trust, Assignment of Leases
and Rents and Security Agreement dated December 22,
1999 from Apple Suites, Inc. and Apple Suites
Management, Inc. for the benefit of Promus Hotels,
Inc. pertaining to the Jackson, Mississippi hotel.
4.3 Fee and Leasehold Deed to Secure Debt, Assignment of
Leases and Rents and Security Agreement dated
December 22, 1999 from Apple Suites, Inc. and Apple
Suites Management, Inc. for the benefit of Promus
Hotels, Inc., constituting a second lien on the
Atlanta - Peachtree hotel.
4.4 Deed to Secure Debt Modification Agreement dated
December 22, 1999, among Promus Hotels, Inc., Apple
Suites, Inc. and Apple Suites Management, Inc.
pertaining to the Atlanta - Galleria/Cumberland
hotel.
4.5 Fee and Leasehold Mortgage, Assignment of Leases and
Rents and Security Agreement dated December 22, 1999
from Apple Suites, Inc. and Apple Suites Management,
Inc. for the benefit of Promus Hotels, Inc.
constituting a second lien on the
Detroit - Warren hotel.
4.6 Fee and Leasehold Deed of Trust, Assignment of Leases
and Rents and Security Agreement and Fixture Filing
dated December 22, 1999, from Apple Suites, Inc. and
Apple Suites Management, Inc. for the benefit of
Promus Hotels, Inc. constituting a second lien on
the Salt Lake City - Midvale hotel.
4.7 Second Deed of Trust Modification Agreement dated
December 22, 1999, among Promus Hotels, Inc., Apple
Suites REIT Limited Partnership and Apple Suites
Services Limited Partnership pertaining to the North
Dallas - Plano hotel.
4.8 Second Deed of Trust Modification Agreement dated
December 22, 1999, among Promus Hotels, Inc., Apple
Suites REIT Limited Partnership and Apple Suites
Services Limited Partnership pertaining to the Dallas
- Addison and Dallas - Irving/Las Colinas hotels.
10.1 Indemnity dated December 22, 1999 from Apple Suites,
Inc. to Promus Hotels, Inc. pertaining to the
Jackson, Mississippi hotel.
10.2 Schedules 2.1(h), 3.1(a)-8, and 3.1(b)-8 to the
Master Hotel Lease Agreement dated September 20, 1999
between Apple Suites, Inc. (as lessor) and
Apple Suites Management, Inc. (as lessee).
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10.3 Homewood Suites License Agreement dated December 22,
1999 between Promus Hotels, Inc. and Apple Suites
Management, Inc. pertaining to the
Jackson, Mississippi hotel.
10.4 Management Agreement dated December 22, 1999 between
Apple Suites Management, Inc. and Promus Hotels, Inc.
pertaining to the Jackson, Mississippi hotel.
10.5 Letter dated December 22, 1999 interpreting
Management Agreement dated December 22, 1999 among
Apple Suites, Inc., Promus Hotels, Inc., Promus
Hotels Florida, Inc. and Hampton Inns, Inc.
pertaining to the Jackson, Mississippi hotel.
10.6 Comfort Letter dated December 22, 1999 among Promus
Hotels, Inc., Apple Suites, Inc. and Apple Suites
Management, Inc. pertaining to the Jackson,
Mississippi hotel.
10.7 Negative Pledge Agreements dated December 22, 1999
between Apple Suites, Inc. and Promus Hotels, Inc.
10.8 Promissory Note dated December 22, 1999 in the amount
of $ 45,000 made payable by Apple Suites Management,
Inc. to the order of Apple Suites, Inc.
(Hotel Franchise Fees)
10.9 Promissory Note dated December 22, 1999 in the amount
of $ 9,100 made payable by Apple Suites Management,
Inc. to the order of Apple Suites, Inc.
24 Consent of Independent Auditors
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Item 2. Acquisition or Disposition of Assets
We purchased the Jackson-Ridgeland (Mississippi) hotel (described
below), an existing Homewood Suites(R) property, from Promus Hotels, Inc. as of
December 22, 1999. The total purchase price for the hotel was $5,846,000. We
used proceeds from our offering of common shares to pay twenty-five percent of
this total, or $1,461,500, at closing in cash. The balance of 75%, or
$4,384,500, is being financed by Promus Hotels, Inc. as short-term or "bridge
financing," as described below.
We paid a real estate commission on this purchase to Apple Suites
Realty Group, Inc., as our real estate broker. This corporation is owned by
Glade M. Knight, who is our president and chief executive officer. The total
amount of the real estate commission was $116,920, which equals two percent (2%)
of the total purchase price.
GENERAL BACKGROUND
The Jackson-Ridgeland hotel is an extended-stay hotel, and is licensed
to operate as Homewood Suites(R) property. We believe that the majority of the
guests at the hotel during the past 12 months have been business travelers. We
expect that this pattern will continue.
Each suite at a Homewood Suites(R) property consists of a bedroom and a
living room, with an adjacent kitchen area. The basic suite is known as a
"Homewood Suite," which generally has one double or king-size bed. Larger
suites, known as "Master Suites" or "Extended Double Suites" are also available.
These suites have larger rooms, with either one king-size bed or two smaller
beds. The largest suites contain two separate bedrooms. Wheelchair-accessible
suites are available at each hotel.
The suites have many features and amenities in common. Most suites have
ceiling fans and two color televisions (one in the bedroom and one in the living
room). Some suites have fireplaces. Typical living room furniture includes a
sofa (often a fold-out sleeper sofa), coffee table and work/dining table with
chairs. Some living rooms contain a recliner and a videocassette player. The
kitchens vary, but generally have a microwave, refrigerator, dishwasher, coffee
maker and stove, together with basic cookware and utensils.
The hotel is marketed, in part, through the Homewood Suites(R) web site
(http://www.homewood-suites.com), which is generally available 24 hours a day,
seven days a week, around the world. Reservations may be made directly through
the web site. The reservation system and the web site are linked to, and
cross-marketed with, the reservation systems and web sites for other hotel
franchises that are owned and operated by Promus Hotels, Inc. Those other
franchises include Hampton Inns(R), Doubletree Hotels(R) and Embassy Suites(R).
Such cross-marketing may affect occupancy at the Homewood Suites(R) properties
by directing travelers toward, or away from, Homewood Suites(R).
The hotel was actively conducting business at the time of their
acquisition. We believe that the acquisition was conducted without materially
disrupting any of the daily activities at the
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hotel. During the past 12 months, the hotel has been covered with property and
liability insurance, and we have arranged to continue such coverage. We believe
the hotel is adequately covered by insurance.
SPECIFIC FEATURES
The Homewood Suites(R) Jackson - Ridgeland is located on a 3.94 acre
site at 853 Centre Street, Ridgeland, Mississippi 39157. The hotel is
approximately 10 miles from downtown Jackson and 15 miles from the Jackson
Municipal Airport.
The hotel opened in February 1997. It has wood frame construction and
consists of a single building with three stories. The hotel contains 91 suites,
which have a combined area of 41,729 (rentable) square feet. The following types
of suites are available:
Type of Suite Number Available Square Feet Per Suite
------------- ---------------- ---------------------
Master Suite 56 406 to 510
Homewood Suite 29 458 to 557
Two-Bedroom Suite 6 690
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 45 to 50 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 108 spaces. The hotel provides complimentary shuttle service
within a five mile radius (and to airport).
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $333,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement,
furniture replacement, bathroom upgrades and parking lot resurfacing and
restriping. We expect to pay for the costs of these renovations and improvements
with proceeds obtained from our ongoing offering of common shares.
During 1999, the average stay at the hotel has been approximately three
nights, and approximately 48.2% of the guests have stayed for five nights or
more. Occupancy at the hotel is not seasonal. The following table shows average
daily occupancy rates, expressed as a percentage, since the opening of the
hotel:
Average Daily Occupancy Rate (calendar year)
1997 1998 1999
---- ---- ----
63.8% 80.6% 78.2%
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For January 1, 1999 through December 28, 1999, the average daily rate
per suite was $81.98, and the average daily net revenue per suite was $63.92. As
explained below, revenue from the hotel's operations will be used to pay
interest due under the promissory note dated December 22, 1999. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of net revenue specified above, approximately 17.55% of the hotel's
revenue would be needed to cover its portion of the interest payments.
The hotel's current rate structure is based on length of stay and type
of suite, as summarized below:
Length of Stay
(number of nights) Homewood Master Two Bedroom
------------------ -------- ------ -----------
1 to 4 $92 $92 $149
5 to 11 82 82 119
12 to 28 74 74 119
29 or more 69 69 109
The hotel offers a weekend discount. This discount varies by type of
suite and generally reduces the basic rate by 20 to 33%. The weekend discount is
not available to guests who stay for five nights or more. The hotel also offers
discounts to guests who stay under certain corporate accounts. These discounts
are often negotiated with the corporate customer and vary from account to
account. During the past 12 months, we estimate that approximately 70% of the
hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include Fire Victims, Entergy, Copac, Computer Task Group, Mississippi
Diversified, Mississippi Baptist Health Systems, Hydro Ellay Enfield,
Saks/McRaes, International Paper and HMA. From January 1, 1999 through August 2,
1999, the 10 biggest corporate accounts were responsible for approximately 24.5%
of the hotel's occupancy. There can be no assurance, however, that the hotel
will continue to receive significant occupancy, or any occupancy, from the
corporate accounts identified above.
The table below shows the average effective annual rental per square
foot since the opening of the hotel:
1997
(annualized) 1998 1999
------------ ---- ----
$33.32 $50.70 $50.88
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $5,287,765 and will be depreciated over a life of
39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property
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component of the hotel will be depreciated in accordance with the modified
accelerated cost recovery system of the Internal Revenue Code.
The following table sets forth the 1999 real estate tax information for
the hotel:
Tax Estimated Value Taxable Portion Tax Amount
Jurisdiction (tax purposes) (15% of Est. Value) Rate of Tax
- ------------ --------------- ------------------- ---- ------
Madison County $4,044,310 $606,650 0.09917 $60,161.48
We estimate that the annual property tax on the expected improvements
will be approximately $33,000 or less.
At least six competing hotels are located within seven miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) One of the competing hotels is
newer than the hotel. The newer competing hotel has a franchise with Townplace
Suites. The other competing hotels have franchises with Residence Inn, Cabot
Lodge, Courtyard by Marriott, Harvey Hotel and Hilton. We believe that the rates
charged by the hotel are generally competitive with the rates charged by these
other hotels. We are aware of ongoing or proposed construction for up to six new
extended-stay hotels within 12 miles of the hotel. We expect these new hotels to
be franchised with Comfort Inn, Hawthorne Suites, Jameson Inn, King Edward
Hotel, Hilton Gardens and Springhill Suites.
HOTEL SUPPLIES AND FRANCHISE FEES
We have provided Apple Suites Management, Inc. with funds for the
purchase of certain hotel supplies, such as sheets, towels and so forth. Apple
Suites Management, Inc. is obligated to repay us under a promissory note made in
the principal amount of $9,100. This promissory note provides for an annual
interest rate of nine percent (9%), which would increase to twelve percent (12%)
if a default occurs, and repayment in sixty-one (61) monthly installments. The
first installment consists of interest only. The due date for the first
installment, subject to a five-day grace period, is January 1, 2000. The
remaining installments consist of principal and interest on an amortized basis.
The final maturity date is January 1, 2005.
We have also provided Apple Suites Management, Inc. with funds for the
payment of hotel franchise fees to Promus Hotels, Inc. Apple Suites Management,
Inc. is obligated to repay us under a promissory note made in the principal
amount of $45,000. This promissory note is substantially similar to the one
described above, but provides for repayment in one hundred twenty-one (121)
monthly installments and has a final maturity date of January 1, 2010.
DESCRIPTION OF FINANCING
As indicated above, Promus Hotels, Inc. financed 75% of the purchase
price of the Jackson-Ridgeland hotel. This financing is substantially similar to
the financing provided by Promus Hotels, Inc. when we purchased our other
hotels. The amounts we owe to Promus Hotels, Inc. are evidenced by the following
promissory notes:
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Original Remaining
Date of Principal Principal as of Annual Rate Date of
Promissory Note Amount January 1, 2000 of Interest Maturity
--------------- ------ --------------- ----------- --------
September 20, 1999 $26,625,000 $26,625,000 8.5% October 1, 2000
October 5, 1999 $ 7,350,000 $ 7,350,000 8.5% October 1, 2000
November 29, 1999 $30,210,000 $30,210,000 8.5% December 1, 2000
December 22, 1999 $ 4,384,500 $ 4,384,500 8.5% January 1, 2001
We consider the financing from Promus Hotels, Inc. to be "bridge
financing" because of its short-term nature (that is, each promissory note
reaches maturity within approximately one year of its date of execution).
Despite the temporary use of bridge financing, over the long-term we will seek
to hold our properties on an all-cash basis, as indicated in the prospectus.
The promissory notes have several provisions in common, which include
the following:
o monthly interest payments
o monthly principal payments, to the extent of the net equity
proceeds from our offering of common shares
o our delivery of monthly notices to specify such net equity
proceeds
o our right to prepay the notes, in whole or in part, without
premium or penalty
o a late payment premium of four percent (4%) for any payment not
made within ten (10) days of its due date
Principal payments under the promissory note dated as of December 22,
1999 are not scheduled to start until the other promissory notes have been paid
in full. Assuming those other notes continue to be paid on schedule, principal
under the note dated as of December 22, 1999 will be due in a single installment
on its maturity date.
SOURCE OF PAYMENTS
Revenue from the operation of the hotels will be used to pay interest
under the promissory notes we have made to Promus Hotels, Inc. The "net equity
proceeds" from our offering of common shares will be used to pay principal. The
phrase "net equity proceeds" means the total proceeds from our offering of
common shares, as reduced by selling commissions, a marketing expense allowance,
closing costs, various fees and charges (legal, accounting, and so forth), a
working capital reserve and a reserve for renovations, repairs and replacements
of capital improvements. We were permitted, by an October 1999 letter agreement,
to use our net equity proceeds to pay 25% of the purchase price of the
Jackson-Ridgeland hotel (rather than use such amounts exclusively for payments
under the earlier promissory notes.)
There can be no assurance that the net equity proceeds from our
offering of common shares will be sufficient to pay principal under the
promissory notes on or before the required due dates. The following amounts
would be due on the maturity dates of the promissory notes,
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assuming that interest payments are made on schedule and that no payments of
principal are made before those maturity dates:
Date of Principal Monthly Total Due
Maturity Due Interest Due at Maturity
-------- --- ------------ -----------
October 1, 2000 $33,975,000 $240,656.25 $34,215,656.25
December 1, 2000 $30,210,000 $213,987.50 $30,423,987.50
January 1, 2001 $ 4,384,500 $ 31,056.88 $ 4,415,556.88
In the event of a default under the promissory notes, various remedies
are available to Promus Hotels, Inc. under certain deeds of trust, which are
described below.
LICENSING AND MANAGEMENT
We expect that the Jackson-Ridgeland hotel will continue to operate as
Homewood Suites(R) property. To help achieve that result, Promus Hotels, Inc.
has executed a license agreement dated as of January 4, 2000. Promus Hotels,
Inc. is managing the hotel under a management agreement dated as of December 22,
1999. These license and management agreements are among the material contracts
described below.
SUMMARY OF MATERIAL CONTRACTS
DEEDS OF TRUST AND RELATED DOCUMENTS
Each of our hotels, including the Jackson-Ridgeland hotel, is subject
to a mortgage on its real property, a security interest in its personal
property, and an assignment of hotel rents and revenues, all in favor of Promus
Hotels, Inc. (As described above, Promus Hotels, Inc. provided financing for our
hotel purchases). These encumbrances are created by substantially similar
documents. For simplicity, we will refer to each of these documents as a "deed
of trust."
At each closing on our purchase of a hotel or group of hotels, we
further encumbered our other hotels. Those further encumbrances are created by
either additional deeds of trust or negative pledges. These documents are
described below.
Each deed of trust corresponds to one of the promissory notes we made
to Promus Hotels, Inc., and secures the payment of principal and interest under
that promissory note. The encumbrance created by a deed of trust will terminate
when its corresponding promissory note is paid in full.
We are subject to various requirements under the deeds of trust. For
instance, we must maintain adequate insurance on the hotels and we must not
grant any further assignments of rents or leases with respect to the hotels.
11
Each deed of trust contains a substantially similar definition of
events of default. In each case, the events of default include (without
limitation) any default that occurs under any of the promissory notes or under
another deed of trust, and any sale of the secured property without the prior
consent of Promus Hotels, Inc. Upon any event of default, various remedies are
available to Promus Hotels, Inc. Those remedies include, for example (1)
declaring the entire principal balance under the promissory notes, and all
accrued and unpaid interest, to be due and payable immediately; (2) taking
possession of the secured property, including the hotels; and (3) collecting
hotel rents and revenues, or foreclosing on the hotels, to satisfy unpaid
amounts under the promissory notes. Each deed of trust requires us to pay any
costs that may be incurred in exercising such remedies.
Negative pledges apply to three of our hotels (Richmond - West End,
Clearwater and Baltimore - BWI Airport). The negative pledges prohibit any
transfer or further encumbrance of the hotels, in whole or in part, without the
prior written consent of Promus Hotels, Inc. Each negative pledge was executed
concurrently with a particular promissory note, and will terminate when its
corresponding promissory note is paid in full.
ENVIRONMENTAL INDEMNITY
An environmental indemnity applies to the Jackson-Ridgeland hotel. This
indemnity protects Promus Hotels, Inc. in the event that we undertake any
corrective work to remove or eliminate hazardous materials from the hotel.
Hazardous materials are defined in the indemnity to include, for example,
asbestos and other toxic materials. We are not aware of any hazardous materials
at the hotel, but there can be no assurance that such materials are not present.
Under the indemnity, we have agreed to indemnify and protect Promus
Hotels, Inc. from any losses that it may incur because of (1) the
nonperformance, or delayed performance and completion, of corrective work; or
(2) the enforcement of the indemnities. Our indemnity generally will terminate
upon payment in full under the promissory note dated as of December 22, 1999.
However, our indemnity will continue with respect to those litigation or
administrative claims, if any, that involve indemnified losses and that are
pending at the date of full payment. In addition, for a period of four years
after the date of such full payment, we will be obligated to pay any enforcement
costs for subsequent litigation or administrative claims.
MASTER HOTEL LEASE AGREEMENT
We have leased the Jackson-Ridgeland hotel to Apple Suites Management,
Inc. Our existing master hotel lease agreement, dated as of September 20, 1999,
has been supplemented to include this hotel as leased properties.
The master hotel lease agreement provides that Apple Suites Management,
Inc. will pay us a base rent, percentage rent and certain additional charges.
Base rent is payable in advance in equal monthly installments. In addition, for
each calendar quarter during the term of the leases, Apple Suites Management,
Inc. will pay percentage rent based on a percentage of gross revenues (less
sales and room taxes), referred to as "suite revenue," derived in connection
with the rental of suites at the hotel. The percentage rent is equal to (a) 17%
of all year-to-date suite revenue,
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up to the applicable quarterly suite revenue breakpoint (as shown below); plus
(b) 55% of the year-to-date suite revenue in excess of the applicable quarterly
suite revenue breakpoint, less both base rents and the percentage rent paid year
to date. The base rent and the quarterly suite revenue breakpoints will be
adjusted each year beginning on January 1, 2001, based on the most recently
published Consumer Price Index.
An annual base rent is $462,750 for both 1999 and 2000. The quarterly
suite revenue breakpoints through 2008, before any adjustment based on the
Consumer Price Index, are described in the table below and in the subsequent
paragraph:
Suite Revenue Breakpoints for the First Quarter
2000 2001 2002 2003 2004 2005 2006 2007 2008
---- ---- ---- ---- ---- ---- ---- ---- ----
$150,394 $155,021 $161,963 $166,590 $171,218 $175,845 $180,473 $185,100 $189,728
In all cases, the suite revenue breakpoints for the second, third and
fourth quarters of the same years are determined by multiplying the breakpoint
for the first quarter (as shown above) by two, three or four, respectively.
HOTEL LICENSE AGREEMENT
The Jackson-Ridgeland hotel is licensed to operate as a Homewood
Suites(R) property. This license was granted by Promus Hotels, Inc. to Apple
Suites Management, Inc. under a license agreement dated as of January 4, 2000.
The license agreement provides that Apple Suites Management, Inc. has
the right to operate the hotel using the Homewood Suites(R) "System." The
"System" includes the service mark "Homewood Suites(R)" and other associated
service marks and similar property rights, access to a reservation system,
distribution of advertising, access to a "Standards Manual," and access to other
training, information, programs and policies comprising the Homewood Suites(R)
hotel business.
In exchange for the license to use the Homewood Suites(R) System, Apple
Suites Management, Inc. has agreed to numerous requirements and restrictions
applicable to its operation of the hotel. Apple Suites Management, Inc. is also
required to pay royalties and other fees, as described below.
Apple Suites Management, Inc. will be subject to various operational
requirements pursuant to the license agreement and a "Standards Manual." The
Standards Manual may be changed at any time by Promus Hotels, Inc. As described
below, Promus Hotels, Inc. will act as the manager of the hotel under a
management agreement. As a practical matter, many of the requirements in the
license agreement and Standards Manual will be the responsibility of Promus
Hotels, Inc. However, certain requirements will remain the practical
responsibility of Apple Suites Management, Inc. Furthermore, the failure of
Promus Hotels, Inc. to comply with the management agreement will not, of itself,
relieve Apple Suites Management, Inc. from the obligations imposed upon it under
the license agreement. In such event, the remedies available
13
to Apple Suites Management, Inc. may be limited to monetary damages for breach
of the hotel management agreement.
The hotel must be operated in accordance with the requirements
established by Promus Hotels, Inc. These requirements cover matters such as the
types of services and products that may be offered at the hotel, the style and
type of signage, the appearance and condition of the hotel, the use of the
reservations system for guests, adherence to a 100% Satisfaction Guarantee rule
of operation, required insurance coverage and other requirements. The
requirements are designed to insure that each hotel meets uniform guidelines for
all Homewood Suites(R) Hotels, wherever located.
Under the license agreement, Apple Suites Management, Inc. is granted
the right to use the Homewood Suites(R) System only during the term of the
license agreement, and has no other ownership interest in, or rights to, such
System. The term of the license agreement is 20 years, but the agreement is
subject to early termination for various reasons, including default by Apple
Suites Management, Inc. or its efforts to obtain bankruptcy protection. If the
license agreement is terminated for any reason, the hotel must immediately cease
to identify itself as a Homewood Suites(R) Hotel.
Apple Suites Management, Inc. is required to pay to Promus Hotels, Inc.
the following monthly amounts: (1) A royalty fee equal to 4% of the gross suites
revenues (less sales and room taxes) received from rental of suites at the
hotel; (2) a marketing contribution equal to 4% of gross suites revenues; (3)
any amounts due Promus Hotels, Inc. for goods or services provided by Promus
Hotels, Inc. to Apple Suites Management, Inc.; and (4) the amount of sales,
gross receipts or similar taxes imposed on Promus Hotels, Inc. as a result of
the payments described in clauses (1), (2), and (3) of this sentence.
Apple Suites Management, Inc. is required to prepare and deliver to
Promus Hotels, Inc. daily, monthly and other reports which, among other things,
certify gross revenues from operation of the hotel. The 4% marketing
contribution is subject to change by Promus Hotels, Inc. from time to time.
Furthermore, there is no assurance that the marketing contribution from the
hotel will be used to fund advertising or marketing for the hotel actually
making the contribution.
Under the license agreement, Promus Hotels, Inc. may from time to time
require Apple Suites Management, Inc. to upgrade hotel facilities to meet the
standards then specified in the Standards Manual. We expect to pay the costs of
any such required upgrades from the proceeds of our ongoing offering of common
shares, although there can be no assurance that such proceeds will be sufficient
for this purpose.
HOTEL MANAGEMENT AGREEMENT
The Jackson-Ridgeland hotel is being managed by Promus Hotels, Inc.
under a management agreement dated December 22, 1999 with Apple Suites
Management, Inc. (which is leasing the hotel from us, as discussed above).
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The management agreement requires Promus Hotels, Inc. to operate the
hotel in conformity with the hotel license agreement described above. Promus
Hotels, Inc. will be responsible for directing the day-to-day activities of the
hotel and establishing policies and procedures relating to the management and
operation of the hotel.
As part of its responsibilities for directing the day-to-day activities
of the hotel, Promus Hotels, Inc. will hire, supervise and determine the
compensation and terms of employment of all hotel personnel. Promus Hotels, Inc.
also will determine the terms for admittance, room rates and all use of hotel
rooms. Promus Hotels, Inc. will select and purchase all operating equipment and
supplies for the hotel. Promus Hotels, Inc. will be responsible for (1)
advertising and promoting the hotel in coordination with the requirements of the
license agreement described above; and (2) obtaining and maintaining any permits
and licenses required to operate the hotel.
Each year, Promus Hotels, Inc. will submit a proposed operating budget
for the hotel to Apple Suites Management, Inc. for its approval. Each budget
will include a business plan describing the business objectives and strategies
for the hotel for the period covered by the budget. In addition, Promus Hotels,
Inc. will submit a recommended capital budget to Apple Suites Management, Inc.
for its approval. The capital budget will apply to furnishings, equipment and
ordinary hotel capital replacements needed to operate the hotel in accordance
with the hotel license agreement. At a minimum, each year's budget for capital
improvements will provide for capital expenditures that are required to meet the
minimum standards of the hotel license agreement, subject to the following
limits: (1) three percent (3%) of adjusted gross revenues for the first full
year after the commencement of the management agreement; (2) four percent (4%)
of adjusted gross revenues for the second full year after the commencement of
the management agreement; and (3) five percent (5%) of adjusted gross revenues
for each year thereafter.
In exchange for performing the services described above, Promus Hotels,
Inc. will receive a management fee, payable monthly. The management fee will
equal 4% of adjusted gross revenues. Adjusted gross revenues are defined
generally as all revenues derived from the hotel, as reduced by (1) refunds;
(2) sales and other similar taxes; (3) proceeds from the sale or other
disposition of the hotel furnishings and other capital assets; (4) fire and
extended coverage insurance proceeds; (5) credits or refunds made to customers;
(6) condemnation awards; (7) proceeds of financing or refinancing of the hotel;
(8) interest on bank accounts; and (9) gratuities or service charges added to a
customer's bill.
Prior to the second anniversary of the management agreement, a portion
of the management fee equal to 1% of adjusted gross revenues will be
subordinated to payment of a basic return to Apple Suites Management, Inc. The
basic return is generally equal to 11% of the purchase price for the hotel (and
related acquisition costs).
The management agreement has a 15-year term. However, Apple Suites
Management, Inc. may terminate the management agreement after its tenth
anniversary. If it does so, Promus Hotels, Inc. will be entitled to a
termination fee. The termination fee generally is equal to (1) the aggregate
management fees earned during the preceding 24 months, if the termination occurs
after the tenth anniversary but on or before the 14th anniversary of the
effective date of the
15
management agreement; or (2) the average monthly management fee earned during
the preceding 24 months times the number of full calendar months remaining in
the term, if the termination occurs after the 14th anniversary of the effective
date of the management agreement.
In addition, if the hotel license agreement is terminated, Promus
Hotels, Inc. may terminate the management agreement. If Promus Hotels, Inc.
terminates the management agreement it will be entitled to a termination fee
equal to (a) $449,143 if the termination occurs within two years of the
effective date of the management agreement; (b) 150% of the aggregate monthly
management fees earned during the preceding 24 months, if the termination occurs
after the second anniversary but on or before the tenth anniversary of the
effective date of the management agreement; (c) 75% of the aggregate monthly
management fees earned during the preceding 24 months, if the termination occurs
after the tenth anniversary but on or before the 14th anniversary of the
effective date of the management agreement; or (d) the average monthly
management fee earned during the preceding 24 months times the number of full
calendar months remaining in the term, if the termination occurs after the 14th
anniversary of the effective date of the management agreement.
Beginning in the first full calendar year of operations, Apple Suites
Management, Inc. may terminate the management agreement if Promus Hotels, Inc.
fails to achieve, in any two consecutive calendar years, a gross operating
profit which is at least equal to 85% of the annual budgeted gross operating
profit. Promus Hotels, Inc. can avoid termination by making a cash payment to
Apple Suites Management, Inc. equal to the difference between the gross
operating profits achieved and 85% of the budgeted gross operating profits for
the second such year. Generally, gross operating profit is defined as the amount
by which adjusted gross revenues exceed operating costs.
COMFORT LETTERS
Our decision to lease the Jackson-Ridgeland hotel to Apple Suites
Management, Inc., is based upon certain technical tax considerations that apply
to us as a real estate investment trust (or REIT) for federal income tax
purposes. To address operational complexities and other potential problems that
may arise from using Apple Suites Management, Inc. as the lessee of our hotel
and the party to the license agreement and management agreement, we have entered
into a "Comfort Letter" with Promus Hotels, Inc. dated as of December 22, 1999.
The comfort letter grants us certain rights if problems arise under such
agreements, or if the lease structure is no longer necessary for tax purposes.
The chief provisions of the comfort letter are described below.
First, as long as we are the owner of the hotel and the license
agreement is in effect, Promus Hotels, Inc. has agreed to notify us of any
breach of the license agreement or management agreement by the lessee. We will
have 10 days to cure any monetary default and 30 days to cure any non-monetary
default. There is no opportunity to cure defaults not capable of being cured
(such as bankruptcy of the lessee or a transfer in violation of the license
agreement), but in such situation, a default would occur under the lease and we
would be able to terminate the lease.
16
Second, if there is a default under the lease and we elect to terminate
the lease, we have the right, which may be exercised within 90 days after giving
notice of termination to Promus Hotels, Inc., to enter into a new lease
agreement with a successor lessee. In general, any such successor lessee must be
majority owned and controlled by us or our affiliates (which includes our
directors and executive officers) and must be a person or entity that has
adequate financial resources to perform under the lease, is not the franchisor
or operator of a competing chain of hotels, and enjoys a favorable reputation
for integrity. If we enter into a new lease, the successor lessee will have a
right to enter into a new license agreement and new management agreement with
Promus Hotels, Inc. for the balance of the original terms of those agreements.
However, if we are unable to provide a qualified successor lessee within such
90-day period, the license agreement may be terminated at the option of Promus
Hotels, Inc. and we will be obligated to pay liquidated damages to Promus
Hotels, Inc. In general, liquidated damages are an amount equal to the total
fees payable under the license agreement for the three years prior to
termination. If the hotel has been open for less than three years, the amount is
equal to the greater of: (1) 36 times the monthly average of fees payable for
the period during which the hotel has been open; or (2) 36 times the amount
payable for the last full month of operation prior to termination. If the hotel
is open but has not been in operation for a full month, liquidated damages equal
$3,000 per suite in the hotel. Other liquidated damage provisions apply in the
case of termination of the license agreement before commencement of construction
of the hotel or if construction is complete but the hotel is not yet opened.
Third, the comfort letter provides that if the income tax rules
applicable to real estate investment trusts are amended to permit us to operate
the hotel directly, we may give notice of such tax change to Promus Hotels, Inc.
and of our election to terminate the lease. We then have the right to enter into
a new license agreement and a new management agreement for a term equal to the
balance of the original terms of such agreements.
17
L.P. MARTIN & COMPANY
A PROFESSIONAL CORPORATION
MEMBERS CERTIFIED PUBLIC ACCOUNTANTS MEMBERS
VIRGINIA SOCIETY OF 4132 INNSLAKE DRIVE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS GLEN ALLEN, VIRGINIA 23060 CERTIFIED PUBLIC ACCOUNTANTS
LEE P. MARTIN, JR., C.P.A. PHONE: (804) 346-2626 ROBERT C. JOHNSON, C.P.A.
WILLIAM L. GRAHAM, C.P.A. FAX: (804) 346-9311 LEE P. MARTIN, C.P.A. (1948-76)
BERNARD G. KINZIE, C.P.A.
W. BARCLAY BRADSHAW, C.P.A.
Independent Auditors' Report
Apple Suites, Inc.
Richmond, Virginia
We have audited the accompanying balance sheets of the Homewood Suites
Hotel - Jackson as of December 31, 1998 and 1997, and the related statements of
income, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the management of the hotel. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. The
accompanying financial statements were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission as
described in Note 1 to the financial statements and are not intended to be a
complete presentation of the Homewood Suites Hotel - Jackson.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Homewood Suites
Hotel - Jackson as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ L. P. Martin & Co., P. C.
November 7, 1999
18
HOMEWOOD SUITES HOTEL - JACKSON
BALANCE SHEETS
ASSETS
December 31,
1998 1997
CURRENT ASSETS
Cash $ 34,756 $ 13,970
Accounts Receivable, Net 148,205 104,456
Prepaids and Other 25,350 25,350
--------------- ---------------
TOTAL CURRENT ASSETS 208,311 143,776
--------------- ---------------
INVESTMENT IN HOTEL PROPERTY
Land and Improvements 749,969 749,969
Buildings and Improvements 5,284,823 5,161,652
Furniture, Fixtures and Equipment 1,197,181 1,182,151
--------------- ---------------
TOTAL 7,231,973 7,093,772
Less: Accumulated Depreciation (797,849) (380,298)
--------------- ---------------
NET INVESTMENT IN HOTEL PROPERTY 6,434,124 6,713,474
--------------- ---------------
TOTAL ASSETS $ 6,642,435 $ 6,857,250
=============== ===============
The accompanying notes are an integral part of these financial statements.
19
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
1998 1997
CURRENT LIABILITIES
Accounts Payable $ 98,225 $ 144,491
Accrued Taxes 87,475 43,165
Accrued Expenses - Other 41,034 39,523
--------------- ---------------
TOTAL CURRENT LIABILITIES 226,734 227,179
--------------- ---------------
SHAREHOLDERS' EQUITY
Contributed Capital 6,046,570 6,734,271
Retained Earnings (Accumulated Deficit) 369,131 (104,200)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 6,415,701 6,630,071
--------------- ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 6,642,435 $ 6,857,250
=============== ===============
20
HOMEWOOD SUITES HOTEL - JACKSON
STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Earnings Total
Contributed (Accumulated Shareholders'
Capital Deficit) Equity
Balances, January 1, 1997 $ 4,638,129 $ (70,003) $ 4,568,126
Net Loss - (34,197) (34,197)
Capital Contributions, Net 2,096,142 - 2,096,142
--------------- --------------- ---------------
Balances, December 31, 1997 6,734,271 (104,200) 6,630,071
Net Income - 473,331 473,331
Capital Distributions, Net (687,701) - (687,701)
--------------- --------------- ---------------
Balances, December 31, 1998 $ 6,046,570 $ 369,131 $ 6,415,701
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
21
HOMEWOOD SUITES HOTEL - JACKSON
INCOME STATEMENTS
Years Ended December 31,
1998 1997
GROSS OPERATING REVENUE
Suite Revenue $ 2,115,861 $ 1,390,347
Other Customer Revenue 161,811 130,494
--------------- ---------------
TOTAL REVENUE 2,277,672 1,520,841
--------------- ---------------
EXPENSES
Property and Operating 927,878 700,874
General and Administrative 69,009 56,870
Advertising and Promotion 128,067 87,703
Utilities 87,815 73,585
Real Estate and Personal Property Taxes,
and Property Insurance 89,387 43,959
Depreciation Expense 417,551 380,298
Franchise Fees 84,634 -
Pre-Opening Expenses - 211,749
--------------- ---------------
TOTAL EXPENSES 1,804,341 1,555,038
--------------- ---------------
NET INCOME (LOSS) $ 473,331 $ (34,197)
=============== ===============
The accompanying notes are an integral part of these financial statements.
22
HOMEWOOD SUITES HOTEL - JACKSON
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income (Loss) $ 473,331 $ (34,197)
--------------- ---------------
Adjustments to Reconcile Net Income
(Loss) to Net Cash Provided by
Operating Activities:
Depreciation 417,551 380,298
Change In:
Accounts Receivable (43,749) (104,456)
Prepaids and Other Current Assets - (25,350)
Accounts Payable (46,266) 7,278
Accrued Taxes 44,310 42,292
Accrued Expenses - Other 1,511 36,532
--------------- ---------------
Net Adjustments 373,357 336,594
--------------- ---------------
NET CASH FLOWS FROM OPERATING
ACTIVITIES 846,688 302,397
CASH FLOWS TO FINANCING ACTIVITIES
Capital Distributions, Net (825,902) (290,927)
--------------- ---------------
NET INCREASE IN CASH 20,786 11,470
CASH, BEGINNING OF YEAR 13,970 2,500
--------------- ---------------
CASH, END OF YEAR $ 34,756 $ 13,970
=============== ===============
SUPPLEMENTAL DISCLOSURES:
NONCASH FINANCING AND INVESTING ACTIVITIES
YEAR ENDED DECEMBER 31, 1998
Investments in hotel properties in the amount of $138,201 were financed
with capital contributions.
YEAR ENDED DECEMBER 31, 1997
Investments in hotel properties in the amount of $7,093,772, were
financed with capital contributions.
Construction in progress in the amount of $5,186,984 was reclassified to
investment in hotel properties.
Accounts payable for construction costs totaling $480,281 was curtailed
with capital contributions.
The accompanying notes are an integral part of these financial statements.
23
HOMEWOOD SUITES HOTEL - JACKSON
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Hotel - Jackson is a 91 suite hotel, located in Ridgeland,
Mississippi, which opened for business on February 20, 1997. The Hotel
specializes in providing extended stay lodging to business or leisure travelers.
While customers may rent rooms for a night, terms of up to a month or longer are
available. Services offered, which are particularly attractive to the extended
stay traveler, include laundry services, 24 hour on-site convenience stores and
grocery shopping services.
Economic conditions in the area in which the Hotel is located impact revenues
and the ability to collect accounts receivable.
The Hotel has been owned and managed by an affiliate of Promus Hotels, Inc. (the
Owner) throughout the financial statement periods. The Owner has a contract
pending to sell the Hotel to an affiliate of Apple Suites, Inc., a real estate
investment trust established to acquire equity interests in hotel properties.
The statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for inclusion in a filing by Apple Suites,
Inc.
The corporate owner pays income taxes on taxable income of the company as a
whole and does not allocate income taxes to individual properties. Accordingly,
the financial statements have been presented on a pretax basis.
NOTE 2 - SIGNIFICANT ACCOUNTING POLCIIES
Property - The hotel property is recorded at cost. Depreciation has been
recorded straight-line using the following lives:
Life
Land Improvements 10-15 Years
Buildings and Improvements 15-35 Years
Furniture, Fixtures and Equipment 3-10 Years
(Continued)
24
HOMEWOOD SUITES HOTEL - JACKSON
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES, Continued
Major renewals, betterments and improvements are capitalized, while ongoing
maintenance and repairs are expensed as incurred. Building costs include
interest capitalized during the construction period. Construction in progress
represents Hotel assets under construction. At the point construction is
completed and the Hotel is ready to be placed in service, the costs are
reclassified to investment in Hotel property for financial statement
presentation. Construction in progress totaling $5,186,984 was reclassified to
investment in hotel property during 1997.
Estimates - The preparation of financial statements in accordance with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosures related thereto. Actual results could differ from
those estimates.
Annually, management of the hotel reviews the carrying value and remaining
depreciable lives of the Hotel property and related assets. Management does not
believe there are any current indications of impairment. However, it is possible
that estimates of the remaining useful lives will change in the near term.
Accounts receivable are recorded net of an allowance for doubtful accounts based
on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash - Cash includes all highly liquid investments with a maturity date of three
months or less when purchased.
Advertising - Advertising costs are expensed in the period incurred.
Pre-Opening Expenses - Pre-opening expenses represent operating expenses
incurred prior to initial opening of the Hotel. In 1997, pre-opening expenses of
$211,749, were expensed as incurred.
(Continued)
25
HOMEWOOD SUITES HOTEL - JACKSON
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES, Continued
Inventories - The Hotel maintains supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Owner allocates a monthly accounting fee of $1,000 to the Hotel. These fees
totaled $12,000 in 1998 and $10,338 in 1997. The Owner also charges the Hotel a
fee for corporate advertising, training and reservations equal to four percent
of net suite revenue. These fees totaled $84,634 in 1998 and $53,614 in 1997. In
1998, the Owner charged a franchise fee of $84,634 to the Hotel, also computed
at four percent of suite revenue. No franchise fee was charged in 1997.
Effective in 1999, the Owner will be charging a "base management fee" of three
percent of suite revenue to the hotel.
The acquisition cost of the property and related furnishings and equipment was
financed by the Owner. The Owner allocated interest to the property on monies
advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotel's normal depreciation
policy. Interest capitalized and included in the cost basis of the Hotel totaled
$235,723 in 1997.
On most property and equipment purchases, excluding base hotel construction
contracts, the following fees paid to Promus Hotels, Inc. have been capitalized:
Purchase Fee - 4% of Asset Cost
Project Management Fee - 4.5% and 5.5.% of labor portion of
capitalized asset costs in 1998 and 1997, respectively.
The Hotel maintains a depository bank account into which customer revenues have
been deposited. The bulk of the Hotel's operating expenditures are paid through
the Owner's corporate accounts. Funds are transferred from the Hotel's
depository bank accounts to the Owner periodically. The transfers to the Owner
and expenditures made on behalf of the Hotel by the Owner are accounted for
through various intercompany accounts. No interest has been charged on these
intercompany advances from ongoing operations. There is no intention to repay
any advances to or from the Owner. Accordingly, the net amounts have been
included in shareholders' equity with 1998 and 1997 intercompany/intracompany
transfers being reflected as net capital contributions or distributions.
26
HOMEWOOD SUITES HOTEL - JACKSON
BALANCE SHEET (unaudited)
AUGUST 31, 1999
ASSETS
CURRENT ASSETS
Cash $ 43,476
Accounts Receivable, Net 227,188
Prepaids and Other 25,350
---------------
TOTAL CURRENT ASSETS 296,014
---------------
INVESTMENT IN HOTEL PROPERTY
Land and Improvements 754,803
Buildings and Improvements 5,278,927
Furniture, Fixtures and Equipment 1,197,295
---------------
TOTAL 7,231,025
Less: Accumulated Depreciation (1,082,506)
---------------
NET INVESTMENT IN HOTEL PROPERTY 6,148,519
---------------
TOTAL ASSETS $ 6,444,533
===============
The accompanying notes are an integral part of this financial statement.
27
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 1,626
Accrued Taxes 69,100
Accrued Expenses - Other 47,842
---------------
TOTAL CURRENT LIABILITIES 118,568
---------------
SHAREHOLDERS' EQUITY
Contributed Capital 5,625,316
Retained Earnings 700,649
---------------
TOTAL SHAREHOLDERS' EQUITY 6,325,965
---------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 6,444,533
===============
28
HOMEWOOD SUITES HOTEL - JACKSON
STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
Total
Contributed Retained Shareholders'
Capital Earnings Equity
Balances, January 1, 1999 $ 6,046,570 $ 369,131 $ 6,415,701
Net Income - 331,518 331,518
Capital Distributions, Net (421,254) - (421,254)
--------------- --------------- ---------------
Balances, August 31, 1999 $ 5,625,316 $ 700,649 $ 6,325,965
=============== =============== ===============
The accompanying notes are an integral part of this financial statement.
29
HOMEWOOD SUITES HOTEL - JACKSON
INCOME STATEMENT (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
GROSS OPERATING REVENUE
Suite Revenue $ 1,487,301
Other Customer Revenue 112,292
---------------
TOTAL REVENUE 1,599,593
---------------
EXPENSES
Property and Operating 636,068
General and Administrative 51,587
Advertising and Promotion 75,268
Utilities 50,426
Real Estate and Personal Property Taxes,
and Property Insurance 62,589
Depreciation Expense 284,657
Franchise and Management Fees 107,480
---------------
TOTAL EXPENSES 1,268,075
---------------
NET INCOME $ 331,518
===============
The accompanying notes are an integral part of this financial statement.
30
HOMEWOOD SUITES HOTEL - JACKSON
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income $ 331,518
---------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 284,657
Change in:
Accounts Receivable (78,983)
Accounts Payable (96,599)
Accrued Taxes (18,375)
Accrued Expenses - Other 6,808
---------------
Net Adjustments 97,508
---------------
NET CASH FLOWS FROM OPERATING
ACTIVITIES 429,026
CASH FLOWS FROM INVESTING ACTIVITIES
Net Disposal of Investment in Hotel Property 948
CASH FLOWS TO FINANCING ACTIVITIES
Net Equity Distributions (421,254)
---------------
NET INCREASE IN CASH 8,720
CASH, JANUARY 1, 1999 34,756
---------------
CASH, AUGUST 31, 1999 $ 43,476
===============
The accompanying notes are an integral part of this financial statement.
31
HOMEWOOD SUITES HOTEL - JACKSON
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Hotel - Jackson is a 91 suite hotel, located in Ridgeland,
Mississippi, which opened in February, 1997. The Hotel specializes in providing
extended stay lodging to business or leisure travelers. While customers may rent
rooms for a night, terms of up to a month or longer are available. Services
offered, which are particularly attractive to the extended stay traveler,
include laundry services, 24 hour on-site convenience stores and grocery
shopping services.
Economic conditions in the area in which the Hotel is located impact revenues
and the ability to collect accounts receivable.
The Hotel has been owned and managed by an affiliate of Promus Hotels, Inc. (the
Owner) throughout the financial statement period. The Owner has a contract
pending to sell the Hotel to an affiliate of Apple Suites, Inc., a real estate
investment trust established to acquire equity interests in hotel properties.
The statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for inclusion in a filing by Apple Suites,
Inc.
The corporate owner pays income taxes on taxable income of the company as a
whole and does not allocate income taxes to individual properties. Accordingly,
the financial statements have been presented on a pretax basis.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Property - The Hotel property is recorded at cost. Depreciation has been
recorded straight-line using the following lives:
Life
Land Improvements 10-15 Years
Buildings and Improvements 15-35 Years
Furniture, Fixtures and Equipment 3-10 Years
(Continued)
32
HOMEWOOD SUITES HOTEL - JACKSON
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES, Continued
Major renewals, betterments and improvements are capitalized, while ongoing
maintenance and repairs are expensed as incurred. Building costs include
interest capitalized during the construction period.
Estimates - The preparation of financial statements in accordance with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosures related thereto. Actual results could differ from
those estimates.
Annually, management of the Hotel reviews the carrying value and remaining
depreciable lives of the Hotel property and related assets. Management does not
believe there are any current indications of impairment. However, it is possible
that estimates of the remaining useful lives will change in the near term.
Accounts receivable are recorded net of an allowance for doubtful accounts based
on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash - Cash includes all highly liquid investments with a maturity date of three
months or less when purchased.
Advertising - Advertising costs are expensed in the period incurred.
Inventories - The Hotel maintains supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
(Continued)
33
HOMEWOOD SUITES HOTEL - JACKSON
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
NOTE 3 - RELATED PARTY TRANSACTIONS
During the period January 1, 1999 through August 31, 1999, the following Owner
related fees were expensed.
Fee Type Basis for Determination Total Expense
Accounting Fees $1,000 per month $ 8,000
Corporate Advertising, Training
and Reservations 4% of net suite revenue 59,492
Franchise Fees 4% of net suite revenue 59,492
Management Fees 3% of net suite revenue 47,988
The acquisition cost of the property and related furnishings and equipment was
financed by the Owner. The Owner allocated interest to the property on monies
advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotel's normal depreciation
policy.
On most property and equipment purchases, excluding base hotel construction
contracts, the following fees paid to Promus Hotels, Inc. have been capitalized:
Purchase Fee - 4% of Asset Cost
Project Management Fee - 4.5% of labor portion of capitalized
asset costs
The Hotel maintains a depository bank account into which customer revenues have
been deposited. The bulk of the Hotel's operating expenditures are paid through
the Owner's corporate accounts. Funds are transferred from the Hotel's
depository bank accounts to the Owner periodically. The transfers to the Owner
and expenditures made on behalf of the Hotel by the Owner are accounted for
through various intercompany accounts. No interest has been charged on these
intercompany advances from ongoing operations. There is no intention to repay
any advances to or from the Owner. Accordingly, the net amounts have been
included in shareholders' equity with intercompany/intracompany transfers being
reflected as net capital distributions.
34
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999
(UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Balance Sheet of Apple
Suites, Inc. (the "Company) is presented as if the acquisition of the seven
Homewood Suites hotels from Promus Hotels, Inc. ("Promus") had occurred on
September 30, 1999. See Note A for individual hotel details. Such information is
based in part upon the consolidated balance sheet of the Company. 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 September 30, 1999, nor does
it purport to represent the future financial position of the Company.
Homewood Homewood
Historical Suites Suites
Balance Acquisition (AII) Acquisition (AIII) Total
Sheet Adjustments Adjustments Proforma
--------------------------------------------------------------
ASSETS
Investment in hotel properties $ 36,292,592 $ 51,081,600 (A) $ 5,962,920(A) $ 93,337,112
Cash and cash equivalents 10,924,786 (10,924,786)(D) -- --
Rent receivable from Apple Suites Management, Inc. 417,306 -- -- 417,306
Due from Apple Suites Management, Inc. 301,636 -- -- 301,636
Prepaid expenses 4,522 -- -- 4,522
Other assets 48,577 -- -- 48,577
----------------------------------------------------------------
Total Assets $ 47,989,419 $ 40,156,814 $ 5,962,920 $ 94,109,153
================================================================
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable $ 26,625,000 $ 37,560,000 (B) $ 4,384,500 (B) $ 68,569,500
Accounts payable 8,303 -- -- 8,303
Accrued expenses 664,082 -- -- 664,082
----------------------------------------------------------------
Total Liabilities 27,297,385 37,560,000 4,384,500 69,241,885
Shareholders' equity
Common stock, no par value, authorized 200,000,000
shares; issued and outstanding 2,532,147 shares 20,629,326 2,596,814 (C) 1,578,420 (C) 24,804,560
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 38,708 -- -- 38,708
----------------------------------------------------------------
Total Shareholders' Equity 20,692,034 2,596,814 1,578,420 24,867,268
----------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 47,989,419 $ 40,156,814 $ 5,962,920 $ 94,109,153
================================================================
35
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited)
(A) Increase represents the purchase of 7 hotels, including the 2% acquisition
fee payable to Apple Suites Realty Group, Inc. The hotels acquired are as
follows:
2%
Date Commenced Date Purchase Acquisition Debt
Property Operations Acquired Price Fee Total Incurred
- ------------------------------------------------------------------------------------------------------------------------------------
II Homewood Suites-Atlanta, GA 1990 October 1, 1999 $ 9,800,000 $ 196,000 $ 9,996,000 $ 7,350,000
II Homewood Suites-Clearwater, FL February 1998 November 24, 1999 10,416,000 208,320 10,624,320 7,812,000
II Homewood Suites-Salt Lake, UT 1996 November 24, 1999 5,153,000 103,060 5,256,060 3,864,750
II Homewood Suites-Atlanta, GA 1990 November 24, 1999 4,033,000 80,660 4,113,660 3,024,750
II Homewood Suites-Detroit, MI 1990 November 24, 1999 4,330,000 86,600 4,416,600 3,247,500
II Homewood Suites-Baltimore, MD March 1998 November 24, 1999 16,348,000 326,960 16,674,960 12,261,000
III Homewood Suites-Jackson, MS February 1997 December 22, 1999 5,846,000 116,920 5,962,920 4,384,500
----------------------------------------------------
Total $55,926,000 $ 1,118,520 $57,044,520 $41,944,500
(B) Represents the debt incurred at acquisition. The notes bear interest of
8.5% per annum. The maturity date for the note in the amount of $7,350,000
is October 1, 2000,the maturity date for the note in the amount of
$30,210,000 is December 1, 2000 and the maturity date of the note in the
amount of $4,384,500 is January 1, 2001. The Company is required to make
monthly principal payments in the amount of the equity proceeds received
during a month in excess of offering expenses.
(C) Increase to common stock to reflect the net proceeds from the sale of
common stock from the Company's continuous offering used to purchase these
hotels.
(D) Reflects the use of cash on hand to purchase these hotels.
36
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1999 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Suites, Inc. (the "Company") are presented as if the
acquisition of the eleven Homewood Suites hotels from Promus Hotels, Inc.
("Promus") had occurred at the beginning of the periods presented or date placed
into service by Promus if later (See Note A) and all of the hotels had been
leased to Apple Suites Management, Inc. (the "Lessee") pursuant to the
Percentage Leases. Such pro forma information is based in part upon the
Consolidated Statements of Operations of the Company, the Pro Forma Statements
of Operations of the Lessee and the historical Statements of Operations of the
acquired hotels. 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 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.
The lease agreements between the Company and the Lessee were based on economic
conditions existing at the time of acquisition. Applicaton of these agreements
to periods prior to the acquisition may not be meaningful. The most significant
assumption which may not be indicative of future operations is the amount of
financial leverage employed. These Pro Forma statements assume 75% of the
purchase price was funded with debt for the entire periods presented. The
Company intends to repay this debt with the proceeds from its "best efforts"
offering. This repayment of debt would result in lower interest expense, higher
net income, but lower earnings per share.
For the twelve months ended December 31, 1998 (unaudited)
Pro forma
Adjustments
Historical Homewood Homewood Homewood
Statement of Suites Suites Suites Total
Operations Acquisition (A I) Acquisition (A II) Acquisition (A III) Pro Forma
---------- ----------------- ------------------ ------------------- ---------
Revenue:
Percentage lease revenue $ -- $6,526,922 (B) $5,241,307 (B) $1,070,700 (B) $12,838,929
Interest income and other income -- -- -- -- --
Expenses:
Taxes and insurance -- 1,040,638 (C) 432,979 (C) 89,387 (C) 1,563,004
General and administrative -- 90,175 (D) 86,477 (D) 65,659 (D) 242,311
Depreciation -- 1,256,071 (E) 1,155,328 (E) 199,487 (E) 2,610,686
Interest expense -- 2,688,125 (F) 2,338,818 (F) 372,683 (F) 5,399,626
-------- ----------- ----------- ---------- -----------
Total expenses -- 5,075,009 4,013,602 727,216 9,815,827
-------- ----------- ----------- ---------- -----------
Net income $ -- $1,451,913 $1,227,705 $ 343,484 $ 3,023,102
======== =========== =========== ========== ===========
Earnings per common share:
Basic and Diluted $ -- $ 1.11
======== ===========
Basic and diluted weighted average
common shares outstanding -- 1,412,531 (G) 1,132,040 (G) 176,360 (G) 2,720,931
======== ============
37
For the nine months ended September 30, 1999 (unaudited)
Pro forma
Adjustments
Historical Homewood Homewood Homewood
Statement of Suites Suites Suites Total
Operations Acquisition (A I) Acquisition (A II) Acquisition (A III) Pro Forma
---------- ----------------- ----------------- ------------------- ---------
Revenue:
Percentage lease revenue $ 417,306 $4,510,833(B) $4,853,958(B) $855,420(B) $10,637,517
Interest income and other income 64,370 - - - 64,370
Expenses:
Taxes and insurance 79,729 822,599(C) 529,548(C) 70,413(C) 1,502,289
General and administrative 36,028 67,221(D) 66,676(D) 49,244(D) 219,169
Depreciation 97,510 931,211(E) 953,304(E) 149,615(E) 2,131,640
Interest expense 229,701 1,977,313(F) 1,925,888(F) 279,512(F) 4,412,414
------- ---------- ---------- -------- -----------
Total expenses 442,968 3,798,344 3,475,416 548,784 8,265,511
Net income $ 38,708 $ 712,490 $1,378,542 $306,636 $ 2,436,376
========== ========== ========== ======== ===========
Earnings per common share:
Basic and Diluted $ 0.02 $ 0.83
========== ========== ========== ======== ===========
Basic and diluted weighted average
common shares outstanding 2,286,052 - (G) 461,427(G) 176,360(G) 2,923,838
========== ========== ========== ======== ===========
38
Notes to Pro Forma Condensed Consolidated Statements of Operations (unaudited)
(A) Represents results of operations for the eleven hotels acquired on a pro
forma basis as if the eleven hotels were owned by the Company at the
beginning of the periods presented or date placed into service by Promus if
later, see below.
Date Commenced Date
Property Operations Acquired
- --------------------------------------------------------------------------------
I Homewood Suites-Dallas, TX 1990 September 1, 1999
I Homewood Suites-Las Colinas, TX 1990 September 1, 1999
I Homewood Suites-Plano, TX 1997 September 1, 1999
I Homewood Suites-Richmond. VA May 1998 September 1, 1999
I Homewood Suites-Atlanta, GA 1990 October 1, 1999
- --------------------------------------------------------------------------------
II Homewood Suites-Clearwater, FL February 1998 November 24, 1999
II Homewood Suites-Salt Lake, UT 1996 November 24, 1999
II Homewood Suites-Atlanta, GA 1990 November 24, 1999
II Homewood Suites-Detroit, MI 1990 November 24, 1999
II Homewood Suites-Baltimore, MD March 1998 November 24, 1999
- --------------------------------------------------------------------------------
III Homewood Suites-Jackson, MS February 1997 December 22, 1999
Since three of the hotels (Richmond, VA, Clearwater, FL, and Baltimore, MD)
were under construction in 1998 and full operations did not commence until
the respective dates, no pro forma adjustments were made for the periods
prior to completion.
(B) Represents lease payment from the Lessee to the Company calculated on a pro
forma basis by applying the rent provisions in the Percentage Leases to the
historical room revenue of the hotels as if the beginning of the period was
the beginning of the lease year. The base rent and the percentage rent will
be calculated and paid based on the terms of the lease agreement. Refer to
the Master Hotel Lease Agreement section to Report for details.
(C) Represents historical real estate and personal property taxes and insurance
which will be paid by the Company pursuant to the Percentage Lease
agreements. Such amounts are the historical amounts paid by the respective
hotels.
(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 and anticipated legal and accounting fees, employee costs, salaries
and other costs of operating as a public company.
(E) Represents the depreciation on the eleven hotels acquired based on the
purchase price, excluding amounts allocated to land, of $37,450,320 for the
first acquisition, $34,954,481 for the second acquisition, and $5,485,886
for the third acquisition, for the period of time not owned by the Company.
The weighted average life of the depreciable assets was 27.5 years. The
estimated useful lives are based on management's knowledge of the
properties and the hotel industry in general. Depreciable assets of
$31,913,270 did not commence depreciation until the respective opening
dates.
(F) Represents the interest expense for the eleven hotel acquisitions for the
period in which the hotels were not owned. Interest was computed using the
interest rates of 8.5% on mortgage debt of $33,975,000 for the first
acquisition, $30,210,000 for the second acquisition and $4,384,500 for the
third acquisition that was incurred at acquisition.
(G) Represents additional common shares assuming the properties were acquired
at the beginning of the periods presented with the net proceeds from the
"best efforts" offering of $9 per share (net $8.06 per share) for the first
$15,000,000 in proceeds and $10 per share (net $8.95 per share) for the
remainder.
39
APPLE SUITES MANAGEMENT, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1999 (unaudited)
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Suites Management, Inc. (the "Lessee") are presented as if
the eleven hotels purchased from Promus Hotels, Inc. ("Promus") had been leased
from Apple Suites, Inc. (the "Company") pursuant to the Percentage Leases from
the beginning of periods presented or date placed into service by Promus (see
Note A). Further, the results of operations reflect the Management Agreement and
License Agreement entered into between Promus and the Lessee or affiliate to
operate the acquired hotels. The lease agreements between the Company and the
Lessee were based on economic conditions existing at the time of of acquisition.
Application of these agreements to periods prior to the acquisition may not be
meaningful. Such pro forma information is based in part upon the Consolidated
Statements of Operations of the Lessee and the Homewood Suites Hotels and should
be read in conjunction with the financials statement contained herein.
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 for the periods are not necessarily indicative of what the actual
results of operations of the Lessee 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 the future periods.
For the twelve months ended December 31, 1998 (unaudited)
Historical Homewood Homewood Homewood
Statement of Suites Suites Suites Pro Forma Total
Operations Acquisitions(A I) Acquisitions(A II) Acquisition(A III) Adjustments Pro Forma
---------- ----------------- ------------------ ------------------ ----------- ---------
Revenues:
Suite revenue $ - $ 14,075,852 $ 10,812,372 $ 2,115,861 - $ 27,004,085
Other income - 811,817 733,318 161,811 - 1,706,946
Expenses:
Operating expenses - 5,586,712 4,748,240 927,878 - 11,262,830
General and administrative - 348,088 315,165 69,009 (124,000)(B)
50,000 (C) 658,262
Advertising and promotion - 648,273 502,899 128,067 (1,083,952)(D)
1,080,163 (E) 1,275,450
Utilities - 626,269 543,828 87,815 - 1,257,912
Taxes and insurance - 1,040,638 432,979 89,387 (1,563,004)(F) -
Depreciation expense - 2,394,294 2,214,501 417,551 (5,026,346)(G) -
Franchise fees - 563,035 432,494 84,634 (1,080,163)(H)
1,080,163 (I) 1,080,163
Management fees - - - - 1,273,441 (K) 1,273,441
Rent expense-Apple Suites, Inc. - - - - 12,838,929 (L) 12,838,929
Other - 226,964 349,961 - (576,925)(M) -
------ ----------- ------------ ----------- ----------- ------------
Total expenses - 11,434,273 9,540,067 1,804,341 6,868,307 29,646,988
Income before income tax - 3,453,396 2,005,623 473,331 (6,868,307) (935,957)
Income tax expense - - - - - -
------ ----------- ------------ ----------- ----------- ------------
Net income $ - $ 3,453,396 $ 2,005,623 $ 473,331 $(6,868,307) $ (935,957)
====== =========== ============ ========== ============ ============
40
For the nine months ended September 30, 1999 (unaudited)
Historical Homewood Homewood Homewood
Statement of Suites Suites Suites Pro Forma Total
Operations Acquisitions (A I) Acquisitions (A II) Acquisition (A III) Adjustments Pro Forma
---------- ------------------ ------------------- ------------------- ----------- ---------
Revenues:
Suite revenue $ 961,604 $ 9,818,797 $ 9,885,579 $ 1,673,214 - $ 22,339,194
Other income 59,548 560,096 580,287 126,329 - 1,326,260
Expenses:
Operating expenses 259,098 3,794,204 3,984,624 715,577 - 8,753,503
General and administrative 85,676 250,317 245,792 58,035 (99,000)(B)
37,500 (C) 578,320
Advertising and promotion 93,237 438,985 475,007 84,677 (855,109)(D)
855,104 (E) 1,091,901
Utilities 26,101 354,113 451,112 56,729 - 888,055
Taxes and insurance - 822,599 529,548 70,413 (1,422,560)(F) -
Depreciation expense - 1,783,021 1,814,014 320,239 (3,917,274)(G) -
Franchise fees 38,464 392,757 395,423 66,929 (855,109)(H)
855,104 (I) 893,568
Management fees 40,769 311,275 313,854 53,987 (679,115)(J)
Rent expense-Apple Suites, Inc. 417,306 - - - 1,000,772 (K) 1,041,542
10,220,211 (L) 10,637,542
Other 15,425 - - - - 15,425
--------- ---------- ----------- ---------- ----------- ----------
Total expenses 976,076 8,147,271 8,209,374 1,426,586 5,140,524 23,899,831
Income before income tax 45,076 2,231,622 2,256,492 372,957 (5,140,524) (234,377)
Income tax expense 18,030 - - - (18,030)(N) -
--------- ----------- ----------- ---------- ----------- ----------
Net income $ 27,046 $ 2,231,622 $ 2,256,492 $ 372,957 $(5,122,495) $ (234,378)
========= =========== =========== ========== =========== ==========
41
Notes to Pro Forma Condensed Consolidated Statements of Operations (unaudited)
(A) Represents results of operations for the eleven Homewood Suites hotel
acquisitions on a pro forma basis as if the hotels acquired were leased
and operated by the Lessee at the beginning of the periods presented or
date placed into service by Promus, see below. The hotels acquired are
as follows:
Date Commenced Date
Property Operations Acquired
- -----------------------------------------------------------------------------------------------------------------------------------
I Homewood Suites-Dallas, TX 1990 September 1, 1999
I Homewood Suites-Las Colinas, TX 1990 September 1, 1999
I Homewood Suites-Plano, TX 1997 September 1, 1999
I Homewood Suites-Richmond. VA May 1998 September 1, 1999
I Homewood Suites-Atlanta, GA 1990 October 1, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
II Homewood Suites-Clearwater, FL February 1998 November 24, 1999
II Homewood Suites-Salt Lake, UT 1996 November 24, 1999
II Homewood Suites-Atlanta, GA 1990 November 24, 1999
II Homewood Suites-Detroit, MI 1990 November 24, 1999
II Homewood Suites-Baltimore, MD March 1998 November 24, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
III Homewood Suites-Jackson, MS February 1997 December 22, 1999
Since three hotels were under construction in 1998 and full operations
did not commence until the respective dates, no pro forma adjustments
were made prior to the date the hotel commenced operations.
(B) Represents the elimination of the historical accounting fee allocated to
the hotels by the prior owner.
(C) Represents the addition of the anticipated legal and accounting and
other expenses to operate as a stand alone company.
(D) Represents the elimination of the historical advertising, training and
reservation fee allocated to the hotels by the prior owner.
(E) Represents the addition of the marketing fee to be incurred under the
new license agreements. The marketing fee is calculated based on the
terms of the license agreements which is 4% of suite revenue.
(F) Represents the elimination of the taxes and insurance. Under the terms
of the lease these expenses will be incurred by the Company and,
accordingly, are reflected in the Company's Pro Forma Condensed
Consolidated Statement of Operations.
(G) Represents the elimination of the depreciation expense. This expense
will be reflected in the Company's Pro Forma Condensed Consolidated
Statement of Operations.
(H) Represents the elimination of the historical franchise fee allocated to
the hotels by the prior owner.
(I) Represents the addition of franchise fees to be incurred under the new
license agreement. The franchise fees are calculated based on the terms
of the agreement, which is 4% of suite revenue.
(J) Represents the elimination of the historical management fees for the
nine months ended September 30, 1999.
(K) Represents the addition of the management fees of 4% of gross revenue
and the accounting fee $1,000 per hotel per month to be incurred under
the new management agreements for the period presented.
(L) Represents lease payments from the Lessee to the Company calculated on a
pro forma basis by applying the rent provisions in the Percentage Leases
to the historical room revenue of the hotels as if the beginning of the
period was the beginning of the lease year. The base rent and the
percentage rent will be calculated and paid based on the terms of the
lease agreement. Refer to the Master Hotel Lease Agreement section to
Report for details.
(M) Represents the elimination of pre-opening operating expenses not
incurred by the Lessee.
(N) Represents the reduction of estimated tax liability at September 30,
1999 based on net loss for the proforma period.
42
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 Suites, Inc.
Date: January 6, 2000 By: /s/ Glade M. Knight
----------------------------
Glade M. Knight,
Chief Executive Officer of
Apple Suites, Inc.