UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ------------
Commission File Number 000-30491
APPLE SUITES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1933472
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At April 20, 2000, there were outstanding 4,224,427 shares of common stock, no
par value, of the registrant.
APPLE SUITES, INC.
FORM 10-Q
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLE SUITES, INC.(The "Company")
Consolidated Balance Sheets - As of 4
March 31, 2000 and December 31, 1999
Consolidated Statement of Operations - 5
Three months ended March 31, 2000
Consolidated Statement of Shareholders' 6
Equity - Three months ended March 31, 2000
Consolidated Statement of Cash Flows - 7
Three months ended March 31, 2000
Notes to Consolidated Financial Statements 8
APPLE SUITES MANAGEMENT, INC. (The "Lessee")
Consolidated Balance Sheets- 13
As of March 31, 2000 and December 31, 1999
Consolidated Statement of Operations- 14
Three months ended March 31, 2000
Consolidated Statement of Cash Flows- 15
Three months ended March 31, 2000
Notes to Consolidated Financial Statements 16
Item 2. Management's Discussion and Analysis 18
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 23
about Market Risk
2
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings (not applicable).
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities
(not applicable).
Item 4. Submission of Matters to a Vote of
Security Holders (not applicable).
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 25
3
APPLE SUITES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
2000 1999
------------- -------------
ASSETS
Investment in hotel -net of accumulated depreciation of
$1,045,410 and $496,209, respectively $ 93,450,963 $ 93,719,632
Cash and cash equivalents 3,781,922 581,344
Restricted cash 696,869 1,023,721
Rent receivable from Apple Suites Management, Inc. 2,641,141 2,123,136
Notes and other receivables from Apple Suites Management, Inc. 694,766 717,019
Capital improvement reserve 753,927 753,927
Prepaid expenses 263,781 270,229
Other assets 531,470 300,000
------------- -------------
Total Assets $ 102,814,839 $ 99,489,008
============= =============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable-secured $ 68,569,500 $ 68,569,500
Interest payable -- 466,140
Accounts payable 161,258 65,214
Accrued expenses 554,977 868,668
Account payable-affiliate 531,285 708,751
Distributions payable -- 712,735
------------- -------------
Total Liabilities 69,817,020 71,391,008
Shareholders' equity
Common stock, no par value, authorized 200,000,000
shares; issued and outstanding 3,922,923 shares and 3,429,414, respectively $ 32,985,016 $ 28,591,260
Class B convertible stock, no par value, authorized 240,000 shares;
issued and outstanding 240,000 shares 24,000 24,000
Distributions greater than net income (11,197) (517,260)
------------- -------------
Total Shareholders' Equity 32,997,819 28,098,000
------------- -------------
Total Liabilities and Shareholders' Equity $ 102,814,839 $ 99,489,008
============= =============
See accompanying notes to consolidated financial statements.
4
APPLE SUITES INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
March 31,
2000
----------
REVENUES:
Lease revenue $3,406,678
Interest income and other revenue 48,007
EXPENSES:
Taxes, insurance and other 691,575
General and administrative 254,736
Depreciation of real estate owned 549,201
Interest 1,453,110
----------
Total expenses 2,948,622
----------
Net income $ 506,063
==========
Basic and diluted earnings per common share $ 0.14
==========
See accompanying notes to consolidated financial statements.
5
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Common Stock Class B Convertible Stock Distributions
--------------------------------------------------- Greater Total
Number Number Than Shareholders'
of Shares Amount of Shares Amount Net Income Equity
------------------------------------------------------------------------------------
Balance at December 31, 1999 3,429,414 $28,591,260 240,000 $ 24,000 $(517,260) $28,098,000
Net proceeds from the sale of common shares 456,873 4,064,541 -- -- -- 4,064,541
Net income -- -- -- -- 506,063 506,063
Common stock issued through reinvestment
of distribution 36,636 329,215 -- -- -- 329,215
--------- ----------- ------- --------- --------- -----------
Balance at March 31, 2000 3,922,923 $32,985,016 240,000 $ 24,000 $ (11,197) $32,997,819
========= =========== ======= ========= ========= ===========
See accompanying notes to consolidated financial statements.
6
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
2000
------------------
Cash flow from operating activities:
Net income $ 506,063
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation of real estate owned 549,201
Changes in operating assets and liabilities:
Prepaid expenses 6,448
Rent and notes receivable from Apple Suites Management, Inc. (509,566)
Other assets (31,395)
Accounts payable 96,044
Accounts payable-affiliates (177,466)
Accrued expenses (313,691)
Interest payable (466,140)
-----------
Net cash used in operating activities (340,502)
Cash flow from investing activities:
Payments received on notes receivable 13,739
Capital improvements (280,532)
Restricted cash for property improvement plan 326,852
Earnest deposit money for pending acquisitions (200,000)
-----------
Net cash used in investing activities (139,941)
Cash flow from financing activities:
Net proceeds from issuance of common shares 4,394,265
Cash distributions paid to shareholders (713,244)
-----------
Net cash provided by financing activities 3,681,021
Increase in cash and cash equivalents 3,200,578
Cash and cash equivalents, beginning of period 581,344
-----------
Cash and cash equivalents, end of period $ 3,781,922
===========
See accompanying notes to consolidated financial statements.
7
APPLE SUITES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2000
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information required by generally accepted accounting principles. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31,
2000 are not necessarily indicative of the results that may be expected
for the period ended December 31, 2000. These consolidated financial
statements should be read in conjunction with the Company's December
31, 1999 Annual Report on Form 10-K.
The Company commenced operations in September 1999, therefore,
consolidated statements of operations and cash flows for the three
month period ended March 31, 1999 are not presented.
Apple Suites, Inc., (the "Company") leased to Apple Suites Management,
Inc. or its subsidiary (the "Lessee") all of its hotels acquired during
1999.
The Lessee hired Promus Hotels, Inc. ("Promus"),a wholly owned
subsidiary of Hilton Hotels Corporation ("Hilton") to manage the
Company's hotels under the terms of a management agreement between
Promus and the Lessee.
Relationship with Lessee
The Company must rely on the Lessee to generate sufficient cash flow
from the operation of the hotels to enable the Lessee to meet its rent
obligation to the Company under the master hotel lease agreement
("Percentage Leases"). At March 31, 2000, the Lessee's rent payable to
the Company amounted to $2,641,141. The original terms under the
Percentage Leases allow monthly base rent to be paid in arrears and
quarterly percentage rent to be paid 15 days following the quarter-end.
The Company did not have any items of comprehensive income requiring
separate reporting and disclosure for the periods presented.
8
(2) INVESTMENT IN HOTELS
At March 31, 2000, the Company owned 11 hotels. Investment in hotels at
March 31, 2000 consist of the following:
Land $15,687,640
Building 77,336,538
Furniture and equipment 1,472,195
-----------
$94,496,373
Less accumulated depreciation (1,045,410)
-----------
$93,450,963
-----------
(3) NOTES PAYABLE
In conjunction with the purchase of 11 hotels, notes were executed by
the Company made payable to the order of Hilton in the amount of
$68,569,500. The notes bear a fixed interest rate of 8.5% per annum and
are cross-collateralized by the 11 hotels owned by the Company.
Interest payments are due monthly. Notes amounting to $64,185,000
mature during the fourth quarter of 2000, and the remaining $4,384,500
note matures in January 2001. Principal payments are to be made to the
extent of net equity proceeds from the offering of common shares.
Hilton has agreed to defer principal payments until the earlier of June
30, 2000 or such time as two additional hotels have been purchased by
the Company. The Company paid $1,453,110 in interest for the period
ended March 31, 2000.
(4) SHAREHOLDERS' EQUITY
The Company is raising equity capital through a "best-efforts" offering
of shares by David Lerner Associates, Inc. (the "Managing Dealer"),
which will receive selling commissions and a marketing expense
allowance based on proceeds of the shares sold. The Company received
gross proceeds of $4,568,723 from the sale of 456,873 shares at $10 per
share during the three month period ended March 31, 2000. The net
proceeds of the offering, after deducting selling commissions and other
offering costs were $4,064,541 for the period.
The Company provides a plan which allows shareholders to reinvest
distributions in the purchase of additional shares of the Company
("Additional Share Option"). Of the total proceeds raised from common
shares during the period ended March 31, 2000, $366,360 (net $329,215)
was provided through the reinvestment of distributions.
(5) COMMITMENTS AND RELATED PARTIES
The Company receives rental income from the Lessee under the Percentage
Leases which expire in 2009, subject to earlier termination by the
Company with 30 days notice. The Leases contain two optional five-year
extensions. The rent due under the Percentage Leases is the sum of base
rent and percentage rent. Percentage rent is calculated by multiplying
fixed percentages by the total amounts of suite revenues with reference
to specified threshold amounts. Both the base rent and the revenue
thresholds used in computing percentage rents
9
are subject to annual adjustments based on increases in the Consumer
Price Index ("CPI"). The Company earned rents of $3,406,678 for the
three month period ended March 31, 2000.
Under the Percentage Leases, the Company is obligated to pay the costs
of real estate and personal property taxes, property insurance,
maintenance of underground utilities and structural elements of the
hotels. The Company is committed under certain agreements to fund 5% of
suite revenues per month for capital expenditures to include periodic
replacement or refurbishment of furniture, fixtures, and equipment. At
March 31, 2000, $753,927 was held by Promus for these capital
improvement reserves. In addition, in accordance with the franchise
agreements, $696,869 was held for the property improvement plan with a
financial institution and treated as restricted cash.
The Lessee engages Promus as a third-party manager to operate the
hotels leased by it and pays the manager based on a percentage fee of
4% of adjusted gross revenues. During the first two years of the
management agreement, a portion of the management fee equal to 1% of
adjusted gross revenues is subordinated to the Lessee's receipt of a
return equal to 11% of the purchase price of each hotel. The Lessee
pays the manager a franchise fee and a marketing fee, equal to 4% of
gross revenues, respectively.
The Company loaned the Lessee $567,900 for franchise fees and $121,800
for hotel supplies for the 11 hotels. The debt agreements are evidenced
by promissory notes bearing interest at a rate of 9% per annum.
Principal and interest payments are due monthly. The promissory notes
have various maturity dates through January 2010.
The Company has contracted with Apple Suites Realty Group, Inc.
("ASRG") to acquire and dispose of real estate assets for the Company.
In accordance with the contract ASRG is to be paid a fee of 2% of the
purchase price of any acquisitions or sale price of any dispositions of
real estate investments, subject to certain conditions. At March 31,
2000, the Company owed ASRG $490,238.
The Company has contracted with Apple Suites Advisors, Inc. ("ASA") to
advise and provide day to day management services to the Company. In
accordance with the contract, the Company will pay ASA a fee equal to
.1% to .25% of total equity contributions received by the Company in
addition to certain reimbursable expenses. For the three months ended
March 31, 2000, ASA earned $22,533 under this agreement and $41,046 was
payable at March 31, 2000.
The Lessee, ASRG and ASA are 100% owned by Glade M. Knight, Chairman
and President of the Company. ASRG and ASA may purchase in the "best
efforts" offering up to 2.5% of the total number of shares of the
Company sold in the offering.
10
(6) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with FAS 128:
Three Months
Ended
3/31/00
-------
Numerator:
Net Income
Numerator for basic and
diluted earnings $ 506,063
Denominator:
Denominator for basic
earnings per share-weighted-
average shares 3,607,458
Effect of dilutive securities:
Stock options 2,200
----------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 3,609,658
----------------------------------------------------------------
Basic and diluted earnings per
common share $ 0.14
----------------------------------------------------------------
11
(7) ACQUISITIONS
The following unaudited pro forma information for the three months
ended March 31, 1999 is presented as if the acquisition of the 11
hotels occurred on January 1, 1999. The pro forma information does not
purport to represent what the Company's results of operations would
actually have been if such transactions, in fact, had occurred on
January 1, 1999, nor does it purport to represent the results of
operations for future periods.
Three Months
Ended
3/31/99
Lease revenue $3,398,637
Net income 748,633
Net income per share-basic and diluted $.22
The pro forma information applies the Company's Percentage Lease
Agreements to actual suite revenue and expenses of the 11 hotels
acquired in 1999 for the respective period in 1999 prior to acquisition
by the Company. Net income has been adjusted as follows: (1)
depreciation has been adjusted based on the Company's basis in the
hotels; (2) advisory expenses have been adjusted based on the Company's
contractual arrangements; (3) interest expense has been adjusted to
reflect the acquisition as of the beginning of the periods; and (4)
common stock raised during 1999 to purchase these hotels has been
adjusted to reflect issuances as of January 1, 1999.
(8) SUBSEQUENT EVENTS
In April, 2000 the Company distributed to its shareholders
approximately $904,918 ($.25 per share) of which approximately $448,641
was reinvested in the purchase of additional shares. On April 18, 2000,
the Company closed the sale to investors of 301,514 shares at $10 per
share representing net proceeds to the Company of $2,350,227.
On May 8, 2000, the Company acquired a Homewood Suites(R) hotel in
Malvern, Pennsylvania for $15,489,000. The hotel was purchased through
a combination of equity proceeds from the equity offering and a note in
the amount of $11,616,750 made payable to the order of Promus. The note
has a fixed interest rate of 8.5% per annum. Interest payments are due
monthly and the maturity date is May, 2001. This hotel will be leased
by the Lessee and managed by Promus in substantially the same manner as
the other 11 Homewood Suites(R) hotels owned at March 31, 2000.
12
APPLE SUITES MANAGEMENT, INC
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, December 31,
2000 1999
----------- -----------
Current assets
Cash and cash equivalents $ 2,329,310 2,395,000
Accounts receivables, net 1,514,431 738,361
Inventories 125,970 121,801
Other assets 2,188 8,142
----------- -----------
Total Current Assets 3,971,899 3,263,304
Non-current assets
Deferred franchise fees 555,753 562,851
----------- -----------
Total Assets $ 4,527,652 $ 3,826,155
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities
Account payable $ 105,247 48,586
Rent payable to Apple Suites, Inc. 2,641,141 2,123,136
Due to third party manager 482,084 454,147
Due to Apple Suites, Inc. 20,552 28,991
Accrued expenses 704,153 624,346
Current portion of note payable to Apple Suites, Inc. 58,350 56,939
----------- -----------
Total Current liabilities 4,011,527 3,336,145
Non-current liabilities
Note payable to Apple Suites, Inc. 615,864 631,014
----------- -----------
Total Liabilities 4,627,391 3,967,159
Shareholders' deficit
Common Stock, no par value, 5,000 authorized;
10 shares issued and outstanding 100 100
Retained deficit (99,839) (141,104)
----------- -----------
Total Shareholders' deficit (99,739) (141,004)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 4,527,652 $ 3,826,155
=========== ===========
See accompanying notes to financial statements.
13
APPLE SUITES MANAGEMENT, INC
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months
Ended
March 31, 2000
--------------
REVENUE
Suite revenue $7,682,355
Other revenue 420,816
----------
Total revenue 8,103,171
EXPENSES
Operating expense 2,295,392
General and administrative 670,943
Advertising and promotion 662,647
Utilities 283,263
Franchise fees 307,294
Management fees 322,766
Rent expense-Apple Suites, Inc. 3,406,678
Interest expense 15,275
Other 96,212
----------
Total expenses 8,060,470
Income before income taxes 42,701
Income tax expense --
----------
Net income $ 42,701
==========
See accompanying notes to consolidated financial statements.
14
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
2000
------------------
Cash flow from operating activities:
Net income $ 42,701
Adjustments to reconcile net income to net cash
used in operating activities
Amortization of deferred franchise fees 7,098
Changes in operating assets and liabilities:
Receivables (776,070)
Other assets 349
Due to Apple Suites, Inc. (8,439)
Rent payable to Apple Suites, Inc. 518,005
Accounts payable 56,661
Due to third party manager 27,937
Accrued expenses 79,807
----------
Net cash used in operating activities (51,951)
Cash flow from financing activities:
Repayments of notes payable (13,739)
----------
Net cash used in financing activities (13,739)
Decrease in cash and cash equivalents (65,690)
Cash and cash equivalents, beginning of period 2,395,000
----------
Cash and cash equivalents, end of period $2,329,310
==========
See accompanying notes to consolidated financial statements.
15
APPLE SUITES MANAGEMENT, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2000
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Apple Suites Management, Inc. (the "Lessee") operates in one business
segment. Each hotel is leased by the Company to the Lessee under a
master hotel lease agreement ("Percentage Lease") having an initial
term of ten years, subject to earlier termination at the option of the
Company upon 30 days notice. The lease agreement provides for two
optional five-year extensions. The Percentage Leases require base rent
payments to be made to the Company on a monthly basis and additional
quarterly payments to be made based upon percentages of suite and
sundry revenue. Promus Hotels, Inc. or an affiliate ("Promus") manages
the hotels under a management agreement with the Lessee. Promus Hotels,
Inc. is a wholly-owned subsidiary of Hilton Hotel Corporation
("Hilton"). The hotels are located throughout the United States and are
licensed with Homewood Suites(R) by Hilton.
The Lessee commenced operations in September 1999, therefore,
consolidated statements of operations and cash flows for the three
month period ended March 31, 1999 are not presented.
(2) PERCENTAGE LEASES
The Percentage Leases expire in 2009, subject to earlier termination by
the Company upon 30 days notice. The Percentage Leases provide for two
optional five-year extensions. The rent due for each hotel is the sum
of a base rent and a percentage rent. Percentage rent is calculated on
a quarterly basis by multiplying fixed percentages by the total amounts
of year-to-date suite revenues with reference to specified threshold
amounts known as breakpoints. Both the base rent and the breakpoints
used in computing percentage rents are subject to annual adjustments
based on increases in the Consumer Price Index ("CPI").
The Lessee has entered into license agreements with Promus to operate
the hotels as Homewood Suites(R) by Hilton properties. These agreements
have terms of 20 years and expire in 2019. These agreements require the
Lessee to, among other things, pay monthly franchise fees equal to 4%
of suite revenue. License and franchise agreements contain specific
standards for, and restrictions and limitations on, the operation and
maintenance of the hotels which are established by Promus to maintain
uniformity in the system for Homewood Suites(R) by Hilton. Such
standards generally regulate the appearance of the hotel, quality and
type of goods and services offered, signage, and protection of marks.
Compliance with such standards may from time to time require
significant expenditures for capital improvements which will be borne
by the Company. In addition, the agreements provide that Promus will
manage the daily operations of the hotels and provide advertising and
promotion to include access to the reservation system for Homewood
Suites(R) by Hilton. The Lessee pays Promus 4% of monthly suite
16
revenue for each of these functions, respectively. Total expenses
incurred by the Lessee for franchise fees, advertising and promotion
fees, and management fees for the three months ended March 31, 2000
totaled $937,354.
(3) SHAREHOLDER'S EQUITY
The Lessee requires or may require funds to capitalize its business to
satisfy its obligations under Percentage Leases with the Company. To
meet these objectives, the Lessee has two funding commitment agreements
of $1 million each from Mr. Knight and Apple Suites Realty Group, Inc.,
("ASRG"), respectively, (together "Payor"). ASRG is owned by Mr.
Knight. The funding commitments are contractual obligations of the
Payor to provide funds to the Lessee. Funds paid to the Lessee under
the commitments are to be used to satisfy any capitalization or net
worth requirements applicable to the Lessee or the Lessee's payment
obligations under the lease agreements and does not represent any
indebtedness. The funding commitments terminate upon the expiration of
the Percentage Leases, written agreement between the Payor and the
Lessee, or payment of all commitments amounts by the Payor to the
Lessee. As of March 31, 2000, no contributions have been made by the
Payor to the Lessee.
(4) SUBSEQUENT EVENTS
Effective May 8, 2000, the Company acquired a hotel property in
Malvern, Pennsylvania. This hotel will be leased by the Lessee and
managed by Promus in substantially the same manner as the other 11
Homewood Suites(R) hotels.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements involve
known and unknown risks, uncertainties, and other factors which may cause
the actual results, performance, or achievements of the Company to be
materially different from any future results, performance or achievement
expressed or implied by such forward-looking statements. Such factors
include the ability of the Company to implement its acquisition strategy and
operating strategy; the Company's ability to manage planned growth; changes
in economic cycles; competitors within the extended-stay industry; and the
liquidity of the Lessee. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable,
any of the assumptions could be inaccurate, and therefore there can be no
assurance that such statements included in this quarterly report will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the results or conditions described in such statements or
the objectives and plans of the Company will be achieved.
General
During 1999, Apple Suites, Inc. (the "Company") acquired 11 hotels with
1,218 suites from Promus Hotels, Inc. (or its affiliates), which was
subsequently acquired by Hilton Hotels Corporation ("Hilton") and is now a
wholly-owned subsidiary of Hilton. All of the Company's hotels are leased to
Apple Suites Management, Inc., or its subsidiary (the "Lessee") pursuant to
the master hotel lease agreements ("Percentage Leases"). Each Percentage
Lease obligates the lessee to pay rent equal to the sum of a base rent and a
percentage rent based on suite revenues and sundry other revenues of each
hotel. The Lessee's ability to make payments to the Company pursuant to the
Percentage Leases is dependent primarily upon the operations of the hotels.
See Note 5 to the consolidated financial statements of the Company for
further lease information.
The Lessee holds the franchise and market reservation agreement for each of
the hotels, which are operated as Homewood Suites(R) by Hilton. The Lessee
engages a third-party manager, Promus Hotels, Inc., ("Promus"), to operate
the hotels. The Company is externally advised and has contracted with Apple
Suites Advisors, Inc. (the "Advisor") to manage its day-to-day operations
and make investment decisions. The Company has contracted with Apple Suites
Realty Group, Inc. ("ASRG") to provide brokerage and acquisition services in
connection with its hotel acquisitions. The Lessee, the Advisor, and ASRG
are all owned by Mr. Glade Knight, the Company's Chairman. See Note 5 to the
consolidated financial statements of the Company for further information on
related-party transactions.
18
RESULTS OF OPERATIONS
APPLE SUITES, INC. - THE COMPANY
Revenues
As operations of the Company commenced effective September 1, 1999, a
comparison to 1999 is not possible. During the three months ended March 31,
2000, the Company had revenues of $3,454,685. All of the Company's lease
revenue is derived from the Percentage Leases covering the hotels in
operations with the Lessee.
The Company's other income consists of $32,732 of interest income earned
from the investments of its cash and cash reserves and 15,275 of interest
earned from the promissory notes with the Lessee for franchise and hotel
supplies.
Expenses
The expenses of the Company consist of property taxes, insurance, general
and administrative expenses, interest on notes payable and depreciation on
the hotels. Total expenses, exclusive of interest and depreciation, for the
three months ended March 31, 2000 were $946,311 or 27% of total revenue.
Interest expense was $1,453,110 for the three months ended March 31, 2000
and represented interest on short-term notes payable to Hilton at an
interest rate of 8.5%.
Depreciation expense was $549,201 for the three months ended March 31, 2000.
Taxes, insurance, and other was $691,575 for the three months ended March
31, 2000 or 20% of total revenue.
General and administrative expense totaled 7% of total revenues. These
expenses represent the administrative expenses of the Company. This
percentage is expected to decrease as the Company's asset base grows.
APPLE SUITES MANAGEMENT, INC. - (THE LESSEE)
Revenues
As operations commenced effective September 1, 1999, a comparison to 1999 is
not possible. Total revenues were $8,103,171. Total revenues consist
primarily of suite revenue, which was $7,682,355 for the three months ended
March 31, 2000
For the three months ended March 31, 2000 the average occupancy rate was
78%, average daily rate ("ADR") was $89, and revenue per available room
("REVPAR") was $69.
19
Expenses
Total expenses for the three months ended March 31, 2000 were $8,060,470.
Rent expense represents $3,406,678 or 42% of total revenue.
The Lessee contracts with Promus to manage the day-to-day operations of the
hotels. The Lessee pays Promus fees of 4% of suite revenue for these
functions. The Lessee also pays Promus a fee of 4% of suite revenue for
franchise licenses to operate as a Homewood Suites(R) by Hilton and to
participate in its reservation system. Total expensee for these services
were $937,354 during the period.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2000, the Company sold 493,509 at $10 per share
of its common stock to its investors. The total gross proceeds from the
shares sold were $4,935,083, which netted $4,393,756 to the Company after
the payment of selling commissions and other offering costs.
The Lessee's obligations under the Percentage Leases are unsecured. The
Lessee has limited capital resources, and, accordingly its ability to make
lease payments under the Percentage Leases is substantially dependent on the
ability of the Lessee to generate sufficient cash flow from operations of
the hotels. The company has certain abilities to cancel the lease with the
Lessee if the Lessee does not perform under the terms of the lease.
To support the Lessee's obligations, the Lessee has two funding commitments
of $1 million each from Mr. Knight and ASRG, respectively (together
"Payor"). The funding commitments are contractual obligations of the Payor
to pay funds to the Lessee. Funds paid to the Lessee under the commitments
are to be used to satisfy any capitalization or net worth requirements
applicable to the Lessee or the Lessee's payment obligations under the lease
agreements, do not represent indebtedness, and are not subject to interest.
The funding commitments terminate upon the expiration of the Percentage
Leases agreements, written agreement between the Payor and the Lessee, or
payment of all commitment amounts by the Payor to the Lessee. As of March
31, 2000, no contributions have been made by the Payor to the lessee under
the funding commitments.
Notes payable
In conjunction with purchase of the 11 hotels, notes were executed by the
Company made payable to the order of Hilton Hotels, Inc. in the amount of
$68,569,500. The notes bear an effective interest rate of 8.5% per annum.
Interest payments are due monthly. Principal payments are to be made from
net proceeds from the offering of common shares. Hilton agreed to defer
principal payments until the earlier of June 30, 2000 or such time as two
additional hotels have been purchased by the Company. At March 31, 2000, the
Company borrowings were $68,569,500.
20
The Company has $68.6 million in notes payable with Hilton Hotels, Inc. with
principal payments of $34 million due on October 1, 2000, $30.2 million due
on November 1, 2000, and $4.4 million due on January 1, 2001. The Company
plans to pay these notes with the proceeds form its continuous "best
efforts" offering of common shares. However, based on the current rate at
which equity is being raised by the offering, the Company may have to seek
other measures to repay these loans. The Company is currently holding
discussions with several lenders to obtain financing for its hotels and is
exploring both unsecured and secured financing arrangements. Although no
firm financing commitments have been received, the Company believes that
based on discussions with lenders and other market indicators it can obtain
sufficient financing prior to maturity of the notes. Obtaining refinancing
is dependent upon a number of factors, including: (1) continued operation of
the hotels at or near current occupancy and room rate levels as the
Company's leases are based on a percentage of hotel suite income, (2)
general level of interest rates including credit spreads of real estate
based on lending, and (3) general economic conditions. For each of the notes
payable, all of the Company's 11 hotels serve as collateral.
Cash and cash equivalents
Cash and cash equivalents totaled $3,781,922 at March 31, 2000.
Capital requirements
The Company has an ongoing capital commitment to fund its capital
improvements. The Company is required under the Percentage Leases to make
available to the Lessee for the repair, replacement, or refurbishing of
furniture, fixtures, and equipment an amount equal to 5% of suite revenue
monthly on a cumulative basis, provided that such amount may be used for
capital expenditures made by the Company with respect to the hotels. The
Company expects that this amount will be adequate to fund the required
repair, replacement, and refurbishments and to maintain its hotels in a
competitive condition. The Company capitalized improvements of $280,532 in
2000. At March 31, 2000 $696,869 was held by Hilton, restricted for funding
of these improvements.
The Company expects to acquire additional hotels during 2000. The Company
plans to have monthly equity closings in 2000, until the offering is fully
funded, or until such time as the Company may opt to discontinue the
offering. It is anticipated that the equity funds will be invested in
additional hotels and used to make principal payments on the notes incurred
in conjunction with the existing acquisitions.
Capital resources are expected to grow with the future sale of its shares.
Approximately 46% of the 2000 common stock dividend distribution, or
$329,215 was reinvested in additional common shares. In general, the
Company's liquidity and capital resources are believed to be more than
adequate to meet its cash requirements during 2000, given current and
anticipated financing arrangements.
Seasonality
The hotel industry historically has been seasonal in nature, reflecting
higher occupancy rates primarily during the first three quarters of the
year. Seasonal variations in occupancy at the Company's hotels may cause
quarterly fluctuations in the Company's lease revenues, particularly during
the fourth quarter, to the extent that it receives percentage rent. To the
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extent that cash flow from operations is insufficient during any quarter,
due to temporary or seasonal fluctuations in lease revenue, the Company
expects to utilize cash on hand or funds from equity raised through its
"best efforts" offering to make distributions.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 1999. See the
information provided in the Company's Annual Report on Form 10-K under Item
7-Management's Discussion and Analysis of Financial Condition and Results of
Operations.
23
Part II, Item 2. Changes in Securities and Use of Proceeds
The following table set forth information concerning the Offering and the use of
proceeds from the Offering as of March 31, 2000:
Common Shares Registered:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
28,500,000.00 Common Shares $10 per Common Share $285,000,000
-------------
Totals: 30,166,666.67 Common Shares
-------------
Common Shares Sold:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
2,256,256.00 Common Shares $10 per Common Share $ 22,562,559
------------ -------------
Totals: 3,922,922.67 Common Shares $ 37,562,559
------------
Expenses of Issuance and Distribution of Common Shares
1. Underwriting discounts and commissions $ 3,756,246
2. Expenses of underwriter $ --
3. Direct or indirect payments to directors or officers
of the Company or their associates, to ten percent
shareholders, or to affiliates of the Company $ --
4. Fees and expenses of third parties $ 821,297
-------------
Total Expenses of Issuance and Distribution of
Common Shares $ 4,577,543
Net Proceeds to the Company $ 32,985,016
1. Purchase of real estate (including repayment of
Indebtedness incurred to purchase real estate) $ 22,856,500
2. Interest on indebtedness $ 2,698,154
3. Working capital $ 5,555,735
4. Fees to the following (all affiliates of officers of the Company):
a. Apple Suites Advisors, Inc. $ 46,107
b. Apple Suites Realty Group, Inc. $ 1,828,520
5. Fees and expenses of third parties: $ --
a. Legal $ --
b. Accounting $ --
6. Other (specify ) $ --
---------------- -------------
Total of Application of Net Proceeds to the Company $ 32,985,016
24
Part II, Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27- Financial Data Schedule
(b) Reports on Form 8-K
The following table lists the reports on Form 8-K filed by the Company
during the quarter ended March 31, 2000, the items reported and the
financial statements included in such filings.
Type and Date Items
of Reports Reported Financials Statements Filed
Form 8-K dated 2 and 7 Historical Balance Sheets as of
December 22, 1999 and December 31, 1998 and 1997;
filed January 6, 2000 Historical Income Statements for
the year ended December 31, 1998
and 1997; Historical Statements of
Cash Flows for the year ended
December 31, 1998 and 1997; and
Historical Statements of
Shareholders' Equity for the year
ended December 31, 1998 and 1997
(pertaining to Jackson-Ridgeland,
Mississippi hotel).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Apple Suites, Inc.
------------------
(Registrant)
DATE: 5-15-00 BY: /s/ Glade M. Knight
---------------------------- ----------------------------------
Glade M. Knight
President
BY: /s/ Stanley J. Olander
----------------------------------
Stanley J. Olander
Secretary and Treasurer
26