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): November 29, 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.
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Item 2. Acquisition or Disposition of Assets 7
Item 7. Financial Statements and Exhibits
a. Financial Statements
Atlanta - Peachtree; Baltimore - BWI Airport; Clearwater,
Detroit--Warren; Salt Lake City--Midvale
1. Property Financial Statements
Independent Auditors Report 33
Combined Balance Sheets - December 31, 1998 and December 31, 1997 34
Combined Statements of Shareholders' Equity - Years ended December
31, 1997 and December 31, 1998 36
Combined Income Statements - Years ended December 31, 1998 and
December 31, 1997 37
Combined Statements of Cash Flows - Years ended December 31, 1998 and
December 31, 1997 38
Notes to the Combined Financial Statements - December 31, 1998 and
December 31, 1997 39
* * *
Combined Balance Sheet - August 31, 1999 (unaudited) 42
Combined Statement of Shareholders' Equity - For the Period January
1, 1999 through August 31, 1999 (unaudited) 44
Combined Income Statement - For the Period January 1, 1999 through
August 31, 1999 (unaudited) 45
Combined Statement of Cash Flows - For the Period January 1, 1999
through August 31, 1999 (unaudited) 46
2
Notes to the Combined Financial Statements - For the Period January
1, 1999 through August 31, 1999 (unaudited) 47
2. Pro Forma Financial Statements
Apple Suites, Inc.--Pro Forma Condensed Consolidated Balance Sheet as
of September 30, 1999 (unaudited) 50
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) 52
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) 55
3
b. Exhibits
4.1 Note dated November 29, 1999 in the principal amount
of $ 30,210,000 made payable by Apple Suites, Inc. to
the order of Promus Hotels, Inc.
4.2 Fee and Leasehold Deed to Secure Debt, Assignment of
Leases and Rents and Security Agreement dated
November 29, 1999 from Apple Suites, Inc. and Apple
Suites Management, Inc. for the benefit of Promus
Hotels, Inc. pertaining to the Atlanta--Peachtree
hotel.
4.3 Fee and Leasehold Deed to Secure Debt, Assignment of
Leases and Rents and Security Agreement dated
November 29, 1999 from Apple Suites, Inc. and Apple
Suites Management, Inc. for the benefit of Promus
Hotels, Inc., constituting a second lien on the
Atlanta--Galleria/Cumberland hotel.
4.4 Purchase Money Fee and Leasehold Deed of Trust,
Assignment of Leases and Rents and Security Agreement
dated November 29, 1999 from Apple Suites, Inc. and
Apple Suites Management, Inc. for the benefit of
Promus Hotels, Inc. pertaining to the Baltimore--BWI
Airport hotel.
4.5 Fee and Leasehold Mortgage, Assignment of Leases and
Rents and Security Agreement dated November 29, 1999
from Apple Suites, Inc. and Apple Suites Management,
Inc. for the benefit of Promus Hotels, Inc.
pertaining to the Clearwater hotel.
4.6 Fee and Leasehold Mortgage, Assignment of Leases and
Rents and Security Agreement dated November 29, 1999
from Apple Suites, Inc. and Apple Suites Management,
Inc. for the benefit of Promus Hotels, Inc.
pertaining to the Detroit--Warren hotel.
4.7 Fee and Leasehold Deed of Trust, Assignment of Leases
and Rents and Security Agreement and Fixture Filing
dated November 29, 1999, from Apple Suites, Inc. and
Apple Suites Management, Inc., for the benefit of
Promus Hotels, Inc. pertaining to the Salt Lake
City--Midvale hotel.
4.8 Deed of Trust Modification Agreement dated November
29, 1999, among Promus Hotels, Inc., Apple Suites
REIT Limited Partnership and Apple Suites Services
Limited Partnership pertaining to the North
Dallas--Plano hotel.
4.9 Deed of Trust Modification Agreement dated November
29, 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 November 29, 1999 from Apple Suites,
Inc. to Promus Hotels, Inc. pertaining to the
Atlanta--Peachtree hotel.
4
10.2 Indemnity dated November 29, 1999 from Apple Suites,
Inc. to Promus Hotels, Inc. pertaining to the
Baltimore--BWI Airport hotel.
10.3 Indemnity dated November 29, 1999 from Apple Suites,
Inc. to Promus Hotels, Inc. pertaining to the
Clearwater hotel. 10.4 Indemnity dated November 29,
1999 from Apple Suites, Inc. to Promus Hotels, Inc.
pertaining to the to the Detroit--Warren hotel.
10.5 Indemnity dated November 29, 1999 from Apple Suites,
Inc. to Promus Hotels, Inc. pertaining to the Salt
Lake City--Midvale hotel.
10.6 Exhibits A-3, A-4, A-5, A-6 and A-7, Schedules
2.1(c), 2.1(d), 2.1(e), 2.1(f) and 2.1(g), Schedules
3.1(a)-3, 3.1(a)-4, 3.1(a)-5, 3.1(a)-6 and 3.1(a)-7,
and Schedules 3.1(b)-3, 3.1(b)-4, 3.1(b)-5, 3.1(b)-6
and 3.1(b)-7 to the Master Hotel Lease Agreement
dated September 20, 1999 between Apple Suites, Inc.
(as lessor) and Apple Suites Management, Inc. (as
lessee).
10.7 Homewood Suites License Agreement dated November 29,
1999 between Promus Hotels, Inc. and Apple Suites
Management, Inc. pertaining to the Atlanta--Peachtree
hotel.
10.8 Homewood Suites License Agreement dated November 29,
1999 between Promus Hotels, Inc. and Apple Suites
Management, Inc. pertaining to the Baltimore--BWI
Airport hotel.
10.9 Homewood Suites License Agreement dated November 29,
1999 between Promus Hotels, Inc. and Apple Suites
Management, Inc. pertaining to the Clearwater hotel.
10.10 Homewood Suites License Agreement dated November 29,
1999 between Promus Hotels, Inc. and Apple Suites
Management, Inc. pertaining to the Detroit--Warren
hotel.
10.11 Homewood Suites License Agreement dated November 29,
1999 between Promus Hotels, Inc. and Apple Suites
Management, Inc. pertaining to the Salt Lake
City--Midvale hotel.
10.12 Management Agreement dated November 29, 1999 between
Apple Suites Management, Inc. and Promus Hotels, Inc.
pertaining to the Atlanta--Peachtree hotel.
10.13 Management Agreement dated November 29, 1999 between
Apple Suites Management, Inc. and Promus Hotels, Inc.
pertaining to the Baltimore--BWI Airport hotel.
5
10.14 Management Agreement dated November 29, 1999 between
Apple Suites Management, Inc. and Promus Hotels
Florida, Inc. pertaining to the Clearwater hotel.
10.15 Management Agreement dated November 29, 1999 between
Apple Suites Management, Inc. and Promus Hotels, Inc.
pertaining to the Detroit--Warren hotel.
10.16 Management Agreement dated November 29, 1999 between
Apple Suites Management, Inc. and Promus Hotels, Inc.
pertaining to the Salt Lake City--Midvale hotel.
10.17 Comfort Letter dated November 29, 1999 among Promus
Hotels, Inc., Apple Suites, Inc. and Apple Suites
Management, Inc. pertaining to the Atlanta--Peachtree
hotel.
10.18 Comfort Letter dated November 29, 1999 among Promus
Hotels, Inc., Apple Suites, Inc. and Apple Suites
Management, Inc. pertaining to the Baltimore--BWI
Airport hotel.
10.19 Comfort Letter dated November 29, 1999 among Promus
Hotels, Inc., Promus Hotels Florida, Inc. Apple
Suites, Inc. and Apple Suites Management, Inc.
pertaining to the Clearwater hotel.
10.20 Comfort Letter dated November 29, 1999 among Promus
Hotels, Inc., Apple Suites, Inc. and Apple Suites
Management, Inc. pertaining to the Detroit--Warren
hotel.
10.21 Comfort Letter dated November 29, 1999 among Promus
Hotels, Inc., Apple Suites, Inc. and Apple Suites
Management, Inc. pertaining to the Salt Lake
City--Midvale hotel.
10.22 Promissory Note dated November 29, 1999 in the amount
of $ 251,500 made payable by Apple Suites Management,
Inc. to the order of Apple Suites, Inc.
10.23 Promissory Note dated November 29, 1999 in the amount
of $ 52,500 made payable by Apple Suites Management,
Inc. to the order of Apple Suites, Inc.
10.24 Negative Pledge Agreements dated November 29, 1999
between Apple Suites, Inc. and Promus Hotels, Inc.
pertaining to the Richmond--West End hotel.
24 Consent of Independent Auditors
6
Item 2. Acquisition or Disposition of Assets
OUR PROPERTIES
We own 10 extended-stay hotels. All of our hotels are licensed to
operate as Homewood Suites(R) properties. Homewood Suites(R) is a registered
service mark of Promus Hotels, Inc. Details about the five hotels we purchased
as of November 29, 1999 are provided in the following sections:
PROPERTY ACQUISITIONS
PAYMENT SUMMARY
We purchased five existing Homewood Suites(R) hotels from Promus
Hotels, Inc., or its affiliates, as of November 29, 1999. The total purchase
price for the five hotels was $40,280,000. We used proceeds from our offering of
common shares to pay twenty-five percent of this total, or $10,070,000, at
closing in cash. The balance of 75%, or $30,210,000, is being financed by Promus
Hotels, Inc. as short-term or "bridge financing," as described below.
We paid a real estate commission on these purchases 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 $805,600, which equals two percent (2%)
of the total purchase price for the hotels.
OVERVIEW OF HOTELS
We purchased the following hotels as of November 29, 1999:
Number Purchase Financed
Name of Hotel of Suites Price Portion
- ------------- --------- ----- -------
Atlanta - Peachtree 92 $ 4,033,000 $ 3,024,750
Baltimore - BWI Airport 147 $16,348,000 $12,261,000
Clearwater 112 $10,416,000 $ 7,812,000
Detroit - Warren 76 $ 4,330,000 $ 3,247,500
Salt Lake City - Midvale 98 $ 5,153,000 $ 3,864,750
All of these hotels have been leased to Apple Suites Management, Inc.
The existing master hotel lease agreement, dated as of September 20, 1999, has
been supplemented to include these hotels as leased properties. This agreement
is among the material contracts described below.
7
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 $52,500. 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 $251,550. 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 five hotels we purchased as of November 29, 1999. 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:
Original Remaining
Date of Principal Principal as of Annual Rate Date of
Promissory Note Amount December 1, 1999 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
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
8
Principal payments under the promissory note dated as of November 29,
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
payments under the note dated as of November 29, 1999 will be due in two
installments on November 1, 2000 and December 1, 2000.
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 letter agreement dated October,
1999, to use our net equity proceeds to pay 25% of the purchase price of the
hotels we acquired on November 29, 1999 (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, assuming 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
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 hotels we purchased as of November 29, 1999 will
continue to operate as Homewood Suites(R) properties. To help achieve that
result, Promus Hotels, Inc. has executed separate license agreements dated as of
December 8, 1999. Promus Hotels, Inc. is managing each of the five hotels under
management agreements dated as of November 29, 1999. These license and
management agreements are among the material contracts described below.
9
POTENTIAL ECONOMIC RISK AND BENEFIT TO GLADE M. KNIGHT
Because we are prohibited under federal tax laws from directly
operating our extended-stay hotels, the five hotels we purchased as of November
29, 1999 have been leased to Apple Suites Management, Inc. Our president and
chief executive officer, Glade M. Knight, is the sole shareholder of Apple
Suites Management, Inc.
The master hotel lease agreement has been structured to minimize, to
the extent possible, the economic benefit to Apple Suites Management, Inc. and
to maximize the rental income we receive from the hotels. However, revenues from
operating the hotels may exceed payment obligations under the master hotel lease
agreement, the license agreements and the management agreements. To the extent
that Apple Suites Management, Inc. has any remaining income after those payment
obligations are met, it will realize an economic benefit. Because this potential
economic benefit depends, in part, on future hotel revenues, the extent of this
potential economic benefit cannot be determined at this time.
Apple Suites Management, Inc. has agreed that it will retain its net
income, if any, rather than distribute such income to Glade M. Knight. This
agreement will remain in effect for the duration of the master hotel lease
agreement, to help ensure that Apple Suites Management, Inc. will be able to
make its rent payments.
If the cash flow from the operations of the hotels and the retained
earnings of Apple Suites Management, Inc. are insufficient to make the rental
payments due under the master lease agreement, Apple Suites Management, Inc. can
receive additional funding under two funding commitments. The funding
commitments are dated as of September 17, 1999, and have been made by Glade M.
Knight and Apple Suites Realty Group, Inc., which is wholly-owned by Mr. Knight.
These funding commitments are payable on demand by Apple Suites Management, Inc.
Under each funding commitment, Apple Suites Management, Inc. can make one or
more demands for funding, subject to the following: (1) the aggregate payments
under the funding commitments shall not exceed $2 million; (2) the demands for
payment shall be limited, in amount and frequency, to those demands that are
reasonably necessary to satisfy any capitalization or net worth requirements of
Apple Suites Management, Inc., or payment obligations under the master hotel
lease agreements for our hotels. Apple Suites Management, Inc. is not required
to repay the funds it receives under the funding commitments.
SUMMARY OF MATERIAL CONTRACTS
DEEDS OF TRUST AND RELATED DOCUMENTS
Each hotel we own is encumbered by at least one mortgage on its real
property, security interest in its personal property, and 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."
10
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.
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.
Our hotel in Virginia, which was purchased on September 20, 1999, was
not covered by additional deeds of trust at subsequent closings. Instead, the
Virginia hotel was encumbered by separate negative pledges, which correspond to
the promissory notes executed at those closings. The negative pledges prohibit
any transfer or further encumbrance of the Virginia hotel, in whole or in part,
without the prior written consent of Promus Hotels, Inc. The encumbrance created
by a negative pledge will terminate when its corresponding promissory note is
paid in full.
At each closing on our purchase of a hotel or group of hotels, we
encumbered the hotels we were purchasing and the hotels we already owned. The
following table summarizes the encumbrances on our hotels and the relative
priority of those encumbrances:
11
Name Summary of Date of Corresponding
of Hotel Encumbrance Promissory Note
-------- ----------- ---------------
Dallas - Addison first mortgage / security interest......... September 20, 1999
second mortgage / security interest........ October 5, 1999
modification of above for new debt......... November 29, 1999
Dallas - Irving/Las Colinas first mortgage / security interest......... September 20, 1999
second mortgage / security interest........ October 5, 1999
modification of above for new debt......... November 29, 1999
North Dallas - Plano first mortgage / security interest......... September 20, 1999
second mortgage / security interest........ October 5, 1999
modification of above for new debt......... November 29, 1999
Richmond - West End first mortgage / security interest......... September 20, 1999
negative pledge............................ October 5, 1999
negative pledge............................ November 29, 1999
Atlanta - Galleria/Cumberland first mortgage / security interest......... October 5, 1999
second mortgage / security interest........ November 29, 1999
Atlanta - Peachtree first mortgage / security interest......... November 29, 1999
Baltimore - BWI Airport first mortgage / security interest......... November 29, 1999
Clearwater first mortgage / security interest......... November 29, 1999
Detroit - Warren first mortgage / security interest......... November 29, 1999
Salt Lake City - Midvale first mortgage / security interest......... November 29, 1999
ENVIRONMENTAL INDEMNITIES
A separate environmental indemnity applies to each of the hotels we
purchased as of November 29, 1999. The indemnities are substantially similar and
protect Promus Hotels, Inc. in the event that we undertake any corrective work
to remove or eliminate hazardous materials from the hotel properties. Hazardous
materials are defined in the indemnities to include, for example, asbestos and
other toxic materials. We are not aware of any hazardous materials at the hotel
properties, but there can be no assurance that such materials are not present.
Under the indemnities, 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 indemnities with respect to the
hotels generally will terminate upon payment in full under the promissory note
dated as of November 29, 1999. However, in each case, our indemnities 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
12
of such full payment, we will be obligated to pay any enforcement costs for
subsequent litigation or administrative claims.
MASTER HOTEL LEASE AGREEMENTS
We have leased the hotels we purchased as of November 29, 1999 to Apple
Suites Management, Inc. Our existing master hotel lease agreement, dated as of
September 20, 1999, has been supplemented to include these hotels as leased
properties.
The master hotel lease agreement has an initial term of ten years and
an optional five-year extension, provided that Apple Suites Management, Inc. is
not in default either at the time of the exercise of the option or at the end of
the original term of the lease. The first five-year extension would be upon the
same terms, conditions and rentals as in the initial term. Apple Suites
Management, Inc. has the option to extend the lease for an additional five years
following the end of the first five-year extension, provided it is not in
default either at the time of the exercise of the option or at the end of the
original term of the first five-year extension. If this second option is
exercised, we and Apple Suites Management, Inc. must negotiate in good faith to
adjust the rental payments for the additional five-year term to a market rate
for similar hotel properties at that time. If no agreement can be reached on
rental terms for this second five-year extension, a panel of three persons who
have generally recognized expertise in evaluating hotel REIT leases and who are
not affiliates of us or Apple Suites Management, Inc. will determine such rental
terms.
We may terminate the master hotel lease agreement if (1) we sell the
hotels to a third party; (2) there is a change of control of Apple Suites
Management, Inc.; or (3) the Internal Revenue Code is amended to permit us to
operate the hotels directly or otherwise render the use of a lease by a hotel
REIT obsolete. If we terminate the master hotel lease agreement we must
compensate Apple Suites Management, Inc. by either paying the fair market value
of the lease as of such termination, or offering to lease one or more substitute
hotel facilities.
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 hotels. The percentage rent is equal to (a) 17%
of all year-to-date suite revenue, 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. The base rents
for 1999 and 2000 are shown below:
13
Base Rent
Name of Hotel (1999 and 2000)
------------- ---------------
Atlanta - Peachtree $414,150
Baltimore - BWI Airport $895,750
Clearwater $664,150
Detroit - Warren $408,450
Salt Lake City - Midvale $438,150
The quarterly suite revenue breakpoints from 1999 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
of each year from 1999 through 2008
Atlanta - Baltimore - Detroit - Salt Lake City -
Year Peachtree BWI Airport Clearwater Warren Midvale
---- --------- ----------- ---------- ------ -------
1999 $149,094 $322,470 $239,094 $147,042 $157,734
2000 $134,599 $291,119 $215,849 $132,746 $142,399
2001 $138,740 $300,076 $222,490 $136,831 $146,780
2002 $144,953 $313,513 $232,453 $142,958 $153,353
2003 $149,094 $322,470 $239,094 $147,042 $157,734
2004 $153,236 $331,428 $245,736 $151,127 $162,116
2005 $157,377 $340,385 $252,377 $155,211 $166,497
2006 $161,519 $349,343 $259,019 $159,296 $170,879
2007 $165,660 $358,300 $265,660 $163,380 $175,260
2008 $169,802 $367,258 $272,302 $167,465 $179,642
14
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.
Under the master hotel lease agreement, Apple Suites Management, Inc.
is responsible for paying all taxes, other than real estate and personal
property taxes, imposed with respect to the hotels or any business conducted by
it at the hotels. In addition, Apple Suites Management, Inc. is responsible for
obtaining and maintaining utility services to the hotels and paying all charges
for electricity, gas, oil, water, sewer and other utilities used in the hotels
during the term of the master hotel lease. Apple Suites Management, Inc. is also
responsible for paying all premiums for personal property insurance,
comprehensive general liability insurance, worker's compensation insurance,
vehicle liability insurance, hazard insurance and any other insurance that we
may reasonably request for the hotels and their operations. We are required to
maintain building insurance (including earthquake and flood insurance),
insurance for loss or damage to the steam boilers and similar apparatus and loss
of income insurance.
The master hotel lease agreement requires Apple Suites Management, Inc.
to maintain the hotels in good order and repair, except for ordinary wear and
tear. However, we are required to maintain any underground utilities and the
structural elements of the hotels, including the exterior walls and roof. In
addition, pursuant to the license agreements and management agreements (as
described below), we are required to maintain, and to upgrade, the hotels under
the standards specified under those agreements in order to operate the hotels as
Homewood Suites(R) hotels. We are also obligated to pay for a reserve for
periodic repair, replacement or refurbishing of furniture, fixtures and
equipment. Our payments must equal up to 5% of our gross revenues (less sales
and room taxes) from the rental of suites at the hotels.
HOTEL LICENSE AGREEMENTS
Each of the hotels we purchased as of November 29, 1999 is licensed to
operate as a Homewood Suites(R) property. These licenses were granted by Promus
Hotels, Inc. to Apple Suites Management, Inc. under substantially similar
license agreements dated as of November 29, 1999.
The license agreement for each hotel 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.
15
Apple Suites Management, Inc. will be subject to various operational
requirements pursuant to the license agreements 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 hotels under separate
management agreements. As a practical matter, many of the requirements in the
license agreements 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 agreements will not, of
itself, relieve Apple Suites Management, Inc. from the obligations imposed upon
it under the license agreements. In such event, the remedies available to Apple
Suites Management, Inc. may be limited to monetary damages for breach of the
hotel management agreements.
The hotels must be operated 24 hours a day in strict compliance with
detailed policies, procedures and 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 agreements, Apple Suites Management, Inc. is granted
the right to use the Homewood Suites(R) System only during the term of the
license agreements, and has no other ownership interest in, or rights to, such
System. The term of each 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 a
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 a hotel
will be used to fund advertising or marketing with respect to the hotel actually
making the contribution.
Under the license agreements, 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.
16
HOTEL MANAGEMENT AGREEMENTS
Promus Hotels, Inc. is managing the hotels we purchased as of November
29, 1999 (except for the hotel in Florida, which is being managed by Promus
Hotels Florida, Inc.). To simplify the following discussion, the manager will be
referred to as "Promus Hotels." The management of our hotels is governed by
separate management agreements with Apple Suites Management, Inc. (which is
leasing the hotels from us, as discussed above). These management agreements are
substantially similar and are dated as of November 29, 1999.
The management agreements require Promus Hotels to operate the hotels
in conformity with the hotel license agreements described above. Promus Hotels
will be responsible for directing the day-to-day activities of the hotels and
establishing policies and procedures relating to the management and operation of
the hotels.
As part of its responsibilities for directing the day-to-day activities
of the hotels, Promus Hotels will hire, supervise and determine the compensation
and terms of employment of all hotel personnel. Promus Hotels also will
determine the terms for admittance, room rates and all use of hotel rooms.
Promus Hotels will select and purchase all operating equipment and supplies for
the hotels. Promus Hotels will be responsible for (1) advertising and promoting
the hotels in coordination with the requirements of the license agreements
described above; and (2) obtaining and maintaining any permits and licenses
required to operate the hotels.
Each year, Promus Hotels will submit a proposed operating budget for
each hotel to Apple Suites Management, Inc. for its approval. Each budget will
include a business plan describing the business objectives and strategies for
each hotel for the period covered by the budget. In addition, Promus Hotels 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 hotels in accordance with the
hotel license agreements. 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
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 hotels, as reduced by (1) refunds; (2) sales and other
similar taxes; (3) proceeds from the sale or other disposition of the hotels,
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 hotels; (8) interest on bank
accounts; and (9) gratuities or service charges added to a customer's bill.
17
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 each hotel (and
related acquisition costs).
Each management agreement has a 15-year term. However, Apple Suites
Management, Inc. may terminate any management agreement after its tenth
anniversary. If it does so, Promus Hotels 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
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 with respect to a
particular hotel is terminated, Promus Hotels may terminate the corresponding
management agreement. If Promus Hotels terminates the management agreement it
will be entitled to a termination fee equal to (a) an amount that ranges from
$426,690 to $882,433 (depending on the hotel involved) 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 a management agreement if Promus Hotels 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 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 hotels we purchased as of November 29, 1999
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 hotels and the party to the license agreements and management
agreements, we have entered into a "Comfort Letter" with Promus Hotels, Inc.
with respect to
18
each hotel. Each comfort letter is dated as of November 29, 1999. The comfort
letters grant 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 letters are described below.
First, as long as we are the owner of the hotel and a particular
license agreement is in effect, Promus Hotels, Inc. has agreed to notify us of
any breach of any 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.
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 letters provide 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.
DESCRIPTION OF PROPERTIES
All of the hotels we purchased as of November 29, 1999 are
extended-stay hotels, and are licensed to operate as Homewood Suites(R)
properties. We believe that the majority of the guests at the hotels during the
past 12 months have been business travelers. We expect that this pattern will
continue.
19
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 livings 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 hotels are 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).
All five of the hotels were actively conducting business at the time of
their acquisition. We believe that the acquisitions were conducted without
materially disrupting any of the daily activities at the hotels. During the past
12 months, each hotel has been covered with property and liability insurance,
and we have arranged to continue such coverage. We believe the hotels are
adequately covered by insurance. More specific property descriptions for each
hotel appear below.
ATLANTA - PEACHTREE
The Homewood Suites(R) Atlanta - Peachtree is located on a 3.45 acre
site at 450 Technology Parkway, Norcross, Georgia 30092. The hotel is
approximately 25 miles from downtown Atlanta and 35 miles from the Hartsfield
Atlanta International Airport.
The hotel opened in February 1990. It has wood frame construction, with
an exterior of brick veneer and wood siding. The hotel consists of four
buildings, each with one, two or three stories. The hotel contains 92 suites,
which have a combined area of 53,920 square feet. The following types of suites
are available:
Type of Suite Number Available Square Feet Per Suite
-------------- ---------------- ---------------------
Master Suite 12 650
Homewood Suite 76 550
Two-Bedroom Suite 4 1,080
20
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 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 117 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
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 $500,000 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 6.4
nights, and approximately 52% 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, for each of the last five years:
Average Daily Occupancy Rate (calendar year)
1995 1996 1997 1998 1999 (through October)
---- ---- ---- ---- ----------------------
79.5% 77.4% 74.8% 72.9% 70.9%
For January 1, 1999 through October 31, 1999, the average daily rate
per suite was $82.06, and the average daily net revenue per suite was $58.15. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory note dated November 29, 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 13.17 % 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 $99 $105 $139
5 to 11 85 95 119
12 to 29 75 85 109
30 or more 59 69 99
21
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 86% of the
hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include Perkin Elmer, Hitachi, GTE Data Services, Valmet, Glenayre, Ultimate
Software, Uptons, Mizuno and Alltel Supply. From January 1, 1999 through August
9, 1999, the 10 biggest corporate accounts were responsible for approximately
50% 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. In particular, the occupancy from GTE Data
Services was due to a one-time occurrence, and Upton's is closing its business
in the area.
The table below shows the average effective annual rental per square
foot for each of the last five years:
1999
1995 1996 1997 1998 (annualized)
---- ---- ---- ---- ------------
$42.53 $47.16 $45.42 $41.95 $36.19
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $2,911,697 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 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 Assessed Taxable Tax Amount
Jurisdiction Value Portion (40%) Rate of Tax
------------ ----- ------------- ---- ------
Gwinnett County $5,688,440 $2,275,380 0.03225 $73,381.01
We estimate that the annual property tax on the expected improvements
will be approximately $6,500 or less.
At least six competing hotels are located within three miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) Three of the competing hotels are
newer than the hotel. The newer competing hotels have franchises with
AmeriSuites, Hilton Garden Inn and Residence Inn. The other competing hotels
have franchises with Courtyard by Marriott, Marriott and Holiday Inn. We believe
that the rates charged by the hotel are generally competitive with the rates
charged by these other hotels. To our knowledge, no extended-stay hotels are
being constructed within five miles of the hotel.
22
BALTIMORE - BWI AIRPORT
The Homewood Suites(R) Baltimore - BWI Airport is located on a 4.69
acre site at 1181 Winterson Road, Linthicum, Maryland 21090. The hotel is
approximately 8 miles from downtown Baltimore and 2 miles from the
Baltimore-Washington International Airport.
The hotel opened in March 1998. It has concrete masonry construction,
with a stucco exterior. The hotel consists of one building with four stories.
The hotel contains 147 suites, which have a combined area of 75,600 square feet.
The following types of suites are available:
Type of Suite Number Available Square Feet Per Suite
-------------- ---------------- ---------------------
Master Suite 20 500
Homewood Suite 120 500
Two-Bedroom Suite 7 800
The hotel offers a 40-seat breakfast/lounge area, and three meeting
rooms that accommodate up to 125 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 157 spaces. The hotel provides complimentary
shuttle service within a five mile radius.
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 $588,000 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 8
nights, and approximately 68% 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)
1998 1999 (through October)
---- ----------------------
67.0% 85.8%
For January 1, 1999 through October 31, 1999, the average daily rate
per suite was $94.15, and the average daily net revenue per suite was $80.75. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory note dated November 29, 1999. There can be no
assurance, however, the proceeds of the offering will be
23
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 24.05%
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 $129 $129 $179
5 to 11 119 119 179
12 to 29 99 99 179
30 or more 89 89 179
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 86% of the
hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include the National Security Agency, Ft. Meade (training and field visitors),
Defense Security Services, Northrop Grumman, the Internal Revenue Service and
DCITP (division of Computer Sciences Corp.). From January 1, 1999 through August
3, 1999, these corporate accounts were responsible for over 45% 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:
1999
1998 (annualized)
---- ------------
$33.46 $57.28
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $14,719,686 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 component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
24
The following table sets forth the 1999 real estate tax information for
the hotel:
Assessed Assessed Taxable Tax Rate Amount
Tax Jurisdiction* Value (1999) Value (1998) Amount* (per $100) of Tax
- ---------------- ------------ ------------ ------ ---------- ------
State of Maryland/ $11,085,900 $10,316,100 $4,229,080 2.57 $108,687.36
Anne Arundel County
* In Maryland, the real estate tax process is coordinated by state and
county. The taxable amount is weighted to reflect the prior year
assessment. It is computed as follows:
40% x [ Prior Year Assessment + ( Change in Assessment / 3 ) ]
We estimate that the annual property tax on the expected improvements
will be approximately $6,100 or less.
At least five competing hotels are located within two 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 Candlewood
Suites. The other competing hotels have franchises with AmeriSuites, Comfort
Suites, DoubleTree Suites and Residence Inn. We believe that the rates charged
by the hotel are generally competitive with the rates charged by these other
hotels. We are aware of proposed construction to build two extended-stay hotels
within approximately seven miles of the hotel. We expect these hotels to be
franchised with Hilton Garden Inn and Town Place Suites.
CLEARWATER
The Homewood Suites(R) Clearwater is located on a 5.91 acre site at
2233 Ulmerton Road, Clearwater, Florida 33762. The hotel is approximately 12
miles from downtown Tampa/St. Petersburg and 15 miles from the Tampa
International Airport.
The hotel opened in February 1998. It has concrete masonry
construction, with a stucco exterior. The hotel consists of one buildings with
two stories. The hotel contains 112 suites, which have a combined area of 58,400
square feet. The following types of suites are available:
Type of Suite Number Available Square Feet Per Suite
-------------- ---------------- ---------------------
Homewood King Suite 88 500
Homewood Double Suite 16 500
Two-Bedroom Suite 8 800
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates up to 75 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 118 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
25
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 $432,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement, common
area upgrades and bathroom upgrades. 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 2.9
nights, and approximately 43% 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)
1998 1999 (through October)
---- ----------------------
63.4% 77.3%
For January 1, 1999 through October 31, 1999, the average daily rate
per suite was $90.65, and the average daily net revenue per suite was $70.03. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory note dated November 29, 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 23.19% 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 Homewood Homewood
(number of nights) King Double Two Bedroom
------------------ ---- ------ -----------
1 to 4 $139 $149 $159
5 to 29 115 125 139
30 or more 79 89 125
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 85% of the
hotel's guests received a corporate discount.
26
The chief corporate accounts (as designated in the hotel's records)
include Home Shopping Network, Raymond James & Assoc., Lucent Technologies, Tech
Data, Honeywell, Franklin Templeton, Unisys, Graham Technology, Transitions
Optical and Omnicare. From January 1, 1999 through August 2, 1999, the 10
biggest corporate accounts were responsible for approximately 30% 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:
1999
1998 (annualized)
---- ------------
$35.31 $48.99
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $7,561,172 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 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 Rate
Tax Jurisdiction Assessed Value (per $1000) Amount of Tax
---------------- -------------- ----------- -------------
Pinellas County $4,312,200 22.9033 $98,763.61
We estimate that the annual property tax on the expected improvements
will be approximately $10,000 or less.
At least seven competing hotels are located within three miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) Three of the competing hotels are
newer than the hotel. The newer competing hotels have franchises with Candlewood
Suites, Fairfield Inn and Town Place Suites. The other competing hotels have
franchises with Courtyard by Marriott, Holiday Inn Select, La Quinta Inns and
Residence Inn. We believe that the rates charged by the hotel are generally
competitive with the rates charged by these other hotels. We are aware of
proposed construction to build four extended-stay hotels within approximately
three miles of the hotel. We expect these hotels to be franchised with Hawthorn
Suites, Radisson Suites, Spring Hill Suites and Woodbridge Suites.
27
DETROIT - WARREN
The Homewood Suites(R) Detroit - Warren is located on a 2.84 acre site
at 30180 N. Civic Center Drive, Warren, Michigan 48093. The hotel is
approximately 17 miles from downtown Detroit and 31 miles from the Detroit
Metropolitan Wayne County Airport.
The hotel opened in March 1990. It has wood frame construction, with a
plaster and wood trim exterior. The hotel consists of three buildings, each with
one, two or three stories. The hotel contains 76 suites, which have a combined
area of 31,520 square feet. The following types of suites are available:
Type of Suite Number Available Square Feet Per Suite
-------------- ---------------- ---------------------
Master Suite 8 540
Homewood Suite 60 360
Two-Bedroom Suite 8 700
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 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 77 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
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 $432,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet repairs, sidewalk and
parking area repairs, common area upgrades and exercise equipment upgrades. 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 3.6
nights, and approximately 57% 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, for each of the last five years:
Average Daily Occupancy Rate (calendar year)
1995 1996 1997 1998 1999 (through October)
---- ---- ---- ---- ----------------------
71.5% 71.6% 80.3% 76.2% 76.3%
For January 1, 1999 through October 31, 1999, the average daily rate
per suite was $88.26, and the average daily net revenue per suite was $67.35. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory note dated November 29, 1999. There can be no
assurance, however, the proceeds of the offering will be
28
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 14.77%
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 6 $104 $139 $159
7 to 29 95 119 149
30 to 89 89 99 139
90 or more 79 89 129
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 40% of the
hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include General Motors, Daimler Chrysler, Cross Huller, Tim Hortons, Ernst &
Young, Impco Technologies and Synergetics. From January 1, 1999 through August
9, 1999, the 10 biggest corporate accounts were responsible for over 45% 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 for each of the last five years:
1999
1995 1996 1997 1998 (annualized)
---- ---- ---- ---- ------------
$45.37 $49.68 $57.14 $58.75 $59.24
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $3,755,879 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 component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
29
The following table sets forth the 1999 real estate tax information for
the hotel:
Assessed Tax Rate Amount Administrative
Tax Jurisdiction Value (per $1000) of Tax Fee
- ---------------- ----- ----------- ------ ---
County of Macomb $1,131,410 5.0171 $ 5,676.40 $ 53.80
City of Warren $1,131,410 16.0468 $18,155.51 n/a
School District $1,131,410 28.6050 $32,363.98 $323.64
--------- ------
TOTAL 56,195.89 $377.44
We estimate that the annual property tax on the expected improvements
will be approximately $21,500 or less.
At least five competing hotels are located within three miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) Three of the competing hotels are
newer than the hotel. The newer competing hotels have franchises with Extended
Stay America, Residence Inn and Studio Plus. The other competing hotels have
franchises with Best Western and Courtyard by Marriott. We believe that the
rates charged by the hotel are generally competitive with the rates charged by
these other hotels. We are aware of proposed construction to build two
extended-stay hotels within approximately five miles of the hotel. We expect
these hotels to be franchised with Red Roof Inn and Sleep Inn.
SALT LAKE CITY - MIDVALE
The Homewood Suites(R) Salt Lake City - Midvale is located on a 3.44
acre site at 844 E. North Union Avenue, Midvale, Utah 84047. The hotel is
approximately 11 miles from downtown Salt Lake City and 15 miles from the Salt
Lake City International Airport.
The hotel opened in November 1996. It has concrete masonry
construction, with an aluminum siding exterior. The hotel consists of one
buildings with three stories. The hotel contains 98 suites, which have a
combined area of 60,070 square feet. The following types of suites are
available:
Type of Suite Number Available Square Feet Per Suite
-------------- ---------------- ---------------------
Master Suite 21 590
Homewood Suite 71 590
Two-Bedroom Suite 6 965
30
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 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 110 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
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 $332,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement,
landscaping, parking lot restriping and common area upgrades. 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 3.2
nights, and approximately 47.5% 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 (through October)
---- ---- ----------------------
51.1% 63.8% 65.1%
For January 1, 1999 through October 31, 1999, the average daily rate
per suite was $89.46, and the average daily net revenue per suite was $58.21. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory note dated November 29, 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 15.78% 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 Homewood Homewood
(number of nights) (King) (Double) Master Two Bedroom
------------------ ------ -------- ------ -----------
1 to 4 $119 $129 $139 $209
5 to 12 109 119 129 199
13 to 29 99 109 119 189
30 or more 89 99 109 179
31
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 42% of the
hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include Ford Associates, American Express, Meridian, Blue Cross/Blue Shield,
Baxter Healthcare, Sonic Innovation, Onyx, Federal Express and Cimetrix. From
January 1, 1999 through October 31, 1999, the 10 biggest corporate accounts were
responsible for approximately 20% 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 1999
(annualized) 1998 (annualized)
---------- ---- ------------
$27.30 $35.09 $34.64
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $4,657,834 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 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 Rate
Tax Jurisdiction Assessed Value (per $100) Amount of Tax
---------------- -------------- ---------- -------------
County of Salt Lake $5,632,000 0.013595 $76,567.04
We estimate that the annual property tax on the expected improvements
will be approximately $4,600 or less.
At least five competing hotels are located within five miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) None of the competing hotels are
newer than the hotel. The other competing hotels have franchises with Candlewood
Suites, Courtyard by Marriott, Crystal Inn and Residence Inn (in two cases). We
believe that the rates charged by the hotel are generally competitive with the
rates charged by these other hotels. We are aware of proposed construction to
build one extended-stay hotel within approximately three miles of the hotel. We
expect this hotel to be franchised with Microtel.
32
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 combined balance sheets of the
Homewood Suites Acquisition Hotels (described in Note 1) as of December 31, 1998
and 1997, and the related combined statements of income, shareholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the management of the hotels. 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 Acquisition Hotels.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Homewood Suites Acquisition Hotels as of December 31, 1998 and 1997, and the
combined results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
November 7, 1999 /s/ L.P. Martin & Co, P.C.
33
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEETS
ASSETS
December 31,
1998 1997
--------------- ---------------
CURRENT ASSETS
Cash $ 298,981 $ 218,853
Accounts Receivable, Net 388,352 316,723
Prepaids and Other 66,670 -
--------------- ---------------
TOTAL CURRENT ASSETS 754,003 535,576
--------------- ---------------
INVESTMENT IN HOTEL PROPERTIES
Land and Improvements 5,363,981 3,035,089
Buildings and Improvements 29,417,804 13,842,622
Furniture, Fixtures and Equipment 7,882,778 4,243,800
--------------- ---------------
TOTAL 42,664,563 21,121,511
Less: Accumulated Depreciation (6,272,356) (4,057,854)
--------------- ---------------
NET INVESTMENT IN HOTEL PROPERTIES 36,392,207 17,063,657
--------------- ---------------
OTHER ASSETS
Construction in Progress - 8,080,834
--------------- ---------------
TOTAL ASSETS $ 37,146,210 $ 25,680,067
=============== ===============
The accompanying notes are an integral part of these financial statements.
34
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
1998 1997
--------------- ---------------
CURRENT LIABILITIES
Accounts Payable $ 368,287 $ 695,044
Accrued Taxes 107,272 96,401
Accrued Expenses - Other 247,767 117,154
--------------- ---------------
TOTAL CURRENT LIABILITIES 723,326 908,599
--------------- ---------------
SHAREHOLDERS' EQUITY
Contributed Capital 30,113,336 20,467,543
Retained Earnings 6,309,548 4,303,925
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 36,422,884 24,771,468
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 37,146,210 $ 25,680,067
=============== ===============
35
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
Total
Contributed Retained Shareholders'
Capital Earnings Equity
--------------- --------------- ---------------
Balances, January 1, 1997 $ 9,295,112 $ 3,139,210 $ 12,434,322
Net Income - 1,164,715 1,164,715
Capital Contributions, Net 11,172,431 - 11,172,431
--------------- --------------- ---------------
Balances, December 31, 1997 20,467,543 4,303,925 24,771,468
Net Income - 2,005,623 2,005,623
Capital Contributions, Net 9,645,793 - 9,645,793
--------------- --------------- ---------------
Balances, December 31, 1998 $ 30,113,336 $ 6,309,548 $ 36,422,884
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
36
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED INCOME STATEMENTS
Years Ended December 31,
1998 1997
--------------- ---------------
GROSS OPERATING REVENUE
Suite Revenue $ 10,812,372 $ 4,659,633
Other Customer Revenue 733,318 275,311
--------------- ---------------
TOTAL REVENUE 11,545,690 4,934,944
--------------- ---------------
EXPENSES
Property and Operating 4,748,240 1,910,407
General and Administrative 315,165 165,060
Advertising and Promotion 502,899 209,918
Utilities 543,828 267,938
Real Estate and Personal Property Taxes,
and Property Insurance 432,979 200,113
Depreciation Expense 2,214,501 803,385
Franchise Fees 432,494 -
Pre-Opening Expenses 349,961 213,408
--------------- ---------------
TOTAL EXPENSES 9,540,067 3,770,229
--------------- ---------------
NET INCOME $ 2,005,623 $ 1,164,715
=============== ===============
The accompanying notes are an integral part of these financial statements.
37
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997
--------------- ---------------
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income $ 2,005,623 $ 1,164,715
--------------- ---------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 2,214,501 803,385
Change In:
Accounts Receivable (71,629) (274,291)
Prepaids and Other Current Assets (66,670) -
Accounts Payable (326,757) 222,328
Accrued Taxes 10,871 (3,724)
Accrued Expenses - Other 130,613 89,823
--------------- ---------------
Net Adjustments 1,890,929 837,521
--------------- ---------------
NET CASH FLOWS FROM OPERATING
ACTIVITIES 3,896,552 2,002,236
CASH FLOWS TO FINANCING ACTIVITIES
Capital Distributions, Net (3,816,424) (2,077,731)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH 80,128 (75,495)
CASH, BEGINNING OF YEAR 218,853 294,348
--------------- ---------------
CASH, END OF YEAR $ 298,981 $ 218,853
=============== ===============
SUPPLEMENTAL DISCLOSURES:
NONCASH FINANCING AND INVESTING ACTIVITIES
YEAR ENDED DECEMBER 31, 1998
Investments in hotel properties in the amount of $13,462,218 were
financed with capital contributions.
Construction in progress in the amount of $8,080,834 was reclassified to
investment in hotel properties.
YEAR ENDED DECEMBER 31, 1997
Investments in hotel properties and construction in progress in the
amounts of $8,048,540 and $5,201,622, respectively, were financed with
capital contributions.
Fully depreciated investments in hotel properties at a cost of $654,112
were disposed of during the year.
The accompanying notes are an integral part of these financial statements.
38
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Acquisition Hotels (the Hotels) consist of the following:
Property Hotel Location Date Opened # of Suites
-------- -------------- ----------- -----------
Detroit/Warren Warren, Michigan March, 1990 76
Atlanta/Peachtree Corners Norcross, Georgia February, 1990 92
Clearwater Clearwater, Florida February, 1998 112
Salt Lake Midvale, Utah November, 1996 98
Baltimore/BWI Linthicum, Maryland March, 1998 147
The Owner purchased the Salt Lake Hotel October 1, 1997. The financial
statements include the results of the Salt Lake hotel operations from this date
forward.
Economic conditions in the localities in which the individual Hotels are located
impact revenues and the ability to collect accounts receivable.
The Hotels specialize 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.
The Hotels have been owned and managed by various affiliates of Promus Hotels,
Inc. (the Owner) throughout the financial statement periods. The accompanying
combined financial statements of the Hotels have been presented on a combined
basis because the Owner has a contract pending to sell the five Hotels 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 combined financial statements have been presented on a pretax basis.
(Continued)
39
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES
Property - The Hotel properties are 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
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 properties under construction. At the point construction is
completed and the Hotels are ready to be placed in service, the costs are
reclassified to investment in Hotel properties for financial statement
presentation.
Estimates - The preparation of financial statements in accordance with generally
accepted accounting principles 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 Hotels reviews the carrying value and remaining
depreciable lives of the Hotel properties 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 Hotels. In 1998, pre-opening expenses
of $148,131 and $201,830 were expensed as incurred for the Clearwater and
Baltimore/BWI Hotels, respectively. In 1997, pre-opening expenses of $64,588,
$111,225 and $37,595 were expensed as incurred for the Clearwater, Salt Lake and
Baltimore/BWI Hotels, respectively.
(Continued)
40
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES, Continued
Inventories - The Hotels maintain 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 each hotel. These fees
totaled $56,000 in 1998 and $27,000 in 1997. The Owner also charges each Hotel a
fee for corporate advertising, training and reservations equal to four percent
of net suite revenue. These fees totaled $432,749 in 1998 and $186,386 in 1997.
In 1998, the Owner charged a franchise fee of $432,494 to these Hotels, 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 each Hotel.
The acquisition costs of the properties and related furnishings and equipment
was financed by the Owner. For all properties, excluding Salt Lake, which was a
purchased project, the Owner allocated interest to each property on monies
advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotels' normal depreciation
policy. During 1998, interest capitalized and included in the cost basis of the
hotels totaled $484,495.
On most property and equipment purchases, excluding base Hotel construction
contracts, the following fees have been paid to Promus Hotels, Inc.:
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.
Each Hotel maintains a depository bank account into which customer revenues have
been deposited. The bulk of each 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 Hotels 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.
41
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEET (UNAUDITED)
AUGUST 31, 1999
ASSETS
CURRENT ASSETS
Cash $ 247,392
Accounts Receivable, Net 472,340
Prepaids and Other 25,892
---------------
TOTAL CURRENT ASSETS 745,624
---------------
INVESTMENT IN HOTEL PROPERTIES
Land and Improvements 5,378,751
Buildings and Improvements 29,280,084
Furniture, Fixtures and Equipment 8,352,742
---------------
TOTAL 43,011,577
Less: Accumulated Depreciation (7,884,812)
----------------
NET INVESTMENT IN HOTEL PROPERTIES 35,126,765
----------------
TOTAL ASSETS $ 35,872,389
===============
The accompanying notes are an integral part of this financial statement.
42
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 314,045
Accrued Taxes 433,300
Accrued Expenses - Other 233,596
---------------
TOTAL CURRENT LIABILITIES 980,941
---------------
SHAREHOLDERS' EQUITY
Contributed Capital 26,576,118
Retained Earnings 8,315,330
---------------
TOTAL SHAREHOLDERS' EQUITY 34,891,448
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 35,872,389
===============
43
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED 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 $ 30,113,336 $ 6,309,548 $ 36,422,884
Net Income - 2,005,782 2,005,782
Capital Distributions, Net (3,537,218) - (3,537,218)
--------------- --------------- ---------------
Balances, August 31, 1999 $ 26,576,118 $ 8,315,330 $ 34,891,448
=============== =============== ===============
The accompanying notes are an integral part of this financial statement.
44
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED INCOME STATEMENT (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
GROSS OPERATING REVENUE
Suite Revenue $ 8,787,181
Other Customer Revenue 515,811
---------------
TOTAL REVENUE 9,302,992
---------------
EXPENSES
Property and Operating 3,541,888
General and Administrative 218,472
Advertising and Promotion 422,228
Utilities 400,988
Real Estate and Personal Property Taxes,
and Property Insurance 470,709
Depreciation Expense 1,612,457
Franchise and Management Fees 630,468
---------------
TOTAL EXPENSES 7,297,210
---------------
NET INCOME $ 2,005,782
===============
The accompanying notes are an integral part of this financial statement.
45
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income $ 2,005,782
---------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 1,612,457
Change in:
Accounts Receivable (83,988)
Prepaids and Other Current Assets 40,778
Accounts Payable (54,242)
Accrued Taxes 326,028
Accrued Expenses - Other (14,171)
---------------
Net Adjustments 1,826,862
---------------
NET CASH FLOWS FROM OPERATING
ACTIVITIES 3,832,644
CASH FLOWS (TO) FINANCING ACTIVITIES
Net Equity Distributions (3,884,233)
---------------
NET DECREASE IN CASH (51,589)
CASH, JANUARY 1, 1999 298,981
---------------
CASH, AUGUST 31, 1999 $ 247,392
===============
SUPPLEMENTAL DISCLOSURES:
NONCASH FINANCING AND INVESTING ACTIVITIES
During the period January 1, 1999 through August 31, 1999, additions to
Investment in Hotel Properties totaling $347,015 were financed with capital
contributions.
The accompanying notes are an integral part of this financial statement.
46
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Acquisition Hotels (the Hotels) consist of the following:
Property Hotel Location Date Opened # of Suites
-------- -------------- ----------- -----------
Detroit/Warren Warren, Michigan March, 1990 76
Atlanta/Peachtree Corners Norcross, Georgia February, 1990 92
Clearwater Clearwater, Florida February, 1998 112
Salt Lake Midvale, Utah November, 1996 98
Baltimore/BWI Linthicum, Maryland March, 1998 147
The Owner purchased the Salt Lake hotel October 1, 1997. The financial
statements include the results of the Salt Lake Hotel operations from this date
forward.
Economic conditions in the localities in which the individual Hotels are located
impact revenues and the ability to collect accounts receivable.
The Hotels specialize 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.
The Hotels have been owned and managed by various affiliates of Promus Hotels,
Inc. (the Owner) throughout the financial statement period. The accompanying
combined financial statements of the Hotels have been presented on a combined
basis because the Owner has a contract pending to sell the five Hotels 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 combined financial statements have been presented on a pretax basis.
(Continued)
47
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
(See Independent Accountants' Compilation Report)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES
Property - The Hotel properties are 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
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 principles 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 Hotels reviews the carrying value and remaining
depreciable lives of the Hotel properties 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.
(Continued)
48
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES, Continued
Inventories - The Hotels maintain 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
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 hotel per month $ 40,000
Corporate Advertising, Training
and Reservations 4% of net suite revenue 351,487
Franchise Fees 4% of net suite revenue 351,487
Management Fees 3% of net suite revenue 278,981
The acquisition costs of the properties and related furnishings and equipment
was financed by the Owner. For all properties, excluding Salt Lake, which was a
purchased project, the Owner allocated interest to each property on monies
advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotels' normal depreciation
policy.
On most property and equipment purchases, excluding base Hotel construction
contracts, the following fees have been paid to Promus Hotels, Inc.:
Purchase Fee - 4% of Asset Cost
Project Management Fee - 4.5% of labor portion of capitalized asset
costs
Each Hotel maintains a depository bank account into which customer revenues have
been deposited. The bulk of each 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 Hotels 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.
49
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 six
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
Historical Suites
Balance Acquisition (A) Total
Sheet Adjustments Proforma
------------------------------------------------------------
ASSETS
Investment in hotel properties $ 36,292,592 $ 51,081,600 (A) $ 87,374,192
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 $ 88,146,233
============================================================
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable $ 26,625,000 37,560,000 (B) $ 64,185,000
Accounts payable 8,303 - 8,303
Accrued expenses 664,082 - 664,082
------------------------------------------------------------
Total Liabilities 27,297,385 37,560,000 64,857,385
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) 23,226,140
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 23,288,848
------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 47,989,419 $ 40,156,814 $ 88,146,233
============================================================
50
Notes to Pro Forma Condensed Consolidated Balance Sheet
(A) Increase represents the purchase of 6 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
- -----------------------------------------------------------------------------------------------------------------------------------
Homewood Suites-Atlanta, GA 1990 October 1, 1999 $ 9,800,000 $ 196,000 $ 9,996,000 $ 7,350,000
Homewood Suites-Clearwater, FL February 1998 November 24, 1999 10,416,000 208,320 10,624,320 7,812,000
Homewood Suites-Salt Lake, UT 1996 November 24, 1999 5,153,000 103,060 5,256,060 3,864,750
Homewood Suites-Atlanta, GA 1990 November 24, 1999 4,033,000 80,660 4,113,660 3,024,750
Homewood Suites-Detroit, MI 1990 November 24, 1999 4,330,000 86,600 4,416,600 3,247,500
Homewood Suites-Baltimore, MD March 1998 November 24, 1999 16,348,000 326,960 16,674,960 12,261,000
--------------------------------------------------------
Total $ 50,080,000 $ 1,001,600 $ 51,081,600 $ 37,560,000
(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 and the maturity date for the note in the amount of
$30,210,000 is December 1, 2000. 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.
51
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 ten 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 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
HISTORICAL ADJUSTMENTS
STATEMENT OF HOMEWOOD SUITES
OPERATIONS ACQUISITION (A I)
-----------------------------------------------------
Revenue:
Percentage lease revenue $ - $ 6,169,723 (B)
Interest income and other income - -
Expenses:
Taxes and insurance - 1,040,638 (C)
General and administrative - 115,112 (D)
Depreciation - 1,256,071 (E)
Interest expense - 2,688,125 (F)
-----------------------------------------------------
Total expenses - 5,099,946
----------------------------------------------
Net income $ -
=====================
Earnings per common share:
Basic and Diluted $ -
=====================
Basic and diluted weighted average common shares outstanding - 1,412,531 (G)
=====================
PRO FORMA
ADJUSTMENTS
HOMEWOOD SUITES TOTAL
ACQUISITION (A II) PRO FORMA
---------------------------------------------------
Revenue:
Percentage lease revenue $ 4,918,647 (B) $ 11,088,370
Interest income and other income - -
Expenses:
Taxes and insurance 432,979 (C) 1,473,617
General and administrative 111,414 (D) 226,526
Depreciation 1,155,328 (E) 2,411,398
Interest expense 2,338,818 (F) 5,026,943
---------------------------------------------------
Total expenses 4,038,538 9,138,484
------------------- -----------------------
Net income $ 1,949,886
=======================
Earnings per common share:
Basic and Diluted $ 0.74
=======================
Basic and diluted weighted average common shares outstanding 1,228,980 (G) 2,641,511
=======================
52
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
PRO FORMA
ADJUSTMENTS
HISTORICAL HOMEWOOD
STATEMENT OF SUITES
OPERATIONS ACQUISITION (A I)
---------------------------------------------------
Revenue:
Percentage lease revenue $ 417,306 $ 4,264,391 (B)
Interest income and other income 64,370 -
Expenses:
Taxes and insurance 79,729 822,599 (C)
General and administrative 36,028 85,924 (D)
Depreciation 97,510 931,211 (E)
Interest expense 229,701 1,977,313 (F)
---------------------------------------------------
Total expenses 442,968 3,817,047
Net income $ 38,708 $ 447,344
==============================================
Earnings per common share:
Basic and Diluted $ 0.02
=====================
Basic and diluted weighted average common shares outstanding 2,286,052 1,385,360 (G)
=====================
PRO FORMA
ADJUSTMENTS
HOMEWOOD
SUITES TOTAL
ACQUISITION (A II) PRO FORMA
-----------------------------------------------------
Revenue:
Percentage lease revenue $ 4,598,632 (B) $ 9,280,329
Interest income and other income - 64,370
Expenses:
Taxes and insurance 529,548 (C) 1,431,876
General and administrative 85,379 (D) 207,331
Depreciation 953,304 (E) 1,982,025
Interest expense 1,925,888 (F) 4,132,902
-----------------------------------------------------
Total expenses 3,494,119 7,754,134
Net income $ 1,104,513 $ 1,590,565
=========================== ==================
Earnings per common share:
Basic and Diluted $ 0.32
==================
Basic and diluted weighted average common shares outstanding 1,349,330 (G) 5,020,742
==================
53
Notes to Pro Forma Condensed Consolidated Statements of Operations
(A) Represents results of operations for the ten hotels acquired on a pro forma
basis as if the ten 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
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 foma 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 ten hotels acquired based on the
purchase price, excluding amounts allocated to land, of $71,554,112 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 ten 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 $64.185 million 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).
54
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
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Suites Management, Inc. (the "Lessee") are presented as if
the ten 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. 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
Historical Homewood Homewood
Statement of Suites Suites
Operations Acquisitions (A I) Acquisitions (A II)
----------------------------------------------------------------------------------------
Revenues:
Suite revenue $ - $ 14,075,852 $ 10,812,372
Other income - 811,817 733,318
Expenses:
Operating expenses - 5,586,712 4,748,240
General and administrative - 348,088 315,165
Advertising and promotion - 648,273 502,899
Utilities - 626,269 543,828
Taxes and insurance - 1,040,638 432,979
Depreciation expense - 2,394,294 2,214,501
Franchise fees - 563,035 432,494
Management fees - - -
Rent expense-Apple Suites, Inc. - - -
Other - 226,964 349,961
--------------------------------------------------------------------------------------
Total expenses - 11,434,273 9,540,067
Income before income tax - 3,453,396 2,005,623
Income tax expense - - -
--------------------------------------------------------------------------------------
Net income $ - $ 3,453,396 $ 2,005,623
======================================================================================
55
Pro Forma Total
Adjustments Pro Forma
-----------------------------------------------------
Revenues:
Suite revenue - $ 24,888,224
Other income - 1,545,135
Expenses:
Operating expenses - 10,334,952
General and administrative $ (112,000) (B)
50,000 (C) 601,253
Advertising and promotion (999,318) (D)
995,529 (E) 1,147,383
Utilities - 1,170,097
Taxes and insurance (1,473,617) (F) -
Depreciation expense (4,608,795) (G) -
Franchise fees (995,529) (H)
995,529 (I) 995,529
Management fees 1,170,334 (K) 1,170,334
Rent expense-Apple Suites, Inc. 11,088,370 (L) 11,088,370
Other (576,925) (N) -
-------------------- ------------------------
Total expenses 5,533,578 26,507,918
Income before income tax (5,533,578) (74,559)
Income tax expense - (M) -
-------------------- ------------------------
Net income $ (5,533,578) $ (74,559)
==================== ========================
56
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
HISTORICAL HOMEWOOD HOMEWOOD
STATEMENT OF SUITES SUITES
OPERATIONS ACQUISITIONS (A I) ACQUISITIONS (A II)
----------------------------------------------------------------------------------
REVENUES:
Suite revenue $ 961,604 $ 9,818,797 $ 9,885,579
Other income 59,548 560,096 580,287
EXPENSES:
Operating expenses 259,098 3,794,204 3,984,624
General and administrative 85,676 250,317 245,792
Advertising and promotion 93,237 438,985 475,007
Utilities 26,101 354,113 451,112
Taxes and insurance - 822,599 529,548
Depreciation expense - 1,783,021 1,814,014
Franchise fees 38,464 392,757 395,423
Management fees 40,769 311,275 313,854
Rent expense-Apple Suites, Inc. 417,306 - -
Other 15,425 - -
---------------------------------------------------------------------------------
Total expenses 976,076 8,147,271 8,209,374
Income before income tax 45,076 2,231,622 2,256,492
Income tax expense 18,030 - -
---------------------------------------------------------------------------------
Net income $ 27,046 $ 2,231,622 $ 2,256,492
=================================================================================
PRO FORMA TOTAL
ADJUSTMENTS PRO FORMA
---------------------------------------------------
REVENUES:
Suite revenue - $ 20,665,980
Other income - 1,199,931
EXPENSES:
Operating expenses - 8,037,926
General and administrative $ (90,000) (B)
37,500 (C) 529,285
Advertising and promotion (788,180) (D)
788,175 (E) 1,007,224
Utilities - 831,326
Taxes and insurance (1,352,147) (F) -
Depreciation expense (3,597,035) (G) -
Franchise fees (788,180) (H)
788,175 (I) 826,639
Management fees (625,128) (J)
919,790 (K) 960,560
Rent expense-Apple Suites, Inc. 8,863,023 (L) 9,280,329
Other - 15,425
--------------------- ------------------------
Total expenses 4,155,993 21,488,714
Income before income tax (4,155,993) 377,197
Income tax expense 132,848 (M) 150,878
--------------------- ------------------------
Net income $ (4,288,842) $ 226,319
===================== ========================
57
Notes to Pro Forma Condensed Consolidated Statements of Operations
(A) Represents results of operations for the ten 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
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 agreements. 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 combined state and federal income tax expense estimated on a
combined rate of 40%.
(N) Represents the elimination of pre-opening operating expenses not incurred
by the Lessee.
58
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: December 14, 1999 By: /s/ Glade M. Knight
----------------------------------------
Glade M. Knight,
Chief Executive Officer of Apple Suites, Inc.