FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NUMBER 333-77055
SUPPLEMENT NO. 2 DATED OCTOBER 5, 1999
TO BE USED WITH PROSPECTUS
DATED AUGUST 3, 1999
SUPPLEMENT NO. 2 DATED OCTOBER 5, 1999
TO PROSPECTUS DATED AUGUST 3, 1999
APPLE SUITES, INC.
The following information supplements the prospectus of Apple Suites, Inc.
dated August 3, 1999 and is part of the prospectus. THIS SUPPLEMENT NO. 2
INCORPORATES AND THEREFORE REPLACES SUPPLEMENT NO. 1 DATED AUGUST 17, 1999.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW BOTH THE PROSPECTUS AND THIS
SUPPLEMENT.
TABLE OF CONTENTS FOR SUPPLEMENT NO. 2
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Status of the Offering ............................................. S-2
Recent Developments ................................................ S-2
Property Acquisitions. ............................................. S-2
Overview of Hotels .............................................. S-3
Hotel Supplies and Franchise Fees ............................... S-5
Description of Financing ........................................ S-5
Licensing and Management ........................................ S-6
Potential Economic Risk and Benefit to Glade M. Knight .......... S-6
Summary of Material Contracts ...................................... S-7
Description of Properties .......................................... S-13
Experts ............................................................ S-22
Index to Financial Statements ...................................... F-1
</TABLE>
The prospectus and this supplement contain forward-looking statements
within the meaning of the federal securities laws which are intended to be
covered by the safe harbors created by those laws. These statements include our
plans and objectives for future operations, including plans and objectives
relating to future growth and availability of funds. These forward-looking
statements are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to these statements involve judgments with
respect to, among other things, the continuation of our offering of common
shares, future economic, competitive and market conditions and future business
decisions. All of these matters are difficult or impossible to predict
accurately and many of them are beyond our control. Although we believe the
assumptions underlying the forward-looking statements, and the forward-looking
statements themselves, are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that these forward-looking
statements will prove to be accurate. In light of the significant uncertainties
inherent in these forward-looking statements, the inclusion of this information
should not be regarded as a representation by us or any other person that our
objectives and plans, which we consider to be reasonable, will be achieved.
S-1
<PAGE>
STATUS OF THE OFFERING
We completed the minimum offering of common shares at $9 per share on
August 23, 1999. We are continuing the offering at $10 per share in accordance
with the prospectus.
As of September 22, 1999, we had closed on the following sales of our
common shares:
<TABLE>
<CAPTION>
PROCEEDS NET OF SELLING
PRICE PER NUMBER OF GROSS COMMISSIONS AND MARKETING
COMMON SHARE COMMON SHARES SOLD PROCEEDS EXPENSE ALLOWANCE
- -------------- -------------------- -------------- --------------------------
<S> <C> <C> <C>
$ 9 1,666,666.67 $15,000,000 $13,500,000
$ 10 865,470.00 $ 8,654,700 $ 7,789,230
----------- -----------
Total $23,654,700 $21,289,230
=========== ===========
</TABLE>
We have used proceeds of the offering to acquire, either directly or
through our subsidiaries, the five extended-stay hotels described below.
RECENT DEVELOPMENTS
On August 16, 1999, we added four individuals to our board of directors.
Those four individuals are Lisa B. Kern, Bruce H. Matson, Michael S. Waters and
Robert M. Wily (all of whom are described in the prospectus).
On the same date, Glade M. Knight, who is our Chairman, Chief Executive
Officer and President, was authorized by the board of directors (1) to close the
purchase of any Homewood Suites(Reg. TM) properties on our behalf as he deems in
our best interests, and (2) to cause us to borrow, on either a secured or an
unsecured basis, up to 75% of the purchase price of Homewood Suites(Reg. TM)
properties on such terms as he determines to be in our best interests. We expect
to repay any such borrowing from the proceeds of our ongoing offering and sale
of common shares. There can be no assurance, however, that we will actually
receive proceeds sufficient for that purpose.
On the same date, C. Douglas Schepker became our Senior Vice President and
Chief Operating Officer. From August 1996 to August 1999, Mr. Schepker (age 50)
was a Senior Manager in the Real Estate Group of Ernst & Young Kenneth
Leventhal. From September 1988 until August 1996, he was a Senior
Manager/Director with KPMG, Pricewaterhouse Coopers and Arthur Andersen. Mr.
Schepker's expertise includes management and financial consulting pertaining to
corporate investments, financings, acquisitions, dispositions, developments,
REIT structures and joint ventures. For over three years, he was director of
real estate for Choice Hotels, Inc., a subsidiary of Manor Care, Inc.
PROPERTY ACQUISITIONS
We have purchased, either directly or through our subsidiaries, five
existing hotels licensed with Homewood Suites(Reg. TM), which is a registered
service mark of Promus Hotels, Inc. The five hotels were purchased from Promus
Hotels, Inc. or its affiliates. The total purchase price for the five hotels was
$45,300,000. We used proceeds from our offering of common shares to pay
twenty-five percent of this total, or $11,325,000, at closing in cash. The
balance of 75%, or $33,975,000, is being financed by Promus Hotels, Inc. as
short-term or "bridge financing," as described below.
We have paid a real estate commission of $906,000 to Apple Suites Realty
Group, Inc., as our real estate broker. This amount equals two percent (2%) of
the total purchase price for the hotels.
S-2
<PAGE>
OVERVIEW OF HOTELS
We have closed on our purchases of the following hotels:
<TABLE>
<CAPTION>
NAME AND TOTAL DATE OF PURCHASE FINANCED
LOCATION OF HOTEL SUITES PURCHASE PRICE PORTION
- --------------------------------- -------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Atlanta-Galleria/Cumberland
Atlanta, Georgia .............. 124 10/5/99 $ 9,800,000 $ 7,350,000
Dallas-Addison
Addison, Texas ................ 120 9/20/99 $ 9,500,000 $ 7,125,000
Dallas-Irving/Las Colinas
Irving, Texas ................. 136 9/20/99 $11,200,000 $ 8,400,000
North Dallas-Plano
Plano, Texas .................. 99 9/20/99 $ 5,400,000 $ 4,050,000
Richmond-West End
Glen Allen, Virginia .......... 123 9/20/99 $ 9,400,000 $ 7,050,000
</TABLE>
We directly acquired the hotels in Atlanta, Georgia and Glen Allen,
Virginia. Those two hotels have been leased to Apple Suites Management, Inc.
under a master hotel lease agreement dated as of September 20, 1999. This
agreement is among the material contracts described below.
The three hotels in Texas were acquired by one of our subsidiaries, Apple
Suites REIT Limited Partnership, a Virginia limited partnership, based on
business and tax planning considerations. We have two wholly-owned subsidiaries
that serve as the sole general partner and sole limited partner of this limited
partnership. The sole general partner is Apple Suites General, Inc., a Virginia
corporation. It holds a one percent partnership interest. The sole limited
partner is Apple Suites LP, Inc., a Virginia corporation. It holds a ninety-nine
percent partnership interest. Glade M. Knight is the sole director of these two
corporate partners.
Under a master hotel lease agreement dated as of September 20, 1999, the
three hotels in Texas have been leased to Apple Suites Services Limited
Partnership, a Virginia limited partnership. This limited partnership is a
subsidiary of Apple Suites Management, Inc. Two direct wholly-owned subsidiaries
of Apple Suites Management, Inc. serve as the sole general partner and sole
limited partner of the limited partnership. The sole general partner is Apple
Suites Services General, Inc., a Virginia corporation. It holds a one percent
partnership interest. The sole limited partner is Apple Suites Services Limited,
Inc., a Virginia corporation.
S-3
<PAGE>
It holds a ninety-nine percent partnership interest. Glade M. Knight is the sole
director of these two corporate partners. The ownership and leasing structure is
depicted in the chart below:
(All entities shown below are organized under Virginia law)
[GRAPHIC OMITTED]
S-4
<PAGE>
HOTEL SUPPLIES AND FRANCHISE FEES
We have provided the lessees of the hotels (Apple Suites Management, Inc.
and Apple Suites Services Limited Partnership) with funds for the purchase of
certain hotel supplies, such as sheets, towels and so forth. The lessees are
obligated to repay us under two promissory notes made in the principal amounts
of $47,800 (for the hotels in Texas and Virginia, as a group) and $12,400 (for
the hotel in Atlanta). These promissory notes are substantially similar. Each
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 respective due dates for the first installment, subject to a five-day
grace period, are October 1, 1999 and November 1, 1999. The remaining
installments consist of principal and interest on an amortized basis. The final
maturity dates are October 1, 2004 and November 1, 2004, respectively.
We have also provided the lessees of the hotels with funds for the payment
of hotel franchise fees to Promus Hotels, Inc. The lessees are obligated to
repay us under two promissory notes made in the principal amounts of $215,550
(for the hotels in Texas and Virginia, as a group) and $55,800 (for the hotel in
Atlanta). These promissory notes are substantially similar to the ones described
above, except that these promissory notes provide for repayment in one hundred
twenty-one (121) monthly installments and have final maturity dates of October
1, 2009 and November 1, 2009, respectively.
DESCRIPTION OF FINANCING
As indicated above, Promus Hotels, Inc. is financing 75% of the purchase
price of the five hotels. We have executed two promissory notes payable to
Promus Hotels, Inc. to evidence our debt. To secure the debt, each hotel is
subject to a mortgage created by a deed of trust. The deeds of trust are among
the material contracts described below.
The principal amounts of the two promissory notes are $26,625,000 (which
represents the aggregate financing for the hotels in Texas and Virginia) and
$7,350,000 (which represents the financing for the hotel in Atlanta). In other
respects, the two promissory notes are substantially similar. The promissory
notes provide for, among other things, the following:
o monthly interest payments, based on an annual interest rate of eight
and one-half percent (8.5%)
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 10 days of its due date
o initial payment dates, subject to a 10-day grace period, of October 1,
1999 (for the $26,625,000 note) and November 1, 1999 (for the
$7,350,000 note)
o final maturity dates of October 1, 2000 for each note
Revenue from the operation of the hotels will be used to pay interest. As
indicated above, 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, etc.), a working capital reserve and a reserve for renovations,
repairs and replacements of capital improvements.
We expect to make monthly payments of principal. There can be no assurance,
however, that the net equity proceeds from our offering of common shares will be
sufficient to pay the principal under the promissory notes on or before the
required due dates. If no payments of principal are made prior to the
S-5
<PAGE>
maturity of the promissory notes, a principal payment of $33,975,000 would be
due at maturity, together with a monthly interest payment of $240,656.25. In the
event of default under the promissory notes, various remedies are available to
Promus Hotels, Inc. under the deeds of trust, as described below.
We consider the financing from Promus Hotels, Inc. to be "bridge financing"
because of its short-term nature (i.e., one year). Thus, 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.
LICENSING AND MANAGEMENT
We expect that all five of the hotels will continue to operate as Homewood
Suites(Reg. TM) franchises, which are licensed by Promus Hotels, Inc. To help
achieve that result, Promus Hotels, Inc. has executed separate license
agreements, dated as of September 20, 1999 with the respect to the hotels in
Texas and Virginia, and dated as of October 5, 1999 with respect to the hotel in
Atlanta. Promus Hotels, Inc. is managing each of the five hotels under
management agreements dated as of September 20, 1999 with respect to the hotels
in Texas and Virginia, and dated as of October 5, 1999 with respect to the hotel
in Atlanta. These license and management agreements are among the material
contracts described below.
POTENTIAL ECONOMIC RISK AND BENEFIT TO GLADE M. KNIGHT
Because we are prohibited under federal tax laws from directly operating
our extended-stay hotels, we have entered into leases for the five hotels we
have purchased. The hotels are leased to Apple Suites Management, Inc. or its
indirectly wholly-owned subsidiary, Apple Suites Services Limited Partnership.
Our president and chief executive officer, Glade M. Knight, is the sole
shareholder of Apple Suites Management, Inc. and, as a result, the indirect
owner of Apple Suites Services Limited Partnership.
The master hotel lease agreements have 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 of the lessees under the
master hotel lease agreements and the license and 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
agreements, to help ensure that Apple Suites Management 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 agreements, Apple Suites Management, Inc.
can receive additional funding from two funding commitments in the aggregate
amount of $2 million. The funding commitments 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. Apple Suites Management, Inc. is not required to repay the funds it
receives under the funding commitments.
S-6
<PAGE>
SUMMARY OF MATERIAL CONTRACTS
DEEDS OF TRUST
Each hotel is encumbered by a mortgage on its real property, and a security
interest in its personal property, together with an assignment of hotel rents
and revenues, all in favor of Promus Hotels, Inc. The encumbrances on the hotels
in Texas and Virginia secure the payment of principal and interest under the
promissory note we have made to Promus Hotels, Inc. in the principal amount of
$26,625,000. The encumbrances on the hotel in Atlanta secure the payment of
principal and interest under both of the promissory notes we have made to Promus
Hotels, Inc.
These encumbrances are created by five separate deeds of trust. For the
four hotels in Texas and Virginia, these deeds of trust are each named a "Fee
and Leasehold Deed of Trust, Assignment of Leases and Rents and Security
Agreement." For the hotel in Atlanta, the deed of trust is named a "Fee and
Leasehold Deed to Secure Debt, Assignment of Leases and Rents and Security
Agreement."
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 defines certain events of default. For each deed of
trust, those events include, among others, any default under the promissory
notes, any default under any other 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.
In addition, our hotels in Texas are subject to a second mortgage and
security interest, under terms and conditions that are substantially similar to
the ones described above. These additional encumbrances provide further security
for the payment of principal and interest under our promissory note to Promus
Hotels, Inc. with respect to the Atlanta hotel. Our hotel in Virginia is subject
to a "negative pledge." Under this negative pledge, we have agreed that, as long
as the promissory note for the Atlanta hotel is outstanding, we will not
transfer or further encumber the Virginia hotel (or any interest therein)
without the prior written consent of Promus Hotels, Inc.
ENVIRONMENTAL INDEMNITIES
Each hotel is subject to a separate indemnity. The indemnities 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 in Texas and
Virginia generally will terminate upon payment in full under the promissory note
we have made to Promus Hotels, Inc. in the principal amount of $26,625,000. Our
indemnity with respect to the hotel in Atlanta generally will terminate upon
payment in full under the promissory note we have made to Promus Hotels, Inc. in
the principal amount of $7,350,000. 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 4 years after the date of such full payment, we will
be obligated to pay any enforcement costs for subsequent litigation or
administrative claims.
S-7
<PAGE>
MASTER HOTEL LEASE AGREEMENTS
We have leased our hotels in Atlanta, Georgia and Richmond, Virginia to
Apple Suites Management, Inc. under a master hotel lease agreement dated as of
September 20, 1999. We have leased our hotels in Texas to Apple Suites Services
Limited Partnership, a subsidiary of Apple Suites Management, Inc., under
another master hotel lease agreement dated as of September 20, 1999. These two
master hotel lease agreements are substantially similar. To simplify the
following discussion, the term "Apple Suites Management" will mean the lessee,
whether it is Apple Suites Management, Inc. or Apple Suites Services Limited
Partnership.
The master hotel lease agreements have an initial term of ten years and an
optional five-year extension, provided that Apple Suites Management 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
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 term of the first
five-year extension. If this second option is exercised, we and Apple Suites
Management 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 will determine such rental terms.
We may terminate the master hotel leases if (1) we sell the hotels to a
third party; (2) there is a change of control of Apple Suites Management; 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 we must compensate Apple Suites Management by either
paying the fair market value of the lease as of such termination, or offering to
lease one or more substitute hotel facilities.
Each master hotel lease agreement provides that Apple Suites Management
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 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:
BASE RENT
NAME OF HOTEL (1999 AND 2000)
--------------------------------------- ----------------
Atlanta-Galleria/Cumberland ......... $661,320
Dallas-Addison ...................... $638,220
Dallas-Irving/Las Colinas ........... $824,340
North Dallas-Plano .................. $501,930
Richmond-West End ................... $674,190
S-8
<PAGE>
The quarterly suite revenue breakpoints for the next ten years, before any
adjustment based on the Consumer Price Index, are described in the table below
and the subsequent paragraph:
SUITE REVENUE BREAKPOINTS FOR THE FIRST QUARTER
OF EACH YEAR FROM 1999 THROUGH 2008
<TABLE>
<CAPTION>
ATLANTA-GALLERIA/ DALLAS- DALLAS-IRVING/ NORTH DALLAS- RICHMOND-
YEAR CUMBERLAND ADDISON LAS COLINAS PLANO WEST END
- --------- ------------------- ----------- ---------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
1999 $285,570 $275,595 $355,965 $216,742 $291,128
2000 $265,530 $256,255 $330,985 $201,533 $270,698
2001 $270,540 $261,090 $337,230 $205,335 $275,805
2002 $275,550 $265,925 $343,475 $209,138 $280,913
2003 $280,560 $270,760 $349,720 $212,940 $286,020
2004 $285,570 $275,595 $355,965 $216,742 $291,128
2005 $290,580 $280,430 $362,210 $220,545 $296,235
2006 $295,590 $285,265 $368,455 $224,348 $301,343
2007 $300,600 $290,100 $374,700 $228,150 $306,450
2008 $305,610 $294,935 $380,945 $231,953 $311,558
</TABLE>
In all cases, the suite revenue breakpoints for the second, third and
fourth quarters of the years from 1999 through 2008 are determined by
multiplying the breakpoint for the first quarter (as shown above) by two, three
or four, respectively.
Under the master hotel lease agreements, Apple Suites Management 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 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 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.
Pursuant to the master hotel lease agreements, Apple Suites Management is
required 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(Reg. TM) properties. 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 hotel is licensed to operate as a Homewood Suites(Reg. TM) property
under a separate Homewood Suites(Reg. TM) "License Agreement." The license
agreements are substantially similar. Under each license agreement, the licensor
is Promus Hotels, Inc. and the licensee is the lessee of the hotel. To simplify
the following discussion, the term "Apple Suites Management" will mean the
licensee/lessee, whether it is Apple Suites Management, Inc. or its indirect
wholly-owned subsidiary, Apple Suites Services Limited Partnership.
Under the license agreements, Promus Hotels, Inc. grants Apple Suites
Management the right to operate the hotel using the Homewood Suites(Reg. TM)
"System." The "System" includes the service mark "Homewood Suites(Reg. TM)" 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(Reg. TM) hotel business.
S-9
<PAGE>
In exchange for the license to use the Homewood Suites(Reg. TM) System,
Apple Suites Management agrees to numerous requirements and restrictions
applicable to its operation of the hotel. Apple Suites Management is also
required to pay royalties and other fees, as described below.
Apple Suites Management 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., as manager. However, certain requirements will remain the
practical responsibility of Apple Suites Management. Furthermore, the failure of
Promus Hotels, Inc. to comply with the management agreements will not, of
itself, relieve Apple Suites Management from the obligations imposed upon it
under the license agreements. In such event, Apple Suites Management's only
remedy may be to seek damages for breach of the 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(Reg.
TM), wherever located.
Under the license agreements, Apple Suites Management is granted the right
to use the Homewood Suites(Reg. TM) System only during the term of the license
agreements, and it obtains 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 or its seeking of bankruptcy protection. If a license
agreement is terminated for any reason, the hotel must immediately cease to
identify itself as a Homewood Suites(Reg. TM) property.
Apple Suites Management 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; 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 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 to upgrade hotel facilities to meet the then
current standards specified in the Standards Manual. We expect to pay the costs
of any such required upgrades from the proceeds of our ongoing offering of
common shares, although there can be no assurance that such proceeds will be
sufficient for this purpose.
HOTEL MANAGEMENT AGREEMENTS
Apple Suites Management, Inc. has agreed to have Promus Hotels, Inc. manage
our hotel in Richmond, Virginia, under a management agreement dated as of
September 20, 1999, and our hotel in Atlanta, under a separate management
agreement dated as of October 5, 1999. Apple Suites Services Limited
Partnership, a subsidiary of Apple Suites Management, Inc., has agreed to have
Promus Hotels, Inc. manage our three hotels in Texas under separate management
agreements dated as of September 20, 1999. The management agreements are
substantially similar. To simplify the following discussion, the term "Apple
Suites Management" will mean the lessee of the hotel, whether it is Apple Suites
Management, Inc. or Apple Suites Services Limited Partnership.
S-10
<PAGE>
Under the management agreements, Promus Hotels, Inc. will direct the
operation of the hotels in conformity with the management agreements described
in this section and the hotel license agreements described above. Promus
Hotels, Inc. 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, Inc. will hire, supervise and determine the
compensation and terms of employment of all hotel personnel. Promus Hotels,
Inc. also will determine the terms for admittance, room rates and all use of
hotel rooms. Promus Hotels, Inc. will select and purchase all operating
equipment and supplies for the hotels. Promus Hotels, Inc. 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, Inc. will submit a proposed operating budget for
each hotel to Apple Suites Management 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, Inc. will
submit a recommended capital budget to Apple Suites Management 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,
Inc. will receive a management fee, payable monthly. The management fee will be
equal to 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.
During the first two years of the term 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. 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 may terminate the agreement after its tenth anniversary. If it does
so Promus Hotels, Inc. will be entitled to a termination fee. The termination
fee generally is equal to (a) 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 (b) 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, Inc. may terminate the corresponding
management agreement. If Promus Hotels, Inc. terminates the management agreement
it will be entitled to a termination fee equal to (a) $733,000 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.
S-11
<PAGE>
Beginning in the first full calendar year of operations, Apple Suites
Management may terminate a management agreement if Promus Hotels, Inc. fails to
achieve, in any two consecutive calendar years, a gross operating profit which
is at least equal to 85% of the annual budgeted gross operating profit. Promus
Hotels, Inc. can avoid this termination by making a cash payment to Apple Suites
Management 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
In the master hotel lease agreements, the use of a separate "lessee" (Apple
Suites Management, Inc. or Apple Suites Services Limited Partnership, depending
upon the state in which the hotel is located) is based upon certain technical
tax considerations applicable to real estate investment trusts. In an effort to
minimize operational complexities or problems that may arise from the lease
structure or from the fact that the lessee, rather than Apple Suites, Inc., is
the party to the license agreements and management agreements, we have entered
into a "Comfort Letter" with Promus Hotels, Inc. with respect to each hotel. The
comfort letters grant us certain rights if problems arise under the license
agreements or leases, 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 given 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.
S-12
<PAGE>
DESCRIPTION OF PROPERTIES
All five of the hotels are extended-stay hotels, and are part of the
Homewood Suites(Reg. TM) franchise. 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.
Each suite 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(Reg. TM) 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 hotels
franchises include Hampton Inns(Reg. TM), Doubletree Hotels(Reg. TM) and Embassy
Suites(Reg. TM). Such cross-marketing may affect occupancy at the Homewood
Suites(Reg. TM) properties by directing travelers toward, or away from, Homewood
Suites(Reg. TM).
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-GALLERIA/CUMBERLAND
ATLANTA, GEORGIA
The Homewood Suites(Reg. TM) Atlanta-Galleria/Cumberland is located on a
3.7 acre site in Atlanta, Georgia. Its address is 3200 Cobb Parkway, Atlanta,
Georgia 30339. The hotel is located within approximately 17 miles of downtown
Atlanta and 35 miles of the Hartsfield Atlanta International Airport.
The hotel opened in July 1990. It has wood frame construction, with an
exterior of brick veneer and wood siding. The hotel consists of four buildings,
each with two or three stories. The hotel contains 124 suites, which have a
combined area of 85,600 square feet. The following types of suites are
available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET PER SUITE
- ----------------------------------- ------------------ ----------------------
<S> <C> <C>
Master Suite ............... 96 700
Homewood Suite ............. 24 600
Two-Bedroom Suite .......... 4 1,000
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 15 to 20 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 150 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 $397,000 on renovations or improvements. We expect that the
principal renovations and improvements will involve exterior painting, carpet
replacement and furniture acquisitions (sofas, recliners and televisions). We
expect to pay for the costs of these renovations and improvements with proceeds
from our ongoing offering of common shares.
S-13
<PAGE>
During 1999, the average stay at the hotel has been approximately 3.5
nights, and approximately 66% 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 JULY)
- --------- ---------- ---------- -------- --------------------
76.7% 71.7% 77.2% 77.4 % 80.8%
For January 1, 1999 through September 21, 1999, the average daily rate per
suite was $90.83, and the average daily net revenue per suite was $70.86. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory notes payable to Promus Hotels, Inc. We expect
to make monthly payments of principal to reduce the accrual of interest. 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 notes, and that the hotel continues to have
the level of net revenue specified above, approximately 19.48% 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 $119 $129 $179
5 to 11 109 119 169
12 to 29 92 99 159
30 or more 79 89 149
The hotel offers a weekend discount. This discount varies by type of suite
and generally reduces the basic rate by 25 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 80% of the
hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
Sprint, SITA Group, JD Edwards, Worldspan and Boeing. From January 1, 1999
through July 26, 1999, the ten biggest corporate accounts were responsible for
over 65% 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, one of the largest corporate
accounts during 1999 was with Boeing, which is scheduled to eliminate its
operations in Atlanta during 2000.
The average effective annual rental per square foot for each of the last
five years is shown in the table below:
1999
1995 1996 1997 1998 (ANNUALIZED)
- ------------- ----------- ----------- ----------- -------------
$ 34.44 $ 34.16 $ 36.45 $ 36.57 $ 37.66
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $5,355,919 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.
S-14
<PAGE>
The following table sets forth the 1999 real estate tax information for the
hotel:
<TABLE>
<CAPTION>
ASSESSED TAXABLE TAX AMOUNT
TAX JURISDICTION VALUE PORTION (40%) RATE OF TAX
- ------------------ ------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Cobb County $5,217,693 $2,087,077 0.03427 $ 71,524.14
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $5,000 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 Homestead
Village, Sheraton Suites and Summer Suites. The other competing hotels have
franchises with Courtyard by Marriott, Embassy Suites, Hawthorne 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 one
proposed construction project to build an extended-stay hotel within
approximately one mile of the hotel. We expect this hotel to be franchised with
Hampton Inn Suites.
DALLAS-ADDISON
ADDISON, TEXAS
The Homewood Suites(Reg. TM) Dallas - Addison is located on a 3.34 acre
site in Addison, Texas. Its address is 4451 Beltline Road, Addison, Texas 75244.
The hotel is located within approximately 15 miles of downtown Dallas and 25
miles of the Dallas/Fort Worth International Airport.
The hotel opened in July 1990. It has wood frame construction, with an
exterior of brick veneer and stucco. The hotel consists of four buildings, each
with two or three stories. The hotel contains 120 suites, which have a combined
area of 61,440 square feet. The following types of suites are available:
SQUARE FEET
TYPE OF SUITE NUMBER AVAILABLE PER SUITE
- ---------------------------------- ------------------ ------------
Master Suite .............. 24 590
Homewood Suite ............ 88 460
Two-Bedroom Suite ......... 8 850
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 136 spaces. The hotel provides complimentary shuttle service
within a 3 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 $360,000 on renovations or improvements. We expect that the
principal renovations and improvements will involve upgrading bathrooms and
kitchens, providing additional signage and replacing exterior doors. We expect
to pay for the costs of these renovations and improvements with proceeds from
our ongoing offering of common shares.
During 1999, the average stay at the hotel has been approximately 3.5
nights, and approximately 55% 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 JULY)
- ---------- ---------- ---------- -------- --------------------
83.9% 78.4% 78.1% 76.9 % 68.3%
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<PAGE>
For January 1, 1999 through September 21, 1999, the average daily rate per
suite was $99.29, and the average daily net revenue per suite was $80.01. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory notes payable to Promus Hotels, Inc. We expect
to make monthly payments of principal to reduce the accrual of interest. 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 notes, and that the hotel continues to have
the level of net revenue specified above, approximately 17.28% 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 MASTER MASTER
(NUMBER OF NIGHTS) HOMEWOOD (KING BED) (DOUBLE BED) TWO BEDROOM
- -------------------- ---------- ------------ -------------- ------------
1 to 4 $139 $149 $154 $181
5 to 11 109 119 129 169
12 to 29 89 99 119 149
30 or more 79 89 99 139
The hotel offers a weekend discount. This discount varies by type of suite
and generally reduces the basic rate by 25 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 75% of the
hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
the Internal Revenue Service, MBNA, Mobil/Exxon, Computer Science Corporation,
Lucent Technologies and People Soft. From January 1, 1999 through August 2,
1999, the ten biggest corporate accounts were responsible for over 22% 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 average effective annual rental per square foot for each of the last
five years is shown in the table below:
1999
1995 1996 1997 1998 (ANNUALIZED)
- ------------- ----------- ----------- ----------- -------------
$ 56.35 $ 55.18 $ 54.05 $ 54.25 $ 46.87
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $7,363,796 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 Dallas $8,100,000 0.43307 $ 35,078.67
City of Dallas 8,100,000 1.46053 118,302.93
Town of Addison 8,100,000 0.40000 32,400.00
-------------
Total $ 185,781.60
=============
We estimate that the annual real estate tax on the expected improvements
will be approximately $8,000 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.) Three of the competing hotels are newer than the
hotel. The newer hotels have franchises with Country Inn Suites, Hilton Inn
S-16
<PAGE>
and Quality Inns. The other competing hotels have franchises with Courtyard by
Marriott 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 three proposed construction projects to build extended-stay hotels within
approximately three miles of the hotel. We expect these hotels to be franchised
with Marriott (in two cases) and Budget Suites.
DALLAS-IRVING/LAS COLINAS
IRVING, TEXAS
The Homewood Suites(Reg. TM) Dallas - Irving/Las Colinas is located on a
3.4 acre site in Irving, Texas in the Las Colinas Urban Center. Its address is
4300 Wingren Drive, Irving, Texas 75039. The hotel is located within
approximately 11 miles of downtown Dallas and 10 miles of the Dallas/Fort Worth
International Airport.
The hotel opened in January 1990. It has wood frame construction, with an
exterior of brick veneer, stucco, and wood siding. The hotel consists of five
buildings, each with two or three stories. The hotel contains 136 suites, which
have a combined area of 80,144 square feet. The following types of suites are
available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET PER SUITE
- ----------------------------------- ------------------ ----------------------
<S> <C> <C>
Master Suite ............... 20 620
Homewood Suite ............. 108 560
Two-Bedroom Suite .......... 8 908
</TABLE>
The hotel offers 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, a basketball court and an exercise room. The hotel also contains a
guest convenience store and laundry. The hotel has its own parking lot with 181
spaces. The hotel provides complimentary shuttle service within a 3 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 $440,000 on renovations or improvements. We expect that the
principal renovations and improvements will involve upgrading bathrooms,
repairing the parking lot and improving the meeting room. We expect to pay for
the costs of these renovations and improvements with proceeds from our ongoing
offering of common shares.
During 1999, the average stay at the hotel has been approximately 10
nights, and approximately 60% 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 JULY)
- --------- ---------- ---------- -------- --------------------
75.2% 75.2% 77.8% 75.8 % 76.0%
For January 1, 1999 through September 21, 1999, the average daily rate per
suite was $99.08, and the average daily net revenue per suite was $79.94. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory notes payable to Promus Hotels, Inc. We expect
to make monthly payments of principal to reduce the accrual of interest. 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 notes, and that the hotel continues to have
the level of net revenue specified above, approximately 17.99% of the hotel's
revenue would be needed to cover its portion of the interest payments.
S-17
<PAGE>
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 $139 $189
5 to 12 109 119 169
13 to 29 99 114 159
30 or more 89 99 149
The hotel offers a weekend discount. This discount varies by type of suite
and generally reduces the basic rate by 25 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 75% of the
hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
GTE/Bell Atlantic, Sprint, SAP America, Ernst & Young, Oracle and Associates of
America (a financial services group of Ford Motor Company). From January 1, 1999
through July 19, 1999, the ten biggest corporate accounts were responsible for
over 47% 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 average effective annual rental per square foot for each of the last
five years is shown in the table below:
1999
1995 1996 1997 1998 (ANNUALIZED)
- ------------- ----------- ----------- ----------- -------------
$ 42.17 $ 44.42 $ 46.85 $ 47.48 $ 46.56
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $8,348,973 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 1998 real estate tax information for the
hotel:
<TABLE>
<CAPTION>
TAX RATE
TAX JURISDICTION ASSESSED VALUE (PER $100) AMOUNT OF TAX
- --------------------------------------- ---------------- ------------ ----------------
<S> <C> <C> <C>
County of Dallas $9,519,990 0.43307 $ 41,228.22
City of Irving 9,519,990 0.49300 46,933.55
Irving School District 9,519,990 1.67840 159,783.51
Dallas County Utility District 9,519,990 1.59480 151,824.80
-------------
Total $ 399,770.08
=============
</TABLE>
We estimate that the annual real estate tax on the expected improvements
will be approximately $18,000 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 hotels have franchises with AmeriSuites, StudioPlus and
Summerfield Suites. The other competing hotels have franchises with Harvey Hotel
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 two proposed construction projects to build extended-stay hotels within
approximately five miles of the hotel. We have no definite franchising
information for these hotels.
S-18
<PAGE>
NORTH DALLAS - PLANO
PLANO, TEXAS
The Homewood Suites(Reg. TM) Dallas - Plano is located on a 2.67 acre site
in the Preston Park Business Center in southern Collin County, Texas. Its
address is 4705 Old Sheppard Place, Plano, Texas 75093. The hotel is located
within approximately 23 miles of downtown Dallas and 20 miles of the Dallas/Fort
Worth International Airport.
The hotel opened in April 1997. It has wood frame construction, with an
exterior of brick veneer and stucco. The hotel consists of a single four-story
building. The hotel contains 99 suites, which have a combined area of 50,120
square feet. The following types of suites are available:
SQUARE FEET
TYPE OF SUITE NUMBER AVAILABLE PER SUITE
- -------------------------------------- ------------------ ------------
Extended Double Suite ......... 37 510
Homewood Suite ................ 55 460
Two-Bedroom Suite ............. 7 850
The hotel offers a meeting room that accommodates 20-25 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 and
whirlpool, an exercise room, and a sports court. The hotel also contains a guest
convenience store and laundry. The hotel has its own parking lot with 123
spaces. The hotel provides complimentary shuttle service within a 5 mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. We do not have any current plans for
significant renovations or improvements at the hotel, although routine
maintenance and upkeep will be required.
During 1999, the average stay at the hotel has been approximately 6.3
nights, and approximately 55% 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 JULY)
--------- -------- --------------------
64.4% 70.9 % 69.3%
For January 1, 1999 through September 21, 1999, the average daily rate per
suite was $88.07, and the average daily net revenue per suite was $65.33. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory notes payable to Promus Hotels, Inc. We expect
to make monthly payments of principal to reduce the accrual of interest. 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 notes, and that the hotel continues to have
the level of net revenue specified above, approximately 14.58% 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 OR
(NUMBER OF NIGHTS) EXTENDED DOUBLE TWO BEDROOM
- -------------------- ----------------- ------------
1 to 6 $114 $159
7 to 29 79 129
30 or more 59 119
The hotel offers a weekend discount. This discount varies by type of suite
and generally reduces the basic rate by 25 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.
S-19
<PAGE>
The chief accounts (as designated in the hotel's records) include Dr.
Pepper/7-Up, Arco, Raytheon/E-Systems, Alcatel Netowork Systems, State Farm
Insurance, USA Cycling, Sterling Software, J.C. Penney, Rug Doctor and Eastman
Kodak. From January 1, 1999 through August 12, 1999, the ten biggest corporate
accounts have been responsible for over 39% 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 average effective annual rental per square foot since the opening of
the hotel is shown in the table below:
1997 1999
(ANNUALIZED) 1998 (ANNUALIZED)
-------------- ----------- -------------
$ 38.87 $ 43.99 $ 41.60
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $4,762,151 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 1998 real estate tax information for the
hotel:
TAX RATE
TAX JURISDICTION ASSESSED VALUE (PER $100) AMOUNT OF TAX
- ------------------ ---------------- ------------ ----------------
Collin County $7,124,145 2.35655 $ 167,884.04
At least nine 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.) Five of the competing hotels are newer than the
hotel. The newer hotels have franchises with AmeriSuites, Candlewood Suites,
Homegate Suites, Hawthorne Suites and Residence Inn. The other competing hotels
have franchises with Courtyard by Marriott (in two cases), Hampton Inn Suites
and Mainstay Suites. We believe that the rates charged by the hotel are
generally competitive with the rates charged by these other hotels. We are aware
of three proposed construction projects to build extended-stay hotels within
approximately five miles of the hotel. Although we do not have complete
franchising information for these hotels, we expect three of them to be
franchised with Doubletree Suites, Marriott Townplace and Weston Suites.
RICHMOND-WEST END
GLEN ALLEN, VIRGINIA
The Homewood Suites(Reg. TM) Richmond - West End is located on a 3.75 acre
site on Innslake Drive in Richmond's Innsbrook Corporate Center. Its address is
4100 Innslake Drive, Glen Allen, Virginia 23060. The hotel is located within
approximately 14 miles of downtown Richmond and 20 miles of the Richmond
International Airport.
S-20
<PAGE>
The hotel opened in May 1998. It has metal stud frame construction, with an
exterior of brick veneer and stucco. The hotel consists of a single four-story
building. The hotel contains 123 suites, which have a combined area of 63,600
square feet. The following types of suites are available:
SQUARE FEET
TYPE OF SUITE NUMBER AVAILABLE PER SUITE
- -------------------------------------- ------------------ ------------
Homewood King Suite ........... 98 500
Homewood Double Suite ......... 18 500
Two-Bedroom Suite ............. 7 800
The hotel offers a meeting room that accommodates up to 80 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 136 spaces. The hotel
provides complimentary shuttle service within a 5 mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. We do not have any current plans for
significant renovations or improvements at the hotel, although routine
maintenance and upkeep will be required.
During 1999, the average stay at the hotel has been approximately 4 nights,
and approximately 50% 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 hotel opened:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
1998 1999 (THROUGH JULY)
---------- --------------------
61.7 % 77.1%
For January 1, 1999 through September 21, 1999, the average daily rate per
suite was $92.34, and the average daily net revenue per suite was $66.48. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory notes payable to Promus Hotels, Inc. We expect
to make monthly payments of principal to reduce the accrual of interest. 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 notes, and that the hotel continues to have
the level of net revenue specified above, approximately 20.08% 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 BED) (DOUBLE BED) TWO BEDROOM
- -------------------- ------------ -------------- ------------
1 to 4 $109 $119 $149 - 179
5 to 29 89 99 119
30 to 89 79 89 119
90 or more 69 79 119
The hotel offers a weekend discount. This discount varies by type of suite
and generally reduces the basic rate by 25 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 50% of the
hotel's guests received a corporate discount.
The chief accounts (as designated in the hotel's records) include Capital
One, Circuit City Stores, First Union Bank, Compulink, Saxon Mortgage, Virginia
Power, Owens & Minor, Target Stores and Richfood Holdings. From January 1, 1999
through July 31, 1999, the ten biggest corporate accounts were
S-21
<PAGE>
responsible for over 44% 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 average effective annual rental per square foot since the opening of
the hotel is shown in the table below:
1998 1999
(ANNUALIZED) (ANNUALIZED)
-------------- -------------
$ 37.80 $ 44.88
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $8,523,055 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 Henrico $5,806,300 0.94000 $ 54,579.22
At least seven competing hotels are located within one mile 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 hotels have franchises with Candlewood Suites (scheduled to
open in October 1999), Comfort Suites and Courtyard by Marriott. The other
competing hotels have franchises with AmeriSuites, Hampton Inn, Homestead
Village 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 three proposed construction projects to build extended-stay hotels within
approximately three miles of the hotel. We expect these hotels to be franchised
with Holiday Inn Express, Hilton Garden Inn and Marriott.
EXPERTS
The combined financial statements pertaining to five purchased hotels
(Atlanta-Galleria/Cumberland; Dallas-Addison; Dallas-Irving/Las Colinas; North
Dallas-Plano; Richmond-West End), included herein, have been included herein in
reliance on the report of L.P. Martin & Company, P.C., independent certified
public accountants, also included herein, and upon the authority of said firm as
experts in accounting and auditing.
S-22
<PAGE>
APPLE SUITES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROPERTY FINANCIAL STATEMENTS
Atlanta - Galleria/Cumberland; Dallas - Addison; Dallas - Irving/Las Colinas;
North Dallas - Plano; Richmond - West End
Independent Auditors' Report ......................................................... F-2
Combined Balance Sheets -- December 31, 1998 and December 31, 1997 ................... F-3
Combined Statements of Shareholders' Equity -- Years ended December 31, 1997 and
December 31, 1998 ................................................................... F-4
Combined Income Statements -- Years ended December 31, 1998 and
December 31, 1997 ................................................................... F-5
Combined Statements of Cash Flows -- Years ended December 31, 1998 and
December 31, 1997 ................................................................... F-6
Notes to the Combined Financial Statements -- December 31, 1998 and
December 31, 1997 ................................................................... F-7
* * *
Combined Balance Sheet -- June 30, 1999 (unaudited) .................................. F-10
Combined Statement of Shareholders' Equity -- For the Period January 1, 1999 through
June 30, 1999 (unaudited) ........................................................... F-11
Combined Income Statement -- For the Period January 1, 1999 through
June 30, 1999 (unaudited) ........................................................... F-12
Combined Statement of Cash Flows -- For the Period January 1, 1999 through
June 30, 1999 (unaudited) ........................................................... F-13
Notes to the Combined Financial Statements -- For the Period January 1, 1999 through
June 30, 1999 (unaudited) ........................................................... F-14
PRO FORMA FINANCIAL STATEMENTS
Apple Suites, Inc. -- Pro Forma Condensed Consolidated Balance Sheet as of
June 30, 1999 (unaudited) ........................................................... F-16
Apple Suites, Inc. -- Pro Forma Condensed Consolidated Statement of Operations for the
Year Ended December 31, 1998 and the Six Months Ended June 30, 1999 (unaudited) ..... F-17
Apples Suites Management, Inc. -- Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1998 and the Six Months Ended
June 30, 1999 (unaudited) ........................................................... F-19
</TABLE>
F-1
<PAGE>
L.P. MARTIN & COMPANY
A PROFESSIONAL CORPORATION
CERTIFIED PUBLIC ACCOUNTANTS
4132 INNSLAKE DRIVE
GLEN ALLEN, VIRGINIA 23060
PHONE: (804) 346-2626
FAX (804) 346-9311
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.
/s/ L.P. Martin & Co., P.C.
August 23, 1999
F-2
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash .................................................. $ 374,092 $ 393,079
Accounts Receivable, Net .............................. 714,718 330,540
Prepaids and Other .................................... 8,355 15,904
------------- ------------
Total Current Assets ............................... 1,097,165 739,523
------------- ------------
INVESTMENT IN HOTEL PROPERTIES
Land and Improvements ................................. 8,031,122 7,454,360
Buildings and Improvements ............................ 29,091,731 22,188,107
Furniture, Fixtures and Equipment ..................... 10,822,281 8,417,814
------------- ------------
Total .............................................. 47,945,134 38,060,281
============= ============
Less: Accumulated Depreciation ........................ (11,098,460) (8,704,166)
------------- ------------
Net Investment in Hotel Properties ................. 36,846,674 29,356,115
------------- ------------
OTHER ASSETS
Construction in Progress .............................. -- 5,994,799
------------- ------------
Total Assets ....................................... $ 37,943,839 $ 36,090,437
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ...................................... $ 440,076 $ 845,173
Accrued Taxes ......................................... 997,897 787,680
Accrued Expenses -- Other ............................. 252,761 158,670
------------- ------------
Total Current Liabilities .......................... 1,690,734 1,791,523
------------- ------------
SHAREHOLDERS' EQUITY
Contributed Capital ................................... 11,000,030 12,499,235
Retained Earnings ..................................... 25,253,075 21,799,679
------------- ------------
Total Shareholders' Equity ......................... 36,253,105 34,298,914
------------- ------------
Total Liabilities and Shareholders' Equity ......... $ 37,943,839 $ 36,090,437
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
--------------- -------------- --------------
<S> <C> <C> <C>
Balances, January 1, 1997 ........... $ 5,966,169 $17,961,115 $ 23,927,284
Net Income .......................... -- 3,838,564 3,838,564
Capital Contributions, Net .......... 6,533,066 -- 6,533,066
------------ ----------- ------------
Balances, December 31, 1997 ......... 12,499,235 21,799,679 34,298,914
Net Income .......................... -- 3,453,396 3,453,396
Capital Distributions, Net .......... (1,499,205) -- (1,499,205)
------------ ----------- ------------
Balances, December 31, 1998 ......... $ 11,000,030 $25,253,075 $ 36,253,105
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
GROSS OPERATING REVENUE
Suite Revenue ........................................................... $14,075,852 $10,683,420
Other Customer Revenue .................................................. 811,817 555,232
----------- -----------
Total Revenue ........................................................ 14,887,669 11,238,652
----------- -----------
EXPENSES
Property and Operating .................................................. 5,586,712 3,843,073
General and Administrative .............................................. 348,088 208,174
Advertising and Promotion ............................................... 648,273 476,762
Utilities ............................................................... 626,269 473,887
Real Estate and Personal Property Taxes, and Property Insurance ......... 1,040,638 789,462
Depreciation Expense .................................................... 2,394,294 1,487,077
Franchise Fees .......................................................... 563,035 --
Pre-Opening Expenses .................................................... 226,964 121,653
----------- -----------
Total Expenses ....................................................... 11,434,273 7,400,088
----------- -----------
Net Income ........................................................... $ 3,453,396 $ 3,838,564
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income ................................................ $ 3,453,396 $ 3,838,564
------------ ------------
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation ............................................ 2,394,294 1,487,077
Change In:
Accounts Receivable ..................................... (384,178) (138,055)
Prepaids and Other Current Assets ....................... 7,549 (7,691)
Accounts Payable ........................................ (405,097) 38,368
Accrued Taxes ........................................... 210,217 195,246
Accrued Expenses -- Other ............................... 94,091 (1,058)
------------ ------------
Net Adjustments ......................................... 1,916,876 1,573,887
------------ ------------
Net Cash Flows from Operating Activities ............... 5,370,272 5,412,451
CASH FLOWS TO FINANCING ACTIVITIES
Capital Distributions, Net ................................ (5,389,259) (5,266,712)
------------ ------------
Net Increase (Decrease) in Cash ........................ (18,987) 145,739
Cash, Beginning of Year ................................ 393,079 247,340
------------ ------------
Cash, End of Year ...................................... $ 374,092 $ 393,079
============ ============
SUPPLEMENTAL DISCLOSURES:
Noncash Financing and Investing Activities ................
</TABLE>
December 31, 1997 construction in progress totaling $5,994,799 was
reclassified to investment in hotel properties during 1998.
Investment in hotel properties totaling $3,890,054 in 1998 and $11,799,781
in 1997 was financed with capital contributions.
During 1997, the hotels disposed of fully depreciated furniture, fixtures
and equipment in the amount of $503,106.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
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:
<TABLE>
<CAPTION>
PROPERTY HOTEL LOCATION DATE OPENED # OF SUITES
- -------------------------------- ---------------------- ------------- ------------
<S> <C> <C> <C>
Atlanta - Galleria/ Cumberland Atlanta, Georgia 1990 124
Dallas - Addison Addison, Texas 1990 120
Dallas - Los Colinas Irving, Texas 1990 136
North Dallas - Plano Plano, Texas April, 1997 99
Richmond - West End Glen Allen, Virginia May, 1998 123
</TABLE>
The Owner purchased the North Dallas-Plano hotel October 1, 1997. The
financial statements include the results of the operations from this date
forward.
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 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.
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 .......................... 12-15 Years
Buildings and Improvements ................. 30-35 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 principals requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
Annually, management of the 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.
F-7
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1998
AND 1997 - (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 Costs -- Pre-opening costs represent operating expenses
incurred prior to initial opening of the hotels. In 1998, pre-opening expenses
of $226,964 for the Richmond-West End hotel were expensed as incurred. In 1997,
pre-opening expenses of $66,045 for the North Dallas - Plano hotel and
pre-opening expenses of $55,608 for the Richmond - West End hotel were expensed
as incurred.
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 $39,000 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 $566,569 in 1998 and $427,337
in 1997. In 1998, the Owner charged a franchise fee of $563,035 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 North Dallas
- - Plano 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 Richmond-West End hotel totaled $445,782.
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.
NOTE 4 -- CONCENTRATIONS AND CONTINGENCIES
Approximately sixty percent of the Richmond-West End hotel's revenues are
from Capital One Financial Corporation, a non affiliated entity.
The Hotels' depository bank accounts are maintained with two financial
institutions; Bank of America and First Union. A concentration of credit risk
exists to the extent that cash deposits exceed amounts insured by FDIC; $100,000
per financial institution. At December 31, 1998, cash deposits exceeded FDIC
insurable amounts by $150,132 and $170,079, respectively.
F-8
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1998
AND 1997 - (CONTINUED)
NOTE 4 -- CONCENTRATIONS AND CONTINGENCIES -- (CONTINUED)
The general contractor who constructed the Richmond-West End hotel has
filed a $3,800,000 lien against the property. Management believes that the
general contractor's case is grossly exaggerated and that the matter will be
satisfactorily resolved in a prompt manner. Management also believes that in the
event they are unable to prevail entirely, any aspect of the claim should not
have a material adverse affect on the Hotels' financial position or results of
operations.
F-9
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEET (UNAUDITED)
JUNE 30, 1999
ASSETS
Current Assets
Cash .................................................. $ 326,301
Accounts Receivable, Net .............................. 727,247
Prepaids and Other .................................... 6,050
-------------
Total Current Assets ................................ 1,059,598
-------------
Investment in Hotel Properties .........................
Land and Improvements ................................. 8,044,305
Buildings and Improvements ............................ 29,188,026
Furniture, Fixtures and Equipment ..................... 11,401,756
-------------
Total ............................................... 48,634,087
Less: Accumulated Depreciation ........................ (12,435,726)
-------------
Net Investment in Hotel Properties .................. 36,198,361
-------------
Total Assets ........................................ $ 37,257,959
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable ..................................... $ 283,849
Accrued Taxes ........................................ 673,966
Accrued Expenses - Other ............................. 298,719
-------------
Total Current Liabilities .......................... 1,256,534
-------------
Shareholders' Equity ..................................
Contributed Capital .................................. 9,074,634
Retained Earnings .................................... 26,926,791
-------------
Total Shareholders' Equity ......................... 36,001,425
-------------
Total Liabilities and Shareholders' Equity ......... $ 37,257,959
=============
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
--------------- -------------- --------------
<S> <C> <C> <C>
Balances, January 1, 1999 .......... $ 11,000,030 $25,253,075 $ 36,253,105
Net Income ......................... -- 1,673,716 1,673,716
Capital Distributions, Net ......... (1,925,396) -- (1,925,396)
------------ ----------- ------------
Balances, June 30, 1999 ............ $ 9,074,634 $26,926,791 $ 36,001,425
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED INCOME STATEMENT (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999
<TABLE>
<S> <C>
GROSS OPERATING REVENUE
Suit Revenue ............................................................ $ 7,364,098
Other Customer Revenue .................................................. 420,072
-----------
Total Revenue ......................................................... 7,784,170
-----------
EXPENSES
Property and Operating .................................................. 2,845,653
General and Administrative .............................................. 187,738
Advertising and Promotion ............................................... 329,239
Utilities ............................................................... 265,585
Real Estate and Personal Property Taxes, and Property Insurance ......... 616,949
Depreciation Expense .................................................... 1,337,266
Franchise and Management Fees ........................................... 528,024
-----------
Total Expenses ........................................................ 6,110,454
-----------
Net Income ............................................................ $ 1,673,716
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income .......................................................... $ 1,673,716
------------
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Depreciation ...................................................... 1,337,266
Change in:
Accounts Receivable ............................................... (12,529)
Prepaids and Other Current Assets ................................. 2,305
Accounts Payable .................................................. (156,227)
Accrued Taxes ..................................................... (323,931)
Accrued Expenses - Other .......................................... 45,958
------------
Net Adjustments ..................................................... 892,842
------------
Net Cash Flows from Operating
Activities ....................................................... 2,566,558
CASH FLOWS FROM (TO) FINANCING ACTIVITIES
Net Equity Distributions ............................................ (2,614,349)
------------
Net Decrease in Cash .............................................. (47,791)
Cash, January 1, 1999 ............................................. 374,092
------------
Cash, June 30, 1999 ............................................... $ 326,301
============
SUPPLEMENTAL DISCLOSURES:
Noncash Financing and Investing Activities
</TABLE>
During the period January 1, 1999 through June 30, 1999, additions to
Investment in Hotel Properties totaling $688,953 were financed with capital
contributions.
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Acquisition Hotels (the Hotels) consist of the
following:
<TABLE>
<CAPTION>
PROPERTY HOTEL LOCATION DATE OPENED # OF SUITES
- ------------------------- ---------------------- ------------- ------------
<S> <C> <C> <C>
Atlanta - Galleria/
Cumberland Atlanta, Georgia 1990 124
Dallas - Addison Addison, Texas 1990 120
Dallas - Los Colinas Irving, Texas 1990 136
North Dallas - Plano Plano, Texas April, 1997 99
Richmond - West End Glen Allen, Virginia May, 1998 123
</TABLE>
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 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.
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 .......................... 12-15 Years
Buildings and Improvements ................. 30-35 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 principals requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
Annually, management of the 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.
F-14
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED) FOR THE
PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999 - (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date of
three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Inventories -- The 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 June 30, 1999, the following fees
were expensed to the owner.
<TABLE>
<CAPTION>
FEE TYPE BASIS FOR DETERMINATION TOTAL EXPENSE
- ----------------------------------- ---------------------------- --------------
<S> <C> <C>
Accounting Fees $1,000 per hotel per month $ 30,000
Corporate Advertising, Training
and Reservations 4% of net suite revenue 294,568
Franchise Fees 4% of net suite revenue 294,568
Management Fees 3% of net suite revenue 233,456
</TABLE>
The acquisition costs of the properties and related furnishings and
equipment was financed by the owner. For all properties, excluding North Dallas
- - Plano 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.
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 current period intercompany/intracompany
transfers being reflected as net contributions or distributions.
NOTE 4 -- CONCENTRATIONS AND CONTINGENCIES
Approximately sixty percent of the Richmond-West End hotel's revenues are
from Capital One Financial Corporation, a non affiliated entity.
The Hotels' depository bank accounts are maintained with two financial
institutions; Bank of America and First Union. A concentration of credit risk
exists to the extent that cash deposits exceed amounts insured by FDIC; $100,000
per financial institution. At June 30, 1999, cash deposits exceeded FDIC
insurable amounts by $108,909.
The general contractor who constructed the Richmond-West End hotel has
filed a $3,800,000 lien against the property. Management believes that the
general contractor's case is grossly exaggerated and that the matter will be
satisfactorily resolved in a prompt manner. Management also believes that in the
event they are unable to prevail entirely, any aspect of the claim should not
have a material adverse affect on the Hotels' financial position or results of
operations.
F-15
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 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
five Homewood Suites hotels from Promus Hotels, Inc. ("Promus") had occurred on
June 30, 1999. See Note A for individual hotel details. Such information is
based in part upon the Historical 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 June 30, 1999, nor does it
purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
HOMEWOOD
HISTORICAL SUITES
BALANCE ACQUISITION TOTAL
SHEET ADJUSTMENTS(A) PRO FORMA
------------ ---------------------- ----------------
<S> <C> <C> <C>
ASSETS
Investment in hotels ............................... -- $ 46,206,000 (A) $ 46,206,000
Cash and cash equivalents .......................... $ 35,208 -- 35,208
Due from lessee .................................... -- -- 0
Prepaid expenses ................................... -- -- 0
Other assets ....................................... 162,449 (155,361)(D) 7,088
-------- -------------- ------------
Total Assets .................................... $197,657 $ 46,050,639 $ 46,248,296
======== ============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage notes payable ............................. -- $ 33,975,000 (B) $ 33,975,000
Line of credit indebtedness ........................ $200,000 0 200,000
Accounts payable ................................... -- 0 0
Accrued expenses ................................... -- 0 0
-------- -------------- ------------
Total Liabilities ............................... 200,000 33,975,000 34,175,000
======== ============== ============
Shareholders' Equity
Common stock ....................................... 100 12,231,000 (C)
-- (155,361)(D) 12,075,739
Net income less than distributions ................. (2,443) -- (2,443)
-------- -------------- ------------
Total Shareholders' Equity ......................... (2,343) 12,075,639 12,073,296
-------- -------------- ------------
Total Liabilities and Shareholders' Equity ......... $197,657 $ 46,050,639 $ 46,248,296
======== ============== ============
</TABLE>
- ----------
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(A) Increase represents the purchase of 5 hotels, including the 2% acquisition
fee payable to Apple Suites Realty Group, Inc. The hotels acquired are as
follows:
<TABLE>
<CAPTION>
2%
DATE COMMENCED MONTH PURCHASE ACQUISITION DEBT
PROPERTY OPERATIONS ACQUIRED PRICE FEE TOTAL ISSUED
- --------------------------------- ---------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Homewood Suites-Dallas, TX 1990 Sept. 1999 $ 9,500,000 $190,000 $ 9,690,000 $ 7,125,000
Homewood Suites-Las Colinas, TX 1990 Sept. 1999 11,200,000 224,000 11,424,000 8,400,000
Homewood Suites-Plano, TX 1997 Sept. 1999 5,400,000 108,000 5,508,000 4,050,000
Homewood Suites-Richmond, VA May 1998 Sept. 1999 9,400,000 188,000 9,588,000 7,050,000
Homewood Suites-Atlanta, GA 1990 Oct. 1999 9,800,000 196,000 9,996,000 7,350,000
----------- -------- ----------- -----------
Total $45,300,000 $906,000 $46,206,000 $33,975,000
=========== ======== =========== ===========
</TABLE>
(B) Represents the debt issued at acquisition. The notes bear interest of 8.5%
per annum. The maturity date for all notes is October 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 representing 1,517,494 shares
at a $9 purchase price per share (net $8.06 per share).
(D) Represents the reclassification of offering costs upon the issuance of
common stock.
F-16
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
SIX MONTHS ENDED JUNE 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 five Homewood Suites hotels from Promus Hotels, Inc.
("Promus") had occurred at the beginning of the periods presented and all of the
hotels had been leased to Apple Suites Management, Inc. or Apple Suites Services
Limited Partnership (the "Lessee") pursuant to the Percentage Leases. Such pro
forma information is based in part upon the Historical 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 Condensed
Consolidated Statements of Operations 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 common share.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------
HISTORICAL
CONSOLIDATED HOMEWOOD
STATEMENT OF SUITES TOTAL
OPERATIONS ACQUISITIONS (A) PRO FORMA
-------------- --------------------- ---------------------
<S> <C> <C> <C>
REVENUE:
Percentage lease revenue ............. $-- $ 6,261,618 (B) $ 6,261,618 (A)
EXPENSES:
Taxes and insurance .................. -- 1,040,638 (C) 1,040,638
General and administrative ........... -- 120,195 (D) 120,195
Depreciation ......................... -- 1,176,103 (E) 1,176,103
--- ------------ ------------
Total expenses ........................ -- 2,336,936 2,336,936
--- ------------ ------------
Income before interest income (expense) -- 3,924,682 3,924,682
Interest income ....................... -- -- --
Interest expense ...................... -- 2,688,125 (F) 2,688,125
--- ------------ ------------
Net income ............................ $-- $ 1,236,557 $ 1,236,557
=== ============ ============
Earnings per common share:
Basic and Diluted .................... $-- $ 0.88
=== ============
Basic and diluted weighted average
common shares outstanding ............ -- 1,412,531 (G) 1,412,531
=== ============ ============
</TABLE>
F-17
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) - (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------
HISTORICAL HOMEWOOD
STATEMENT OF SUITES TOTAL
OPERATIONS ACQUISITIONS (A) PRO FORMA
-------------- --------------------- --------------
<S> <C> <C> <C>
REVENUE:
Percentage lease revenue ........... $ -- $ 3,317,994 (B) 3,317,994
EXPENSES:
Taxes and insurance ................ -- 616,949 (C) 616,949
General and administrative ......... 2,443 61,155 (D) 63,598
Depreciation ....................... -- 640,931 (E) 640,931
-------- ------------ ---------
Total expenses ...................... 2,443 1,319,035 1,321,478
-------- ------------ ---------
Income (loss) before interest income
(expense) .......................... (2,443) 1,998,959 1,996,516
Interest income ..................... -- -- --
Interest expense .................... -- 1,443,938 (F) 1,443,938
-------- ------------ ---------
Net income (loss) ................... $ (2,443) $ 555,021 $ 552,578
======== ============ ===========
Earnings per common share:
Basic and Diluted .................. $ -- $ 0.36
======== ===========
Basic and diluted weighted average
common shares outstanding .......... -- 1,517,494 (G) 1,517,494
======== ============ ===========
</TABLE>
- ----------
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents results of operations for the five hotels acquired on a pro forma
basis as if the five hotels were owned by the Company at the beginning of
the periods presented. Since one of the hotels was under construction in
1998 and full operations did not commence until May 1998, no pro forma
adjustments were made for the periods prior to completion. See Note A to Pro
Forma Condensed Consolidated Balance Sheet for a list of individual hotels
acquired.
(B) 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 agreements. Refer to
the Master Hotel Lease Agreement section to the prospectus supplement 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 were derived from 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 five hotels acquired based on the
purchase price, excluding amounts allocated to land, of $35,251,200, 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 $8,725,080 related to one hotel did not commence
depreciation until May 1998.
(F) Represents the interest expense for the five hotel acquisitions for the
period in which the hotels were not owned. Interest was computed using the
interest rates of 8.5% on mortgage debt of $33.975 million that was assumed
at acquisition. Interest expense on $7.125 million was not recorded for the
first four months in 1998 as this amount was attributable to one hotel that
had not commenced operations. See Note B to the Pro Forma Condensed
Consolidated Balance Sheet for more detail.
(G) Represents common shares issued, 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), except for the
common shares issued to purchase the Richmond, Virginia property, which were
assumed to be issued on May 1, 1998.
F-18
<PAGE>
APPLE SUITES MANAGEMENT, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Suites Management, Inc. (the "Lessee") are presented as if
the five 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. 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 Historical Consolidated Statements of
Operations of the Lessee, and the five 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.
<TABLE>
<CAPTION>
FOR THE YEAR-ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------------
HISTORICAL HOMEWOOD
STATEMENT OF SUITES PRO FORMA TOTAL
OPERATIONS ACQUISITIONS (A) ADJUSTMENTS PRO FORMA
-------------- ------------------ --------------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Suite revenue ...................... $-- $ 14,075,852 -- $ 14,075,852
Other income ....................... -- 811,817 -- 811,817
EXPENSES:
Property and operating costs and
expenses ......................... -- 5,586,712 -- 5,586,712
General and administrative ......... -- 348,088 $ (56,000)(B)
50,000 (C) 342,088
Advertising and promotion .......... -- 648,273 (566,569)(D)
-- -- 563,034 (E) 644,738
Utilities .......................... -- 626,269 -- 626,269
Taxes and insurance ................ -- 1,040,638 (1,040,638)(F) --
Depreciation expense ............... -- 2,394,294 (2,394,294)(G) --
Franchise fees ..................... -- 563,035 (563,035)(H)
-- -- 563,035 (I) 563,035
Management fees .................... -- 619,034 (K) 619,034
Percentage of rent lease payment -- -- 6,261,618 (L) 6,261,618
Other .............................. -- 226,964 -- 226,964
--- ------------ ------------- ------------
Total expenses ...................... -- 11,434,273 3,436,185 14,870,458
--- ------------ ------------- ------------
Income before income taxes .......... -- 3,453,396 3,436,185 17,211
Income tax expense ................. -- -- 6,884 (M) 6,884
--- ------------ ------------- ------------
Net income .......................... $-- $ 3,453,396 $ (3,443,069) $ 10,327
=== ============ ============= ============
</TABLE>
F-19
<PAGE>
APPLE SUITES MANAGEMENT, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) - (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------------------------
HISTORICAL HOMEWOOD
STATEMENT OF SUITES PRO FORMA TOTAL
OPERATIONS ACQUISITIONS (A) ADJUSTMENTS PRO FORMA
-------------- ------------------ --------------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Suite revenue ............................ $-- $7,364,098 -- $7,364,098
Other income ............................. -- 420,072 -- 420,072
EXPENSES:
Property and operating costs and
expenses ............................... -- 2,845,653 -- 2,845,653
General and administrative ............... -- 187,738 $ (30,000)(B)
-- -- 25,000 (C) 182,738
Advertising and promotion ................ -- 329,239 (294,568)(D)
-- -- 294,568 (E) 329,239
Utilities ................................ -- 265,585 -- 265,585
Taxes and insurance ...................... -- 616,949 (616,949)(F) --
Depreciation expense ..................... -- 1,337,266 (1,337,266)(G) --
Franchise fees ........................... 294,568 (294,568)(H) --
294,568 (I) 294,568
Management fees .......................... 233,456 (233,456)(J) --
324,564 (K) 324,564
Percentage of rent lease payment ......... -- -- 3,317,994 (L) 3,317,994
--- ---------- ------------- ----------
Total expenses ............................ -- 6,110,454 1,449,887 7,560,341
--- ---------- ------------- ----------
Income before income tax .................. -- 1,673,716 (1,449,887) 223,829
--- ---------- ------------- ----------
Income tax expense ....................... -- -- 89,531 (M) 89,531
--- ---------- ------------- ----------
Net income ................................ $-- $1,673,716 $ (1,539,418) $ 134,298
=== ========== ============= ==========
</TABLE>
- ----------
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents results of operations for the five 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. The hotels
acquired are as follows:
DATE COMMENCED MONTH
PROPERTY OPERATIONS ACQUIRED
- ----------------------------------------- ---------------- -----------
Homewood Suites-Dallas, TX .............. 1990 Sept. 1999
Homewood Suites-Las Colinas, TX ......... 1990 Sept. 1999
Homewood Suites-Plano, TX ............... 1997 Sept. 1999
Homewood Suites-Richmond. VA ............ May 1998 Sept. 1999
Homewood Suites-Atlanta, GA ............. 1990 Oct. 1999
Since the Richmond hotel was under construction in 1998 and full operations did
not commence until May 1998, 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, 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 market reservation fee to be incurred under
the new management agreements. The market reservation fee is calculated
based on 4% of gross revenue.
(F) Represents the elimination of the taxes and insurance. Under the terms of
the lease these expenses will be the responsibility of the Company and,
accordingly, are reflected in the Company's Pro Forma Condensed
Consolidated Statement of Operations.
F-20
<PAGE>
APPLE SUITES MANAGEMENT, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) - (CONTINUED)
(G) Represents the elimination of the depreciation expense. This expense is
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 franchise fees to be incurred under the new management
agreements. The franchise fees are calculated based on the terms of the
agreement which is 4% of gross revenue.
(J) Represents the elimination of the historical management fees for the six
months ended June 30, 1999.
(K) Represents 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 year ended December 31, 1998 and six month period ended
June 30, 1999.
(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. Refer to the Master Hotel Lease
Agreements section in the prospectus supplement for details.
(M) Represents the state and federal income tax expense estimated on a combined
rate of 40%.
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