FILED PURSUANT TO RULE 424(b)(3)
FILE NUMBER: 333-77055
SUPPLEMENT NO. 5 DATED MARCH 21, 2000 TO BE USED WITH PROSPECTUS DATED AUGUST 3,
1999.
SUPPLEMENT NO. 5 DATED MARCH 21, 2000
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. 5
INCORPORATES AND THEREFORE REPLACES ALL SUPPLEMENTS PREVIOUSLY IN USE
(SUPPLEMENTS 1, 2, 3 AND 4). PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE
PROSPECTUS AND THIS SUPPLEMENT.
TABLE OF CONTENTS FOR SUPPLEMENT NO. 5
<TABLE>
<CAPTION>
<S> <C>
Status of the Offering..............................................................................S - 2
Recent Developments.................................................................................S - 2
Company Management..................................................................................S - 3
Our Properties......................................................................................S - 3
Property Acquisitions...............................................................................S - 4
Overview...................................................................................S - 4
Ownership and Leasing of Hotels............................................................S - 5
Hotel Supplies and Franchise Fees..........................................................S - 6
Description of Financing...................................................................S - 7
Licensing And Management...................................................................S - 9
Potential Economic Risk and Benefit Involving Apple Suites Management......................S - 9
Summary of Material Contracts.......................................................................S - 10
Description of Properties...........................................................................S - 17
Management's Discussion and Analysis................................................................S - 46
Selected Financial Data.............................................................................S - 51
Update Concerning Prior Programs....................................................................S - 52
Experts.............................................................................................S - 57
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 March 17, 2000, 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 2,256,256.00 22,562,560 20,306,304
------------ ---------- ----------
TOTAL 3,922,922.67 $37,562,560 $33,806,304
============ ========== ==========
</TABLE>
We have purchased, either directly or through our subsidiaries, a total of
11 extended-stay hotels with the net proceeds of our offering. All of our hotels
are licensed with Homewood Suites(R) by Hilton, which is a registered service
mark of Hilton Hotels Corporation. A summary of our hotels appears below.
RECENT DEVELOPMENTS
As discussed in detail below, we have a total of $68.6 million in notes
payable in connection with the purchase of our hotels. Final principal payments
are due as follows: (a) $34 million on October 1, 2000, (b) $30.2 million on
November 1, 2000, and (c) $4.4 million on January 1, 2001. We plan to pay these
notes with the proceeds from our continuous "best efforts" offering of common
shares. However, based on the current rate at which equity is being raised by
the offering, we may need to seek other measures to repay these loans. We
currently are holding discussions with several lenders to obtain financing for
the hotels and are exploring both unsecured and secured financing arrangements.
Although no firm financing commitments have been received, we believe,
based on discussions with lenders and other market indicators, that we can
obtain sufficient financing prior to maturity of the notes. Obtaining
refinancing is dependent upon a number of factors, including: (a) continued
operation of the hotels at or near current occupancy and room rate levels, as
the hotel leases are based on a percentage of hotel suite income, (b) the
general level of interest rates, including credit spreads for real estate based
lending, and (c) general economic conditions.
There is no assurance that we will be able to obtain financing to repay our
current outstanding debt. If we are unable to obtain such financing and if our
offering proceeds are insufficient, we would be subject to a number of default
remedies, including possible loss of the hotels through foreclosure. Depending
on the terms of any financing
S-2
<PAGE>
we obtain, we may need to modify our borrowing policy, as described in the
prospectus, of holding our properties on an all-cash basis over the long-term.
COMPANY MANAGEMENT
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 to close the
purchase of hotels on our behalf as he deems in our best interests. He also was
authorized to cause us to borrow, on either a secured or an unsecured basis, up
to 75% of the purchase price for such hotels. 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.
From August 1999 through March 2000, C. Douglas Schepker served as our
Senior Vice President and Chief Operating Officer. His duties were assumed by
Glade M. Knight in March 2000.
OUR PROPERTIES
(Map of United States shows general location of hotels)
[GRAPHICS OMITTED]
S-3
<PAGE>
<TABLE>
<CAPTION>
Date of Name Total Date of Name Total
Purchase of Hotel Suites Purchase of Hotel Suites
- -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C>
September 1999 Dallas - Addison 120 November 1999 Atlanta - Peachtree 92
September 1999 Dallas - Irving/Las Colinas 136 November 1999 Baltimore - BWI Airport 147
September 1999 North Dallas - Plano 99 November 1999 Clearwater 112
September 1999 Richmond - West End 123 November 1999 Detroit - Warren 76
October 1999 Atlanta - Galleria/Cumberland 124 November 1999 Salt Lake City - Midvale 98
December 1999 Jackson-Ridgeland 91
</TABLE>
PROPERTY ACQUISITIONS
OVERVIEW
We used the proceeds from our offering of common shares to pay 25% of the
purchase price for each hotel to Promus Hotels, Inc., or an affiliate, as the
seller. Promus Hotels, Inc. is a wholly-owned subsidiary of Hilton Hotels
Corporation. The balance, or 75% of the purchase price for each hotel, is being
financed by Promus Hotels, Inc. as short-term or "bridge financing" (described
in further detail below). We paid a 2% real estate commission on the total
purchase price for each hotel to Apple Suites Realty Group, Inc., as our real
estate broker. This corporation is owned by Glade M. Knight, who is our
president and chief executive officer. The following table summarizes the
purchase information for our hotels:
<TABLE>
<CAPTION>
Hotel Purchase Amount Real Estate
Name Price Financed (75%) Commission
- ----- ---------- ------------- -----------
<S> <C> <C> <C>
Dallas - Addison $9,500,000 $7,125,000 $190,000
Dallas - Irving/Las Colinas 11,200,000 8,400,000 224,000
North Dallas - Plano 5,400,000 4,050,000 108,000
Richmond - West End 9,400,000 7,050,000 188,000
Atlanta - Galleria/Cumberland 9,800,000 7,350,000 196,000
Atlanta - Peachtree 4,033,000 3,024,750 80,660
Baltimore - BWI Airport 16,348,000 12,261,000 326,960
Clearwater 10,416,000 7,812,000 208,320
Detroit - Warren 4,330,000 3,247,500 86,600
Salt Lake City - Midvale 5,153,000 3,864,750 103,060
Jackson - Ridgeland 5,846,000 4,384,500 116,920
----------- ----------- ----------
TOTAL $91,426,000 $68,569,500 $1,828,520
=========== =========== ==========
</TABLE>
S-4
<PAGE>
OWNERSHIP AND LEASING OF HOTELS
We directly purchased the hotels located in states other than Texas. The
hotels that we own directly 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.
We purchased the hotels in Texas through 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. It holds a ninety-nine percent partnership
interest. Glade M. Knight is the sole director of these two corporate partners.
The following chart shows the ownership and leasing structure for our
hotels in Texas:
S-5
<PAGE>
(All entities shown below are organized under Virginia law)
[GRAPHICS OMITTED]
For simplicity, the general term "Apple Suites Management" will be used
where appropriate as a combined reference to the entities that lease our hotels
(Apple Suites Management, Inc. and its subsidiary, Apple Suites Services Limited
Partnership).
HOTEL SUPPLIES AND FRANCHISE FEES
We have provided Apple Suites Management with funds for the purchase of
certain hotel supplies (such as sheets, towels and so forth), and with funds for
the payment of hotel franchise fees to Promus Hotels, Inc. Apple Suites
Management is obligated to repay us under the promissory notes described below:
S-6
<PAGE>
<TABLE>
<CAPTION>
Month of Principal Amount Principal Amount
Promissory Note (Supplies) (Franchise Fees)
--------------- ---------- ----------------
<S> <C> <C>
September 1999 $ 47,800 $215,550
October 1999 12,400 55,800
November 1999 52,500 251,550
December 1999 9,100 45,000
------ -------
TOTAL $121,800 $567,900
======= =======
</TABLE>
Each promissory note provides for an annual interest rate of nine percent
(9%), which would increase to twelve percent (12%) if a default occurs. After
the initial payment of interest only, amortized payments of principal and
interest are due in monthly installments. The promissory notes with respect to
hotel supplies are payable to us in sixty-one (61) monthly installments. The
promissory notes with respect to franchise fees are payable to us in one hundred
twenty-one (121) monthly installments.
DESCRIPTION OF FINANCING
As indicated above, Promus Hotels, Inc. is financing 75% of the purchase
price of our hotels. The amounts we owe to Promus Hotels, Inc. are evidenced by
the following promissory notes:
<TABLE>
<CAPTION>
Original Remaining
Month of Principal Principal as of Annual Rate Date of
Promissory Note Amount March 1, 2000 of Interest Maturity
--------------- ------ ------------- ----------- --------
<S> <C> <C> <C> <C>
September 1999 $26,625,000 $26,625,000 8.5% October 1, 2000
October 1999 $ 7,350,000 $ 7,350,000 8.5% October 1, 2000
November 1999 $30,210,000 $30,210,000 8.5% December 1, 2000
December 1999 $ 4,384,500 $ 4,384,500 8.5% January 1, 2001
----------- -----------
TOTAL $68,569,500 $68,569,500
========== ==========
</TABLE>
We consider the financing from Promus Hotels, Inc. to be "bridge financing"
because of its short-term nature (that is, each promissory note reaches maturity
within approximately one year of its date of execution). Despite the temporary
use of bridge financing, over the long-term we will seek to hold our properties
on an all-cash basis, as indicated in the prospectus.
The promissory notes have several provisions in common, which include the
following:
o monthly interest payments, based on the actual number of days per
month
o our delivery of monthly notices to specify the net equity proceeds
from our offering
o our right to prepay the notes, in whole or in part, without premium or
penalty
o a late payment premium of four percent (4%) for any payment not made
within ten (10) days of its due date
S-7
<PAGE>
Revenue from the operation of the hotels will be used to pay interest under
the promissory notes we have made to Promus Hotels, Inc. The "net equity
proceeds" from our offering of common shares will be the source of our principal
payments. The phrase "net equity proceeds" means the total proceeds from our
offering of common shares, as reduced by selling commissions, a marketing
expense allowance, closing costs, various fees and charges (legal, accounting,
and so forth), a working capital reserve and a reserve for renovations, repairs
and replacements of capital improvements.
Under an October 1999 letter agreement, we were permitted to use such net
equity proceeds to pay 25% of the purchase price for additional hotels,
including the hotels we purchased in November and December of 1999. Furthermore,
Hilton Hotels Corporation, the parent company of Promus Hotels, Inc. has agreed
to defer principal payments until the earlier of April 28, 2000 or our purchase
of two additional extended-stay hotels licensed with Homewood Suites(R) by
Hilton. Otherwise, to the extent that we have such net equity proceeds, we are
obligated to make monthly principal payments under the promissory notes dated as
of September 20, 1999 and October 5, 1999. Once those promissory notes are paid
in full, we will have a similar obligation to make monthly principal payments
under the other promissory notes. Assuming the September and October promissory
notes are paid in full by their common maturity date of October 1, 2000,
principal under the November promissory note will be due in two monthly
installments ending on December 1, 2000, and principal under the remaining
promissory note will be due in a single installment on its maturity date of
January 1, 2001.
To date, we have made all scheduled interest payments under the promissory
notes. The aggregate amount of our interest payments through March 2000 is
$2,508,767.
There can be no assurance that the net equity proceeds from our offering of
common shares will be sufficient to pay principal under the promissory notes on
or before the required due dates. The following amounts would be due on the
maturity dates of the promissory notes, assuming that interest payments continue
to be made on schedule and that no payments of principal are made before those
maturity dates:
<TABLE>
<CAPTION>
Month of Date of If Principal Due Then Total Due
Promissory Note Maturity at Maturity Equals at Maturity Equals
--------------- -------- ------------------ ------------------
<S> <C> <C> <C>
September 1999 October 1, 2000 $26,625,000 $26,811,010
October 1999 October 1, 2000 $ 7,350,000 $ 7,401,349
November 1999 December 1, 2000 $30,210,000 $30,421,056
December 1999 January 1, 2001 $ 4,384,500 $ 4,415,131
----------- ----------
TOTAL $68,569,500 $69,048,546
========== ==========
</TABLE>
In the event of a default under the promissory notes, various remedies are
available to Promus Hotels, Inc. under certain deeds of trust, which are
described below in the Summary of Material Contracts.
S-8
<PAGE>
LICENSING AND MANAGEMENT
We expect that our hotels will continue to be licensed with Homewood
Suites(R) by Hilton. To help achieve that result, Apple Suites Management has
executed separate license agreements with Promus Hotels, Inc. for each of our
hotels. Promus Hotels, Inc. is managing each of the hotels under separate
management agreements with Apple Suites Management. These license and management
agreements are among the material contracts described below.
POTENTIAL ECONOMIC RISK AND BENEFIT INVOLVING APPLE SUITES MANAGEMENT
Because federal tax laws prohibit us from directly operating our hotels, we
have leased them to Apple Suites Management, Inc. or its subsidiary (Apple
Suites Services Limited Partnership). Our president and chief executive officer,
Glade M. Knight, is the sole shareholder of Apple Suites Management, Inc.
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 under the master hotel lease
agreements, the license agreements and the management agreements. To the extent
that operating income remains after those payment obligations are met, Apple
Suites Management, Inc. will realize an economic benefit. The extent of this
potential economic benefit cannot be determined at this time because it depends,
in part, on future hotel revenues.
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, Inc. will be able to
make its rent payments.
If the cash flow from the operations of the hotels and the retained
earnings of Apple Suites Management, Inc. are insufficient to make the rental
payments due under the master lease agreements, Apple Suites Management, Inc.
can receive additional funding under two funding commitments. The funding
commitments are dated as of September 17, 1999, and have been made by Glade M.
Knight and Apple Suites Realty Group, Inc., which is wholly-owned by Mr. Knight.
These funding commitments are payable on demand by Apple Suites Management, Inc.
Under each funding commitment, Apple Suites Management, Inc. can make one or
more demands for funding, subject to two qualifications. First, the aggregate
payments under the funding commitments shall not exceed $2 million. Second, the
demands for payment shall be limited, in amount and frequency, to those demands
that are reasonably necessary to satisfy any capitalization or net worth
requirements of Apple Suites Management, Inc., or payment obligations under the
master hotel lease agreements for our hotels. Apple Suites Management, Inc. is
not required to repay the funds it receives under the funding commitments.
S-9
<PAGE>
SUMMARY OF MATERIAL CONTRACTS
DEEDS OF TRUST AND RELATED DOCUMENTS
Each of our hotels is subject to a mortgage on its real property, a
security interest in its personal property, and an assignment of hotel rents and
revenues, all in favor of Promus Hotels, Inc. (As described above, Promus
Hotels, Inc. provided financing for our hotel purchases). These encumbrances are
created by substantially similar documents. For simplicity, we will refer to
each of these documents as a "deed of trust."
Each deed of trust corresponds to one of the promissory notes we made to
Promus Hotels, Inc., and secures the payment of principal and interest under
that promissory note. The encumbrance created by a deed of trust will terminate
when its corresponding promissory note is paid in full.
We are subject to various requirements under the deeds of trust. For
instance, we must maintain adequate insurance on the hotels and we must not
grant any further assignments of rents or leases with respect to the hotels.
Each deed of trust contains a substantially similar definition of events of
default. In each case, the events of default include (without limitation) any
default that occurs under any of the promissory notes or under another deed of
trust, and any sale of the secured property without the prior consent of Promus
Hotels, Inc. Upon any event of default, various remedies are available to Promus
Hotels, Inc. Those remedies include, for example (a) declaring the entire
principal balance under the promissory notes, and all accrued and unpaid
interest, to be due and payable immediately; (b) taking possession of the
secured property, including the hotels; and (c) 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.
At each closing on our purchase of a hotel or group of hotels, we further
encumbered the hotels we already owned with additional deeds of trust or with
negative pledges. The negative pledges apply to three of our hotels (Richmond -
West End, Clearwater and Baltimore - BWI Airport). The negative pledges prohibit
any transfer or further encumbrance of the hotels, in whole or in part, without
the prior written consent of Promus Hotels, Inc. Each negative pledge was
executed concurrently with a particular promissory note, and will terminate when
its corresponding promissory note is paid in full.
ENVIRONMENTAL INDEMNITIES
A separate environmental indemnity applies to each of our hotels. The
indemnities are substantially similar and protect Promus Hotels, Inc. in the
event that we undertake any corrective work to remove or eliminate hazardous
materials from the hotels. 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 hotels, but there can be no assurance that such
materials are not present.
S-10
<PAGE>
Under the indemnities, we have agreed to indemnify and protect Promus
Hotels, Inc. from any losses that it may incur because of (a) the
nonperformance, or delayed performance and completion, of corrective work; or
(b) the enforcement of the indemnities. The indemnity for a particular hotel
corresponds to the promissory note that was executed at closing on the purchase
of that hotel. In general, each indemnity will terminate when its corresponding
promissory note is paid in full. However, the indemnities will continue with
respect to those litigation or administrative claims, if any, that involve
indemnified losses and that are pending at the date of full payment. In
addition, for a period of four years after the date of such full payment, we
will be obligated to pay any enforcement costs for subsequent litigation or
administrative claims.
MASTER HOTEL LEASE AGREEMENTS
All of our hotels, except the hotels in Texas, have been leased to Apple
Suites Management, Inc. These leases were created by a master hotel lease
agreement dated September 20, 1999, which has been supplemented to include the
hotels we purchased after that date. The hotels in Texas have been leased to
Apple Suites Services Limited Partnership under a separate and substantially
similar master hotel lease agreement dated September 20, 1999.
Each master hotel lease agreement has an initial term of ten years. Apple
Suites Management has the option to extend the lease term for two additional
five-year periods, provided that Apple Suites Management is not in default at
the end of the prior term or at the time the option is exercised. If the first
option is exercised, rental payments would continue to be adjusted as provided
in the master lease agreement. If the second option is exercised, we must
negotiate in good faith with Apple Suites Management to adjust the rental
payments to a market rate for similar hotels. If no agreement can be reached,
rental terms would be determined by an independent panel of experts in
evaluating hotel REIT leases.
We may terminate a master hotel lease agreement if we sell the hotels to a
third party, if there is a change of control of Apple Suites Management, or
based on any amendments to the Internal Revenue Code that would permit our
direct operation of the hotels or would make the lease structure unnecessary.
Upon any termination, we must compensate Apple Suites Management by paying the
fair market value of the lease as of such termination, or by offering to lease
one or more substitute hotels.
The master hotel lease agreements provide for an annual base rent, a
quarterly percentage rent and a quarterly sundry rent. Base rent is payable in
advance in equal monthly installments. Beginning in 2001, the base rent will be
adjusted annually in proportion to the Consumer Price Index. The following table
shows the initial base rents for each hotel:
S-11
<PAGE>
<TABLE>
<CAPTION>
Base Rent
Name of Hotel (1999 and 2000)
- ------------ ---------------
<S> <C>
Dallas - Addison $638,220
Dallas - Irving/Las Colinas 824,340
North Dallas - Plano 501,930
Richmond - West End 674,190
Atlanta - Galleria/Cumberland 661,320
Atlanta - Peachtree 414,150
Baltimore - BWI Airport 895,750
Clearwater 664,150
Detroit - Warren 408,450
Salt Lake City - Midvale 438,150
Jackson - Ridgeland 462,750
</TABLE>
Percentage rent is payable quarterly. The percentage rent for a particular
hotel depends on a formula that compares fixed "suite revenue breakpoints" with
a portion of "suite revenue," which is equal to gross revenue from suite rentals
(less sales and room taxes). Specifically, the percentage rent is equal to the
sum of (a) 17% of all year-to-date suite revenue, up to the applicable suite
revenue breakpoint; plus (b) 55% of the year-to-date suite revenue in excess of
the applicable suite revenue breakpoint, as reduced by base rent and percentage
rent paid year-to-date. Beginning in 2001, the suite revenue breakpoints will be
adjusted in proportion to the Consumer Price Index. Suite revenue breakpoints
have been determined for the first quarter of each year during the initial term
of the master hotel lease agreements. The suite revenue breakpoints for
subsequent quarters are determined by multiplying the first quarter values by
two, three or four, respectively. The following table shows the initial suite
revenue breakpoints for each hotel, before any adjustment due to the Consumer
Price Index:
Suite Revenue Breakpoints
for the First Quarter of the Indicated Years
<TABLE>
<CAPTION>
Name of Hotel 2000 2001 2002 2003
- ------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Dallas - Addison $256,255 $261,090 $265,925 $270,760
Dallas - Irving/Las Colinas 330,985 337,230 343,475 349,720
North Dallas - Plano 201,533 205,335 209,138 212,940
Richmond - West End 270,698 275,805 280,913 286,020
Atlanta - Galleria/Cumberland 265,530 270,540 275,550 280,560
Atlanta - Peachtree 134,599 138,740 144,953 149,094
Baltimore - BWI Airport 291,119 300,076 313,513 322,470
Clearwater 215,849 222,490 232,453 239,094
Detroit - Warren 132,746 136,831 142,958 147,042
Salt Lake City - Midvale 142,399 146,780 153,353 157,734
Jackson - Ridgeland 150,394 155,021 161,963 166,590
</TABLE>
S-12
<PAGE>
<TABLE>
<CAPTION>
Name of Hotel 2004 2005 2006 2007 2008
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Dallas - Addison $275,595 $280,430 $285,265 $290,100 $294,935
Dallas - Irving/Las Colinas 355,965 362,210 368,455 374,700 380,945
North Dallas - Plano 216,742 220,545 224,348 228,150 231,953
Richmond - West End 291,128 296,235 301,343 306,450 311,558
Atlanta - Galleria/Cumberland 285,570 290,580 295,590 300,600 305,610
Atlanta - Peachtree 153,236 157,377 161,519 165,660 169,802
Baltimore - BWI Airport 331,428 340,385 349,343 358,300 367,258
Clearwater 245,736 252,377 259,019 265,660 272,302
Detroit - Warren 151,127 155,211 159,296 163,380 167,465
Salt Lake City - Midvale 162,116 166,497 170,879 175,260 179,642
Jackson - Ridgeland 171,218 175,845 180,473 185,100 189,728
</TABLE>
The sundry rent is payable quarterly and equals 99% of all sundry revenue,
which consists of revenue other than suite revenue less the amount of sundry
rent paid year-to-date.
Under the master hotel lease agreements, Apple Suites Management must pay
all taxes, other than real estate and personal property taxes, imposed on the
hotels. In addition, Apple Suites Management must provide and pay for hotel
utilities, such as electricity, gas, oil, water and sewer service. Apple Suites
Management also must maintain and pay for insurance with respect to the hotels,
including building insurance (with earthquake and flood insurance), equipment
insurance (against loss or damage to steam boilers and similar apparatus) and
loss of income insurance.
The master hotel lease agreements require Apple Suites Management to
maintain the hotels in good order and repair, except for ordinary wear and tear.
This requirement applies to any underground utilities and the structural
elements of the hotels, including the exterior walls and roofs. We are obligated
to maintain a reserve fund for periodic repair, replacement or refurbishing of
furniture, fixtures and equipment. Our payments to this reserve fund may equal
up to 5% of suite revenue.
HOTEL LICENSE AGREEMENTS
Each of our hotels is licensed with Homewood Suites(R) by Hilton under
separate and substantially similar license agreements with Promus Hotels, Inc..
Under the license agreements, Apple Suites Management has the right to operate
the hotels using the "System" established for all properties licensed with
Homewood Suites(R) by Hilton. The "System" includes access to a reservation
system, to advertising methods, to a "Standards Manual," and to other training,
information, programs and policies.
In exchange, Apple Suites Management has agreed 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 the Standards Manual. The Standards
Manual is subject to change at
S-13
<PAGE>
any time. (As described below, Promus Hotels, Inc. will act as the manager of
the hotels under separate management agreements.) As a practical matter, many of
the requirements in the license agreements and Standards Manual will be the
responsibility of Promus Hotels, Inc. However, certain requirements will remain
the practical responsibility of Apple Suites Management. Furthermore, the
failure of Promus Hotels, Inc. to comply with the management agreements will
not, by itself, relieve Apple Suites Management from its obligations under the
license agreements. In such event, the remedies available to Apple Suites
Management may be limited to monetary damages for breach of the hotel management
agreements.
The hotels must be operated in accordance with the requirements established
by Promus Hotels, Inc. These requirements cover matters such as the types of
services and products that may be offered at the hotel, the style and type of
signage, the appearance and condition of the hotel, the use of the reservations
system for guests, adherence to a 100% Satisfaction Guarantee rule of operation,
required insurance coverage and other requirements.
Under the license agreements, Apple Suites Management may use the System
only during the 20-year term of the license agreements. The license agreements
are subject to early termination for various reasons, including default by Apple
Suites Managemen or its efforts to obtain bankruptcy protection. If a license
agreement is terminated for any reason, the hotel must immediately cease to
identify itself as having a license with Homewood Suites(R) by Hilton.
Apple Suites Management must pay the following monthly amounts to Promus
Hotels, Inc. in accordance with the license agreements: (a) A royalty fee equal
to 4% of the gross suites revenues (less sales and room taxes) received from
rental of suites at the hotels; (b) a marketing contribution equal to 4% of
gross suites revenues; (c) any amounts due Promus Hotels, Inc. for goods or
services provided by Promus Hotels, Inc. to Apple Suites Management; and (d) the
amount of sales, gross receipts or similar taxes imposed on Promus Hotels, Inc.
as a result of each payment described above. 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 require Apple Suites
Management to upgrade hotel facilities from time to time to meet current
standards, as then specified in the Standards Manual. We expect to pay the costs
of any 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
Each of our hotels is being managed by Promus Hotels, Inc. or an affiliate.
To simplify the following discussion, the manager will be referred to as "Promus
Hotels." The management of our hotels is governed by separate and substantially
similar management agreements with Apple Suites Management.
S-14
<PAGE>
The management agreements require Promus Hotels to operate the hotels in
conformity with the hotel license agreements described above. Promus Hotels will
be responsible for directing the day-to-day activities of the hotels and
establishing policies and procedures relating to the management and operation of
the hotels.
As part of its responsibilities for directing the day-to-day activities of
the hotels, Promus Hotels will hire, supervise and determine the compensation
and terms of employment of all hotel personnel. Promus Hotels also will
determine the terms for admittance, room rates and all use of hotel rooms.
Promus Hotels will select and purchase all operating equipment and supplies for
the hotels. Promus Hotels will be responsible for (a) advertising and promoting
the hotels in coordination with the requirements of the license agreements
described above; and (b) obtaining and maintaining any permits and licenses
required to operate the hotels.
Each year, Promus Hotels will submit a proposed operating budget for each
hotel to Apple Suites Management for its approval. Each budget will include a
business plan describing the business objectives and strategies for each hotel
for the period covered by the budget. In addition, Promus Hotels will submit a
recommended capital budget to Apple Suites Management 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: (a) 3% of
adjusted gross revenues for the first full year after the commencement of the
management agreement; (b) 4% of adjusted gross revenues for the second full year
after the commencement of the management agreement; and (c) 5% of adjusted gross
revenues for each year thereafter.
In exchange for performing the services described above, Promus Hotels will
receive a management fee, payable monthly. The management fee will equal 4% of
adjusted gross revenues. Adjusted gross revenues are defined generally as all
revenues derived from the hotels, as reduced by (a) refunds; (b) sales and other
similar taxes; (c) proceeds from the sale or other disposition of the hotels,
furnishings and other capital assets; (d) fire and extended coverage insurance
proceeds; (e) credits or refunds made to customers; (f) condemnation awards; (g)
proceeds of financing or refinancing of the hotels; (h) interest on bank
accounts; and (i) gratuities or service charges added to a customer's bill.
Prior to the second anniversary of the management agreement, a portion of
the management fee, equal to 1% of adjusted gross revenues, will be subordinated
to payment of a basic return to Apple Suites Management. 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 any management agreement after its tenth anniversary.
If it does so, Promus Hotels will be entitled to a termination fee. The
termination fee generally is equal to (a) the aggregate management fees earned
during the preceding 24 months, if the termination occurs after the tenth
anniversary but on or before the 14th anniversary of the effective date of the
management agreement; or (b) the average monthly management fee earned during
the preceding
S-15
<PAGE>
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 for a particular hotel is
terminated, Promus Hotels may terminate the corresponding management agreement.
If Promus Hotels terminates the management agreement it will be entitled to a
termination fee equal to (a) an amount that ranges from $426,690 to $899,000
(depending on the hotel involved) if the termination occurs within two years of
the effective date of the management agreement; (b) 150% of the aggregate
monthly management fees earned during the preceding 24 months, if the
termination occurs after the second anniversary but on or before the tenth
anniversary of the effective date of the management agreement; (c) 75% of the
aggregate monthly management fees earned during the preceding 24 months, if the
termination occurs after the tenth anniversary but on or before the 14th
anniversary of the effective date of the management agreement; or (d) the
average monthly management fee earned during the preceding 24 months times the
number of full calendar months remaining in the term, if the termination occurs
after the 14th anniversary of the effective date of the management agreement.
Beginning in the first full calendar year of operations, Apple Suites
Management may terminate a management agreement if Promus Hotels fails to
achieve, in any two consecutive calendar years, a gross operating profit which
is at least equal to 85% of the annual budgeted gross operating profit. Promus
Hotels can avoid termination by making a cash payment to Apple Suites Management
that equals the difference between the gross operating profits achieved and 85%
of the budgeted gross operating profits for the second such year. Generally,
gross operating profit is defined as the amount by which adjusted gross revenues
exceed operating costs.
COMFORT LETTERS
Our decision to lease our hotels to Apple Suites Management is based upon
certain technical tax considerations that apply to us as a REIT for federal
income tax purposes. To address operational complexities and other potential
problems that may arise from using Apple Suites Management as the lessee of our
hotels and the party to the license agreements and management agreements, we
have entered into separate and substantially similar "Comfort Letters" with
Promus Hotels, Inc. with respect to each hotel. The comfort letters grant us
certain rights if problems arise under such agreements, or if the lease
structure is no longer necessary for tax purposes. The chief provisions of the
comfort letters are described below.
First, as long as we are the owner of the hotel and its corresponding
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
S-16
<PAGE>
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), must be
a person or entity that has adequate financial resources to perform under the
lease and must have a favorable reputation for integrity. The successor lessee
cannot be the franchisor or operator of a competing chain of hotels. 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: (a)
36 times the monthly average of fees payable for the period during which the
hotel has been open; or (b) 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.
Third, the comfort letters provide that if the income tax rules that apply
to REITs are amended to permit us to operate the hotel directly, we may give
notice of such tax change to Promus Hotels, Inc. and of our election to
terminate the lease. We then have the right to enter into a new license
agreement and a new management agreement for a term equal to the balance of the
original terms of such agreements.
DESCRIPTION OF PROPERTIES
Each of our hotels is an extended-stay hotel, and is licensed with Homewood
Suites(R) by Hilton. 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 living rooms contain a recliner and a videocassette player. The
kitchens vary, but generally have a microwave, refrigerator, dishwasher, coffee
maker and stove, together with basic cookware and utensils.
The hotel are marketed, in part, through the website for Homewood Suites(R)
by Hilton (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
S-17
<PAGE>
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 Hilton Hotel Corporation. Such cross-marketing may affect occupancy
at our hotels by directing travelers or potential guests toward, or away from,
our hotels.
The hotels were actively conducting business on the date of purchase. We
believe that the purchases were conducted without materially disrupting any
daily hotel operations. During the past 12 months, the hotels have been covered
with property and liability insurance, and we have arranged to continue such
coverage. We believe the hotels are adequately covered by insurance.
DALLAS - ADDISON
The Homewood Suites(R) Dallas - Addison is located on a 3.3 acre site at
4451 Beltline Road, Addison, Texas 75244. The hotel is approximately 15 miles
from downtown Dallas and 25 miles from 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
rentable area of 61,440 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 24 590
Homewood Suite 88 460
Two-Bedroom Suite 8 850
</TABLE>
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 $400,000 on renovations or improvements. We expect that the
principal renovations and improvements will include: 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 was approximately 6.2 nights,
and approximately 64.3% of the guests have stayed for five nights or more. In
general, occupancy at
S-18
<PAGE>
the hotel is not seasonal. The following table shows average daily occupancy
rates, expressed as a percentage, for the last five years:
Average Daily Occupancy Rate (calendar year)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
83.9% 78.4% 78.1% 76.9 % 73.8%
</TABLE>
During 1999, the average daily rate per suite was $89.87, and the average
daily revenue per available suite was $66.30. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 20.9% 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:
<TABLE>
<CAPTION>
Length of Stay Master Master
(number of nights) Homewood (king) (double) Two Bedroom
- ------------------ -------- ------ -------- -----------
<S> <C> <C> <C> <C>
1 to 4 $139 $139 $139 $179
5 to 11 109 109 109 149
12 to 29 89 89 89 129
30 or more 79 79 79 119
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 36.7% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include: MBNA, CSC, Santa Fe International, Lucent Technologies, Lawson
Software, People Soft, Business Jet, Stonebridge Technology and Acclivus. During
1999, the 10 largest corporate accounts were responsible for approximately 6.8%
of the hotel's occupancy. There can be no assurance, however, that the hotel
will continue to receive significant occupancy, or any occupancy, from the
corporate accounts identified above.
The table below shows the average effective annual rental per square foot
for the last five years:
S-19
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$56.35 $55.18 $54.05 $54.25 $47.26
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $7,312,316 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 summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
Tax Assessed Tax Rate Amount
Jurisdiction Value (per $100) of Tax
- ------------ ----- ---------- ------
<S> <C> <C> <C>
County of Dallas $8,100,000 0.447699 $ 36,263.62
City of Dallas $8,100,000 1.460530 $118,302.93
Town of Addison $8,100,000 0.384600 $ 31,152.60
---------
TOTAL $185,719.15
==========
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $4,500 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 competing hotels have franchises with Country Inn Suites,
Hilton Inn 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 ongoing or proposed construction for three extended-stay
hotels within approximately three miles of the hotel. We expect these new hotels
to be franchised with Marriott (in two instances) and Budget Suites.
DALLAS - IRVING/LAS COLINAS
The Homewood Suites(R) Dallas - Irving/Las Colinas is located on a 3.4 acre
site at 4300 Wingren Drive, Irving, Texas 75039. The hotel is approximately 11
miles from downtown Dallas and 10 miles from 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
S-20
<PAGE>
three stories. The hotel contains 136 suites, which have a combined rentable
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 $450,000 on renovations or improvements. We expect that the
principal renovations and improvements will include 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 was approximately 4.5 nights,
and approximately 69.3% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, for the last five
years:
Average Daily Occupancy Rate (calendar year)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
75.2% 75.2% 77.8% 75.8 % 76.4%
</TABLE>
During 1999, the average daily rate per suite was $94.71, and the average
daily revenue per available suite was $72.35. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 19.9% 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:
S-21
<PAGE>
<TABLE>
<CAPTION>
Length of Stay
(number of nights) Homewood Master Two Bedroom
- ------------------ -------- ------ -----------
<S> <C> <C> <C>
1 to 4 $134 $134 $174
5 to 12 119 119 159
13 to 29 109 109 149
30 or more 89 89 129
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 65.4% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include: GTE, SAP America, Amdocs, Ernst & Young, Sprint, Oracle Corp., The
Associates, Caltex, Associates Corp. of North America and Olympus America Inc.
During 1999, the 10 largest corporate accounts were responsible for
approximately 25% of the hotel's occupancy. There can be no assurance, however,
that the hotel will continue to receive significant occupancy, or any occupancy,
from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
for the last five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$42.17 $44.42 $46.85 $47.48 $44.81
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $8,292,872 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-22
<PAGE>
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
Tax Assessed Tax Rate Amount
Jurisdiction Value (per $100) of Tax
- ------------ ----- ---------- ------
<S> <C> <C> <C>
County of Dallas $9,519,990 0.447699 $ 42,620.90
City of Irving $9,519,990 0.488000 $ 46,457.55
Irving School District $9,519,990 1.668400 $158,831.51
Dallas County Utility District $9,519,990 1.189800 $113,268.84
----------
TOTAL $361,178.80
==========
</TABLE>
We estimate that the annual real estate tax on the expected improvements
will be approximately $8,500 or less.
At least five competing hotels are located within three miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) Three of the competing hotels are newer than the
hotel. The newer competing hotels have franchises with 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 ongoing or proposed construction for two extended-stay hotels within
approximately five miles of the hotel. We have no definite franchising
information for these hotels.
NORTH DALLAS - PLANO
The Homewood Suites(R) Dallas - Plano is located on a 2.67 acre site in the
Preston Park Business Center. Its address is 4705 Old Sheppard Place, Plano,
Texas 75093. The hotel is approximately 23 miles from downtown Dallas and 20
miles from 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 rentable area of
50,120 square feet. The following types of suites are available:
<TABLE>
<CAPTION>
Type of Suite Number Available Square Feet/per Suite
-------------- ---------------- ---------------------
<S> <C> <C>
Extended Double Suite 37 510
Homewood Suite 55 460
Two-Bedroom Suite 7 850
</TABLE>
S-23
<PAGE>
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. Over the next 12 months, we plan to spend
approximately $28,000 on renovations or improvements. We expect that the
principal renovations and improvements will include interior upgrades and
landscaping. 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 was approximately 7.5 nights,
and approximately 63.7% of the guests have stayed for five nights or more. In
general, 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)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
64.4% 70.9% 71.9%
</TABLE>
During 1999, the average daily rate per suite was $79.86, and the average
daily revenue per available suite was $57.43. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 16.6% 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:
<TABLE>
<CAPTION>
Length of Stay Extended
(number of nights) Homewood Double Two Bedroom
- ------------------ -------- -------- -----------
<S> <C> <C> <C>
1 to 6 $109 $109 $149
7 to 29 69 69 109
30 or more 59 59 99
</TABLE>
S-24
<PAGE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 49.5% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
J.C. Penney, Dr. Pepper/7-Up, Alcatel, Arco, Raytheon, State Farm Insurance, Rug
Doctor, Sterling Software, Oracle Corp and Frito Lay . During 1999, the 10
largest corporate accounts were responsible for approximately 34% of the hotel's
occupancy. There can be no assurance, however, that the hotel will continue to
receive significant occupancy, or any occupancy, from the corporate accounts
identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C>
$38.87 $43.99 $41.41
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $4,713,290 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 summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
Tax Assessed Tax Rate Amount
Jurisdiction Value (per $100) of Tax
- ------------ ----- ---------- ------
<S> <C> <C> <C>
County of Collin $7,124,145 2.35655 $167,884.04
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $500 or less.
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 competing 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 ongoing
S-25
<PAGE>
or proposed construction for three 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
The Homewood Suites(R) Richmond - West End is located on a 3.8 acre site in
the Innsbrook Corporate Center. Its address is 4100 Innslake Drive, Glen Allen,
Virginia 23060. The hotel is approximately 14 miles from downtown Richmond and
20 miles from the Richmond International Airport.
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 rentable area of
63,600 square feet. The following types of suites are available:
<TABLE>
<CAPTION>
Type of Suite Number Available Square Feet/per Suite
-------------- ---------------- ---------------------
<S> <C> <C>
Homewood King Suite 98 500
Homewood Double Suite 18 500
Two-Bedroom Suite 7 800
</TABLE>
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. Over the next 12 months, we plan to spend
approximately $100,000 on renovations or improvements. We expect that the
principal renovations and improvements will include installing new telephone
system and purchasing new furniture. 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 was approximately 3.1 nights,
and approximately 52.1% of the guests have stayed for five nights or more. In
general, 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)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
61.7 % 75.2%
</TABLE>
S-26
<PAGE>
During 1999, the average daily rate per suite was $82.95, and the average
daily revenue per available suite was $62.41. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 21.4% 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:
<TABLE>
<CAPTION>
Length of Stay Homewood Homewood
(number of nights) (king bed) (double bed) Two Bedroom
- ------------------ ---------- ------------ -----------
<S> <C> <C> <C>
1 to 4 $114 $114 $154
5 to 29 84 84 124
30 to 89 74 74 114
90 or more 74 74 114
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 79% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
Target, Capital One, Circuit City, First Union National Bank, Virginia Power,
Owens Minor, Saxon Mortgage Corp., Promus Hotels, Inc., Deloitte & Touche and
Old Dominion Electric Cooperative. During 1999, the 10 largest corporate
accounts were responsible for approximately 55% of the hotel's occupancy. There
can be no assurance, however, that the hotel will continue to receive
significant occupancy, or any occupancy, from the corporate accounts identified
above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
$37.80 $44.06
</TABLE>
S-27
<PAGE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $8,461,493 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 summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
Tax Assessed Tax Rate Amount
Jurisdiction Value (per $100) of Tax
- ------------ ----- ---------- ------
<S> <C> <C> <C>
County of Henrico $5,806,300 0.9400 $54,579.22
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $500 or less.
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 competing hotels have franchises with Candlewood Suites,
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 ongoing or proposed
construction for three extended-stay hotels within approximately three miles of
the hotel. We expect these new hotels to be franchised with Holiday Inn Express,
Hilton Garden Inn and Marriott.
ATLANTA - GALLERIA/CUMBERLAND
The Homewood Suites(R) Atlanta - Galleria/Cumberland is located on a 3.7
acre site at 3200 Cobb Parkway, Atlanta, Georgia 30339. The hotel is
approximately 17 miles from downtown Atlanta and 35 miles from 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 rentable 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>
S-28
<PAGE>
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 $285,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement and
furniture acquisitions (sofas, recliners and televisions). We expect to pay for
the costs of these renovations and improvements with proceeds obtained from our
ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 4.7 nights,
and approximately 72% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, for the last five
years:
Average Daily Occupancy Rate (calendar year)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
76.7% 71.7% 77.2% 77.4 % 79.2%
</TABLE>
During 1999, the average daily rate per suite was $86.62, and the average
daily revenue per available suite was $68.64. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 20.1% 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:
<TABLE>
<CAPTION>
Length of Stay
(number of nights) Homewood Master Two Bedroom
- ------------------ -------- ------ ----------
<S> <C> <C> <C>
1 to 4 $119 $119 $159
5 to 11 109 109 149
12 to 29 92 92 132
30 or more 79 79 119
</TABLE>
S-29
<PAGE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 39% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
Boeing, J.D. Edwards & Company, SITA, Worldspan, Sprint, IBM, Lockheed Martin
Corporation, Southcorp, Atlantic Envelope Corp. and Concert. During 1999, the 10
largest corporate accounts were responsible for approximately 12.8% of the
hotel's occupancy. There can be no assurance, however, that the hotel will
continue to receive significant occupancy, or any occupancy, from the corporate
accounts identified above.
The table below shows the average effective annual rental per square foot
for the last five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$34.44 $34.16 $36.45 $36.57 $36.29
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $7,445,773 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 summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
Tax Assessed Taxable Tax Amount
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 $3,900 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
S-30
<PAGE>
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.
ATLANTA - PEACHTREE
The Homewood Suites(R) Atlanta - Peachtree is located on a 3.45 acre site
at 450 Technology Parkway, Norcross, Georgia 30092. The hotel is approximately
25 miles from downtown Atlanta and 35 miles from the Hartsfield Atlanta
International Airport.
The hotel opened in February 1990. It has wood frame construction, with an
exterior of brick veneer and wood siding. The hotel consists of four buildings,
each with one, two or three stories. The hotel contains 92 suites, which have a
combined rentable area of 53,920 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 12 650
Homewood Suite 76 550
Two-Bedroom Suite 4 1,080
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 117 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $500,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement,
furniture replacement, bathroom upgrades and parking lot resurfacing and
restriping. We expect to pay for the costs of these renovations and improvements
with proceeds obtained from our ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 5 nights, and
approximately 56% of the guests have stayed for five nights or more. In general,
occupancy at the hotel is not seasonal. The following table shows average daily
occupancy rates, expressed as a percentage, for the last five years:
Average Daily Occupancy Rate (calendar year)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
79.5% 77.4% 74.8% 72.9% 70.1%
</TABLE>
S-31
<PAGE>
During 1999, the average daily rate per suite was $81.17, and the average
daily revenue per available suite was $56.86. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 13.5% 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:
<TABLE>
<CAPTION>
Length of Stay
(number of nights) Homewood Master Two Bedroom
- ------------------ -------- ------ -----------
<S> <C> <C> <C>
1 to 4 $99 $99 $139
5 to 11 85 85 125
12 to 29 75 75 115
30 or more 59 59 99
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 42% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
Hitachi, Perkin Elmer Corporation, CIBA Vision, Ultimate Software, Valmet,
Federated Systems, IBM, Sunds Defibrator, Unisys and Mizuno. During 1999, the 10
largest corporate accounts were responsible for approximately 13.2% of the
hotel's occupancy. There can be no assurance, however, that the hotel will
continue to receive significant occupancy, or any occupancy, from the corporate
accounts identified above.
The table below shows the average effective annual rental per square foot
for the last five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$42.53 $47.16 $45.42 $41.95 $35.41
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $2,911,697 and will be depreciated over a life of
39 years (or less, as permitted by
S-32
<PAGE>
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 summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
Tax Assessed Taxable Tax Amount
Jurisdiction Value Portion (40%) Rate of Tax
- ------------ ----- ------------- ---- ------
<S> <C> <C> <C> <C>
Gwinnett County $5,688,440 $2,275,380 0.03225 $73,381
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $3,300 or less.
At least six competing hotels are located within three miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) Three of the competing hotels are newer than the
hotel. The newer competing hotels have franchises with AmeriSuites, Hilton
Garden Inn and Residence Inn. The other competing hotels have franchises with
Courtyard by Marriott, Marriott and Holiday Inn. We believe that the rates
charged by the hotel are generally competitive with the rates charged by these
other hotels. To our knowledge, no extended-stay hotels are being constructed
within five miles of the hotel.
BALTIMORE - BWI AIRPORT
The Homewood Suites(R) Baltimore - BWI Airport is located on a 4.69 acre
site at 1181 Winterson Road, Linthicum, Maryland 21090. The hotel is
approximately 8 miles from downtown Baltimore and 2 miles from the
Baltimore-Washington International Airport.
The hotel opened in March 1998. It has concrete masonry construction, with
a stucco exterior. The hotel consists of one building with four stories. The
hotel contains 147 suites, which have a combined rentable area of 75,600 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 20 500
Homewood Suite 120 500
Two-Bedroom Suite 7 800
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, and three meeting rooms
that accommodate up to 125 people, and a business center that offers guests the
use of a personal computer, a photocopier and an electric typewriter.
Recreational facilities include an outdoor pool, a whirlpool and an exercise
room. The hotel also contains a guest convenience store and laundry. The hotel
has its own parking lot with 157 spaces. The hotel provides complimentary
shuttle service within a five mile radius.
S-33
<PAGE>
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 $60,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement,
furniture replacement, bathroom upgrades and parking lot resurfacing and
restriping . We expect to pay for the costs of these renovations and
improvements with proceeds obtained from our ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 7.5 nights,
and approximately 67.9% of the guests have stayed for five nights or more. In
general, 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)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
67.0% 83.2%
</TABLE>
During 1999, the average daily rate per suite was $94.17, and the average
daily revenue per available suite was $78.39. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 24.8% 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:
<TABLE>
<CAPTION>
Length of Stay
(number of nights) Homewood Master Two Bedroom
- ------------------ -------- ------ -----------
<S> <C> <C> <C>
1 to 4 $129 $129 $169
5 to 11 119 229 159
12 to 29 109 109 149
30 or more 89 89 129
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 93% of the hotel's guests received a corporate discount.
S-34
<PAGE>
The chief corporate accounts (as designated in the hotel's records) include
Defense Security Services, Gap, Ciera, Northcorp Grumman, National Security
Agency, Boeing, International Paper, Lockheed Martin Corporation, Dept. of
Defense and Carmax. During 1999, the 10 largest corporate accounts were
responsible for approximately 13% of the hotel's occupancy. There can be no
assurance, however, that the hotel will continue to receive significant
occupancy, or any occupancy, from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
$33.46 $55.64
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $14,719,686 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999 (and is based on a formula that uses the assessed values for the current
and prior years to determine a separate taxable amount):
<TABLE>
<CAPTION>
Assessed Assessed Taxable Tax Rate Amount
Tax Jurisdiction Value (1999) Value (1998) Amount (per $100) of Tax
- ---------------- ------------ ------------ ------ ---------- ------
<S> <C> <C> <C> <C> <C>
State of Maryland/ $11,085,900 $10,316,100 $4,229,080 2.57 $108,687.36
Anne Arundel County
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $800 or less.
At least five competing hotels are located within two miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) One of the competing hotels is newer than the
hotel. The newer competing hotel has a franchise with Candlewood Suites. The
other competing hotels have franchises with AmeriSuites, Comfort Suites,
DoubleTree Suites and Residence Inn. We believe that the rates charged by the
hotel are generally competitive with the rates charged by these other hotels. We
are aware of ongoing or proposed construction for two extended-stay hotels
within approximately seven miles of the hotel. We expect these new hotels to be
franchised with Hilton Garden Inn and Town Place Suites.
S-35
<PAGE>
CLEARWATER
The Homewood Suites(R) Clearwater is located on a 5.91 acre site at 2233
Ulmerton Road, Clearwater, Florida 33762. The hotel is approximately 12 miles
from downtown Tampa/St. Petersburg and 15 miles from the Tampa International
Airport.
The hotel opened in February 1998. It has concrete masonry construction,
with a stucco exterior. The hotel consists of one buildings with two stories.
The hotel contains 112 suites, which have a combined area of 58,400 square feet.
The following types of suites are available:
<TABLE>
<CAPTION>
Type of Suite Number Available Square Feet Per Suite
-------------- ---------------- ---------------------
<S> <C> <C>
Homewood King Suite 88 500
Homewood Double Suite 16 500
Two-Bedroom Suite 8 800
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates up to 75 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 118 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
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 $15,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement, common
area upgrades and bathroom upgrades. We expect to pay for the costs of these
renovations and improvements with proceeds obtained from our ongoing offering of
common shares.
During 1999, the average stay at the hotel was approximately 2.9 nights,
and approximately 45% of the guests have stayed for five nights or more. In
general, 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)
<TABLE>
<S> <C> <C>
1998 1999
---- ----
<S> <C> <C>
63.4% 75.8%
</TABLE>
During 1999, the average daily rate per suite was $89.68, and the average
daily revenue per available suite was $67.93. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase
S-36
<PAGE>
of the hotel. There can be no assurance, however, the proceeds of the offering
will be sufficient to permit such payments of principal. Assuming that no
principal payments are made until the maturity of the promissory note, and that
the hotel continues to have the level of revenue specified above, approximately
24% 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:
<TABLE>
<CAPTION>
Length of Stay Homewood Homewood
(number of nights) King Double Two Bedroom
- ------------------ -------- -------- -----------
<S> <C> <C> <C>
1 to 4 $109 $109 $149
5 to 11 99 99 139
12 to 29 99 89 129
30+ 69 69 109
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 78.7% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
Raymond James, Home Shopping Network, Lucent Technologies, Tech Data, Honeywell,
Unisys, Franklin Templeton Group, PSCU, Raytheon and Digital Lightwave. During
1999, the 10 largest corporate accounts were responsible for approximately 31%
of the hotel's occupancy. There can be no assurance, however, that the hotel
will continue to receive significant occupancy, or any occupancy, from the
corporate accounts identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
$35.31 $47.55
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $7,561,172 and will be depreciated over a life of
39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
S-37
<PAGE>
<TABLE>
<CAPTION>
Tax Assessed Tax Rate Amount
Jurisdiction Value (per $1000) of Tax
- ------------ ----- ----------- ------
<S> <C> <C> <C>
Pinellas County $4,312,200 22.9033 $98,763.61
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $180 or less.
At least seven competing hotels are located within three miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) Three of the competing hotels are
newer than the hotel. The newer competing hotels have franchises with Candlewood
Suites, Fairfield Inn and Town Place Suites. The other competing hotels have
franchises with Courtyard by Marriott, Holiday Inn Select, La Quinta Inns and
Residence Inn. We believe that the rates charged by the hotel are generally
competitive with the rates charged by these other hotels. We are aware of
ongoing or proposed construction for four extended-stay hotels within
approximately three miles of the hotel. We expect these new hotels to be
franchised with Hawthorn Suites, Radisson Suites, Spring Hill Suites and
Woodbridge Suites.
DETROIT - WARREN
The Homewood Suites(R) Detroit - Warren is located on a 2.84 acre site
at 30180 N. Civic Center Drive, Warren, Michigan 48093. The hotel is
approximately 17 miles from downtown Detroit and 31 miles from the Detroit
Metropolitan Wayne County Airport.
The hotel opened in March 1990. It has wood frame construction, with a
plaster and wood trim exterior. The hotel consists of three buildings, each with
one, two or three stories. The hotel contains 76 suites, which have a combined
rentable area of 31,520 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 8 540
Homewood Suite 60 360
Two-Bedroom Suite 8 700
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 77 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $330,000
S-38
<PAGE>
on renovations or improvements. We expect that the principal renovations and
improvements will include carpet repairs, sidewalk and parking area repairs,
common area upgrades and exercise equipment upgrades. We expect to pay for the
costs of these renovations and improvements with proceeds obtained from our
ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 6.2 nights,
and approximately 55.9% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, for the last five
years:
Average Daily Occupancy Rate (calendar year)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
71.5% 71.6% 80.3% 76.2% 74.3%
</TABLE>
During 1999, the average daily rate per suite was $88.11, and the average
daily revenue per available suite was $65.46. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 15.2% 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:
<TABLE>
<CAPTION>
Length of Stay
(number of nights) Homewood Master Two Bedroom
- ------------------ --------- ------ -----------
<S> <C> <C> <C>
1 to 6 $104 $104 $144
7 to 29 95 95 135
30 to 89 89 89 129
90 or more 79 79 119
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 59% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
General Motors, Raytheon, Chrysler, Ernst &Young, Optima Package, Electronic
Systems, Boeing,
S-39
<PAGE>
Chrysler First, IBM, PBS and J. Liebherr Machine Tool. During 1999, the 10
largest corporate accounts were responsible for approximately 19.6% of the
hotel's occupancy. There can be no assurance, however, that the hotel will
continue to receive significant occupancy, or any occupancy, from the corporate
accounts identified above.
The table below shows the average effective annual rental per square foot
since for the last five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$45.37 $49.68 $57.14 $58.75 $57.61
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $3,755,879 and will be depreciated over a life of
39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
Tax Assessed Tax Rate Amount
Jurisdiction Value (per $100) of Tax
- ------------ ----- ---------- ------
<S> <C> <C> <C>
County of Macomb $1,131,410 5.0171 $ 5,676.40
City of Warren $1,131,410 16.0468 $18,155.51
School District $1,131,410 28.6050 $32,363.98
---------
TOTAL $56,195.89
=========
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $8,200 or less.
At least five competing hotels are located within three miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) Three of the competing hotels are newer than the
hotel. The newer competing hotels have franchises with Extended Stay America,
Residence Inn and Studio Plus. The other competing hotels have franchises with
Best Western and Courtyard by Marriott. We believe that the rates charged by the
hotel are generally competitive with the rates charged by these other hotels. We
are aware of ongoing or proposed construction for two extended-stay hotels
within approximately five miles of the hotel. We expect these new hotels to be
franchised with Red Roof Inn and Sleep Inn.
S-40
<PAGE>
SALT LAKE CITY - MIDVALE
The Homewood Suites(R) Salt Lake City - Midvale is located on a 3.44 acre
site at 844 E. North Union Avenue, Midvale, Utah 84047. The hotel is
approximately 11 miles from downtown Salt Lake City and 15 miles from the Salt
Lake City International Airport.
The hotel opened in November 1996. It has concrete masonry construction,
with an aluminum siding exterior. The hotel consists of one buildings with three
stories. The hotel contains 98 suites, which have a combined rentable area of
60,070 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 21 590
Homewood Suite 71 590
Two-Bedroom Suite 6 965
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 110 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $72,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement,
landscaping, parking lot restriping and common area upgrades. We expect to pay
for the costs of these renovations and improvements with proceeds obtained from
our ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 3.5 nights,
and approximately 47.7% of the guests have stayed for five nights or more. In
general, 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)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
51.1% 63.8% 63.5%
</TABLE>
During 1999, the average daily rate per suite was $89.03, and the average
daily revenue per available suite was $56.55. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase
S-41
<PAGE>
of the hotel. There can be no assurance, however, the proceeds of the offering
will be sufficient to permit such payments of principal. Assuming that no
principal payments are made until the maturity of the promissory note, and that
the hotel continues to have the level of revenue specified above, approximately
16.2% 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:
<TABLE>
<CAPTION>
Length of Stay Homewood Homewood
(number of nights) (King) (Double) Master Two Bedroom
- ------------------ ------ -------- ------ -----------
<S> <C> <C> <C> <C>
1 to 4 $99 $99 $99 $139
5 to 12 89 89 89 129
13 to 29 79 79 99 119
30 or more 69 69 69 109
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 49% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
American Express, The Associates, Meridian Diagnostics, Regency Blue Cross,
Cimetrix, Baxter Healthcare, Fed-Ex, Onyx Acceptance, 3M and United Healthcare.
During 1999, the 10 largest corporate accounts were responsible for
approximately 10% of the hotel's occupancy. There can be no assurance, however,
that the hotel will continue to receive significant occupancy, or any occupancy,
from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
$27.30 $35.09 $33.67
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $4,657,834 and will be depreciated over a life of
39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
S-42
<PAGE>
The following table summarizes the hotel's real estate tax information
for 1999:
<TABLE>
<CAPTION>
Tax Assessed Tax Rate Amount
Jurisdiction Value (per $1000) of Tax
- ------------ ----- ----------- ------
<S> <C> <C> <C>
County of Salt Lake $5,632,000 0.013595 $76,567.04
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $500 or less.
At least five competing hotels are located within five miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) None of the competing hotels are newer than the
hotel. The other competing hotels have franchises with Candlewood Suites,
Courtyard by Marriott, Crystal Inn and Residence Inn (in two cases). We believe
that the rates charged by the hotel are generally competitive with the rates
charged by these other hotels. We are aware of proposed construction to build
one extended-stay hotel within approximately three miles of the hotel. We expect
this hotel to be franchised with Microtel.
JACKSON - RIDGELAND
The Homewood Suites(R) Jackson - Ridgeland is located on a 3.9 acre site at
853 Centre Street, Ridgeland, Mississippi 39157. The hotel is approximately 10
miles from downtown Jackson and 15 miles from the Jackson Municipal Airport.
The hotel opened in February 1997. It has wood frame construction and
consists of a single building with three stories. The hotel contains 91 suites,
which have a combined rentable area of 41,729 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 56 406 to 510
Homewood Suite 29 458 to 557
Two-Bedroom Suite 6 690
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 45 to 50 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 108 spaces. The hotel provides complimentary shuttle service
within a five mile radius (and to the airport).
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $58,000 on
S-43
<PAGE>
renovations or improvements. We expect that the principal renovations and
improvements will include carpet replacement, furniture replacement, bathroom
upgrades and parking lot resurfacing and restriping. We expect to pay for the
costs of these renovations and improvements with proceeds obtained from our
ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 3.2
nights, and approximately 47.4% of the guests have stayed for five nights or
more. In general, 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)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
63.8% 80.6% 77.6%
</TABLE>
During 1999, the average daily rate per suite was $81.96, and the average
daily revenue per available suite was $63.63. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 17.6% 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:
<TABLE>
<CAPTION>
Length of Stay
(number of nights) Homewood Master Two Bedroom
- ------------------ -------- ------ -----------
<S> <C> <C> <C>
1 to 4 $92 $92 $132
5 to 11 82 82 122
12 to 28 74 74 114
29 or more 69 69 109
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The 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 1999, we estimate
that approximately 65% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records) include
Fire Victims, Entergy, Baptist Healthcare, Mississippi Diversified, Copac,
Athena Computer Learning, Ergon, International Paper, Illinois Central and
Nissan. During 1999, the 10 largest corporate accounts
S-44
<PAGE>
were responsible for approximately 16% of the hotel's occupancy. There can be no
assurance, however, that the hotel will continue to receive significant
occupancy, or any occupancy, from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
$33.32 $50.70 $50.65
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $5,287,765 and will be depreciated over a life of
39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
Tax Estimated Value Taxable Portion Tax Amount
Jurisdiction (tax purposes) (of Estimated Value) Rate Of Tax
- ------------ -------------- -------------------- ---- ------
<S> <C> <C> <C> <C>
Madison County $4,044,310 $606,650 0.09917 $60,161.48
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $500 or less.
At least six competing hotels are located within seven miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) One of the competing hotels is newer than the
hotel. The newer competing hotel has a franchise with Townplace Suites. The
other competing hotels have franchises with Residence Inn, Cabot Lodge,
Courtyard by Marriott, Harvey Hotel and Hilton. We believe that the rates
charged by the hotel are generally competitive with the rates charged by these
other hotels. We are aware of ongoing or proposed construction for up to six new
extended-stay hotels within 12 miles of the hotel. We expect these new hotels to
be franchised with Comfort Inn, Hawthorne Suites, Jameson Inn, King Edward
Hotel, Hilton Gardens and Springhill Suites.
S-45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Apple Suites, Inc. (the "company") owns extended-stay hotels. During 1999,
the company acquired 11 hotels with 1,218 suites from Promus Hotels, Inc. or an
affiliate. Promus Hotels, Inc. was subsequently acquired by Hilton Hotels
Corporation ("Hilton") and is now a wholly-owned subsidiary of Hilton. The
hotels were acquired for an aggregate purchase price of $91,426,000. Since
current federal income tax laws prohibit a real estate investment trust from
actively operating hotels, all of the company's hotels are leased to Apple
Suites Management, Inc. or its subsidiary (the "lessee") pursuant to master
hotel lease agreements ("Percentage Leases"). Each Percentage Lease obligates
the lessee to pay rent equal to the sum of a base rent and a percentage rent
based on suite revenues and sundry other revenues of each hotel. The lessee's
ability to make payments to the company pursuant to the Percentage Leases is
dependent primarily upon the operations of the hotels. See Note 9 to the
consolidated financial statements for further lease information.
The lessee holds the franchise and market reservation agreement for each of
the hotels, which are operated as Homewood Suites(R) by Hilton. The lessee
engages a third-party manager, Promus Hotels, Inc. ("Promus"), to operate the
hotels. The company is externally advised and has contracted with Apple Suites
Advisors, Inc. (the "Advisor") to manage its day-to-day operations and make
investment decisions. The company has contracted with Apple Suites Realty Group,
Inc. ("ASRG") to provide brokerage and acquisition services in connection with
its hotel acquisitions. The lessee, the Advisor and ASRG are all owned by Mr.
Glade Knight, the company's Chairman and Chief Executive Officer. See Note 6 to
the consolidated financial statements for further information on related party
transactions.
RESULTS OF OPERATIONS
Apple Suites, Inc. (The Company)
REVENUES: As operations of the company commenced effective September 1,
1999 with the purchase of four hotels, a comparison to 1998 is not possible.
During the period ended December 31, 1999, the company had revenues of
$2,518,031. All of the company's lease revenue is derived from the Percentage
Leases covering the hotels in operations with the lessee.
The company's other income consists of $158,171 of interest income earned
from the investments of its cash and cash reserves and $10,915 of interest
earned from the promissory notes with the lessee for franchise and hotel
supplies.
EXPENSES: The expenses of the company consist of property taxes, insurance,
general and administrative expenses, interest on notes payable, and depreciation
on the hotels. Total expenses, exclusive of interest and depreciation, for the
period ended December 31, 1999 were $580,399 or 22% of total revenue.
Interest expense was $1,245,044 for the period ended December 31, 1999 and
represented interest on short-term notes payable to Hilton at an interest rate
of 8.5%.
S-46
<PAGE>
Depreciation expense was $496,209 for the period ended December 31, 1999.
Taxes, insurance, and other was $426,592 for the period ended December 31,
1999 or 16% of total revenue.
General and administrative expense totaled 6% of total revenues. These
expenses represent the administrative expenses of the company. This percentage
is expected to decrease as the company's asset base grows.
Apple Suites Management, Inc. (The Lessee)
The lessee incurred an operating loss for the period ending December 31,
1999 of $141,104 primarily due to the timing of the hotel acquisitions and the
seasonality of the hotel industry. Historically, the hotel industry has seasonal
variations in occupancy that can be expected to cause quarterly fluctuations in
the company's lease revenues, particularly in the fourth quarter.
REVENUES: As operations commenced effective September 1, 1999, a comparison
to 1998 is not possible. Total revenues were $5,671,075 consisting primarily of
suite revenue, which was $5,335,925 for the period ended December 31, 1999.
For the period ended December 31, 1999 the average occupancy rate was 71%,
average daily rate ("ADR") was $83, and revenue per available room ("REVPAR")
was $59.
EXPENSES: Total expenses for the period ended December 31, 1999 were
$5,812,179. Rent expense represents $2,518,031 or 44% of total revenue. The
lessee contracts with Promus to manage the day-to-day operations of the hotels.
The lessee pays Promus fees of 4% of suite revenue for these functions. The
lessee also pays Promus a fee of 4% of suite revenue for franchise licenses to
operate as a Homewood Suites (R) by Hilton and to participate in its reservation
system. Total expense for these services was $653,010 during the period.
LIQUIDITY AND CAPITAL RESOURCES
EQUITY: The company commenced operations effective September 1, 1999 with
the acquisition of four hotels using a combination of proceeds from the
company's ongoing "best efforts" offering and notes. During 1999, the company
sold 3,429,414 shares (1,666,667 shares at $9 per share and 1,762,747 shares at
$10 per share) of its common stock to its investors. Included in the 1,762,747
shares sold is 9,294 common shares sold through the company's additional share
option. The total gross proceeds from the shares sold were $32,627,476, which
netted $28,591,260 to the company after the payment of selling commissions and
other offering costs.
During 1999, the company acquired 11 hotels with a total purchase price of
$91,426,000. In conjunction with these acquisitions, the company executed notes
in the aggregate of $68,569,500.
S-47
<PAGE>
The lessee's obligations under the Percentage Leases are unsecured. The
lessee has limited capital resources, and, accordingly its ability to make lease
payments under the Percentage Leases is substantially dependent on the ability
of the lessee to generate sufficient cash flow from operations of the hotels.
The company has certain abilities to cancel the lease with the lessee if the
lessee does not perform under the terms of the lease.
To support the lessee's obligations, the lessee has two funding commitments
of $1 million each from Mr. Knight and ASRG, respectively (together "Payor").
The funding commitments are contractual obligations of the Payor to pay funds to
the lessee. Funds paid to the lessee under the commitments are to be used to
satisfy any capitalization or net worth requirements applicable to the lessee or
the lessee's payment obligations under the lease agreements, do not represent
indebtedness, and are not subject to interest. The funding commitments terminate
upon the expiration of the Master Hotel Lease agreements, written agreement
between the Payor and the lessee, or payment of all commitment amounts by the
Payor to the lessee. As of December 31, 1999, no contributions have been made by
the Payor to the lessee under the funding commitments.
NOTES PAYABLE: On April 20, 1999, the company obtained a line of credit in
a principal amount of $1 million with a commercial bank guaranteed by Mr.
Knight. The line required interest at LIBOR plus 1.50%. Interest was payable
monthly and the principal balance and all accrued interest were paid in full by
September 30, 1999.
In conjunction with purchase of the 11 hotels, notes were executed by the
company made payable to the order of Hilton in the amount of $68,569,500. The
notes bear an effective interest rate of 8.5% per annum. Interest payments are
due monthly. Principal payments are to be made from net proceeds from the
offering of common shares. Hilton, which controls Promus, agreed to defer
principal payments until the earlier of April 29, 1999 or such time as two
additional hotels have been purchased by the company. At December 31, 1999, the
company's borrowings were $68,569,500.
The company has $68.6 million in notes payable with Hilton have principal
payments of $34 million due on October 1, 2000, $30.2 million due on November 1,
2000 and $4.4 million due on January 1, 2001. The company plans to pay these
notes with the proceeds from its continuous "best efforts" offering of common
shares. However, based on the current rate at which equity is being raised by
the offering, the company may have to seek other measures to repay these loans.
The company is currently holding discussions with several lenders to obtain
financing for its hotels and is exploring both unsecured and secured financing
arrangements. Although no firm financing commitments have been received, the
company believes that based on discussions with lenders and other market
indicators it can obtain sufficient financing prior to maturity of the notes.
Obtaining refinancing is dependent upon a number of factors, including: (1)
continued operation of the hotels at or near current occupancy and room rate
levels as the company's leases are based on a percentage of hotel suite income,
(2) general level of interest rates including credit spreads for real estate
based lending, and (3) general economic conditions. For each of the notes
payable, all of the Company's 11 hotels serve as collateral.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents totaled $581,344 at
December
S-48
<PAGE>
31, 1999.
CAPITAL REQUIREMENTS: The company has an ongoing capital commitment to fund
its capital improvements. The company is required under the Percentage Leases to
make available to the lessee for the repair, replacement, or refurbishing of
furniture, fixtures, and equipment an amount equal to 5% of suite revenue
monthly on a cumulative basis, provided that such amount may be used for capital
expenditures made by the company with respect to the hotels. The company expects
that this amount will be adequate to fund the required repair, replacement, and
refurbishments and to maintain its hotels in a competitive condition. The
company capitalized improvements of $290,741 in 1999. At December 31, 1999,
$753,926 was held by Hilton, restricted for funding of these improvements.
The company expects to acquire additional hotels during 2000. The company
plans to have monthly equity closings in 2000, until the offering is fully
funded, or until such time as the company may opt to discontinue the offering.
During January and February 2000, the company closed the sale to investors of
335,487 shares at $10 per share representing net proceeds to the company of
$3,019,377. It is anticipated that the equity funds will be invested in
additional hotels and principal payments on the notes incurred in conjunction
with the existing acquisitions.
Capital resources are expected to grow with the future sale of its shares.
Approximately 10% of the 1999 common stock dividend distribution, or $83,646,
was reinvested in additional common shares. In general, the company's liquidity
and capital resources are believed to be more than adequate to meet its cash
requirements during 2000, given current and anticipated financing arrangements.
The company is operated as, and will annually elect to be taxed as, a real
estate investment trust under the Internal Revenue Code. As a result, the
company has no provision for taxes, and thus there is no effect on the company's
liquidity from taxes.
INFLATION: All of the company's Percentage Leases provide, on an annual
basis, for adjustments in the rent payable thereunder, and thus may enable the
company to obtain increased base rents, which generally serves to minimize the
risk to the company of adverse effects of inflation. Operators of hotels, in
general, possess the ability to adjust room rates daily to reflect the effects
of inflation. Competitive pressures may, however, limit the operator's ability
to raise room rates.
SEASONALITY: The hotel industry historically has been seasonal in nature,
reflecting higher occupancy rates primarily during the first three quarters of
the year. Seasonal variations in occupancy at the company's hotels may cause
quarterly fluctuations in the company's lease revenues, particularly during the
fourth quarter, to the extent that it receives percentage rent. To the extent
the cash flow from operations is insufficient during any quarter, due to
temporary or seasonal fluctuations in lease revenue, the company expects to
utilize cash on hand or funds from equity raised through its "best efforts"
offering to make distributions.
IMPACT OF YEAR 2000: The company and lessee completed the year 2000 project
as planned. The company and lessee have not experienced any year 2000 problems
company-wide
S-49
<PAGE>
or from external sources and do not anticipate any. The company's total costs
incurred to meet year 2000 compliance were not significant.
MARKET RISK DISCLOSURES: In connection with the acquisition of the 11
hotels, the company incurred $68,569,500 of short-term borrowings at a fixed
interest rate of 8.5%. The company has repricing risk associated with any
refinancing of these debt obligations which have various maturity dates through
January 2001.
REIT MODERNIZATION ACT: In December 1999, the REIT Modernization Act
("RMA") was signed into law legislation. The most important feature of this
legislation to the company is the ability under certain conditions to operate
our hotels through a taxable REIT subsidiary without using a third party lessee.
This provision of the RMA is not effective until after December 31, 2000. Our
current lease agreements provide for termination of the lease agreements for
changes in tax law such as the RMA. Currently, we are evaluating the impact of
the RMA on our operating structure.
S-50
<PAGE>
SELECTED FINANCIAL DATA
March 26, 1999 to December 31, 1999 (b)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Lease revenue $ 2,518,031
Interest income and other revenue 169,086
-----------
Total revenue 2,687,117
Expenses:
Taxes, insurance, and other 426,592
General and administrative 153,807
Depreciation 496,209
Interest 1,245,044
------------
Total expenses 2,321,652
Net income $ 365,465
============
- --------------------------------------------------------------------------------
Per Share
Earnings per share - basic and diluted $ 0.14
Distributions to common shareholders $ 0.33
Weighted-average common shares outstanding 2,648,196
Balance Sheet Data at December 31, 1999:
Cash and cash equivalents $ 581,344
Investment in hotels, net $ 93,719,632
Total assets $ 99,489,008
Notes payable - secured $ 68,569,500
Shareholders Equity $ 28,098,000
- --------------------------------------------------------------------------------
Other Data
Cash flow from:
Operating activities $ 548,015
Investing activities $(28,411,941)
Financing activities $ 28,445,170
Number of hotels owned at December 31, 1999 11
- --------------------------------------------------------------------------------
Funds From Operations Calculation
Net income $ 365,465
Depreciation of real estate owned 496,209
Start-up costs 22,002
------------
Funds from Operations (a) $ 883,676
============
</TABLE>
(a) "Funds from operations" is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. This definition conforms
to the recommendations set forth in a White Paper adopted by the National
Association of Real Estate Investment Trusts (NAREIT). The company considers
funds from operations in evaluating property acquisitions and its operating
performance, and believes that funds from operations should be considered along
with, but not as an alternative to, net income and cash flows as a measure of
the company's operating performance and liquidity. Funds from operations, which
may not be comparable to other similarly titled measures of other REITs, does
not represent cash generated from operating activities in accordance with
generally accepted accounting principles and is not necessarily indicative of
cash available to fund cash needs.
(b) The company was initially capitalized on March 26, 1999; however, operations
did not commence until September 1, 1999.
S-51
<PAGE>
UPDATE CONCERNING PRIOR PROGRAMS
The prospectus contains information on prior programs sponsored by Glade M.
Knight to invest in real estate. The information in the prospectus on the prior
programs is generally current as of June 15, 1999 except where a different date
is specified. The following information describes recent developments affecting
these prior programs and is generally current through December 31, 1999 except
where a different date is specified.
As indicated in the prospectus, the information on prior programs should
not be considered to be indicative of our operations, and purchasers of our
common shares will not have any interest in these other programs or in any of
the properties owned by them.
On July 23, 1999, Apple Residential Income Trust, Inc. was merged into a
subsidiary of Cornerstone Realty Income Trust, Inc. Thus, as a result of that
merger, Apple Residential Income Trust, Inc. ceased to exist and its properties
became properties of Cornerstone Realty Income Trust, Inc.
As of February 29, 2000, Cornerstone had approximately 18,000 holders of
its common shares and approximately 10,000 holders of its preferred shares. Its
common shares are listed and traded on the New York Stock Exchange under the
symbol "TCR," but its preferred shares are not listed. At December 31, 1999,
Cornerstone owned a total of 87 apartment communities in Georgia, North
Carolina, South Carolina and Virginia. On March 10, 2000, Cornerstone sold 16
apartment communities and now owns 71 apartment communities as of the date of
this supplement.
As indicated in the prospectus, on June 15, 1999, Mr. Knight had ceased to
hold an interest in all but one of the 40 privately-offered partnerships
sponsored by him. Mr. Knight disposed of his interest in that one remaining
partnership during 1999.
For more information, prospective investors should refer to the updated
tabular information on prior programs sponsored by Mr. Knight that appears
immediately after this paragraph. In addition, Part II of our Registration
Statement (which is not included in the prospectus or this supplement) contains
a more detailed summary of the property acquisitions by Cornerstone Realty
Income Trust, Inc. and Apple Residential Income Trust, Inc. that occurred on or
before December 31, 1999. Also included is information on the acquisition by
Cornerstone Realty Income Trust, Inc. of the properties owned by Apple
Residential Income Trust, Inc. as a result of the merger described above. We
will provide a copy of the summary of property acquisitions without charge upon
request of any investor or prospective investor.
S-52
<PAGE>
TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds
by Cornerstone and Apple, whose investment objectives are similar to those of
the Company and whose offering closed within the three years ending December 31,
1999.
<TABLE>
<CAPTION>
Cornerstone Apple
---------------------------- -----------------------
<S> <C> <C>
Dollar amount offered $409,409,897 $300,000,000
Dollar amount raised $409,409,897 $302,867,348*
LESS OFFERING EXPENSES:
Selling commissions and discounts 6.79% 10.00%
Organizational expenses 2.82% 1.00%
Other 0.00% 0.00%
Reserves 3.00% 0.50%
Percent available from investment 87.39% 88.50%
ACQUISITION COSTS:
Prepaid items and fees to purchase property 86.27% 86.50%
Cash down payment 0.00% 0.00%
Acquisition fees 1.12% 2.00%
Other 0.00% 0.00%
Total Acquisition Costs 87.39% 88.50%
Percentage leverage (excluding unsecured debt) 11.43% 10.84%
Date offering began May 1993 January 1997
Length of offering (in months) 66 31
Months to invest amount available for investment 66 31
</TABLE>
* Amount includes shares purchased by Cornerstone Realty Income Trust, Inc.
exclusive of the offering.
S-53
<PAGE>
TABLE II: COMPENSATION TO SPONSOR AND ITS AFFILIATES
Table II summarizes the compensation paid to the Prior Program Sponsor
and its Affiliates (i) by programs organized by it and closed within the three
years ended December 31, 1999, and (ii) by all other programs during the three
years ended December 31, 1999
<TABLE>
<CAPTION>
Cornerstone Apple Other Programs
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
Date offering commenced May 1993 January 1997 Various
Dollar Amount raised $409,409,897 $302,867,348 $9,868,220
AMOUNTS PAID TO PRIOR PROGRAM SPONSOR FROM
PROCEEDS OF OFFERING:
Acquisition fees
Real estate commission $ 4,075,337 $ 4,882,032 $ --
Advisory fees $ 515,689 $ 1,140,874 $ --
Other $ -- $ -- $ --
Cash generated from operations before deducting
AGGREGATE COMPENSATION TO PRIOR PROGRAM SPONSOR:
Management and accounting fees $ 3,088,348 $3,859,448 $2,828,330
Reimbursements $ 2,717,655 $ -- $ --
Leasing fees $ -- $ -- $ --
Other fees $ -- $ -- $ --
There have been no fees from property sales or
refinancings
</TABLE>
S-54
<PAGE>
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for
Cornerstone and Apple, the offerings closed in the five years ending December
31, 1999. Table III is shown on both an income tax basis as well as in
accordance with generally accepted accounting principles, the only significant
difference being the methods of calculating depreciation.
<TABLE>
<CAPTION>
1999 1999 1998 1998 1997 1997 1996 1995
Cornerstone Apple Cornerstone Apple Cornerstone Apple Cornerstone Cornerstone
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital contributions by year $9,168,728 $32,497,218 $38,905,636 $142,800,094 $63,485,868 $109,090,359 $144,798,035 $71,771,027
Gross revenue 125,041,524 26,243,431 93,637,948 30,764,904 71,970,624 12,005,968 40,261,674 16,266,610
Operating expenses 46,940,388 15,307,051 33,797,439 14,958,699 27,339,955 5,993,492 17,198,882 7,457,574
Interest income (expense) (14,953,613) (302,919)(12,175,940) 900,669 (7,230,205) (235,708) (1,140,667) (68,061)
Depreciation 29,310,325 5,893,349 20,741,130 5,788,476 15,163,593 1,898,003 8,068,063 2,788,818
Net income (loss) GAAP basis 30,037,102 (16,328,050) 23,210,642 10,079,908 19,225,553 3,499,194 (4,169,849) 5,229,715
Taxable income -- -- -- -- -- -- -- --
Cash generated from operations 62,310,895 10,680,641 45,027,655 17,122,276 34,973,533 7,075,025 20,162,776 9,618,956
Less cash distributions to 42,050,415 19,346,455 38,317,602 13,040,936 31,324,870 3,249,098 15,934,901 6,316,185
Cash generated after cash 20,260,480 (8,665,814) 6,710,053 4,081,340 3,648,663 3,825,927 4,227,875 3,302,771
Special items
Capital contributions, net 9,168,728 32,497,218 38,905,636 142,800,094 63,485,868 109,090,359 144,798,035 71,771,027
Fixed asset additions 332,558,553 44,755,816 97,863,162 125,017,627 157,859,343 88,753,814 194,519,406 75,589,089
Line of credit (44,392,999) -- 50,323,852 -- 96,166,147 -- 41,603,000 3,300,000
Cash generated 13,677,972 (21,366,155) (1,923,622) 15,910,626 1,331,335 24,162,472 (3,890,496) 2,784,709
End of period cash $16,268,336 $18,707,044 $2,590,364 $40,073,198 $4,513,986 $24,162,572 $3,182,651 $7,073,147
Tax and distribution data
Cash distributions to investors
Investment income 95 46 82 -- 77 -- 85 80
Return of capital 12 21 21 82 23 60 14 16
Source (on Cash basis)
Sales -- -- -- -- -- -- --
Refinancings -- -- -- -- -- -- --
Operations 107 67 103 82 100 60 99 96
Other -- -- -- -- -- -- --
</TABLE>
S-55
<PAGE>
TABLE IV: RESULTS OF COMPLETED PROGRAMS
Table IV shows the results of programs sponsored by affiliates of ASA which
completed operations in the five years ending December 31, 1999. All of these
programs had investment objectives dissimilar to those of the Company.
<TABLE>
<CAPTION>
Mountain Teal
Program Name View Westfield Sunstone Point Apple
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollar amount raised $2,605,800 $1,825,600 $1,890,000 $3,310,620 $302,867,348
Number of properties 1 1 1 1 29
Date of closing of offering Oct 1984 Nov 1984 July 1984 Dec 1989 Jan 1997
Date of first sale of property Aug 1995 Apr 1996 Nov 1995 Dec 1997 July 1999
Date of final sale of property Aug 1995 Apr 1996 Nov 1995 Dec 1997 July 1999
Tax and Distribution data per $1,000
investment through-
Federal income tax results:
Ordinary income
From Operations $68 $80 $122 $(4) $46
From recapture $1,200 $1,302 $526 $-- $21
Capital gain $-- $-- $-- $2,126 $--
Deferred gain
Capital $-- $-- $-- $-- $--
Ordinary $-- $-- $-- $-- $--
Cash distributions to investors
Source(On GAAP basis)
Investment income $68 $80 $122 $(4) $46
Return of capital $38 $233 $-- $-- $21
Source (On cash basis)
Sales $38 $233 $122 $2,126 $--
Refinancing $-- $-- $-- $-- $--
Operations $68 $80 $-- $(4) $67
Other $-- $-- $-- $-- $--
Receivable on net purchase money
financing $-- $-- $-- $-- $--
</TABLE>
S-56
<PAGE>
TABLE V: SALES OR DISPOSALS OF PROPERTIES
On July 23, 1999, Apple Residential Income Trust, Inc. merged with a
wholly-owned subsidiary of Cornerstone Realty Income Trust, Inc. Prior to the
merger, Apple owned 29 apartment communities containing 7,503 apartment homes.
The aggregate acquisition price in the merger was $311 million. In addition,
Apple's debt of approximately $32 million was assumed by Cornerstone.
EXPERTS
The following financial statements for our hotels are set forth below:
(a) combined financial statements pertaining to the Atlanta -
Galleria/Cumberland; Dallas - Addison; Dallas - Irving/Las Colinas; North Dallas
- - Plano; and Richmond - West End hotels; (b) combined financial statements
pertaining to the Atlanta - Peachtree, Baltimore - BWI Airport, Clearwater,
Detroit - Warren, and Salt Lake City - Midvale hotels; and (c) the financial
statements for the Jackson - Ridgeland hotel. These financial statements have
been included herein in reliance on the report of L. P. Martin & Company, P.C.,
independent certified public accountants, which is also included herein, and
upon the authority of that firm as an expert in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited Apple Suites,
Inc.'s consolidated financial statements and schedule at December 31, 1999 and
March 26, 1999, and for the period March 26, 1999 through December 31, 1999, as
set forth in their report. We've included our financial statements and schedule
in the prospectus supplement and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have audited Apple Suites
Management, Inc.'s consolidated financial statements at December 31, 1999 and
for the period March 11, 1999 through December 31, 1999, as set forth in their
report. We've included those financial statements in the prospectus supplement
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
S-57
<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-4
Combined Balance Sheets - December 31, 1998 and December 31, 1997................................F-5
Combined Statements of Shareholders' Equity - Years ended
December 31, 1997 and December 31, 1998..........................................................F-6
Combined Income Statements - Years ended
December 31, 1998 and December 31, 1997..........................................................F-7
Combined Statements of Cash Flows - Years ended
December 31, 1998 and December 31, 1997..........................................................F-8
Notes to the Combined Financial Statements - December 31, 1998
and December 31, 1997............................................................................F-9
Combined Balance Sheet - June 30, 1999 (unaudited)...............................................F-12
Combined Statement of Shareholders' Equity - For the Period
January 1, 1999 through June 30, 1999 (unaudited)................................................F-13
Combined Income Statement - For the Period
January 1, 1999 through June 30, 1999 (unaudited)................................................F-14
Combined Statement of Cash Flows - For the Period
January 1, 1999 through June 30, 1999 (unaudited)................................................F-15
Notes to the Combined Financial Statements - For the Period
January 1, 1999 through June 30, 1999 (unaudited)................................................F-16
Atlanta - Peachtree, Baltimore - BWI Airport,
Clearwater, Detroit - Warren, and Salt Lake City - Midvale
Independent Auditors' Report.....................................................................F-18
Combined Balance Sheets - December 31, 1998 and December 31, 1997................................F-19
Combined Statements of Shareholders' Equity - Years ended
December 31, 1997 and December 31, 1998..........................................................F-20
Combined Income Statements - Years ended
December 31, 1998 and December 31, 1997..........................................................F-21
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Combined Statements of Cash Flows - Years ended
December 31, 1998 and December 31, 1997..........................................................F-22
Notes to the Combined Financial Statements - December 31, 1998
and December 31, 1997............................................................................F-23
Combined Balance Sheet - August 31, 1999 (unaudited).............................................F-25
Combined Statement of Shareholders' Equity - For the Period
January 1, 1999 through August 31, 1999 (unaudited)..............................................F-26
Combined Income Statement - For the Period
January 1, 1999 through August 31, 1999 (unaudited)..............................................F-27
Combined Statement of Cash Flows - For the Period
January 1, 1999 through August 31, 1999 (unaudited)..............................................F-28
Notes to the Combined Financial Statements - For the Period
January 1, 1999 through August 31, 1999 (unaudited)..............................................F-29
Jackson - Ridgeland
Independent Auditors' Report.....................................................................F-31
Balance Sheets - December 31, 1998 and December 31, 1997.........................................F-32
Statements of Shareholders' Equity - Years ended
December 31, 1997 and December 31, 1998..........................................................F-33
Income Statements - Years ended
December 31, 1998 and December 31, 1997..........................................................F-33
Statements of Cash Flows - Years ended
December 31, 1998 and December 31, 1997..........................................................F-34
Notes to the Financial Statements - December 31, 1998
and December 31, 1997............................................................................F-35
Balance Sheet - August 31, 1999 (unaudited)......................................................F-37
Statement of Shareholders' Equity - For the Period
January 1, 1999 through August 31, 1999 (unaudited)..............................................F-38
Income Statement - For the Period
January 1, 1999 through August 31, 1999 (unaudited)..............................................F-38
Statement of Cash Flows - For the Period
January 1, 1999 through August 31, 1999 (unaudited)..............................................F-39
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Notes to the Financial Statements - For the Period
January 1, 1999 through August 31, 1999 (unaudited)..............................................F-40
APPLE SUITES, INC.
Report of Independent Auditors...................................................................F-42
Consolidated Balance Sheets as of December 31, 1999 and March 26, 1999...........................F-43
Consolidated Statement of Operations for the Period March 26, 1999
through December 31, 1999........................................................................F-44
Consolidated Statement of Shareholders Equity for the Period March 26, 1999
through December 31, 1999........................................................................F-45
Consolidated Statement of Cash Flows for the Period March 26, 1999
through December 31, 1999........................................................................F-46
Notes to the Consolidated Financial Statements...................................................F-47
Schedule III -- Real Estate and Accumulated Depreciation (as of December 31, 1999)........................F-59
APPLE SUITES MANAGEMENT, INC.
Report of Independent Auditors...................................................................F-60
Consolidated Balance Sheet as of December 31, 1999...............................................F-61
Consolidated Statement of Operations and Retained Deficit for the Period
March 11, 1999 through December 31, 1999.........................................................F-62
Consolidated Statement of Cash Flows for the Period March 11, 1999
through December 31, 1999........................................................................F-63
Notes to Consolidated Financial Statements.......................................................F-64
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Apple Suites, Inc. Pro Forma Condensed Consolidated Statement of Operations
for the Years Ended December 31, 1999............................................................F-68
Apple Suites Management, Inc. Pro Forma Condensed Consolidated Statement
of Operations for the Years Ended December 31, 1999..............................................F-71
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
L.P. MARTIN & COMPANY
A PROFESSIONAL CORPORATION
MEMBERS CERTIFIED PUBLIC ACCOUNTANTS MEMBERS
VIRGINIA SOCIETY OF 4132 INNSLAKE DRIVE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS GLEN ALLEN, VIRGINIA 23060 CERTIFIED PUBLIC ACCOUNTANTS
LEE P. MARTIN, JR., C.P.A. PHONE: (804) 346-2626 ROBERT C. JOHNSON, C.P.A.
WILLIAM L. GRAHAM, C.P.A. LEE P. MARTIN, C.P.A. (1948-78)
BERNARD G. KINZIE, C.P.A. FAX (804) 346-9311
W. BARCLAY BRADSHAW, C.P.A.
</TABLE>
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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
L.P. MARTIN & COMPANY
A PROFESSIONAL CORPORATION
MEMBERS CERTIFIED PUBLIC ACCOUNTANTS MEMBERS
VIRGINIA SOCIETY OF 4132 INNSLAKE DRIVE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS GLEN ALLEN, VIRGINIA 23060 CERTIFIED PUBLIC ACCOUNTANTS
LEE P. MARTIN, JR., C.P.A. PHONE: (804) 346-2626 ROBERT C. JOHNSON, C.P.A.
WILLIAM L. GRAHAM, C.P.A. LEE P. MARTIN, C.P.A. (1948-78)
BERNARD G. KINZIE, C.P.A. FAX (804) 346-9311
W. BARCLAY BRADSHAW, C.P.A.
</TABLE>
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.
November 7, 1999
F-18
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................. $ 298,981 $ 218,853
Accounts Receivable, Net ............................. 388,352 316,723
Prepaids and Other ................................... 66,670 --
------------ ------------
Total Current Assets ............................... 754,003 535,576
------------ ------------
INVESTMENT IN HOTEL PROPERTIES
Land and Improvements ................................ 5,363,981 3,035,089
Buildings and Improvements ........................... 29,417,804 13,842,622
Furniture, Fixtures and Equipment .................... 7,882,778 4,243,800
------------ ------------
Total .............................................. 42,664,563 21,121,511
Less: Accumulated Depreciation ....................... (6,272,356) (4,057,854)
------------ ------------
Net Investment in Hotel Properties ................. 36,392,207 17,063,657
------------ ------------
OTHER ASSETS
Construction in Progress ............................. -- 8,080,834
------------ ------------
Total Assets ....................................... $ 37,146,210 $ 25,680,067
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ..................................... $ 368,287 $ 695,044
Accrued Taxes ........................................ 107,272 96,401
Accrued Expenses - Other ............................. 247,767 117,154
------------ ------------
Total Current Liabilities .......................... 723,326 908,599
------------ ------------
SHAREHOLDERS' EQUITY
Contributed Capital .................................. 30,113,336 20,467,543
Retained Earnings .................................... 6,309,548 4,303,925
------------ ------------
Total Shareholders' Equity ......................... 36,422,884 24,771,468
------------ ------------
Total Liabilities and Shareholders' Equity ......... $ 37,146,210 $ 25,680,067
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<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 ........... $ 9,295,112 $3,139,210 $12,434,322
Net Income .......................... -- 1,164,715 1,164,715
Capital Contributions, Net .......... 11,172,431 -- 11,172,431
-----------
Balances, December 31, 1997 ......... 20,467,543 4,303,925 24,771,468
Net Income .......................... -- 2,005,623 2,005,623
Capital Contributions, Net .......... 9,645,793 -- 9,645,793
----------- ---------- -----------
Balances, December 31, 1998 ......... $30,113,336 $6,309,548 $36,422,884
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
GROSS OPERATING REVENUE
Suite Revenue .......................... $10,812,372 $4,659,633
Other Customer Revenue ................. 733,318 275,311
----------- ----------
Total Revenue ....................... 11,545,690 4,934,944
----------- ----------
EXPENSES
Property and Operating ................. 4,748,240 1,910,407
General and Administrative ............. 315,165 165,060
Advertising and Promotion .............. 502,899 209,918
Utilities .............................. 543,828 267,938
Real Estate and Personal Property Taxes,
and Property Insurance ............... 432,979 200,113
Depreciation Expense ................... 2,214,501 803,385
Franchise Fees ......................... 432,494 --
Pre-Opening Expenses ................... 349,961 213,408
----------- ----------
Total Expenses ...................... 9,540,067 3,770,229
----------- ----------
Net Income .......................... $ 2,005,623 $1,164,715
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<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 .............................................................................. $ 2,005,623 $ 1,164,715
------------ ------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation .......................................................................... 2,214,501 803,385
Change In:
Accounts Receivable ................................................................... (71,629) (274,291)
Prepaids and Other Current Assets ..................................................... (66,670) --
Accounts Payable ...................................................................... (326,757) 222,328
Accrued Taxes ......................................................................... 10,871 (3,724)
Accrued Expenses - Other .............................................................. 130,613 89,823
------------ ------------
Net Adjustments ....................................................................... 1,890,929 837,521
------------ ------------
Net Cash Flows From Operating Activities 3,896,552 2,002,236
CASH FLOWS TO FINANCING ACTIVITIES
Capital Distributions, Net .............................................................. (3,816,424) (2,077,731)
------------ ------------
Net Increase (Decrease) in Cash ....................................................... 80,128 (75,495)
Cash, Beginning of Year ............................................................... 218,853 294,348
------------ ------------
Cash, End of Year ..................................................................... $ 298,981 $ 218,853
============ ============
SUPPLEMENTAL DISCLOSURES:
Noncash Financing and Investing Activities ..............................................
YEAR ENDED DECEMBER 31, 1998
Investments in hotel properties in the amount of $13,462,218 were financed with capital
contributions.
Construction in progress in the amount of $8,080,834 was reclassified to investment in hotel
properties.
YEAR ENDED DECEMBER 31, 1997
Investments in hotel properties and construction in progress in the amounts of $8,048,540 and
$5,201,622, respectively, were financed with capital contributions.
Fully depreciated investments in hotel properties at a cost of $654,112 were disposed of during the
year.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<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>
Detroit/Warren Warren, Michigan March, 1990 76
Atlanta/Peachtree Corners Norcross, Georgia February, 1990 92
Clearwater Clearwater, Florida February, 1998 112
Salt Lake Midvale, Utah November, 1996 98
Baltimore/BWI Linthicum, Maryland March, 1998 147
</TABLE>
The Owner purchased the Salt Lake Hotel October 1, 1997. The financial
statements include the results of the Salt Lake hotel operations from this date
forward.
Economic conditions in the localities in which the individual Hotels are
located impact revenues and the ability to collect accounts receivable.
The Hotels specialize in providing extended stay lodging to business or
leisure travelers. While customers may rent rooms for a night, terms of up to a
month or longer are available. Services offered, which are particularly
attractive to the extended stay traveler, include laundry services, 24 hour
on-site convenience stores and grocery shopping services.
The Hotels have been owned and managed by various affiliates of Promus
Hotels, Inc. (the Owner) throughout the financial statement periods. The
accompanying combined financial statements of the Hotels have been presented on
a combined basis because the Owner has a contract pending to sell the five
Hotels to an affiliate of Apple Suites, Inc., a real estate investment trust
established to acquire equity interests in hotel properties. The statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for inclusion in a filing by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the combined financial statements have been presented on a pretax
basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Property -- The Hotel properties are recorded at cost. Depreciation has
been recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 10-15 Years
Buildings and Improvements ................. 15-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
Major renewals, betterments and improvements are capitalized, while
ongoing maintenance and repairs are expensed as incurred. Building costs
include interest capitalized during the construction period. Construction in
progress represents Hotel properties under construction. At the point
construction is completed and the Hotels are ready to be placed in service, the
costs are reclassified to investment in Hotel properties for financial
statement presentation.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
F-23
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 - (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Annually, management of the Hotels reviews the carrying value and
remaining depreciable lives of the Hotel properties and related assets.
Management does not believe there are any current indications of impairment.
However, it is possible that estimates of the remaining useful lives will
change in the near term.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Pre-opening Expenses -- Pre-opening expenses represent operating expenses
incurred prior to initial opening of the Hotels. In 1998, pre-opening expenses
of $148,131 and $201,830 were expensed as incurred for the Clearwater and
Baltimore/BWI Hotels, respectively. In 1997, pre-opening expenses of $64,588,
$111,225 and $37,595 were expensed as incurred for the Clearwater, Salt Lake
and Baltimore/BWI Hotels, respectively.
Inventories -- The Hotels maintain supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
The Owner allocates a monthly accounting fee of $1,000 to each hotel.
These fees totaled $56,000 in 1998 and $27,000 in 1997. The Owner also charges
each Hotel a fee for corporate advertising, training and reservations equal to
four percent of net suite revenue. These fees totaled $432,749 in 1998 and
$186,386 in 1997. In 1998, the Owner charged a franchise fee of $432,494 to
these Hotels, also computed at four percent of suite revenue. No franchise fee
was charged in 1997. Effective in 1999, the Owner will be charging a "base
management fee" of three percent of suite revenue to each Hotel.
The acquisition costs of the properties and related furnishings and
equipment was financed by the Owner. For all properties, excluding Salt Lake,
which was a purchased project, the Owner allocated interest to each property on
monies advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotels' normal depreciation
policy. During 1998, interest capitalized and included in the cost basis of the
hotels totaled $484,495.
On most property and equipment purchases, excluding base Hotel
construction contracts, the following fees have been paid to Promus Hotels,
Inc.:
Purchase Fee -- 4% of Asset Cost
Project Management Fee -- 4.5% and 5.5.% of labor portion of capitalized
asset costs in 1998 and 1997, respectively.
Each Hotel maintains a depository bank account into which customer
revenues have been deposited. The bulk of each Hotel's operating expenditures
are paid through the Owner's corporate accounts. Funds are transferred from the
Hotel's depository bank accounts to the Owner periodically. The transfers to
the Owner and expenditures made on behalf of the Hotels by the Owner are
accounted for through various intercompany accounts. No interest has been
charged on these intercompany advances from ongoing operations. There is no
intention to repay any advances to or from the Owner. Accordingly, the net
amounts have been included in shareholders' equity, with 1998 and 1997
intercompany/intracompany transfers being reflected as net capital
contributions or distributions.
F-24
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEET
AUGUST 31, 1999 (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash .................................................... $ 247,392
Accounts Receivable, Net ................................ 472,340
Prepaids and Other ...................................... 25,892
------------
Total Current Assets ............................... 745,624
------------
INVESTMENT IN HOTEL PROPERTIES
Land and Improvements ................................... 5,378,751
Buildings and Improvements .............................. 29,280,084
Furniture, Fixtures and Equipment ....................... 8,352,742
------------
Total .............................................. 43,011,577
Less: Accumulated Depreciation ........................... (7,884,812)
------------
Net Investment in Hotel Properties ................. 35,126,765
------------
Total Assets ....................................... $ 35,872,389
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ........................................ $ 314,045
Accrued Taxes ........................................... 433,300
Accrued Expenses -- Other ............................... 233,596
------------
Total Current Liabilities .......................... 980,941
------------
SHAREHOLDERS' EQUITY
Contributed Capital ..................................... 26,576,118
Retained Earnings ....................................... 8,315,330
------------
Total Shareholders' Equity ......................... 34,891,448
------------
Total Liabilities and Shareholders' Equity ......... $ 35,872,389
============
The accompanying notes are an integral part of this financial statement.
F-25
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
--------------- ------------- --------------
<S> <C> <C> <C>
Balances, January 1, 1999 .......... $ 30,113,336 $6,309,548 $ 36,422,884
Net Income ......................... -- 2,005,782 2,005,782
Capital Distributions, Net ......... (3,537,218) -- (3,537,218)
------------ ---------- ------------
Balances, August 31, 1999 .......... $ 26,576,118 $8,315,330 $ 34,891,448
============ ========== ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-26
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED INCOME STATEMENT
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
GROSS OPERATING REVENUE
Suite Revenue ........................................................... $8,787,181
Other Customer Revenue .................................................. 515,811
----------
Total Revenue ...................................................... 9,302,992
----------
EXPENSES
Property and Operating .................................................. 3,541,888
General and Administrative .............................................. 218,472
Advertising and Promotion ............................................... 422,228
Utilities ............................................................... 400,988
Real Estate and Personal Property Taxes, and Property Insurance ......... 470,709
Depreciation Expense .................................................... 1,612,457
Franchise and Management Fees ........................................... 630,468
----------
Total Expenses ..................................................... 7,297,210
----------
Net Income ......................................................... $2,005,782
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-27
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income .......................................................... $ 2,005,782
------------
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Depreciation ...................................................... 1,612,457
Change in:
Accounts Receivable ............................................... (83,988)
Prepaids and Other Current Assets ................................. 40,778
Accounts Payable .................................................. (54,242)
Accrued Taxes ..................................................... 326,028
Accrued Expenses - Other .......................................... (14,171)
------------
Net Adjustments ..................................................... 1,826,862
------------
Net Cash flows from Operating Activities .......................... 3,832,644
CASH FLOWS (TO) FINANCING ACTIVITIES
Net Equity Distributions ............................................ (3,884,233)
------------
Net Decrease in Cash .............................................. (51,589)
Cash, January 1, 1999 ............................................. 298,981
------------
Cash, August 31, 1999 ............................................. $ 247,392
============
SUPPLEMENTAL DISCLOSURES: ............................................
Noncash Financing and Investing Activities
</TABLE>
During the period January 1, 1999 through August 31, 1999, additions to
Investment in Hotel Properties totaling $347,015 were financed with capital
contributions.
The accompanying notes are an integral part of this financial statement.
F-28
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Acquisition Hotels (the Hotels) consist of the
following:
<TABLE>
<CAPTION>
PROPERTY HOTEL LOCATION DATE OPENED # OF SUITES
- --------------------------- --------------------- ---------------- ------------
<S> <C> <C> <C>
Detroit/Warren Warren, Michigan March, 1990 76
Atlanta/Peachtree Corners Norcross, Georgia February, 1990 92
Clearwater Clearwater, Florida February, 1998 112
Salt Lake Midvale, Utah November, 1996 98
Baltimore/BWI Linthicum, Maryland March, 1998 147
</TABLE>
The Owner purchased the Salt Lake hotel October 1, 1997. The financial
statements include the results of the Salt Lake Hotel operations from this date
forward.
Economic conditions in the localities in which the individual Hotels are
located impact revenues and the ability to collect accounts receivable.
The Hotels specialize in providing extended stay lodging to business or
leisure travelers. While customers may rent rooms for a night, terms of up to a
month or longer are available. Services offered, which are particularly
attractive to the extended stay traveler, include laundry services, 24 hour
on-site convenience stores and grocery shopping services.
The Hotels have been owned and managed by various affiliates of Promus
Hotels, Inc. (the Owner) throughout the financial statement period. The
accompanying combined financial statements of the Hotels have been presented on
a combined basis because the Owner has a contract pending to sell the five
Hotels to an affiliate of Apple Suites, Inc., a real estate investment trust
established to acquire equity interests in hotel properties. The statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for inclusion in a filing by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the combined financial statements have been presented on a pretax
basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Property -- The Hotel properties are recorded at cost. Depreciation has
been recorded straight-line using the following lives:
LIFE
------------
Land Improvements .......................... 10-15 Years
Buildings and Improvements ................. 15-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
Major renewals, betterments and improvements are capitalized, while
ongoing maintenance and repairs are expensed as incurred. Building costs
include interest capitalized during the construction period.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
F-29
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 - (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Annually, management of the Hotels reviews the carrying value and
remaining depreciable lives of the Hotel properties and related assets.
Management does not believe there are any current indications of impairment.
However, it is possible that estimates of the remaining useful lives will
change in the near term.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Inventories -- The Hotels maintain supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
During the period January 1, 1999 through August 31, 1999, the following
Owner related fees were expensed.
<TABLE>
<CAPTION>
FEE TYPE BASIS FOR DETERMINATION TOTAL EXPENSE
- --------------------------------------- ---------------------------- --------------
<S> <C> <C>
Accounting Fees $1,000 per hotel per month $ 40,000
Corporate Advertising, Training
and Reservations 4% of net suite revenue 351,487
Franchise Fees 4% of net suite revenue 351,487
Management Fees 3% of net suite revenue 278,981
</TABLE>
The acquisition costs of the properties and related furnishings and
equipment was financed by the Owner. For all properties, excluding Salt Lake,
which was a purchased project, the Owner allocated interest to each property on
monies advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotels' normal depreciation
policy.
On most property and equipment purchases, excluding base Hotel
construction contracts, the following fees have been paid to Promus Hotels,
Inc.:
Purchase Fee-4% of Asset Cost
Project Management Fee-4.5% of labor portion of capitalized asset costs
Each Hotel maintains a depository bank account into which customer
revenues have been deposited. The bulk of each Hotel's operating expenditures
are paid through the Owner's corporate accounts. Funds are transferred from the
Hotel's depository bank accounts to the Owner periodically. The transfers to
the Owner and expenditures made on behalf of the Hotels by the Owner are
accounted for through various intercompany accounts. No interest has been
charged on these intercompany advances from ongoing operations. There is no
intention to repay any advances to or from the Owner. Accordingly, the net
amounts have been included in shareholders' equity, with
intercompany/intracompany transfers being reflected as net capital
distributions.
F-30
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
L.P. MARTIN & COMPANY
A PROFESSIONAL CORPORATION
MEMBERS CERTIFIED PUBLIC ACCOUNTANTS MEMBERS
VIRGINIA SOCIETY OF 4132 INNSLAKE DRIVE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS GLEN ALLEN, VIRGINIA 23060 CERTIFIED PUBLIC ACCOUNTANTS
LEE P. MARTIN, JR., C.P.A. PHONE: (804) 346-2626 ROBERT C. JOHNSON, C.P.A.
WILLIAM L. GRAHAM, C.P.A. LEE P. MARTIN, C.P.A. (1948-78)
BERNARD G. KINZIE, C.P.A. FAX (804) 346-9311
W. BARCLAY BRADSHAW, C.P.A.
</TABLE>
INDEPENDENT AUDITORS' REPORT
Apple Suites, Inc.
Richmond, Virginia
We have audited the accompanying balance sheets of the Homewood Suites
Hotel - Jackson as of December 31, 1998 and 1997, and the related statements of
income, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the management of the hotel. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. The accompanying financial statements were prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission as described in Note 1 to the financial statements and are
not intended to be a complete presentation of the Homewood Suites Hotel -
Jackson.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Homewood Suites Hotel -
Jackson as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ L.P. Martin & Co.,P.C.
November 7, 1999
F-31
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash .................................................. $ 34,756 $ 13,970
Accounts Receivable, Net .............................. 148,205 104,456
Prepaids and Other .................................... 25,350 25,350
---------- ----------
Total Current Assets ............................... 208,311 143,776
---------- ----------
INVESTMENT IN HOTEL PROPERTY ...........................
Land and Improvements ................................. 749,969 749,969
Buildings and Improvements ............................ 5,284,823 5,161,652
Furniture, Fixtures and Equipment ..................... 1,197,181 1,182,151
---------- ----------
Total .............................................. 7,231,973 7,093,772
Less: Accumulated Depreciation ........................ (797,849) (380,298)
---------- ----------
Net Investment in Hotel Property ................... 6,434,124 6,713,474
---------- ----------
Total Assets ....................................... $6,642,435 $6,857,250
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ...................................... $ 98,225 $ 144,491
Accrued Taxes ......................................... 87,475 43,165
Accrued Expenses - Other .............................. 41,034 39,523
---------- ----------
Total Current Liabilities .......................... 226,734 227,179
---------- ----------
SHAREHOLDERS' EQUITY
Contributed Capital ................................... 6,046,570 6,734,271
Retained Earnings (Accumulated Deficit) ............... 369,131 (104,200)
---------- ----------
Total Shareholders' Equity ......................... 6,415,701 6,630,071
---------- ----------
Total Liabilities and Shareholders' Equity ......... $6,642,435 $6,857,250
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS TOTAL
CONTRIBUTED (ACCUMULATED SHAREHOLDERS'
CAPITAL DEFICIT) EQUITY
------------- -------------- --------------
<S> <C> <C> <C>
Balances, January 1, 1997 ........... $4,638,129 $ (70,003) $4,568,126
Net Loss ............................ -- (34,197) (34,197)
Capital Contributions, Net .......... 2,096,142 -- 2,096,142
---------- ---------- ----------
Balances, December 31, 1997 ......... 6,734,271 (104,200) 6,630,071
Net Income .......................... -- 473,331 473,331
Capital Distributions, Net .......... (687,701) -- (687,701)
---------- ---------- ----------
Balances, December 31, 1998 ......... $6,046,570 $ 369,131 $6,415,701
========== ========== ==========
</TABLE>
INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
GROSS OPERATING REVENUE
Suite Revenue ........................................................... $2,115,861 $1,390,347
Other Customer Revenue .................................................. 161,811 130,494
---------- ----------
Total Revenue ........................................................ 2,277,672 1,520,841
---------- ----------
EXPENSES
Property and Operating .................................................. 927,878 700,874
General and Administrative .............................................. 69,009 56,870
Advertising and Promotion ............................................... 128,067 87,703
Utilities ............................................................... 87,815 73,585
Real Estate and Personal Property Taxes, and Property Insurance ......... 89,387 43,959
Depreciation Expense .................................................... 417,551 380,298
Franchise Fees .......................................................... 84,634 --
Pre-Opening Expenses .................................................... -- 211,749
---------- ----------
Total Expenses ....................................................... 1,804,341 1,555,038
---------- ----------
Net Income (Loss) .................................................... $ 473,331 $ (34,197)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income (Loss) ............................................. $ 473,331 $ (34,197)
---------- ----------
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
Depreciation ................................................ 417,551 380,298
Change In:
Accounts Receivable ......................................... (43,749) (104,456)
Prepaids and Other Current Assets ........................... -- (25,350)
Accounts Payable ............................................ (46,266) 7,278
Accrued Taxes ............................................... 44,310 42,292
Accrued Expenses - Other .................................... 1,511 36,532
---------- ----------
Net Adjustments ............................................. 373,357 336,594
---------- ----------
Net Cash Flows from Operating Activities ................... 846,688 302,397
CASH FLOWS TO FINANCING ACTIVITIES
Capital Distributions, Net .................................... (825,902) (290,927)
---------- ----------
Net Increase in Cash ....................................... 20,786 11,470
Cash, Beginning of Year .................................... 13,970 2,500
---------- ----------
Cash, End of Year .......................................... $ 34,756 $ 13,970
========== ==========
SUPPLEMENTAL DISCLOSURES:
NONCASH FINANCING AND INVESTING ACTIVITIES
</TABLE>
YEAR ENDED DECEMBER 31, 1998
Investments in hotel properties in the amount of $138,201 were financed
with capital contributions.
YEAR ENDED DECEMBER 31, 1997
Investments in hotel properties in the amount of $7,093,772, were financed
with capital contributions.
Construction in progress in the amount of $5,186,984 was reclassified to
investment in hotel properties.
Accounts payable for construction costs totaling $480,281 was curtailed
with capital contributions.
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Hotel - Jackson is a 91 suite hotel, located in
Ridgeland, Mississippi, which opened for business on February 20, 1997. The
Hotel specializes in providing extended stay lodging to business or leisure
travelers. While customers may rent rooms for a night, terms of up to a month
or longer are available. Services offered, which are particularly attractive to
the extended stay traveler, include laundry services, 24 hour on-site
convenience stores and grocery shopping services.
Economic conditions in the area in which the Hotel is located impact
revenues and the ability to collect accounts receivable.
The Hotel has been owned and managed by an affiliate of Promus Hotels,
Inc. (the Owner) throughout the financial statement periods. The Owner has a
contract pending to sell the Hotel to an affiliate of Apple Suites, Inc., a
real estate investment trust established to acquire equity interests in hotel
properties. The statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for inclusion in a filing
by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the financial statements have been presented on a pretax basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLCIIES
Property -- The hotel property is recorded at cost. Depreciation has been
recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 10-15 Years
Buildings and Improvements ................. 15-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
Major renewals, betterments and improvements are capitalized, while
ongoing maintenance and repairs are expensed as incurred. Building costs
include interest capitalized during the construction period. Construction in
progress represents Hotel assets under construction. At the point construction
is completed and the Hotel is ready to be placed in service, the costs are
reclassified to investment in Hotel property for financial statement
presentation. Construction in progress totaling $5,186,984 was reclassified to
investment in hotel property during 1997.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
Annually, management of the hotel reviews the carrying value and remaining
depreciable lives of the Hotel property and related assets. Management does not
believe there are any current indications of impairment. However, it is
possible that estimates of the remaining useful lives will change in the near
term.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
F-35
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLCIIES -- (CONTINUED)
Advertising -- Advertising costs are expensed in the period incurred.
Pre-Opening Expenses -- Pre-opening expenses represent operating expenses
incurred prior to initial opening of the Hotel. In 1997, pre-opening expenses
of $211,749, were expensed as incurred.
Inventories -- The Hotel maintains supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
The Owner allocates a monthly accounting fee of $1,000 to the Hotel. These
fees totaled $12,000 in 1998 and $10,338 in 1997. The Owner also charges the
Hotel a fee for corporate advertising, training and reservations equal to four
percent of net suite revenue. These fees totaled $84,634 in 1998 and $53,614 in
1997. In 1998, the Owner charged a franchise fee of $84,634 to the Hotel, also
computed at four percent of suite revenue. No franchise fee was charged in
1997. Effective in 1999, the Owner will be charging a "base management fee" of
three percent of suite revenue to the hotel.
The acquisition cost of the property and related furnishings and equipment
was financed by the Owner. The Owner allocated interest to the property on
monies advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotel's normal depreciation
policy. Interest capitalized and included in the cost basis of the Hotel
totaled $235,723 in 1997.
On most property and equipment purchases, excluding base hotel
construction contracts, the following fees paid to Promus Hotels, Inc. have
been capitalized:
Purchase Fee - 4% of Asset Cost
Project Management Fee - 4.5% and 5.5.% of labor portion of capitalized
asset costs in 1998 and 1997, respectively.
The Hotel maintains a depository bank account into which customer revenues
have been deposited. The bulk of the Hotel's operating expenditures are paid
through the Owner's corporate accounts. Funds are transferred from the Hotel's
depository bank accounts to the Owner periodically. The transfers to the Owner
and expenditures made on behalf of the Hotel by the Owner are accounted for
through various intercompany accounts. No interest has been charged on these
intercompany advances from ongoing operations. There is no intention to repay
any advances to or from the Owner. Accordingly, the net amounts have been
included in shareholders' equity with 1998 and 1997 intercompany/intracompany
transfers being reflected as net capital contributions or distributions.
F-36
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
BALANCE SHEET (UNAUDITED)
AUGUST 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash ................................................. $ 43,476
Accounts Receivable, Net ............................. 227,188
Prepaids and Other ................................... 25,350
------------
Total Current Assets ............................... 296,014
------------
INVESTMENT IN HOTEL PROPERTY
Land and Improvements ................................ 754,803
Buildings and Improvements ........................... 5,278,927
Furniture, Fixtures and Equipment .................... 1,197,295
------------
Total .............................................. 7,231,025
Less: Accumulated Depreciation ....................... (1,082,506)
------------
Net Investment in Hotel Property ................... 6,148,519
------------
Total Assets ....................................... $ 6,444,533
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ..................................... $ 1,626
Accrued Taxes ........................................ 69,100
Accrued Expenses - Other ............................. 47,842
------------
Total Current Liabilities .......................... 118,568
------------
SHAREHOLDERS' EQUITY
Contributed Capital .................................. 5,625,316
Retained Earnings .................................... 700,649
------------
Total Shareholders' Equity ......................... 6,325,965
------------
Total Liabilities and Shareholders' Equity ......... $ 6,444,533
============
</TABLE>
The acompanying notes are an integral part of these financial statements.
F-37
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
------------- ---------- --------------
<S> <C> <C> <C>
Balances, January 1, 1999 .......... $6,046,570 $369,131 $6,415,701
Net Income ......................... -- 331,518 331,518
Capital Distributions, Net ......... (421,254) -- (421,254)
---------- -------- ----------
Balances, August 31, 1999 .......... $5,625,316 $700,649 $6,325,965
========== ======== ==========
</TABLE>
INCOME STATEMENT (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
<TABLE>
<S> <C>
GROSS OPERATING REVENUE
Suite Revenue ........................................................... $1,487,301
Other Customer Revenue .................................................. 112,292
----------
Total Revenue ......................................................... 1,599,593
----------
EXPENSES
Property and Operating .................................................. 636,068
General and Administrative .............................................. 51,587
Advertising and Promotion ............................................... 75,268
Utilities ............................................................... 50,426
Real Estate and Personal Property Taxes, and Property Insurance ......... 62,589
Depreciation Expense .................................................... 284,657
Franchise and Management Fees ........................................... 107,480
----------
Total Expenses ........................................................ 1,268,075
----------
Net Income ............................................................ $ 331,518
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-38
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income ...................................................................... $ 331,518
----------
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation .................................................................. 284,657
Change in:
Accounts Receivable ........................................................... (78,983)
Accounts Payable .............................................................. (96,599)
Accrued Taxes ................................................................. (18,375)
Accrued Expenses - Other ...................................................... 6,808
----------
Net Adjustments ................................................................. 97,508
----------
Net Cash Flows from Operating Activities ...................................... 429,026
CASH FLOWS FROM INVESTING ACTIVITIES
Net Disposal of Investment in Hotel Property .................................... 948
CASH FLOWS TO FINANCING ACTIVITIES
Net Equity Distributions ........................................................ (421,254)
----------
Net Increase in Cash .......................................................... 8,720
Cash, January 1, 1999 ......................................................... 34,756
----------
Cash, August 31, 1999 ......................................................... $ 43,476
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-39
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Hotel - Jackson is a 91 suite hotel, located in
Ridgeland, Mississippi, which opened in February, 1997. The Hotel specializes
in providing extended stay lodging to business or leisure travelers. While
customers may rent rooms for a night, terms of up to a month or longer are
available. Services offered, which are particularly attractive to the extended
stay traveler, include laundry services, 24 hour on-site convenience stores and
grocery shopping services.
Economic conditions in the area in which the Hotel is located impact
revenues and the ability to collect accounts receivable.
The Hotel has been owned and managed by an affiliate of Promus Hotels,
Inc. (the Owner) throughout the financial statement period. The Owner has a
contract pending to sell the Hotel to an affiliate of Apple Suites, Inc., a
real estate investment trust established to acquire equity interests in hotel
properties. The statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for inclusion in a filing
by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the financial statements have been presented on a pretax basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Property -- The Hotel property is recorded at cost. Depreciation has been
recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 10-15 Years
Buildings and Improvements ................. 15-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
Major renewals, betterments and improvements are capitalized, while
ongoing maintenance and repairs are expensed as incurred. Building costs
include interest capitalized during the construction period.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
Annually, management of the Hotel reviews the carrying value and remaining
depreciable lives of the Hotel property and related assets. Management does not
believe there are any current indications of impairment. However, it is
possible that estimates of the remaining useful lives will change in the near
term.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
F-40
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 -- (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Inventories -- The Hotel maintains supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
During the period January 1, 1999 through August 31, 1999, the following
Owner related fees were expensed.
<TABLE>
<CAPTION>
FEE TYPE BASIS FOR DETERMINATION TOTAL EXPENSE
- ----------------------------------------------------------- -------------------------- --------------
<S> <C> <C>
Accounting Fees ........................................... $1,000 per month $ 8,000
Corporate Advertising, Training and Reservations .......... 4% of net suite revenue 59,492
Franchise Fees ............................................ 4% of net suite revenue 59,492
Management Fees ........................................... 3% of net suite revenue 47,988
</TABLE>
The acquisition cost of the property and related furnishings and equipment
was financed by the Owner. The Owner allocated interest to the property on
monies advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotel's normal depreciation
policy.
On most property and equipment purchases, excluding base hotel
construction contracts, the following fees paid to Promus Hotels, Inc. have
been capitalized:
Purchase Fee -- 4% of Asset Cost
Project Management Fee -- 4.5% of labor portion of capitalized asset costs
The Hotel maintains a depository bank account into which customer revenues
have been deposited. The bulk of the Hotel's operating expenditures are paid
through the Owner's corporate accounts. Funds are transferred from the Hotel's
depository bank accounts to the Owner periodically. The transfers to the Owner
and expenditures made on behalf of the Hotel by the Owner are accounted for
through various intercompany accounts. No interest has been charged on these
intercompany advances from ongoing operations. There is no intention to repay
any advances to or from the Owner. Accordingly, the net amounts have been
included in shareholders' equity with intercompany/intracompany transfers being
reflected as net capital distributions.
F-41
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Apple Suites, Inc.
We have audited the accompanying consolidated balance sheets of Apple Suites,
Inc. (the "Company") as of December 31, 1999 and March 26, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the period from March 26, 1999 through December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 36. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also 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
estimate made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Apple
Suites, Inc. at December 31, 1999 and March 26, 1999, and the consolidated
results of its operations and its cash flows for the period from March 26, 1999
through December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Richmond, Virginia
February 28, 2000
F-42
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 March 26, 1999
----------------- --------------
<S> <C> <C>
ASSETS
Investment in hotels
(net of $496,209 accumulated depreciation) $ 93,719,632 --
Cash and cash equivalents 581,344 $ 100
Restricted cash 1,023,721 --
Rent receivable from Apple Suites Management, Inc. 2,123,136 --
Notes and other receivables from Apple Suites Management, Inc. 717,019 --
Capital improvements reserve 753,927 --
Prepaid expenses 270,229 --
Other assets 300,000 --
-------------- ------------
Total Assets $ 99,489,008 $ 100
============== ============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable--secured $ 68,569,500 --
Interest payable 466,140 --
Accounts payable 65,214 --
Accrued expenses 868,668 --
Accounts payable--affiliates 708,751 --
Distributions payable 712,735 --
-------------- ------------
Total Liabilities $ 71,391,008 --
============== ============
Shareholders' Equity
Common Stock, no par value, authorized 200,000,000
shares; issued and outstanding 3,429,414 shares and 10
shares, respectively 28,591,260 $ 100
Class B Convertible Stock, no par value, authorized
240,000 shares; issued and outstanding 240,000 shares 24,000 --
Distributions greater than net income (517,260) --
-------------- ------------
Total Shareholders' Equity $ 28,098,000 100
-------------- ------------
Total Liabilities and Shareholders' Equity $ 99,489,008 $ 100
============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period March 26, 1999 through December 31, 1999(a)
<TABLE>
<CAPTION>
<S> <C>
Revenues
Lease revenue $ 2,518,031
Interest income and other revenue 169,086
Expenses
Taxes, insurance, and other 426,592
General and administrative 153,807
Depreciation of real estate owned 496,209
Interest 1,245,044
-----------------------
Total expenses 2,321,652
-----------------------
Net income $ 365,465
=======================
Basic and diluted earnings per common share $ 0.14
=======================
</TABLE>
(a) The company was initially capitalized on March 26, 1999; however, operations
did not commence until September 1, 1999.
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Period March 26, 1999 through December 31, 1999(a)
<TABLE>
<CAPTION>
Class B
Common Stock Convertible Stock
-------------------------------- ----------------------------
Distributions Total
Number of Number of Greater than Shareholders'
Shares Amount Shares Amount Net Income Equity
- --------------------- --------------- ---------------- -------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
March 26, 1999 10 $ 100 -- -- -- $ 100
Issuance of Class B
Convertible Stock -- -- 240,000 $24,000 -- 24,000
Net proceeds from
the sale of common
shares 3,420,110 28,507,514 -- -- -- 28,507,514
Net income -- -- -- -- $ 365,465 365,465
Cash distributions
declared to shareholders
($.33 per share) -- -- -- -- (882,725) (882,725)
Common stock issued
through reinvestment of
distributions 9,294 83,646 -- -- -- 83,646
- --------------------- --------------- ---------------- -------------- ------------- ---------------- ------------------
Balance at December
31, 1999 3,429,414 $28,591,260 240,000 $24,000 $(517,260) $28,098,000
- --------------------- --------------- ---------------- -------------- ------------- ---------------- ------------------
</TABLE>
(a) The Company was initially capitalized on March 26, 1999; however, operations
did not commence until September 1, 1999.
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period March 26, 1999 through December 31, 1999 (a)
CASH FLOW FROM OPERATING ACTIVITIES:
<TABLE>
<CAPTION>
<S> <C>
Net income $ 365,465
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of real estate owned 496,209
Changes in operating assets and liabilities:
Prepaid expenses (270,229)
Due from Apple Suites Management, Inc. (2,152,203)
Accounts payable 65,214
Accounts payable--affiliates 708,751
Accrued expenses 868,668
Interest payable 466,140
-------------------
Net cash provided by operating activities 548,015
CASH FLOW FROM INVESTING ACTIVITIES:
Payments received on notes receivable 1,748
Cash paid for acquisitions of hotels (26,045,300)
Capital improvements (290,741)
Restricted cash for property improvement plan (1,023,721)
Capital improvements reserve held by third-party manager (753,927)
Earnest deposit money for pending acquisitions (300,000)
-------------------
Net cash used in investing activities (28,411,941)
CASH FLOW FROM FINANCING ACTIVITIES:
Payment from officer-shareholder for Class B Convertible Stock 24,000
Net proceeds from issuance of common stock 28,591,160
Cash distributions paid to shareholders (169,990)
-------------------
Net cash provided by financing activities 28,445,170
Increase in cash and cash equivalents 581,244
Cash and cash equivalents, beginning of period 100
-------------------
Cash and cash equivalents, end of period $ 581,344
====================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 550,147
Non-cash transaction:
Notes payable--secured issued by seller
in connection with hotel acquisitions $ 68,569,500
</TABLE>
(a) The company was initially capitalized on March 26, 1999; however, operations
did not commence until September 1, 1999.
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Apple Suites, Inc., together with its subsidiaries (the "company"), is a
Virginia corporation formed in March of 1999, which commenced operations as a
hotel real estate investment trust on September 1, 1999, the effective date of
its first four hotel acquisitions. The accompanying consolidated financial
statements include the accounts of the company along with its subsidiaries. All
significant intercompany transactions and balances have been eliminated.
The company operates in one defined business segment consisting of extended-stay
hotels. The hotels are located throughout the United States and operate as
Homewood Suites(R) by Hilton. The company leased to Apple Suites Management,
Inc. or its subsidiary (the "lessee") all of its hotels acquired during 1999.
The lessee is wholly owned by Glade M. Knight, Chairman and Chief Executive
Officer of the company.
The lessee hired Promus Hotels, Inc. ("Promus"), a wholly owned subsidiary of
Hilton Hotels Corporation ("Hilton") to manage the company's hotels under the
terms of a management agreement between Promus and the lessee.
F-47
<PAGE>
RELATIONSHIP WITH LESSEE
The company must rely on the lessee to generate sufficient cash flow from the
operation of the hotels to enable the lessee to meet its rent obligation to the
company under the master hotel lease agreements ("Percentage Leases"). At
December 31, 1999, the lessee's rent payable to the company amounted to
$2,123,136. The original terms under the Percentage Leases allow monthly base
rent to be paid in arrears and quarterly percentage rent to be paid 15 days
following the quarter-end.
REFINANCING
The company has $68.6 million in notes payable with Hilton with principal
payments of $34 million due on October 1, 2000, $30.2 million due on November 1,
2000 and $4.4 million due on January 1, 2001. The company plans to pay these
notes with the proceeds from its continuous "best efforts" offering of common
shares. However, based on the current rate at which equity is being raised by
the offering, the company may have to seek other measures to repay these loans.
The company is currently holding discussions with several lenders to obtain
financing for its hotels and is exploring both unsecured and secured financing
arrangements. Although no firm financing commitments have been received, the
company believes that based on discussions with lenders and other market
indicators it can obtain sufficient financing prior to maturity of the notes.
Obtaining refinancing is dependent upon a number of factors, including: (1)
continued operation of the hotels at or near current occupancy and room rate
levels as the company's leases are based on a percentage of hotel suite income,
(2) general level of interest rates including credit spreads for real estate
based lending, and (3) general economic conditions. For each of the notes
payable, all of the Company's 11 hotels serve as collateral.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with original maturities of
three months or less. The fair market value of cash and cash equivalents
approximate their carrying value.
RESTRICTED CASH
Restricted cash consists of cash restricted for property improvements.
INVESTMENT IN HOTELS
The hotels are stated at cost, net of depreciation, and including real estate
brokerage commissions paid to Apple Suites Realty Group, Inc., a related party
(see Note 6). Repair and maintenance costs are expensed as incurred while
significant improvements, renovations, and replacements are capitalized.
Depreciation is computed using the straight-line method over estimated useful
lives of the assets, which are 39 years for buildings and major improvements and
5 to 7 years for furniture and equipment.
The carrying values of each hotel are evaluated periodically to determine if
circumstances exist indicating an impairment in the carrying value of the
investment in the hotel. Adjustments are made based on fair value of the
underlying property if impairment is indicated. No impairment losses have been
recorded to date.
F-48
<PAGE>
REVENUE RECOGNITION
Lease revenue is reported as income over the lease term as it becomes due from
the lessee according to the provisions of the Percentage Lease agreements. At
December 31, 1999, the lessee is in compliance with its rental obligations under
the Percentage Leases.
STOCK INCENTIVE PLANS
The company elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. As discussed in Note 5, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," (FASB 123) requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
EARNINGS PER COMMON SHARE
Basic earnings per common share is computed based upon the weighted average
number of shares outstanding during the year. Diluted earnings per share is
calculated after giving effect to all potential common shares that were dilutive
and outstanding for the year. Class B Convertible Shares are not included in
earnings per common share calculations until such time it becomes probable that
such shares can be converted to common shares (see Note 4).
FEDERAL INCOME TAXES
The company is operated as, and will annually elect to be taxed as, a real
estate investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"). Generally, a real estate investment trust which complies with the
provisions of the Code and distributes at least 95% of its taxable income to its
shareholders does not pay federal income taxes on its distributed income.
Accordingly, no provision has been made for federal income taxes.
For federal income tax purposes, distributions paid to shareholders consist of
ordinary income and return of capital or a combination thereof. Distributions
declared per share were $.33 for the period ended December 31, 1999. In 1999, of
the total distribution, 68% was taxable as ordinary income, and 32% was a
non-taxable return of capital.
USE OF ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
COMPREHENSIVE INCOME
The company does not currently have any items of comprehensive income requiring
separate reporting and disclosure.
F-49
<PAGE>
NOTE 2
INVESTMENT IN HOTELS
At December 31, 1999, the company owned the following Homewood Suites(R) by
Hilton:
<TABLE>
<CAPTION>
Acquisition Carrying Accumulated First Mortgage Date
Location Cost Value* Depreciation Encumbrances Acquired
- ---------------------------------- --------------- ----------------- ----------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
Dallas/Addison, Texas $ 9,500,000 $ 9,780,937 $ 70,349 $ 7,141,500 September 1999
Dallas/Las Colinas, Texas 11,200,000 11,555,748 80,052 8,383,500 September 1999
Dallas/Plano, Texas 5,400,000 5,558,623 46,204 4,050,000 September 1999
Richmond, Virginia 9,400,000 9,667,166 80,046 7,050,000 September 1999
Atlanta/Cumberland, Georgia 9,800,000 10,199,600 55,013 7,350,000 October 1999
Baltimore, Maryland 16,348,000 16,857,511 65,349 12,261,000 November 1999
Clearwater, Florida 10,416,000 10,712,279 34,082 7,812,000 November 1999
Detroit, Michigan 4,330,000 4,466,485 17,209 3,247,500 November 1999
Atlanta/Peachtree, Georgia 4,033,000 4,137,785 13,728 3,024,750 November 1999
Salt Lake City, Utah 5,153,000 5,314,389 21,546 3,864,750 November 1999
Jackson, Mississippi 5,846,000 5,965,318 12,631 4,384,500 December 1999
--------------- ----------------- ----------------- --------------------- -------------------
$91,426,000 $94,215,841 $496,209 $68,569,500
--------------- ----------------- ----------------- --------------------- -------------------
</TABLE>
* Includes real estate commissions (see Note 6), closing costs, and improvements
capitalized since the date of acquisition for hotels acquired to date.
Investment in hotels at December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Land $15,683,084
Building and improvements 77,165,860
Furniture and equipment 1,366,897
- ------------------------------------------------------- -----------
$94,215,841
Less accumulated depreciation (496,209)
- ------------------------------------------------------- -----------
Investments in hotels, net $93,719,632
- ------------------------------------------------------- -----------
</TABLE>
F-50
<PAGE>
NOTE 3
NOTES PAYABLE
On April 20, 1999, the company obtained a line of credit in a principal amount
of $1 million with a commercial bank. The line of credit was guaranteed by Mr.
Knight, Chairman and Chief Executive Officer. The line required interest at
LIBOR plus 1.50%. The principal balance and all accrued interest were paid in
full by September 30, 1999.
In conjunction with the purchase of 11 hotels, notes were executed by the
company made payable to the order of Hilton in the amount of $68,569,500. The
notes bear a fixed interest rate of 8.5% per annum and are cross-collateralized
by the 11 hotels owned by the company. Interest payments are due monthly. Notes
amounting to $64,185,000 mature during the fourth quarter of 2000, and the
remaining $4,384,500 note matures in January 2001. Principal payments are to be
made to the extent of net equity proceeds from the offering of common shares.
Hilton has agreed to defer principal payments until the earlier of April 29,
2000 or such time as two additional hotels have been purchased by the company.
The company paid $550,147 in interest for the period ended December 31, 1999.
The company's borrowings were $68,569,500 at December 31, 1999. The carrying
value of the notes at December 31, 1999 approximates fair value.
NOTE 4
SHAREHOLDERS' EQUITY
The company is raising equity capital through a "best-efforts" offering of
shares by David Lerner Associates, Inc. (the "Managing Dealer"), which will
receive selling commissions of 7.5% and a marketing expense allowance of 2.5%
based on proceeds of the shares sold. The company received gross proceeds of
$32,627,476 from the sale of 1,666,667 shares at $9 per share and 1,762,747
shares at $10 per share during 1999. The net proceeds of the offering, after
deducting selling commissions and other offering costs were $28,591,260.
The company provides a plan which allows shareholders to reinvest distributions
in the purchase of additional shares of the company ("Additional Share Option").
Of the total proceeds raised from common shares during the year ended December
31, 1999, $92,940 (net $83,646) was provided through the reinvestment of
distributions.
The company issued 240,000 Class B Convertible Shares, consisting of 202,500
shares to Mr. Knight, and a combined 37,500 Class B Convertible Shares to two
other individuals. The Class B Convertible Shares were issued by the company
before the initial closing of the minimum offering of $15,000,000, in exchange
for payment of $.10 per Class B Convertible Share, or an aggregate of $24,000.
There will be no dividend payable on the Class B Convertible Shares. On
liquidation of the company, the holders of the Class B Convertible Shares will
be entitled to a liquidation payment of $.10 per share before any distributions
of liquidation proceeds to holders of the common shares. Holders of more than
two-thirds of the Class B Convertible Shares must approve any proposed amendment
to the Articles of Incorporation that would adversely affect the Class B
Convertible Shares or create a new class of stock senior to, or on a parity
with, the Class B Convertible Shares. The Class B Convertible Shares may not be
redeemed by the company.
Each holder of outstanding Class B Convertible Shares shall have the right to
convert any of such shares into common shares of the company upon and for 180
days following the occurrence
F-51
<PAGE>
of either of the following conversion events: (1) the sale or transfer of
substantially all of the company's assets, stock or business, whether through
sale, exchange, merger, consolidation, lease, share exchange or otherwise, or
(2) the termination or expiration without renewal of the Advisory Agreement with
Apple Suites Advisors, Inc., and if the company ceases to use Apple Suites
Realty Group, Inc. to provide substantially all of its property acquisition and
disposition services.
Upon the occurrence of either conversion event, each of the Class B Convertible
Shares may be converted into a number of common shares based upon the gross
proceeds raised through the date of conversion in the public offering or
offerings of the company's common shares made by the company's prospectus
according to the following formula:
<TABLE>
<CAPTION>
Number of Common Shares through Conversion of Each
Gross Proceeds Raised from Sales of Common Shares Class B Convertible Share (the initial "Conversion
through Date of Conversion Ratio")
- ------------------------------------------------------- -----------------------------------------------------
<S> <C>
$ 50 million 1.0
$100 million 2.0
$150 million 3.5
$200 million 5.3
$250 million 6.7
$300 million 8.0
</TABLE>
No additional consideration is due upon the conversion of the Class B
Convertible Shares. Upon the probable occurrence of a conversion event, the
company will record expense for the difference between the market value of the
company's common stock and issue price of the Class B Convertible Shares.
The Company has authorized 15 million shares of preferred stock. There were no
shares issued and outstanding at December 31, 1999.
NOTE 5
STOCK INCENTIVE PLANS
In July 1999, the Board of Directors approved a Non-Employee Directors Stock
Option Plan (the "Directors Plan") whereby Directors, who are not employees of
the company or affiliates (see Note 6), automatically receive options to
purchase stock for 10 years from the adoption of the plan. Under the Directors
Plan, the number of shares to be issued is equal to 45,000 plus 1.8% of the
number of shares sold in excess of 1,666,667. This plan currently relates to the
initial public offering of 30,166,667 shares; therefore the maximum number of
shares to be issued under the Directors Plan currently is 558,000. The options
expire ten years from the date of grant. As of December 31, 1999, 76,729 had
been reserved for issuance.
In July 1999, the Board of Directors approved an Incentive Stock Option Plan
(the "Incentive Plan") whereby incentive awards may be granted to certain
employees of the company or affiliates. Under the Incentive Plan, the number of
shares to be issued is equal to 35,000 plus 4.625% of the number of shares sold
in excess of 1,666,667. This plan also currently relates to the initial public
offering of 30,166,667 shares; therefore, the maximum number of shares that can
be issued under the Incentive Plan currently is 1,353,125. As of December 31,
1999, 116,527 shares had been reserved for issuance.
F-52
<PAGE>
Both plans generally provide, among other things, that options be granted at
exercise prices not lower than the market value of the shares on the date of
grant. Under the Incentive Plan, at the earliest, options become exercisable at
the date of grant. The optionee has up to 10 years from the date on which the
options first become exercisable during which to exercise the options. In 1999,
the company granted 22,000 options to purchase shares under the Directors Plan
and no options under the Incentive Plan. Activity in the company's share option
plan during 1999 is summarized in the following table:
<TABLE>
<CAPTION>
1999
--------------------------- -----------------------------------
Options Weighted-Average Exercise Price
- --------------------------------------------- --------------------------- -----------------------------------
<S> <C> <C>
Outstanding, beginning of period -- --
Granted 22,000 $9.00
Exercised -- --
Forfeited -- --
- --------------------------------------------- --------------------------- -----------------------------------
Outstanding, end of year 22,000 $9.00
Exercisable at end of year 22,000 $9.00
- --------------------------------------------- --------------------------- -----------------------------------
Weighted-average fair value of options
granted during the year $ .31
- --------------------------------------------- --------------------------- -----------------------------------
</TABLE>
Pro forma information regarding net income and earnings per share is required by
FASB 123, under the fair value method described in that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999:
risk-free interest rates of 5.6%; a dividend yield of 10.0%; and volatility
factor of the expected market price of the company's common stock of .208; and a
weighted average expected life of the options of 10 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
For purposes of FASB 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. As the options
are exercisable within six months of the date of grant, the full impact of the
pro forma adjustment to net income is disclosed below.
F-53
<PAGE>
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Net income available
to common shareholders
Pro forma $358,645
As reported $365,465
Earnings per common share-diluted
Pro forma $.14
As reported $.14
</TABLE>
NOTE 6
COMMITMENTS AND RELATED PARTIES
The company receives rental income from the lessee under the Percentage Leases
which expire in 2009 subject to earlier termination by the company with 30 days
notice. The Leases contain two optional five-year extensions. The rent due under
the Percentage Lease is the sum of base rent and percentage rent. Percentage
rent is calculated by multiplying fixed percentages by the total amounts of
suite revenues with reference to specified threshold amounts. Both the base rent
and the revenue thresholds used in computing percentage rents are subject to
annual adjustments based on increases in the Consumer Price Index ("CPI"). The
company earned rents of $2,518,031 for the period ended December 31, 1999.
Minimum future rental income (i.e. base rents) payable to the company under the
Percentage Leases in effect at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 6,583,400
2001 6,583,400
2002 6,583,400
2003 6,583,400
2004 6,583,400
Thereafter 31,564,507
-----------
$64,481,507
-----------
</TABLE>
Under the Percentage Leases, the company is obligated to pay the costs of real
estate and personal property taxes, property insurance, maintenance of
underground utilities and structural elements of the hotels. The company is
committed under certain agreements to fund 5% of suite revenues per month for
capital expenditures to include periodic replacement or refurbishment of
furniture, fixtures, and equipment. At December 31, 1999, $753,927 was held by
Promus for capital improvement reserves. In addition in accordance with the
franchise agreements, $1,023,721 was held for the property improvement plan with
a financial institution and treated as restricted cash.
F-54
<PAGE>
The company loaned the lessee $567,900 for franchise fees and $121,800 for hotel
supplies for the 11 hotels. The debt agreements are evidenced by promissory
notes bearing interest at a rate of 9% per annum. Principal and interest
payments are due monthly. The promissory notes have various maturity dates
through January 2010.
The company has contracted with Apple Suites Realty Group, Inc. ("ASRG") to
acquire and dispose of real estate assets for the company. In accordance with
the contract ASRG is to be paid a fee of 2% of the purchase price of any
acquisitions or sale price of any dispositions of real estate investments,
subject to certain conditions. During 1999, ASRG earned $1,828,520 under the
agreement of which $849,628 was payable at December 31, 1999.
The company has contracted with Apple Suites Advisors, Inc. ("ASA") to advise
and provide day to day management services to the company. In accordance with
the contract, the company will pay ASA a fee equal to .1% to .25% of total
equity contributions received by the company in addition to certain reimbursable
expenses. During 1999, ASA earned $23,574 under this agreement of which $18,513
was payable at December 31, 1999.
The lessee, ASRG and ASA are 100% owned by Mr. Knight. ASRG and ASA may purchase
in the "best efforts" offering up to 2.5% of the total number of shares of the
company sold in the "best efforts" offering.
Mr. Knight also serves as the Chairman and Chief Executive Officer of
Cornerstone Realty Income Trust, Inc., an apartment REIT. During 1999,
Cornerstone Realty Income Trust, Inc. provided the company with services and
rental space and was paid approximately $55,000.
NOTE 7
WARRANTS
The company has agreed to sell to the Managing Dealer for an aggregate of $100,
warrants (the "warrants") to purchase 10% of the shares sold in this offering,
up to 3,000,000 common shares, at an exercise price of $16.50 per common share
(165% of the public offering price per common share). The Warrants may not be
sold, transferred, assigned or hypothecated for one year from the date of
issuance, except to the officers and employees of the Managing Dealer and are
exercisable at any time and from time to time, in whole or in part, during the
five-year period commencing on the date of the final closing after the
termination of the offering (the "Warrant Exercise Term"). At the company's
expense, the company may be required to register the Warrants under the
Securities Act during the Warrant Exercise Term.
F-55
<PAGE>
NOTE 8
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
<S> <C>
Year Ended December 31, 1999
NUMERATOR:
Net income and numerator for
basic and diluted earnings $ 365,465
DENOMINATOR:
Denominator for basic earnings per
share-weighted-average shares 2,648,196
EFFECT OF DILUTIVE SECURITIES:
Stock options 2,200
- ---------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed conversions 2,650,396
- ---------------------------------------------------------------
Basic and diluted earnings per
common share $ .14
- ---------------------------------------------------------------
</TABLE>
NOTE 9
LESSEE
All of the company's lease revenue is derived from the Percentage Leases with
the lessee. Certain information, related to the lessee's financial statements,
is as follows:
<TABLE>
<CAPTION>
<S> <C>
As of December 31,1999
- -------------------------------------------------------------------
BALANCE SHEET INFORMATION:
Cash and cash equivalents $2,395,000
Total assets 3,826,155
Due to Apple Suites, Inc. 2,123,136
Shareholders' Deficit (141,004)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
For the period September 1 through December 31,1999
- -------------------------------------------------------------------
STATEMENT OF OPERATIONS INFORMATION:
Total revenue $5,671,075
Rent expense-Apple Suites, Inc. 2,518,031
Total expenses 5,812,179
Net loss (141,104)
</TABLE>
At December 31, 1999, the company owned 11 hotels operating as Homewood
Suites(R) by Hilton. The hotels operate pursuant to franchise license agreements
which require the payment of fees based on a percentage of suite revenue and
sundry revenue. These fees are paid by the lessee.
F-56
<PAGE>
The lessee engages Promus as a third-party manager to operate the hotels leased
by it and pays the manager a 4% management fee based on a percentage of adjusted
gross revenue. During the first two years of the management agreement, a portion
of the management fee equal to 1% of adjusted gross revenues is subordinated to
the lessee's receipt of a return equal to 11% of the purchase price of each
hotel. The lessee pays the manager a franchise fee and a marketing fee, equal to
4% of gross revenues, respectively.
NOTE 10
QUARTERLY AND FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results of operations for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
1999 Third Quarter* Fourth Quarter
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Revenues $481,676 $2,205,441
Net income 38,708 326,757
Basic and diluted .02 .12
Distributions declared per share -- .33
</TABLE>
* Operations commenced on September 1, 1999.
NOTE 11
PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information for the period ended December 31,
1999 is presented as if the acquisition of the 11 hotels occurred on January 1,
1999. The pro forma information does not purport to represent what the company's
results of operations would actually have been if such transaction, in fact, had
occurred on January 1, 1999, nor does it purport to represent the results of
operations for future periods.
<TABLE>
<CAPTION>
Twelve months ended 12/31/99
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Lease revenue $14,102,040
Net income $ 3,828,096
Net income per share-basic and diluted $ 1.31
</TABLE>
The pro forma information reflects adjustments for actual lease revenue and
expenses of the 11 hotels acquired in 1999 for the respective period in 1999
prior to acquisition by the company. Net income has been adjusted as follows:
(1) depreciation has been adjusted based on the company's basis in the hotels;
(2) advisory expenses have been adjusted based on the company's contractual
arrangements; (3) interest expense has been adjusted to reflect the acquisition
as of January 1, 1999; and (4) common stock raised during 1999 to purchase these
hotels has been adjusted to reflect issuance as of January 1, 1999.
F-57
<PAGE>
NOTE 12
SUBSEQUENT EVENTS
During January and February of 2000, the company closed the sale to investors of
335,487 shares at $10 per share representing net proceeds to the company of
$3,019,377.
The company has entered into contracts to purchase two additional hotels from
Hilton on or before April 28, 2000 for a total purchase price of $30.4 million.
The purchase is subject to a number of customary closing conditions. In
addition, the ability of the company to purchase the hotels is contingent upon
its obtaining sufficient funds, either through the sale of sufficient common
shares under the company's "best efforts" offering or through alternate
financing sources. Therefore, there can be no assurance that the proposed
purchase will occur as scheduled, or at all. There is a required deposit with
Hilton of $400,000 against the aggregate purchase price. If the company does not
complete the purchase, it could lose the monies deposited.
F-58
<PAGE>
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (AS OF DECEMBER 31,
1999)-APPLE SUITES, INC.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
1. Addison, $7,141,500 $2,090,000 $7,410,000 $280,937 $2,117,035 $7,663,902 $9,780,937
Texas
2. Las Colinas, 8,383,500 2,800,000 8,400,000 355,748 2,835,140 8,720,608 11,555,748
Texas
3. Plano, 4,050,000 594,000 4,806,000 158,623 600,481 4,958,142 5,558,623
Texas
4. Richmond, 7,050,000 846,000 8,554,000 267,166 858,975 8,808,191 9,667,166
Virginia
5. Atlanta, 7,350,000 2,254,000 7,546,000 399,600 2,282,915 7,916,685 10,199,600
Georgia
(Galleria)
6. Baltimore, 12,261,000 1,634,800 14,713,200 509,511 1,671,050 15,186,461 16,857,511
Maryland
7. Clearwater, 7,812,000 2,395,680 8,020,320 296,279 2,853,277 7,859,002 10,712,279
Florida
8. Detroit, 3,247,500 412,240 3,917,760 136,485 526,858 3,939,627 4,466,485
Michigan
9. Atlanta, 3,024,750 519,600 3,513,400 104,785 1,051,850 3,085,935 4,137,785
Georgia
(Peachtree)
10. Salt Lake 3,864,750 1,048,580 4,104,420 161,389 415,557 4,898,832 5,314,389
City, Utah
11. Jackson, 4,384,500 467,680 5,378,320 119,318 469,946 5,495,372 5,965,318
Mississippi
TOTALS $68,569,500 $15,062,580 $76,363,420 $2,789,840 $15,683,084 $78,532,757 $94,215,841 (1)
====================================================================================================================
<CAPTION>
<S> <C> <C> <C> <C>
1. Addison, $70,349 1990 Sept 1999 39 yrs.
Texas
2. Las Colinas, 80,052 1990 Sept 1999 39 yrs.
Texas
3. Plano, 46,204 1997 Sept 1999 39 yrs.
Texas
4. Richmond, 80,046 1998 Sept 1999 39 yrs.
Virginia
5. Atlanta, 55,013 1990 Oct 1999 39 yrs.
Georgia
(Galleria)
6. Baltimore, 65,349 1998 Nov 1999 39 yrs.
Maryland
7. Clearwater, 34,082 1998 Nov 1999 39 yrs.
Florida
8. Detroit, 17,209 1990 Nov 1999 39 yrs.
Michigan
9. Atlanta, 13,728 1990 Nov 1999 39 yrs.
Georgia
(Peachtree)
10. Salt Lake 21,546 1996 Nov 1999 39 yrs.
City, Utah
11. Jackson, 12,631 1997 Dec 1999 39 yrs.
Mississippi
TOTALS $496,209
===============================
</TABLE>
(1) Represents the aggregate cost for federal income tax purposes.
(2) The reconciliation of the carrying amount of real estate owned is as
follows:
CARRYING VALUE:
Beginning balance $ --
Acquisition of hotel properties 91,426,000
Subsequent costs capitalized 2,789,841
----------
Balance at December 31, 1999 $94,215,841
===========
F-59
<PAGE>
Independent Auditor's Report
The Management
Apple Suites Management, Inc.
We have audited the accompanying consolidated balance sheet of Apple Suites
Management, Inc. (the "Company") as of December 31, 1999, and the related
consolidated statements of operations and retained deficit and cash flows for
the period from March 11, 1999 (date of inception) through December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also 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
estimate made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Apple
Suites Management, Inc. at December 31, 1999, and the consolidated results of
its operations and its cash flows for the period from March 11, 1999 (date of
inception) through December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Richmond, Virginia
February 28, 2000
F-60
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------
<S> <C>
Current assets
Cash and cash equivalents $2,395,000
Net receivables 738,361
Inventories 121,801
Other assets 8,142
-------------------
Total current assets 3,263,304
Deferred franchise fees 562,851
-------------------
Total assets $3,826,155
===================
Liabilities and Shareholders' Deficit
Current liabilities
Accounts payable $48,586
Rent payable to Apple Suites, Inc. 2,123,136
Due to third party manager 454,147
Due to Apple Suites, Inc. 28,991
Accrued expenses 624,346
Current portion of long-term notes payable to Apple Suites, Inc. 56,939
-------------------
Total current liabilities 3,336,145
Long-term notes payable to Apple Suites, Inc. 631,014
-------------------
Total liabilities 3,967,159
Shareholders' deficit
Common stock, no par value, 5,000 authorized;
10 shares issued and outstanding 100
Retained deficit (141,104)
-------------------
Total shareholders' deficit (141,004)
-------------------
Total Liabilities and Shareholders' Deficit $3,826,155
===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-61
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED DEFICIT
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 11, 1999
THROUGH
DECEMBER 31, 1999(a)
----------------------------
<S> <C>
REVENUE
Suite revenue $5,335,925
Other revenue and interest income 335,150
-----------------------------
Total revenue 5,671,075
EXPENSES
Rent expense-Apple Suites, Inc. 2,518,031
Operating expense 1,656,540
General and administrative 494,377
Advertising and promotion 472,787
Utilities 199,907
Franchise fees 213,437
Management fees 226,136
Other 30,964
-----------------------------
Total expenses 5,812,179
Loss before income taxes (141,104)
Income tax benefit --
-----------------------------
Net loss $(141,104)
Retained deficit, beginning of period --
-----------------------------
Retained deficit, end of period $(141,104)
=============================
</TABLE>
(a) The Lessee commenced operations on September 1, 1999.
See accompanying notes to consolidated financial statements.
F-62
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 11, 1999
THROUGH
DECEMBER 31, 1999(a)
--------------------------
<S> <C>
Cash flow from operating activities:
Net loss $(141,104)
Adjustment to reconcile net loss to net cash
provided by operating activities
Amortization of deferred franchise fees 5,049
Changes in operating assets and liabilities:
Receivables (738,361)
Other assets (8,142)
Due to Apple Suites, Inc. 28,991
Rent payable to Apple Suites, Inc. 2,123,136
Accounts payable 48,586
Due to third party manager 454,147
Accrued expenses 624,346
---------------------------
Net cash provided by operating activities 2,396,648
Cash flow from financing activities:
Repayments of notes payable (1,748)
Proceeds from sale of common stock 100
---------------------------
Net cash used in financing activities (1,648)
Increase in cash and cash equivalents 2,395,000
Cash and cash equivalents, beginning of period --
---------------------------
Cash and cash equivalents, end of period $2,395,000
===========================
Supplemental Cash Flow Information:
Non-cash transactions:
Notes payables-issued by Apple Suites, Inc. $ 689,701
Payment of deferred franchise fees $ 567,900
Acquisition of inventory $ 121,801
(a) The Lessee commenced operations on September 1, 1999.
See accompanying notes to consolidated financial statements.
</TABLE>
F-63
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Apple Suites Management, Inc. (together with its subsidiaries, the "Lessee") was
formed on March 11, 1999 and is owned 100% by Glade M. Knight. Mr. Knight also
serves as the Chairman and CEO of Apple Suites, Inc. (the "Company"). The Lessee
commenced operations effective September 1, 1999 with the acquisition of 4
extended-stay hotels by the Company.
The Lessee operates in one business segment. Each hotel is leased by the Company
to the Lessee under a master hotel lease agreement ("Percentage Lease") having
an initial term of ten years, subject to earlier termination at the option of
the Company upon 30 day notice. The lease agreement provides for two optional
five year extensions. The Percentage Leases require base rent payments to be
made to the Company on a monthly basis and additional quarterly payments to be
made based upon percentages of suite and sundry revenue. Promus Hotels, Inc. or
an affiliate ("Promus") manages the hotels under a management agreement with the
Lessee. Promus Hotels, Inc. is a wholly-owned subsidiary of Hilton Hotel
Corporation ("Hilton"). The hotels are located throughout the United States and
are licensed with Homewood Suites(R) by Hilton.
The accompanying financial statements include the accounts of the Lessee and its
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with original maturities of
three months or less. The fair market value of cash and cash equivalents
approximate their carrying value.
INVENTORIES
Inventories, consisting primarily of food and beverages and hotel supplies are
stated at the lower of cost or market, with cost determined on a method that
approximates the first-in, first-out basis.
REVENUE RECOGNITION
Revenue is recognized as earned, which is generally defined as the date upon
which a guest occupies a room or utilizes the hotel's services.
OTHER REVENUE
Other revenue consists of revenues derived from hotel services such as
telephone, TV, valet and vending machines. These sundry revenues are recognized
in the period the related services are provided.
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed when incurred. Advertising and
promotion costs represent the expense for franchise advertising and reservation
systems under the terms of the hotel franchise agreements and general and
administrative expenses that are directly attributable to advertising and
promotion.
F-64
<PAGE>
DEFERRED FRANCHISE FEES
Deferred franchise fees represent the costs incurred in connection with entering
into hotel license agreements, which have a term of 20 years. Deferred franchise
fees are being amortized over the term of the hotel license agreements.
RENT EXPENSE
Rent expense is recognized as incurred by the Company under the Percentage
Leases commencing on the date the lease is executed. Percentage rent is accrued
prior to the Lessee achieving the baseline revenue that triggers the percentage
rental expense when achievement of the baseline revenue is considered probable.
Baseline revenue amounts are determined on a quarterly basis for each hotel.
INCOME TAXES
The Lessee provides for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes".
SFAS No. 109 requires an asset and liability based approach in accounting for
income taxes.
COMPREHENSIVE INCOME
The Company does not currently have any items of comprehensive income requiring
separate reporting and disclosure.
USE OF ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
SEASONALITY
The hotel industry is seasonal in nature. Seasonal variations in revenues at the
hotels under lease may cause quarterly fluctuations in the Company's revenues.
Revenues for 1999 primarily consist of fourth quarter revenues which may not be
indicative of a full year.
NOTE 2
PERCENTAGE LEASES
The Percentage Leases expire in 2009, subject to earlier termination by the
Company upon 30 day notice. The Percentage Leases provide for two optional
five-year extensions. The rent due for each hotel is the sum of a base rent and
a percentage rent. Percentage rent is calculated on a quarterly basis by
multiplying fixed percentages by the total amounts of year-to-date suite
revenues with reference to specified threshold amounts, known as breakpoints.
Both the base rent and the breakpoints used in computing percentage rents are
subject to annual adjustments based on increases in the Consumer Price Index
("CPI").
The Lessee's future commitments to the Company for base rent in effect at
December 31, 1999 are as follows:
F-65
<PAGE>
Year Amount
---- ------
2000 $ 6,583,400
2001 6,583,400
2002 6,583,400
2003 6,583 400
2004 6,583,400
Thereafter 31,564,507
----------
$64,481,507
===========
Base rent is payable to the Company in arrears and percentage rent is payable 15
days following a quarter-end. The Lessee incurred rent expense of $2,518,031 for
the year ended December 31, 1999 and had rent payable of $2,123,136 at December
31, 1999.
NOTE 3
COMMITMENTS AND RELATED PARTY TRANSACTIONS
On September 17, 1999, the Lessee entered into various debt agreements with the
Company. The Lessee borrowed from the Company $567,900 for franchise fees and
$121,800 for hotel supplies. The promissory notes relating to these debt
agreements bear interest at a rate of 9% per annum. Principal and interest
payments are due monthly. The Lessee incurred interest expense of $10,915
related to the promissory notes and $7,557 was payable at December 31, 1999.
The aggregate maturities of principal for promissory notes subsequent to
December 31, 1999 are as follows:
Year Amount
---- ------
2000 $ 56,939
2001 62,612
2002 68,485
2003 74,909
2004 79,687
Thereafter 345,321
-------
$687,953
========
The Lessee has entered into license agreements with Promus to operate the hotels
as Homewood Suites(R) by Hilton properties. These agreements have terms of 20
years and expire in 2019. These agreements require the Lessee to, among other
things, pay monthly franchise fees equal to 4% of suite revenue. License and
franchise agreements contain specific standards for, and restrictions and
limitations on, the operation and maintenance of the hotels which are
established by Promus to maintain uniformity in the system for Homewood
Suites(R) by Hilton. Such standards generally regulate the appearance of the
hotel, quality and type of goods and services offered, signage, and protection
of marks. Compliance with such standards may from time to time require
significant expenditures for capital improvements which will be borne by the
Company. In addition, the agreements provide that Promus will manage the daily
operations of the hotels and provide advertising and promotion to include access
to the reservation system for Homewood Suites(R) by Hilton. The Lessee pays
Promus 4% of monthly suite revenue for each
F-66
<PAGE>
of these functions, respectively. Total expenses incurred by the Lessee for
franchise fees, advertising and promotion fees, and management fees totaled
$653,010.
NOTE 4
SHAREHOLDER'S EQUITY
The Lessee requires or may require funds to capitalize its business to satisfy
its obligations under Percentage Leases with the Company, dated September 17,
1999. To meet these objectives, the Lessee has two funding commitment agreements
(together "Payor") of $1 million each from Mr. Knight and Apple Suites Realty
Group, Inc., ("ASRG"), respectively. ASRG is owned by Mr. Knight. The funding
commitments are contractual obligations of the Payor to provide funds to the
Lessee. Funds paid to the Lessee under the commitments are to be used to satisfy
any capitalization or net worth requirements applicable to the Lessee or the
Lessee's payment obligations under the lease agreements and does not represent
any indebtedness. The funding commitments terminate upon the expiration of the
Percentage Leases, written agreement between the Payor and the Lessee, or
repayment of all amounts to the Payor. As of December 31, 1999, no contributions
have been made by the Payor to the Lessee.
NOTE 5
INCOME TAXES
The Lessee is subject to federal and state income taxes. The Lessee incurred a
loss during the period and as such has no income tax liability at December 31,
1999. No deferred income tax asset has been recorded in the consolidated balance
sheet since realization is uncertain. At December 31, 1999, the Lessee has
$110,000 of net operating loss carryforwards which expire in 2020.
NOTE 6
CREDIT RISK
The Lessee maintains cash on deposit with Promus in a pooled investment account
that potentially subjects the Lessee to a concentration of credit risk. At
December 31, 1999 the Lessee has $1,107,399 on deposit with Promus.
F-67
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statement of
Operations of Apple Suites, Inc. (the "Company") are presented as if the
acquisition and leasing of the eleven extended-stay hotels by the Company had
occurred at the beginning of the period presented. The seller was Promus Hotels,
Inc., or an affiliate. Promus Hotels, Inc. is a wholly-owned subsidiary of
Hilton Hotel Corporation ("Hilton"). The hotels have been leased to Apple Suites
Management, Inc. or its subsidiary (the "Lessee") pursuant to master hotel lease
agreements. Such pro forma information is based in part upon the Consolidated
Statement of Operations of the Company, the Pro Forma Statement 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 Statement of
Operations for the period 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 period presented, nor
does it purport to represent the results of operations for future periods. The
master hotel lease agreements between the Company and the Lessee were based on
economic conditions existing at the time of acquisition. Application of these
agreements to periods prior to the acquisition may not be meaningful. The most
significant assumption which may not be indicative of future operations is the
amount of financial leverage employed. This Pro Forma Statement assume 75% of
the purchase price was funded with debt for the entire period presented. The
Company intends to repay this debt with the proceeds from its "best efforts"
offering. This repayment of debt would result in lower interest expense, higher
net income, but lower earnings per share.
F-68
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------------------------------------------------------------------
Homewood Homewood Homewood
Historical Suites Suites Suites
Statement of Acquisition Acquisition Acquisition Total
Operations (A I) (A II) (A III) Pro Forma
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Percentage lease revenue $2,518,031 $4,510,834 (B) $5,932,615 (B) $1,140,560 (B) $14,102,040
Interest income and other income 169,086 -- -- -- 169,086
Expenses:
Taxes and insurance 426,592 822,599 (C) 647,225 (C) 93,884 (C) 1,990,300
General and administrative 153,807 82,649 (D) 86,636 (D) 65,659 (D) 388,751
Depreciation 496,209 656,623 (E) 821,580 (E) 140,664 (E) 2,115,076
Interest expense 1,245,044 1,977,313 (F) 2,353,863 (F) 372,683 (F) 5,948,903
---------------------------------------------------------------------------------
Total expenses 2,321,652 3,539,184 3,909,304 672,890 10,443,030
---------------------------------------------------------------------------------
Net income $ 365,465 $ 971,650 $2,023,311 $467,670 $ 3,828,096
=================================================================================
Earnings per common share:
Basic and diluted $0.14 $1.31
============== ==============
Basic and diluted weighted average
common shares outstanding 2,648,196 -- (G) 99,283 (G) 176,360 (G) 2,923,839
============== ==============
</TABLE>
Notes to Pro Forma Condensed Consolidated Statements of Operations
(A) Represents results of operations for the eleven hotels acquired on a pro
forma basis as if the eleven hotels were owned by the Company at the beginning
of the period presented.
<TABLE>
<CAPTION>
Date Commenced Date
Property Operations Acquired
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
I Homewood Suites - Dallas, TX 1990 September 1, 1999
I Homewood Suites - Las Colinas, TX 1990 September 1, 1999
I Homewood Suites - Plano, TX 1997 September 1, 1999
I Homewood Suites - Richmond. VA May 1998 September 1, 1999
I Homewood Suites - Atlanta, GA 1990 October 1, 1999
- -------------------------------------------------------------------------------------------------------------------
II Homewood Suites - Clearwater, FL February 1998 November 24, 1999
II Homewood Suites - Salt Lake, UT 1996 November 24, 1999
II Homewood Suites - Atlanta, GA 1990 November 24, 1999
II Homewood Suites - Detroit, MI 1990 November 24, 1999
II Homewood Suites - Baltimore, MD March 1998 November 24, 1999
- -------------------------------------------------------------------------------------------------------------------
III Homewood Suites - Jackson, MS February 1997 December 22, 1999
</TABLE>
(B) Represents lease payment from the Lessee to the Company calculated on a pro
foma basis by applying the rent provisions in the master hotel lease agreements
to the historical room revenue of the hotels as if the beginning of the period
was the beginning of the lease year. The
F-69
<PAGE>
base rent and the percentage rent will be calculated and paid based on the terms
of the lease agreement. Refer to the discussion of the master hotel lease
agreement for details.
(C) Represents historical real estate and personal property taxes and insurance
which will be paid by the Company pursuant to the master hotel lease agreements.
Such amounts are the historical amounts paid by the respective hotels.
(D) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company and anticipated legal and accounting fees, employee costs, salaries and
other costs of operating as a public company.
(E) Represents the depreciation on the eleven hotels acquired based on the
purchase price, excluding amounts allocated to land, of $37,450,320 for the
first acquisition, $41,085,600 for the second acquisition, and $5,485,886 for
the third acquisition, for the period of time not owned by the Company. The
average life of the depreciable assets was 39 years. The estimated useful lives
are based on management's knowledge of the properties and the hotel industry in
general.
(F) Represents the interest expense for the eleven hotel acquisitions for the
period in which the hotels were not owned, interest was computed using the
interest rates of 8.5% on mortgage debt of $33,975,000 for the first
acquisition, $30,210,000 for the second acquisition and $4,384,500 for the third
acquisition that was incurred at acquisition.
(G) Represents additional common shares assuming the properties were acquired at
the beginning of the period presented with the net proceeds from the "best
efforts" offering of $9 per share (net $8.06 per share) for the first
$15,000,000 and $10 per share (net $8.95 per share) for the remainder.
F-70
<PAGE>
APPLE SUITES MANAGEMENT, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statement of
Operations of Apple Suites Management, Inc. (the "Lessee") are presented as if
the leasing of the eleven extended-stay hotels from Apple Suites, Inc. (the
"Company") to the Lessee or its subsidiary had occurred at the beginning of the
period presented. The Company purchased the hotels from Promus Hotels, Inc., or
an affiliate. Promus Hotels, Inc. is a wholly-owned subsidiary of Hilton Hotel
Corporation ("Hilton"). The hotels have been leased to the Lessee or its
subsidiary pursuant to master hotel lease agreements. Further, the results of
operations reflect the hotel management agreements and hotel license agreements
between Promus and the Lessee or its subsidiary. The master hotel lease
agreements were based on economic conditions existing at the time of
acquisition. Application of these agreements to periods prior to the acquisition
may not be meaningful. Such pro forma information is based in part upon the
Consolidated Statement of Operations of the Lessee and the 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 Statement of
Operations for the period 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 period presented, nor does it
purport to represent the results of operations for the future periods.
F-71
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Homewood Homewood Homewood
Historical Suites Suites Suites
Statement of Acquisitions Acquisitions Acquisition Pro Forma Total
Operations (A I) (A II) (A III) Adjustments Pro Forma
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Suite revenue $5,335,925 $9,818,797 $12,082,374 $2,230,952 -- $29,468,048
Other income 335,150 560,096 709,240 168,438 -- 1,772,924
EXPENSES:
Operating expenses 1,656,540 3,794,204 4,870,096 954,102 -- 11,274,942
General and administrative 494,377 250,317 300,399 77,381 $(107,000) (B)
19,036 (C) 1,034,510
Advertising and promotion 472,787 438,985 580,564 112,902 (965,290) (D)
965,285 (E) 1,605,233
Utilities 199,907 354,113 551,359 75,639 -- 1,181,018
Taxes and insurance -- 822,599 647,225 93,884 (1,563,708) (F) --
Depreciation expense -- 1,783,021 2,217,128 426,986 (4,427,135) (G) --
Franchise fees 213,437 392,757 483,295 89,238 (965,290) (H)
965,285 (I) 1,178,722
Management fees 226,136 311,275 383,599 71,982 (766,856) (J)
1,130,796 (K) 1,356,932
Rent expense-Apple Suites, Inc. 2,518,031 -- -- -- 11,584,009 (L) 14,102,040
Other 30,964 -- -- -- -- 30,964
---------------------------------------------------------------------- --------------
Total expenses 5,812,179 8,147,271 10,033,665 1,902,114 5,869,132 31,764,361
Income before income tax (141,104) 2,231,622 2,757,949 497,276 (5,869,132) (523,389)
Income tax expense -- -- -- -- -- --
---------------------------------------------------------------------- --------------
Net income $(141,104) $2,231,622 $2,757,949 $497,276 $(5,869,132) $(523,389)
====================================================================== ==============
</TABLE>
Notes to Pro Forma Condensed Consolidated Statements of Operations
(A) Represents results of operations for the eleven Homewood Suites hotel
acquisitions on a pro forma basis as if the hotels acquired were leased and
operated by the Lessee at the beginning of the period presented, see below. The
hotels acquired are as follows:
F-72
<PAGE>
<TABLE>
<CAPTION>
Date Commenced Date
Property Operations Acquired
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
I Homewood Suites - Dallas, TX 1990 September 1, 1999
I Homewood Suites - Las Colinas, TX 1990 September 1, 1999
I Homewood Suites - Plano, TX 1997 September 1, 1999
I Homewood Suites - Richmond. VA May 1998 September 1, 1999
I Homewood Suites - Atlanta, GA 1990 October 1, 1999
- -------------------------------------------------------------------------------------------------------------------
II Homewood Suites - Clearwater, FL February 1998 November 24, 1999
II Homewood Suites - Salt Lake, UT 1996 November 24, 1999
II Homewood Suites - Atlanta, GA 1990 November 24, 1999
II Homewood Suites - Detroit, MI 1990 November 24, 1999
II Homewood Suites - Baltimore, MD March 1998 November 24, 1999
- -------------------------------------------------------------------------------------------------------------------
III Homewood Suites - Jackson, MS February 1997 December 22, 1999
</TABLE>
(B) Represents the elimination of the historical accounting fee allocated to the
hotels by the prior owner.
(C) Represents the addition of the anticipated legal and accounting and other
expenses to operate as a stand alone company.
(D) Represents the elimination of the historical advertising, training and
reservation fee allocated to the hotels by the prior owner.
(E) Represents the addition of the marketing fee to be incurred under the new
license agreements. The marketing fee is calculated based on the terms of the
license agreements which is 4% of suite revenue.
(F) Represents the elimination of the taxes and insurance. Under the terms of
the lease these expenses will be incurred by the Company and, accordingly, are
reflected in the Company's Pro Forma Condensed Consolidated Statement of
Operations.
(G) Represents the elimination of the depreciation expense. This expense will be
reflected in the Company's Pro Forma Condensed Consolidated Statement of
Operations.
(H) Represents the elimination of the historical franchise fee allocated to the
hotels by the prior owner.
(I) Represents the addition of franchise fees to be incurred under the new
license agreements. The franchise fees are calculated based on the terms of the
agreement , which is 4% of suite revenue.
(J) Represents the elimination of the historical management fees for the year
ended December 31, 1999.
(K) Represents the addition of the management fees of 4% of gross revenue and
the accounting fee $1,000 per hotel per month to be incurred under the new
management agreements for the period presented.
(L) Represents lease payments from the Lessee to the Company calculated on a pro
forma basis by applying the rent provisions in the master hotel lease agreements
to the historical room revenue of the hotels as if the beginning of the period
was the beginning of the lease year. The base rent and the percentage rent will
be calculated and paid based on the terms of the lease agreement. Refer to the
discussion of the master hotel lease agreements for details.
F-73
