FILED PURSUANT TO RULE 424(b)(3)
FILE NUMBER: 333-77055
SUPPLEMENT NO. 4 DATED JANUARY 10, 2000 TO BE USED WITH PROSPECTUS DATED AUGUST
3, 1999, SUPPLEMENT NO. 2 DATED OCTOBER 5, 1999 AND SUPPLEMENT NO. 3 DATED
DECEMBER 17, 1999.
SUPPLEMENT NO. 4 DATED JANUARY 10, 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. 4
RELATES TO MATTERS THAT HAVE CHANGED OR OCCURRED SINCE DECEMBER 17, 1999. OTHER
IMPORTANT MATTERS WERE DISCUSSED IN SUPPLEMENT NO. 3 AND IN SUPPLEMENT NO. 2,
WHICH INCORPORATED AND REPLACED SUPPLEMENT NO. 1.
Supplement No. 4 does not incorporate or replace any prior Supplement.
Prospective investors should carefully review the prospectus, Supplement No. 2,
Supplement No. 3 and this Supplement.
TABLE OF CONTENTS FOR SUPPLEMENT NO. 4
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Status of the Offering ...................... S-2
Our Properties .............................. S-2
Property Acquisition ........................ S-3
Payment Summary ............................ S-3
Hotel Supplies and Franchise Fees .......... S-3
Description of Financing ................... S-4
Source of Payments ......................... S-4
Summary of Material Contracts ............... S-5
Description of Property ..................... S-6
Experts ..................................... S-8
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 December 20, 1999, we had closed on the following sales of our
common shares:
<TABLE>
<CAPTION>
PROCEEDS NET OF SELLING
PRICE PER NUMBER OF GROSS COMMISSIONS AND MARKETING
COMMON SHARE COMMON SHARES SOLD PROCEEDS EXPENSE ALLOWANCE
- -------------- -------------------- -------------- --------------------------
<S> <C> <C> <C>
$ 9 1,666,666.67 $15,000,000 $13,500,000
$10 1,762,737.60 $17,627,376 $15,864,638
------------ ----------- -----------
Total 3,429,404.27 $32,627,376 $29,364,638
=========== ===========
</TABLE>
We have used the proceeds of our offering to acquire, either directly or
through our subsidiaries, a total of 11 extended-stay hotels. All of our hotels
are licensed to operate as Homewood Suites(Reg. TM) properties. Homewood
Suites(Reg. TM) is a registered service mark of Promus Hotels, Inc. A summary
of our hotels appears below.
OUR PROPERTIES
(Map of United States shows general location of hotels)
[GRAPHIC OMITTED]
S- 2
<PAGE>
<TABLE>
<CAPTION>
DATE OF NAME AND TOTAL DATE OF NAME AND TOTAL
PURCHASE ADDRESS OF HOTEL SUITES PURCHASE ADDRESS OF HOTEL SUITES
- ----------- ----------------------------- -------- ---------- ------------------------ -------
<S> <C> <C> <C> <C> <C>
9/20/99 Dallas-Addison 120 11/29/99 Atlanta-Peachtree 92
9/20/99 Dallas-Irving/Las Colinas 136 11/29/99 Baltimore-BWI Airport 147
9/20/99 North Dallas-Plano 99 11/29/99 Clearwater 112
9/20/99 Richmond-West End 123 11/29/99 Detroit-Warren 76
10/5/99 Atlanta-Galleria/Cumberland 124 11/29/99 Salt Lake City-Midvale 98
12/22/99 Jackson-Ridgeland 91
</TABLE>
PROPERTY ACQUISITION
PAYMENT SUMMARY
We purchased the Jackson-Ridgeland hotel, an existing Homewood Suites(Reg.
TM) property, from Promus Hotels, Inc. as of December 22, 1999. The total
purchase price for the hotel was $5,846,000. We used proceeds from our offering
of common shares to pay twenty-five percent of this total, or $1,461,500, at
closing in cash. The balance of 75%, or $4,384,500, is being financed by Promus
Hotels, Inc. as short-term or "bridge financing," as described below.
We paid a real estate commission on this purchase to Apple Suites Realty
Group, Inc., as our real estate broker. This corporation is owned by Glade M.
Knight, who is our president and chief executive officer. The total amount of
the real estate commission was $116,920, which equals two percent (2%) of the
total purchase price.
HOTEL SUPPLIES AND FRANCHISE FEES
We have provided Apple Suites Management, Inc. with funds for the purchase
of certain hotel supplies, such as sheets, towels and so forth. Apple Suites
Management, Inc. is obligated to repay us under a promissory note made in the
principal amount of $9,100. This promissory note provides for an annual
interest rate of nine percent (9%), which would increase to twelve percent
(12%) if a default occurs, and repayment in sixty-one (61) monthly
installments. The first installment consists of interest only. The due date for
the first installment, subject to a five-day grace period, was January 1, 2000.
The remaining installments consist of principal and interest on an amortized
basis. The final maturity date is January 1, 2005.
We have also provided Apple Suites Management, Inc. with funds for the
payment of hotel franchise fees to Promus Hotels, Inc. Apple Suites Management,
Inc. is obligated to repay us under a promissory note made in the principal
amount of $45,000. This promissory note is substantially similar to the one
described above, but provides for repayment in one hundred twenty-one (121)
monthly installments and has a final maturity date of January 1, 2010.
S- 3
<PAGE>
DESCRIPTION OF FINANCING
As indicated above, Promus Hotels, Inc. financed 75% of the purchase price
of the Jackson-Ridgeland hotel. This financing is substantially similar to the
financing provided by Promus Hotels, Inc. when we purchased our other hotels.
The amounts we owe to Promus Hotels, Inc. are evidenced by the following
promissory notes:
<TABLE>
<CAPTION>
ORIGINAL REMAINING
DATE OF PRINCIPAL PRINCIPAL AS OF ANNUAL RATE DATE OF
PROMISSORY NOTE AMOUNT JANUARY 1, 2000 OF INTEREST MATURITY
- -------------------- -------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
September 20, 1999 $26,625,000 $26,625,000 8.5% October 1, 2000
October 5, 1999 $ 7,350,000 $ 7,350,000 8.5% October 1, 2000
November 29, 1999 $30,210,000 $30,210,000 8.5% December 1, 2000
December 22, 1999 $ 4,384,500 $ 4,384,500 8.5% January 1, 2001
</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
o monthly principal payments, to the extent of the net equity proceeds from
our offering of common shares
o our delivery of monthly notices to specify such net equity proceeds
o our right to prepay the notes, in whole or in part, without premium or
penalty
o a late payment premium of four percent (4%) for any payment not made
within ten (10) days of its due date
Principal payments under the promissory note dated as of December 22, 1999
are not scheduled to start until the other promissory notes have been paid in
full. Assuming those other notes continue to be paid on schedule, principal
under the note dated as of December 22, 1999 will be due in a single
installment on its maturity date.
SOURCE OF PAYMENTS
Revenue from the operation of the hotels will be used to pay interest
under the promissory notes we have made to Promus Hotels, Inc. The "net equity
proceeds" from our offering of common shares will be used to pay principal. The
phrase "net equity proceeds" means the total proceeds from our offering of
common shares, as reduced by selling commissions, a marketing expense
allowance, closing costs, various fees and charges (legal, accounting, and so
forth), a working capital reserve and a reserve for renovations, repairs and
replacements of capital improvements. We were permitted, by an October 1999
letter agreement, to use our net equity proceeds to pay 25% of the purchase
price of the Jackson-Ridgeland hotel (rather than use such amounts exclusively
for payments under the earlier promissory notes.)
There can be no assurance that the net equity proceeds from our offering
of common shares will be sufficient to pay principal under the promissory notes
on or before the required due dates. The following amounts would be due on the
maturity dates of the promissory notes, assuming that interest payments are
made on schedule and that no payments of principal are made before those
maturity dates:
<TABLE>
<CAPTION>
DATE OF PRINCIPAL MONTHLY TOTAL DUE
MATURITY DUE INTEREST DUE AT MATURITY
- ------------------ -------------- ---------------- -------------------
<S> <C> <C> <C>
October 1, 2000 $33,975,000 $ 240,656.25 $ 34,215,656.25
December 1, 2000 $30,210,000 $ 213,987.50 $ 30,423,987.50
January 1, 2001 $ 4,384,500 $ 31,056.88 $ 4,415,556.88
</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.
S- 4
<PAGE>
SUMMARY OF MATERIAL CONTRACTS
DEEDS OF TRUST AND RELATED DOCUMENTS
Each of our hotels, including the Jackson-Ridgeland hotel, is subject to a
mortgage on its real property, a security interest in its personal property,
and an assignment of hotel rents and revenues, all in favor of Promus Hotels,
Inc. (As described above, Promus Hotels, Inc. provided financing for our hotel
purchases). These encumbrances are created by substantially similar documents.
For simplicity, we will refer to each of these documents as a "deed of trust."
At each closing on our purchase of a hotel or group of hotels, we further
encumbered our other hotels by permitting additional deeds of trust or negative
pledges. These documents are described below.
Each deed of trust corresponds to one of the promissory notes we made to
Promus Hotels, Inc., and secures the payment of principal and interest under
that promissory note. The encumbrance created by a deed of trust will terminate
when its corresponding promissory note is paid in full.
We are subject to various requirements under the deeds of trust. For
instance, we must maintain adequate insurance on the hotels and we must not
grant any further assignments of rents or leases with respect to the hotels.
Each deed of trust contains a substantially similar definition of events
of default. In each case, the events of default include (without limitation)
any default that occurs under any of the promissory notes or under another deed
of trust, and any sale of the secured property without the prior consent of
Promus Hotels, Inc. Upon any event of default, various remedies are available
to Promus Hotels, Inc. Those remedies include, for example (1) declaring the
entire principal balance under the promissory notes, and all accrued and unpaid
interest, to be due and payable immediately; (2) taking possession of the
secured property, including the hotels; and (3) collecting hotel rents and
revenues, or foreclosing on the hotels, to satisfy unpaid amounts under the
promissory notes. Each deed of trust requires us to pay any costs that may be
incurred in exercising such remedies.
Negative pledges apply to three of our hotels (Richmond-West End,
Clearwater and Baltimore- BWI Airport). The negative pledges prohibit any
transfer or further encumbrance of the hotels, in whole or in part, without the
prior written consent of Promus Hotels, Inc. Each negative pledge was executed
concurrently with a particular promissory note, and will terminate when its
corresponding promissory note is paid in full.
MASTER HOTEL LEASE AGREEMENT
We have leased the Jackson-Ridgeland hotel to Apple Suites Management,
Inc. Our existing master hotel lease agreement, dated as of September 20, 1999,
has been supplemented to include this hotel as leased properties.
The master hotel lease agreement provides that Apple Suites Management,
Inc. will pay us a base rent, percentage rent and certain additional charges.
Base rent is payable in advance in equal monthly installments. In addition, for
each calendar quarter during the term of the leases, Apple Suites Management,
Inc. will pay percentage rent based on a percentage of gross revenues (less
sales and room taxes), referred to as "suite revenue," derived in connection
with the rental of suites at the hotel. The percentage rent is equal to (a) 17%
of all year-to-date suite revenue, up to the applicable quarterly suite revenue
breakpoint (as shown below); plus (b) 55% of the year-to-date suite revenue in
excess of the applicable quarterly suite revenue breakpoint, less both base
rents and the percentage rent paid year to date. The base rent and the
quarterly suite revenue breakpoints will be adjusted each year beginning on
January 1, 2001, based on the most recently published Consumer Price Index.
An annual base rent is $462,750 for both 1999 and 2000. The quarterly
suite revenue breakpoints through 2008, before any adjustment based on the
Consumer Price Index, are described in the table below and in the subsequent
paragraph:
S- 5
<PAGE>
SUITE REVENUE BREAKPOINTS FOR THE FIRST QUARTER
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 2005 2006 2007 2008
- ------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 150,394 $155,021 $161,963 $166,590 $171,218 $175,845 $180,473 $185,100 $189,728
</TABLE>
The suite revenue breakpoints for the second, third and fourth quarters of
the same years are determined by multiplying the breakpoint for the first
quarter (as shown above) by two, three or four, respectively.
OTHER AGREEMENTS
The Jackson-Ridgeland hotel is subject to a license agreement and a
management agreement with Promus Hotels, Inc. We have entered into an
environmental indemnity agreement with Promus Hotels, Inc., as well as a
comfort letter regarding the lease structure and certain other issues. These
agreements are substantially similar to agreements that exist with respect to
our other hotels.
DESCRIPTION OF PROPERTY
GENERAL BACKGROUND
The Jackson-Ridgeland hotel is an extended-stay hotel, and is licensed to
operate as Homewood Suites(Reg. TM) property. We believe that the majority of
the guests at the hotel during the past 12 months have been business travelers.
We expect that this pattern will continue.
Each suite at a Homewood Suites(Reg. TM) property consists of a bedroom
and a living room, with an adjacent kitchen area. The basic suite is known as a
"Homewood Suite," which generally has one double or king-size bed. Larger
suites, known as "Master Suites" or "Extended Double Suites" are also
available. These suites have larger rooms, with either one king-size bed or two
smaller beds. The largest suites contain two separate bedrooms.
Wheelchair-accessible suites are available at each hotel.
The suites have many features and amenities in common. Most suites have
ceiling fans and two color televisions (one in the bedroom and one in the
living room). Some suites have fireplaces. Typical living room furniture
includes a sofa (often a fold-out sleeper sofa), coffee table and work/dining
table with chairs. Some living rooms contain a recliner and a videocassette
player. The kitchens vary, but generally have a microwave, refrigerator,
dishwasher, coffee maker and stove, together with basic cookware and utensils.
Homewood Suites(Reg. TM) markets its hotel franchise through its web site
(http://www.homewood-suites.com), which is generally available 24 hours a day,
seven days a week, around the world. Reservations may be made directly through
the web site. The reservation system and the web site are linked to, and
cross-marketed with, the reservation systems and web sites for other hotel
franchises that are owned and operated by Promus Hotels, Inc. Those other
franchises include Hampton Inns(Reg. TM), Doubletree Hotels(Reg. TM) and
Embassy Suites(Reg. TM). Such cross-marketing may affect occupancy at the
Homewood Suites(Reg. TM) properties by directing travelers toward, or away
from, Homewood Suites(Reg. TM).
The hotel was actively conducting business at the time of its acquisition.
We believe that the acquisition was conducted without materially disrupting any
of the daily activities at the hotel. During the past 12 months, the hotel has
been covered with property and liability insurance, and we have arranged to
continue such coverage. We believe the hotel is adequately covered by
insurance.
SPECIFIC FEATURES
The Homewood Suites(Reg. TM) Jackson - Ridgeland is located on a 3.94 acre
site at 853 Centre Street, Ridgeland, Mississippi 39157. The hotel is
approximately 10 miles from downtown Jackson and 15 miles from the Jackson
Municipal Airport.
The hotel opened in February 1997. It has wood frame construction and
consists of a single building with three stories. The hotel contains 91 suites,
which have a combined rentable area of 41,729 square feet. The following types
of suites are available:
S-6
<PAGE>
<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 $333,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement,
furniture replacement, bathroom upgrades and parking lot resurfacing and
restriping. We expect to pay for the costs of these renovations and
improvements with proceeds obtained from our ongoing offering of common shares.
During 1999, the average stay at the hotel has been approximately three
nights, and approximately 48.2% of the guests have stayed for five nights or
more. Occupancy at the hotel is not seasonal. The following table shows average
daily occupancy rates, expressed as a percentage, since the opening of the
hotel:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1997 1998 1999
--------- ---------- ------------
<S> <C> <C>
63.8% 80.6% 78.2%
</TABLE>
For January 1, 1999 through December 28, 1999, the average daily rate per
suite was $81.98, and the average daily net revenue per suite was $63.92. As
explained above, revenue from the hotel's operations will be used to pay
interest due under the promissory note dated as of December 22, 1999. There can
be no assurance, however, the proceeds of the offering will be sufficient to
permit such payments of principal. Assuming that no principal payments are made
until the maturity of the promissory note, and that the hotel continues to have
the level of net revenue specified above, approximately 17.55% of the hotel's
revenue would be needed to cover its portion of the interest payments.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $92 $92 $149
5 to 11 82 82 119
12 to 28 74 74 119
29 or more 69 69 109
</TABLE>
The hotel offers a weekend discount. This discount varies by type of suite
and generally reduces the basic rate by 20 to 33%. The weekend discount is not
available to guests who stay for five nights or more. The hotel also offers
discounts to guests who stay under certain corporate accounts. These discounts
are often negotiated with the corporate customer and vary from account to
account. During the past 12 months, we estimate that approximately 70% of the
hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include Fire Victims, Entergy, Copac, Computer Task Group, Mississippi
Diversified, Mississippi Baptist Health Systems, Hydro Ellay Enfield,
Saks/McRaes, International Paper and HMA. From January 1, 1999 through August
2, 1999, the 10 biggest corporate accounts were responsible for approximately
24.5% of the hotel's occupancy. There can be no assurance, however, that the
hotel will continue to receive significant occupancy, or any occupancy, from
the corporate accounts identified above.
S-7
<PAGE>
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1997
(ANNUALIZED) 1998 1999
-------------- ----------- -----------
<S> <C> <C>
$ 33.32 $ 50.70 $ 50.88
</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 sets forth the 1999 real estate tax information for
the hotel:
<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 $33,000 or less.
At least six competing hotels are located within seven miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) One of the competing hotels is newer than the
hotel. The newer competing hotel has a franchise with Townplace Suites. The
other competing hotels have franchises with Residence Inn, Cabot Lodge,
Courtyard by Marriott, Harvey Hotel and Hilton. We believe that the rates
charged by the hotel are generally competitive with the rates charged by these
other hotels. We are aware of ongoing or proposed construction for up to six
new extended-stay hotels within 12 miles of the hotel. We expect these new
hotels to be franchised with Comfort Inn, Hawthorne Suites, Jameson Inn, King
Edward Hotel, Hilton Gardens and Springhill Suites.
EXPERTS
The financial statements for the Jackson-Ridgeland hotel are set forth
below. 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.
S-8
<PAGE>
APPLE SUITES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROPERTY FINANCIAL STATEMENTS (Jackson - Ridgeland)
Independent Auditors' Report ............................................................ F-2
Balance Sheets - December 31, 1998 and December 31, 1997 ................................ F-3
Statements of Shareholders' Equity - Years ended December 31, 1997 and December 31, 1998. F-4
Income Statements - Years ended December 31, 1998 and December 31, 1997 ................. F-4
Statements of Cash Flows - Years ended December 31, 1998 and December 31, 1997 .......... F-5
Notes to the Financial Statements - December 31, 1998 and December 31, 1997 ............. F-6
* * *
Balance Sheet - August 31, 1999 (unaudited) ............................................. F-8
Statement of Shareholders' Equity - For the Period January 1, 1999 through August 31,
1999 (unaudited) ....................................................................... F-9
Income Statement - For the Period January 1, 1999 through August 31, 1999 (unaudited) ... F-9
Statement of Cash Flows - For the Period January 1, 1999 through August 31, 1999
(unaudited) ........................................................................... F-10
Notes to the Financial Statements - For the Period January 1, 1999 through August 31,
1999(unaudited) ........................................................................ F-11
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Apple Suites, Inc.
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1999 ................. F-13
Notes to Pro Forma Condensed Consolidated Balance Sheet ................................. F-13
Pro Forma Condensed Consolidated Statements of Operations for the Year Ended
December 31, 1998 and the Nine Months Ended September 30, 1999 ........................ F-15
Notes to Pro Forma Condensed Consolidated Statements of Operations ...................... F-16
Apple Suites Management, Inc.
Pro Forma Condensed Consolidated Statements of Operations for the Year Ended
December 31, 1998 and the Nine Months Ended September 30, 1999 ........................ F-18
Notes to Pro Forma Condensed Consolidated Statements of Operations ...................... F-19
</TABLE>
F-1
<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.
November 7, 1999
F-2
<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-3
<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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Balance Sheet of
Apple Suites, Inc. (the "Company") is presented as if the acquisition of the
seven Homewood Suites hotels from Promus Hotels, Inc. ("Promus") had occurred
on September 30, 1999. See Note A for individual hotel details. Such
information is based in part upon the consolidated balance sheet of the
Company. In management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Balance Sheet is
not necessarily indicative of what the actual financial position would have
been assuming such transactions had been completed as of September 30, 1999,
nor does it purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
HOMEWOOD HOMEWOOD
HISTORICAL SUITES SUITES
BALANCE ACQUISITION (A II) ACQUISITION (A III) TOTAL
SHEET ADJUSTMENTS ADJUSTMENTS PRO FORMA
--------------- ----------------------- --------------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Investment in hotel properties ......... $ 36,292,592 $ 51,081,600 (A) $ 5,962,920 (A) $ 93,337,112
Cash and cash equivalents .............. 10,924,786 (10,924,786)(D) -- --
Rent receivable from Apple Suites
Management, Inc. ..................... 417,306 -- -- 417,306
Due from Apple Suites Management,
Inc. ................................. 301,636 -- -- 301,636
Prepaid expenses ....................... 4,522 -- -- 4,522
Other assets ........................... 48,577 -- -- 48,577
------------ -------------- ------------ ------------
Total Assets ........................... $ 47,989,419 $ 40,156,814 $ 5,962,920 $ 94,109,153
============ ============== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable .......................... $ 26,625,000 $ 37,560,000 (B) $ 4,384,500 (B) $ 68,569,500
Accounts payable ....................... 8,303 -- -- 8,303
Accrued expenses ....................... 664,082 -- -- 664,082
------------ -------------- ------------ ------------
Total Liabilities ...................... 27,297,385 37,560,000 4,384,500 69,241,885
Shareholders' equity
Common stock, no par value,
authorized 200,000,000 shares;
issued and outstanding 2,532,147
shares ............................... 20,629,326 2,596,814 (C) 1,578,420 (C) 24,804,560
Class B convertible stock, no par
value, authorized 240,000 shares;
issued and outstanding 240,000
shares ............................... 24,000 -- -- 24,000
Net income greater than distributions 38,708 -- -- 38,708
------------ --------------- -------------- ------------
Total Shareholders' Equity ............. 20,692,034 2,596,814 1,578,420 24,867,268
------------ --------------- -------------- ------------
Total Liabilities and Shareholders'
Equity ............................... $ 47,989,419 $ 40,156,814 $ 5,962,920 $ 94,109,153
============ =============== ============== ============
</TABLE>
- ----------
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(A) Increase represents the purchase of 7 hotels, including the 2%
acquisitionfee payable to Apple Suites Realty Group, Inc. The hotels
acquired are as follows:
F-13
<PAGE>
<TABLE>
<CAPTION>
2%
DATE COMMENCED DATE PURCHASE ACQUISITION DEBT
PROPERTY OPERATIONS ACQUIRED PRICE FEE TOTAL INCURRED
-------- ---------- -------- ----- --- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
II Homewood Suites-Atlanta, GA 1990 October 1, 1999 $ 9,800,000 $ 196,000 $ 9,996,000 $ 7,350,000
II Homewood Suites-Clearwater, FL February 1998 November 24, 1999 10,416,000 208,320 10,624,320 7,812,000
II Homewood Suites-Salt Lake, UT 1996 November 24, 1999 5,153,000 103,060 5,256,060 3,864,750
II Homewood Suites-Atlanta, GA 1990 November 24, 1999 4,033,000 80,660 4,113,660 3,024,750
II Homewood Suites-Detroit, MI 1990 November 24, 1999 4,330,000 86,600 4,416,600 3,247,500
II Homewood Suites-Baltimore, MD March 1998 November 24, 1999 16,348,000 326,960 16,674,960 12,261,000
III Homewood Suites-Jackson, MS February 1997 December 22, 1999 5,846,000 116,920 5,962,920 4,384,500
Total ----------- ----------- ----------- -----------
$55,926,000 $ 1,118,520 $57,044,520 $41,944,500
=========== =========== =========== ===========
</TABLE>
(B) Represents the debt incurred at acquisition. The notes bear interest of
8.5% per annum. The maturity date for the note in the amount of $7,350,000
is October 1, 2000,the maturity date for the note in the amount of
$30,210,000 is December 1, 2000 and the maturity date of the note in the
amount of $4,384,500 is January 1, 2001. The Company is required to make
monthly principal payments in the amount of the equity proceeds received
during a month in excess of offering expenses.
(C) Increase to common stock to reflect the net proceeds from the sale of
common stock from the Company's continuous offering used to purchase these
hotels.
(D) Reflects the use of cash on hand to purchase these hotels.
F-14
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Suites, Inc. (the "Company") are presented as if the
acquisition of the eleven Homewood Suites hotels from Promus Hotels, Inc.
("Promus") had occurred at the beginning of the periods presented or date
placed into service by Promus if later (See Note A) and all of the hotels had
been leased to Apple Suites Management, Inc. (the "Lessee") pursuant to the
Percentage Leases. Such pro forma information is based in part upon the
Consolidated Statements of Operations of the Company, the Pro Forma Statements
of Operations of the Lessee and the historical Statements of Operations of the
acquired hotels. In management's opinion, all adjustments necessary to reflect
the effects of these transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the periods presented are not necessarily indicative of what
actual results of operations of the Company would have been assuming such
transactions had been completed as of the beginning of the periods presented,
nor does it purport to represent the results of operations for future periods.
The lease agreements between the Company and the Lessee were based on economic
conditions existing at the time of acquisition. Applicaton of these agreements
to periods prior to the acquisition may not be meaningful. The most significant
assumption which may not be indicative of future operations is the amount of
financial leverage employed. These Pro Forma statements assume 75% of the
purchase price was funded with debt for the entire periods presented. The
Company intends to repay this debt with the proceeds from its "best efforts"
offering. This repayment of debt would result in lower interest expense, higher
net income, but lower earnings per share.
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-------------------------------------------------------------------------
HISTORICAL HOMEWOOD HOMEWOOD HOMEWOOD
STATEMENT OF SUITES SUITES SUITES TOTAL
OPERATIONS ACQUISITION (A I) ACQUISITION (A II) ACQUISITION (A III) PRO FORMA
------------ ----------------- ------------------ ------------------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Percentage lease revenue ............ $ -- $ 6,526,922 (B) $ 5,241,307 (B) $ 1,070,700 (B) $12,838,929
Interest income and other income .... -- -- -- -- --
EXPENSES:
Taxes and insurance ................. -- 1,040,638 (C) 432,979 (C) 89,387 (C) 1,563,004
General and administrative .......... -- 90,175 (D) 86,477 (D) 65,659 (D) 242,311
Depreciation ........................ -- 1,256,071 (E) 1,155,328 (E) 199,487 (E) 2,610,686
Interest expense .................... -- 2,688,125 (F) 2,338,818 (F) 372,683 (F) 5,399,626
---- ------------ ------------ ------------ ------------
Total expenses ....................... -- 5,075,009 4,013,602 727,216 9,815,827
---- ------------ ------------ ------------ ------------
Net income ........................... $ -- $ 1,451,913 $ 1,227,705 $ 343,484 $ 3,023,102
==== ============ ============ ============ ============
Earnings per common share:
Basic and Diluted ................... $ -- $ 1.11
==== ============
Basic and diluted weighted average
common shares outstanding ........... -- 1,412,531 (G) 1,132,040 (G) 176,360 (G) 2,720,931
==== ============ ============ ============ ============
</TABLE>
F-15
<PAGE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-------------------------------------------------------------------------
HISTORICAL HOMEWOOD HOMEWOOD HOMEWOOD
STATEMENT OF SUITES SUITES SUITES TOTAL
OPERATIONS ACQUISITION (A I) ACQUISITION (A II) ACQUISITION (A III) PRO FORMA
------------ ----------------- ------------------ ------------------- ------------
<S> <C> <C> <C> <C>
REVENUE:
Percentage lease revenue ............ $ 417,306 $ 4,510,833 (B) $ 4,853,958 (B) $ 855,420 (B) $10,637,517
Interest income and other income .... 64,370 -- -- -- 64,370
EXPENSES:
Taxes and insurance ................. 79,729 822,599 (C) 529,548 (C) 70,413 (C) 1,502,289
General and administrative .......... 36,028 67,221 (D) 66,676 (D) 49,244 (D) 219,169
Depreciation ........................ 97,510 931,211 (E) 953,304 (E) 149,615 (E) 2,131,640
Interest expense .................... 229,701 1,977,313 (F) 1,925,888 (F) 279,512 (F) 4,412,414
----------- ------------ ------------ ---------- -----------
Total expenses ....................... 442,968 3,798,344 3,475,416 548,784 8,265,511
Net income ........................... $ 38,708 $ 712,490 $ 1,378,542 $ 306,636 $ 2,436,376
=========== ============ ============ ========== ===========
Earnings per common share:
Basic and Diluted ................... $ 0.02 $ 0.83
=========== ============
Basic and diluted weighted average
common shares outstanding ........... 2,286,052 -- (G) 461,427 (G) 176,360 (G) 2,923,838
=========== ============ ============ ========== ============
</TABLE>
----------
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(A) Represents results of operations for the eleven hotels acquired on a pro
forma basis as if the eleven hotels were owned by the Company at the
beginning of the periods presented or date placed into service by Promus
if later, see below.
<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>
Since three of the hotels (Richmond, VA, Clearwater, FL, and Baltimore, MD)
were under construction in 1998 and full operations did not commence until
the respective dates, no pro forma adjustments were made for the periods
prior to completion.
(B) Represents lease payment from the Lessee to the Company calculated on a pro
forma basis by applying the rent provisions in the Percentage Leases to
the historical room revenue of the hotels as if the beginning of the
period was the beginning of the lease year. The base rent and the
percentage rent will be calculated and paid based on the terms of the
lease agreement. Refer to the Master Hotel Lease Agreement section to
Report for details.
(C) Represents historical real estate and personal property taxes and insurance
which will be paid by the Company pursuant to the Percentage Lease
agreements. Such amounts are the historical amounts paid by the respective
hotels.
(D) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company and anticipated legal and accounting fees, employee costs,
salaries and other costs of operating as a public company.
(E) Represents the depreciation on the eleven hotels acquired based on the
purchase price, excluding amounts allocated to land, of $37,450,320 for
the first acquisition, $34,954,481 for the second acquisition, and
$5,485,886 for the third acquisition, for the period of time not owned by
the Company. The weighted average life of the depreciable assets was 27.5
years. The estimated useful lives are based on management's knowledge of
the properties and the hotel industry in general. Depreciable assets of
$31,913,270 did not commence depreciation until the respective opening
dates.
F-16
<PAGE>
(F) Represents the interest expense for the eleven hotel acquisitions for the
period in which the hotels were not owned. Interest was computed using the
interest rates of 8.5% on mortgage debt of $33,975,000 for the first
acquisition, $30,210,000 for the second acquisition and $4,384,500 for the
third acquisition that was incurred at acquisition.
(G) Represents additional common shares assuming the properties were acquired
at the beginning of the periods presented with the net proceeds from the
"best efforts" offering of $9 per share (net $8.06 per share) for the
first $15,000,000 in proceeds and $10 per share (net $8.95 per share) for
the remainder.
F-17
<PAGE>
APPLE SUITES MANAGEMENT, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Suites Management, Inc. (the "Lessee") are presented as if
the eleven hotels purchased from Promus Hotels, Inc. ("Promus") had been leased
from Apple Suites, Inc. (the "Company") pursuant to the Percentage Leases from
the beginning of periods presented or date placed into service by Promus (see
Note A). Further, the results of operations reflect the Management Agreement
and License Agreement entered into between Promus and the Lessee or affiliate
to operate the acquired hotels. The lease agreements between the Company and
the Lessee were based on economic conditions existing at the time of of
acquisition. Application of these agreements to periods prior to the
acquisition may not be meaningful. Such pro forma information is based in part
upon the Consolidated Statements of Operations of the Lessee and the Homewood
Suites Hotels and should be read in conjunction with the financials statement
contained herein. In management's opinion, all adjustments necessary to reflect
the effects of these transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the periods are not necessarily indicative of what the actual
results of operations of the Lessee would have been assuming such transactions
had been completed as of the beginning of the periods presented, nor does it
purport to represent the results of operations for the future periods.
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HOMEWOOD HOMEWOOD
STATEMENT OF SUITES SUITES
OPERATIONS ACQUISITIONS(A I) ACQUISITIONS(A II)
-------------- ------------------- --------------------
<S> <C> <C> <C>
REVENUES:
Suite revenue ............... $ -- $ 14,075,852 $ 10,812,372
Other income ................ -- 811,817 733,318
EXPENSES:
Operating expenses .......... -- 5,586,712 4,748,240
General and
administrative ............. -- 348,088 315,165
Advertising and
promotion .................. -- 648,273 502,899
Utilities ................... -- 626,269 543,828
Taxes and insurance ......... -- 1,040,638 432,979
Depreciation expense ........ -- 2,394,294 2,214,501
Franchise fees .............. -- 563,035 432,494
Management fees ............. -- -- --
Rent expense--Apple
Suites, Inc. ............... -- -- --
Other ....................... -- 226,964 349,961
---- ------------ ------------
Total expenses ............... -- 11,434,273 9,540,067
Income before income tax ..... -- 3,453,396 2,005,623
Income tax expense ......... -- -- --
---- ------------ ------------
Net income ................... $ -- $ 3,453,396 $ 2,005,623
==== ============ ============
<CAPTION>
HOMEWOOD
SUITES PRO FORMA TOTAL
ACQUISITION(A III) ADJUSTMENTS PRO FORMA
-------------------- --------------------- ---------------
<S> <C> <C> <C>
REVENUES:
Suite revenue ............... $ 2,115,861 -- $ 27,004,085
Other income ................ 161,811 -- 1,706,946
EXPENSES:
Operating expenses .......... 927,878 -- 11,262,830
General and
administrative ............. 69,009 (124,000)(B)
50,000 (C) 658,262
Advertising and
promotion .................. 128,067 (1,083,952)(D)
1,080,163 (E) 1,275,450
Utilities ................... 87,815 -- 1,257,912
Taxes and insurance ......... 89,387 (1,563,004)(F) --
Depreciation expense ........ 417,551 (5,026,346)(G) --
Franchise fees .............. 84,634 (1,080,163)(H)
1,080,163 (I) 1,080,163
Management fees ............. -- 1,273,441 (K) 1,273,441
Rent expense--Apple
Suites, Inc. ............... -- 12,838,929 (L) 12,838,929
Other ....................... -- (576,925)(M) --
----------- ---------- ------------
Total expenses ............... 1,804,341 6,868,307 29,646,988
Income before income tax ..... 473,331 (6,868,307) (935,957)
Income tax expense ......... -- -- --
----------- ---------- ------------
Net income ................... $ 473,331 $ (6,868,307) $ (935,957)
=========== ============== ============
</TABLE>
F-18
<PAGE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HOMEWOOD HOMEWOOD
STATEMENT OF SUITES SUITES
OPERATIONS ACQUISITIONS(A I) ACQUISITIONS(A II)
-------------- ------------------- --------------------
<S> <C> <C> <C>
REVENUES:
Suite revenue ............... $ 961,604 $ 9,818,797 $ 9,885,579
Other income ................ 59,548 560,096 580,287
EXPENSES:
Operating expenses .......... 259,098 3,794,204 3,984,624
General and
administrative ............. 85,676 250,317 245,792
Advertising and
promotion .................. 93,237 438,985 475,007
Utilities ................... 26,101 354,113 451,112
Taxes and insurance ......... -- 822,599 529,548
Depreciation expense ........ -- 1,783,021 1,814,014
Franchise fees .............. 38,464 392,757 395,423
Management fees ............. 40,769 311,275 313,854
Rent expense--Apple
Suites, Inc. ............... 417,306 -- --
Other ....................... 15,425 -- --
--------- ----------- -----------
Total expenses ............... 976,076 8,147,271 8,209,374
Income before income tax ..... 45,076 2,231,622 2,256,492
Income tax expense ......... 18,030 -- --
--------- ----------- -----------
Net income ................... $ 27,046 $ 2,231,622 $ 2,256,492
========= =========== ===========
<CAPTION>
HOMEWOOD
SUITES PRO FORMA TOTAL
ACQUISITION(A III) ADJUSTMENTS PRO FORMA
-------------------- --------------------- ---------------
<S> <C> <C> <C>
REVENUES:
Suite revenue ............... $ 1,673,214 -- $ 22,339,194
Other income ................ 126,329 -- 1,326,260
EXPENSES:
Operating expenses .......... 715,577 -- 8,753,503
General and
administrative ............. 58,035 (99,000)(B)
37,500 (C) 578,320
Advertising and
promotion .................. 84,677 (855,109)(D)
855,104 (E) 1,091,901
Utilities ................... 56,729 -- 888,055
Taxes and insurance ......... 70,413 (1,422,560)(F) --
Depreciation expense ........ 320,239 (3,917,274)(G) --
Franchise fees .............. 66,929 (855,109)(H)
855,104 (I) 893,568
Management fees ............. 53,987 (679,115)(J)
Rent expense--Apple
Suites, Inc. ............... -- 1,000,772 (K) 1,041,542
10,220,211 (L) 10,637,542
Other ....................... -- -- 15,425
----------- --------------- ------------
Total expenses ............... 1,426,586 5,140,524 23,899,831
Income before income tax ..... 372,957 (5,140,524) (234,377)
Income tax expense ......... -- (18,030)(N) --
----------- --------------- ------------
Net income ................... $ 372,957 $ (5,122,495) $ (234,378)
=========== =============== ============
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(A) Represents results of operations for the eleven Homewood Suites hotel
acquisitions on a pro forma basis as if the hotels acquired were leased
and operated by the Lessee at the beginning of the periods presented or
date placed into service by Promus, see below. The hotels acquired are as
follows:
<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>
Since three hotels were under construction in 1998 and full operations did
not commence until the respective dates, no pro forma adjustments were made
prior to the date the hotel commenced operations.
(B) Represents the elimination of the historical accounting fee allocated to
the hotels by the prior owner.
(C) Represents the addition of the anticipated legal and accounting and other
expenses to operate as a stand alone company.
(D) Represents the elimination of the historical advertising, training and
reservation fee allocated to the hotels by the prior owner.
(E) Represents the addition of the marketing fee to be incurred under the new
license agreements. The marketing fee is calculated based on the terms of
the license agreements which is 4% of suite revenue.
F-19
<PAGE>
(F) Represents the elimination of the taxes and insurance. Under the terms of
the lease these expenses will be incurred by the Company and, accordingly,
are reflected in the Company's Pro Forma Condensed Consolidated Statement
of Operations.
(G) Represents the elimination of the depreciation expense. This expense will
be reflected in the Company's Pro Forma Condensed Consolidated Statement
of Operations.
(H) Represents the elimination of the historical franchise fee allocated to the
hotels by the prior owner.
(I) Represents the addition of franchise fees to be incurred under the new
license agreement. The franchise fees are calculated based on the terms of
the agreement, which is 4% of suite revenue.
(J) Represents the elimination of the historical management fees for the nine
months ended September 30, 1999.
(K) Represents the addition of the management fees of 4% of gross revenue and
the accounting fee $1,000 per hotel per month to be incurred under the new
management agreements for the period presented.
(L) Represents lease payments from the Lessee to the Company calculated on a
pro forma basis by applying the rent provisions in the Percentage Leases
to the historical room revenue of the hotels as if the beginning of the
period was the beginning of the lease year. The base rent and the
percentage rent will be calculated and paid based on the terms of the
lease agreement. Refer to the Master Hotel Lease Agreement section to
Report for details.
(M) Represents the elimination of pre-opening operating expenses not incurred
by the Lessee.
(N) Represents the reduction of estimated tax liability at September 30, 1999
based on net loss for the proforma period.
F-20
