UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 000-30491
APPLE SUITES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
VIRGINIA 54-1933472
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
</TABLE>
(804) 643-1761
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
At November 1, 2000, there were outstanding 7,146,032 shares of common stock, no
par value, of the registrant.
1
<PAGE>
APPLE SUITES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLE SUITES, INC. (The "Company")
Consolidated Balance Sheets - 4
September 30, 2000 and December 31, 1999
Consolidated Statement of Operations - 5
Three months ended September 30, 2000
and For the period ended March 26, 1999
through September 30, 1999
Nine months ended September 30, 2000
and For the period ended March 26, 1999
through September 30, 1999
Consolidated Statement of Shareholders' 6
Equity - Nine months ended September 30, 2000
Consolidated Statement of Cash Flows - 7
Nine months ended September 30, 2000
and For the period ended March 26, 1999
through September 30, 1999
Notes to Consolidated Financial Statements 8
APPLE SUITES MANAGEMENT, INC. (The "Lessee")
Consolidated Balance Sheets- 14
September 30, 2000 and December 31, 1999
Consolidated Statement of Operations- 15
Three months ended September 30, 2000
and For the period ended September 1, 1999
through September 30, 1999
Nine months ended September 30, 2000
and For the period ended September 1, 1999
through September 30, 1999
Consolidated Statement of Cash Flows- 16
Nine months ended September 30, 2000
and For the period ended September 1, 1999
through September 30, 1999
Notes to Consolidated Financial Statements 17
Item 2. Management's Discussion and Analysis 19
of Financial Condition and Results of
Operations
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
Item 3. Quantitative and Qualitative Disclosures 24
about Market Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings (not applicable).
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities
(not applicable).
Item 4. Submission of Matters to a Vote of
Security Holders (not applicable).
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
3
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------- --------------------
<S> <C> <C>
ASSETS
Investment in hotels -net of accumulated depreciation of
$2,515,951 and $496,209, respectively $ 124,911,597 $ 93,719,632
Cash and cash equivalents 2,314,096 581,344
Restricted cash 294,873 1,023,721
Rent receivable from Apple Suites Management, Inc. 2,425,809 2,123,136
Notes and other receivables from Apple Suites Management, Inc. 1,805,011 717,019
Capital improvement reserve 388,467 753,927
Prepaid expenses 255,147 270,229
Other assets 1,312,837 300,000
-------------------- --------------------
Total Assets $ 133,707,837 $ 99,489,008
==================== ====================
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable-secured $ 72,780,500 $ 68,569,500
Notes payable-unsecured 3,500,000 -
Interest payable 222,542 466,140
Accounts payable 255,120 65,214
Accrued expenses 1,038,664 868,668
Account payable-affiliate 101,091 708,751
Distributions payable -- 712,735
-------------------- --------------------
Total Liabilities 77,897,917 71,391,008
Shareholders' equity
Common stock, no par value, authorized 200,000,000
shares; issued and outstanding 6,490,885 shares and 3,429,414, respectively 55,739,856 28,591,260
Class B convertible stock, no par value, authorized 240,000 shares;
issued and outstanding 240,000 shares 24,000 24,000
Distributions (greater) less than net income 46,064 (517,260)
-------------------- --------------------
Total Shareholders' Equity 55,809,920 28,098,000
-------------------- --------------------
Total Liabilities and Shareholders' Equity $ 133,707,837 $ 99,489,008
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
APPLE SUITES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the period
March 26, 1999
Three Months Ended Three Months Ended Nine Months Ended through
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Lease revenue $ 4,587,021 $ 417,306 $ 11,829,752 $ 417,306
Interest income and other revenue 75,815 64,370 222,504 64,370
EXPENSES:
Taxes, insurance and other 408,385 79,729 1,610,940 79,729
General and administrative 131,241 36,028 843,363 36,028
Depreciation of real estate owned 800,496 97,510 2,019,742 97,510
Interest 1,963,591 229,701 5,023,329 229,701
------------------------------------ -------------------------------------
Total expenses 3,303,713 442,968 9,497,374 442,968
------------------------------------ -------------------------------------
Net income $ 1,359,123 $ 38,708 $ 2,554,882 $ 38,708
==================================== =====================================
Basic and diluted earnings per common share $ 0.25 $ 0.02 $ 0.58 $ 0.02
==================================== =====================================
Dividends declared per common share $ 0.26 $ -- $ 0.76 $ --
======================================= =====================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Class B Convertible Stock Distributions
----------------------------------------------------------- (Greater) Total
Number Number Less Than Shareholders'
of Shares Amount of Shares Amount Net Income Equity
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 3,429,414 $ 28,591,260 240,000 $ 24,000 $(517,260) $ 28,098,000
Net proceeds from the sale of common shares 2,927,903 25,946,996 -- -- -- 25,946,996
Net income -- -- -- -- 2,554,882 2,554,882
Cash distributions declared and paid to
shareholders ($.76 per share) -- -- -- -- (1,991,558) (1,991,558)
Common stock issued through reinvestment
of distribution 133,568 1,201,600 -- -- -- 1,201,600
---------------------------------------------------------------------------------------
Balance at September 30, 2000 6,490,885 $ 55,739,856 240,000 $ 24,000 $ 46,064 $ 55,809,920
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the period
March 26, 1999
Nine Months Ended through
September 30, September 30,
2000 1999
----------------------- ---------------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 2,554,882 $ 38,708
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation of real estate owned 2,019,742 97,510
Amortization of deferred financing costs 90,983 --
Changes in operating assets and liabilities:
Prepaid expenses 15,082 (4,522)
Rent and notes receivable from Apple Suites Management, Inc. (1,326,259) (455,592)
Other assets 215,499 (48,577)
Accounts payable 189,906 8,303
Accounts payable-affiliates (607,660) --
Accrued expenses 169,996 85,076
Interest payable (243,598) 69,205
----------------------- ---------------------
Net cash provided by (used in) operating activities 3,078,573 (209,889)
Cash flow from investing activities:
Cash paid for acquisitions of hotels (8,741,849) (9,254,301)
Additions to restricted cash for property improvement plan (724,300) --
Loan to Apple Suites Management, Inc. -- (263,350)
Payments received on notes receivable 64,845 --
----------------------- ---------------------
Net cash used in investing activities (9,401,304) (9,517,651)
Cash flow from financing activities:
Repayment of secured notes payable (68,569,500) --
Repayment of unsecured notes payable (6,500,000) --
Proceeds from secured notes payable 60,000,000 --
Net proceeds from issuance of common shares 27,148,596 20,629,226
Payment from officer-shareholder for Class B shares -- 24,000
Cash distributions paid to shareholders (2,704,293) --
Cash payments for deferred financing costs (1,319,320) --
----------------------- ---------------------
Net cash provided by financing activities 8,055,483 20,653,226
Increase in cash and cash equivalents 1,732,752 10,925,686
Cash and cash equivalents, beginning of period 581,344 100
----------------------- ---------------------
Cash and cash equivalents, end of period $ 2,314,096 $ 10,925,786
======================= =====================
Supplemental cash flow information:
Interest paid $ 5,175,944 $ 7,159
Non-cash transaction:
Notes payable-secured issued by seller in connection with
hotel acquisitions $ 22,780,500 $ 26,625,000
Capital improvements made from restricted cash and capital
improvement reserve $ (1,818,608) $ --
Reduction in capital improvement reserve 365,460 --
Reduction in restricted cash for property improvement plan 1,453,148 --
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2000
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Apple Suites, Inc., together with its subsidiaries, (the "Company") is a
Virginia corporation formed in March of 1999 and 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.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information required by
generally accepted accounting principles. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and nine
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the period ended December 31, 2000. These consolidated
financial statements should be read in conjunction with the Company's December
31, 1999 Annual Report on Form 10-K.
Certain previously reported amounts have been reclassified to conform with the
current financial statement presentation.
Apple Suites, Inc., (the "Company") leased to Apple Suites Management, Inc. or
its subsidiary (the "Lessee") all of its hotels acquired to date.
The Lessee hired Promus Hotels, Inc. ("Promus"), a wholly owned subsidiary of
Hilton Hotels Corporation ("Hilton") to manage the Company's hotels under the
terms of a management agreement between Promus and the Lessee.
Relationship with Lessee
The Company must rely on the Lessee to generate sufficient cash flow from the
operation of the hotels to enable the Lessee to meet its rent obligation to the
Company under the master hotel lease agreement ("Percentage Leases"). At
September 30, 2000, the Lessee's rent payable to the Company amounted to
$2,425,809. The terms under the Percentage Leases allow quarterly percentage
rent to be paid 45 days following the quarter-end. Amounts were paid by the
Lessee in November 2000.
The Company did not have any items of comprehensive income requiring separate
reporting and disclosure for the periods presented.
8
<PAGE>
(2) INVESTMENT IN HOTELS
At September 30, 2000, the Company owned 13 hotels. Investment in hotels at
September 30, 2000 consists of the following:
<TABLE>
<S> <C>
Land $ 20,437,614
Building 104,665,801
Furniture and equipment 2,324,133
------------
$127,427,548
Less accumulated depreciation (2,515,951)
------------
$124,911,597
------------
</TABLE>
On May 8, 2000, the Company acquired a 123-room hotel located in Malvern,
Pennsylvania for $15,489,000. On June 30, 2000, the Company acquired a 112-room
hotel located in Boulder, Colorado for $14,885,000.
(3) NOTES PAYABLE
In conjunction with the purchase of 13 hotels, notes were executed by the
Company made payable to the order of Hilton in the amount of $91,350,000
($22,780,500 in 2000 and $68,569,500 in 1999). On September 8, 2000, the Company
refinanced much of this short-term debt with loans from First Union in the
amount of $60,000,000. These loans were used to repay the four promissory notes
the Company executed in 1999 when acquiring 11 of the hotels. Of the $60,000,000
total, $50,000,000 is repayable over 10 years. The loan bears a fixed interest
rate of 9% per annum and is secured by 11 of our hotels. Repayment will be made
in monthly principal and interest installments over the next 10 years. In
connection with the loan, the Company incurred $1.3 million of financing costs
which will be amortized over a 10 year period. The remaining $10,000,000
represented a short-term loan which was repaid on October 25, 2000, with
proceeds from the Company's equity offering. The loan bore an interest rate of
8.6% per annum.
The aggregate maturities of the secured notes payable for the five years
subsequent to September 30, 2000 are as follows:
<TABLE>
<S> <C>
2000 $ 76,936
2001 500,565
2002 548,201
2003 600,370
2004 644,604
Therafter 47,629,324
----------
$50,000,000
</TABLE>
Two notes (totaling $22,780,500) executed in conjunction with the Boulder and
Philadelphia acquisitions remain in place and mature on April 28, 2001. The
notes bear a fixed interest rate of 8.5% and are secured by the two hotels.
Interest payments are due monthly. Principal payments are to be made to the
extent of net equity proceeds from the offering of common
9
<PAGE>
shares.
The Company paid $5,175,944 in interest for the period ended September 30, 2000.
During the quarter, the Company made a principal payment of $6,500,000 on the
$10,000,000 First Union loan.
(4) SHAREHOLDERS' EQUITY
The Company is raising equity capital through a "best-efforts" offering of
shares by David Lerner Associates, Inc. (the "Managing Dealer"), which will
receive selling commissions and a marketing expense allowance based on proceeds
of the shares sold. The Company received gross proceeds of $29,279,030 from the
sale of 2,927,903 shares at $10 per share during the nine month period ended
September 30, 2000. The net proceeds of the offering, after deducting selling
commissions and other offering costs were $25,946,996 for the period.
The Company provides a plan which allows shareholders to reinvest distributions
in the purchase of additional shares of the Company ("Additional Share Option").
Of the total proceeds raised from common shares during the period ended
September 30, 2000, $1,335,677 (net $1,201,600) was provided through the
reinvestment of distributions.
(5) COMMITMENTS AND RELATED PARTIES
The Company receives rental income from the Lessee under the Percentage Leases
which expire in 2009 and 2010, subject to earlier termination by the Company
with 30 days notice. The Leases contain two optional five-year extensions. The
rent due under the Percentage Leases is the sum of base rent and percentage
rent. Percentage rent is calculated by multiplying fixed percentages by the
total amounts of suite revenues with reference to specified threshold amounts.
Both the base rent and the revenue thresholds used in computing percentage rents
are subject to annual adjustments based on increases in the Consumer Price Index
("CPI"). The Company earned rents of $11,829,752 and $417,306 for the nine month
period ended September 30, 2000 and 1999, respectively.
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 September 30, 2000, $388,467 was held by
Promus for these capital improvement reserves. In addition, in accordance with
the franchise agreements, $294,873 was held for the property improvement plan
with a financial institution and treated as restricted cash.
The Lessee engages Promus as a third-party manager to operate the hotels leased
by it and pays the manager based on a percentage fee of 4% of adjusted gross
revenues. During the first two years of the management agreement, a portion of
the management fee equal to 1% of adjusted gross revenues is subordinated to the
Lessee's receipt of a return equal to 11% of the purchase price of the hotel
(including property improvements required by the franchise agreements). The
Lessee pays the manager a franchise fee and a marketing fee, equal to 4%
10
<PAGE>
of gross suite revenues, respectively.
The Company loaned the Lessee $673,650 for franchise fees, $145,300 for hotel
supplies and $1,040,000 for working capital for the 13 hotels since inception.
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 July 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. For the nine months ended September 30, 2000 and
1999, ASRG earned $607,480 and $710,000, respectively, under this agreement.
The Company has contracted with Apple Suites Advisors, Inc. ("ASA") to advise
and provide day-to-day management services to the Company. In accordance with
the contract, the Company will pay ASA a fee equal to .1% to .25% of total
equity contributions received by the Company in addition to certain reimbursable
expenses. For the nine months ended September 30, 2000 and 1999, ASA earned
$86,122 and $4,928, respectively.
The Lessee, ASRG and ASA are 100% owned by Glade M. Knight, Chairman and
President of the Company. ASRG and ASA may purchase in the "best efforts"
offering up to 2.5% of the total number of shares of the Company sold in the
offering.
Mr. Knight also serves as the Chairman and Chief Executive Officer of
Cornerstone Realty Income Trust, Inc., an apartment REIT. During 2000,
Cornerstone Realty Income Trust, Inc. provided the Company with services and
rental space and was paid approximately $246,000.
11
<PAGE>
(6) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share in accordance with FAS 128:
<TABLE>
<CAPTION>
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
9/30/00 9/30/00 9/30/99 9/30/99
----------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Numerator:
Net income
Numerator for basic and
Diluted earnings $ 1,359,123 $ 2,554,882 $ 38,708 $ 38,708
Denominator:
Denominator for basic
Earnings per share-weighted-
Average shares 5,426,002 4,419,681 2,286,052 2,286,052
Effect of dilutive securities:
Stock options 2,200 2,200 -- --
Class B Convertible Shares*
--------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 5,428,202 4,421,881 2,286,052 2,286,052
--------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per
Common share $ 0.25 $ 0.58 $ 0.02 $ 0.02
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Class B Convertible Shares are not included in earnings per common share
calculation until such time it becomes probable that such shares can be
converted to common shares.
12
<PAGE>
(7) ACQUISITIONS
The following unaudited pro forma information for the nine months ended
September 30, 2000 and 1999 is presented as if the acquisition of the 13 hotels
occurred on January 1, 1999. The pro forma information does not purport to
represent what the Company's results of operations would actually have been if
such transactions, in fact, had occurred on January 1, 1999, nor does it purport
to represent the results of operations for future periods.
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
9/30/00 9/30/99
------------- -------------
<S> <C> <C>
Lease revenue $13,478,526 $12,456,122
Net income 3,322,365 2,427,727
Net income per share-basic and diluted $.66 $ .55
</TABLE>
The pro forma information applies the Company's Percentage Lease Agreements to
actual suite revenue and expenses of the 11 hotels acquired in 1999 and 2 hotels
acquired in 2000 for the respective period in 1999 prior to acquisition by the
Company. Net income also 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; and (3) interest
expense has been adjusted to reflect the acquisition as of the beginning of the
periods; and (4) common stock raised during 1999 and 2000 to purchase these
hotels has been adjusted to reflect issuances as of January 1, 1999.
(8) SUBSEQUENT EVENTS
In October 2000 the Company declared and distributed to its shareholders
approximately $1,394,865 ($.25625 per share) of which approximately $626,258 was
reinvested in the purchase of additional shares. On October 26, 2000, the
Company closed the sale to investors of 655,149 shares at $10 per share
representing net proceeds to the Company of $5,896,336.
In October 2000, the Company paid the remaining $3,500,000 balance on the
$10,000,000 short-term loan in addition to $2,000,000 on the Hilton notes with
net proceeds from the offering.
13
<PAGE>
APPLE SUITES MANAGEMENT, INC
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------------- ------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,983,707 $ 2,395,000
Accounts receivables, net 1,619,391 738,361
Inventories 145,300 121,801
Other assets 243,057 8,142
--------------------- ------------------
Total Current Assets 4,991,455 3,263,304
Non-current assets
Deferred franchise fees 618,971 562,851
--------------------- ------------------
Total Assets $ 5,610,426 $ 3,826,155
===================== ==================
Liabilities and Shareholders' Deficit
Current liabilities
Accounts payable $ 299,181 $ 48,586
Rent payable to Apple Suites, Inc. 2,425,809 2,123,136
Due to third party manager 461,605 454,147
Due to Apple Suites, Inc. 13,069 28,991
Accrued expenses 863,518 624,346
Current portion of note payable to Apple Suites, Inc. 141,181 56,939
--------------------- ------------------
Total Current liabilities 4,204,363 3,336,145
Non-current liabilities
Note payable to Apple Suites, Inc. 1,650,761 631,014
--------------------- ------------------
Total Liabilities 5,855,124 3,967,159
Shareholders' deficit
Common Stock, no par value, 5,000 authorized;
10 shares issued and outstanding 100 100
Retained deficit (244,798) (141,104)
--------------------- ------------------
Total Shareholders' deficit (244,698) (141,004)
--------------------- ------------------
Total Liabilities and Shareholders' Deficit $ 5,610,426 $ 3,826,155
===================== ==================
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
APPLE SUITES MANAGEMENT, INC
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT (UNAUDITED)
<TABLE>
<CAPTION>
For the period For the period
Three Months September 1, 1999 Nine Months September 1, 1999
Ended through Ended through
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
-------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Suite revenue $ 10,112,731 $ 961,604 $ 26,274,917 $ 961,604
Other revenue 539,807 59,548 1,431,358 59,548
--------------------------------------- -----------------------------------------
Total revenue 10,652,538 1,021,152 27,706,275 1,021,152
EXPENSES
Operating expense 3,056,886 259,098 8,010,921 259,098
General and administrative 791,866 85,676 2,201,464 85,676
Advertising and promotion 944,689 93,237 2,380,732 93,237
Utilities 495,993 26,101 1,097,414 26,101
Franchise fees 402,161 38,464 1,047,226 38,464
Management fees 383,954 40,769 1,063,326 40,769
Rent expense-Apple Suites, Inc. 4,587,021 417,306 11,829,752 417,306
Interest expense 40,055 922 85,642 922
Other 37,178 14,503 93,492 14,503
--------------------------------------- -----------------------------------------
Total expenses 10,739,803 976,076 27,809,969 976,076
Income before income taxes (87,265) 45,076 (103,694) 45,076
Income taxes -- 18,030 -- 18,030
--------------------------------------- -----------------------------------------
Net loss $ (87,265) $ 27,046 $ (103,694) $ 27,046
======================================= =========================================
Retained deficit, beginning of period $ (157,533) -- $ (141,104) --
--------------------------------------- -----------------------------------------
Retained earnings (deficit), end of period $ (244,798) $ 27,046 $ (244,798) $ 27,046
======================================= =======================================
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the period
Nine Months Ended September 1, 1999
September 30, through
2000 September 30, 1999
---------------------- ---------------------
<S> <C> <C>
Cash flow from operating activities:
Net (loss) income $ (103,694) $ 27,046
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of deferred franchise fees 49,630 --
Changes in operating assets and liabilities:
Receivables (881,030) (454,004)
Inventories -- (64,164)
Other assets (234,915) (216,521)
Due to Apple Suites, Inc. (15,922) --
Rent payable to Apple Suites, Inc. 1,342,181 417,306
Accounts payable 250,595 15,915
Due to third party manager 7,458 --
Accrued expenses 239,248 851,417
---------------------- ---------------------
Net cash used in operating activities 653,551 576,995
Cash flow from financing activities:
Proceeds from sale of common stock -- 100
Proceeds from promissory notes -- 263,350
Repayments of notes payable (64,845) --
---------------------- ---------------------
Net cash provided (used in) financing activities (64,845) 263,450
Decrease in cash and cash equivalents 588,706 840,445
Cash and cash equivalents, beginning of period 2,395,000 --
---------------------- ---------------------
Cash and cash equivalents, end of period $2,983,706 $ 840,445
====================== =====================
Supplemental cash flow information:
Non-cash transactions:
Notes payable-issued by Apple Suites, Inc. $1,169,250 $ 689,700
Payment of working capital by Apple Suites, Inc. 1,040,000 --
Payment of deferred franchise fees by Apple Suites, Inc. 105,750 567,900
Acquisition of inventory by Apple Suites, Inc. 23,500 121,800
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
APPLE SUITES MANAGEMENT, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2000
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Apple Suites Management, Inc. (the "Lessee") operates in one business segment.
Each hotel is leased by the Company to the Lessee under a master hotel lease
agreement ("Percentage Lease") having an initial term of ten years, subject to
earlier termination at the option of the Company upon 30 days notice. The lease
agreement provides for two optional five-year extensions. The Percentage Leases
require base rent payments to be made to the Company on a monthly basis and
additional quarterly payments to be made based upon percentages of suite and
sundry revenue. Promus Hotels, Inc. or an affiliate ("Promus") manages the
hotels under a management agreement with the Lessee. Promus Hotels, Inc. is a
wholly-owned subsidiary of Hilton Hotel Corporation ("Hilton"). The hotels are
located throughout the United States and are licensed with Homewood Suites(R) by
Hilton.
Certain previously reported amounts have been reclassified to conform with the
current financial statement presentation.
(2) COMMITMENTS AND RELATED PARTIES
The Percentage Leases expire in 2009 and 2010, subject to earlier termination by
the Company upon 30 days notice. The Percentage Leases provide for two optional
five-year extensions. The rent due for each hotel is the sum of a base rent and
a percentage rent. Percentage rent is calculated on a quarterly basis by
multiplying fixed percentages by the total amounts of year-to-date suite
revenues with reference to specified threshold amounts known as breakpoints.
Both the base rent and the breakpoints used in computing percentage rents are
subject to annual adjustments based on increases in the Consumer Price Index
("CPI").
The Lessee has entered into license agreements with Promus to operate the hotels
as Homewood Suites(R) by Hilton properties. These agreements have terms of 20
years and expire in 2019 and 2020. 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 the reservation assessment and 4% of
total revenue for the
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management fee. Total expenses incurred by the Lessee for franchise fees,
advertising and promotion fees, and management fees for the nine months ended
September 30, 2000 and 1999 totaled $3,157,281 and $117,697, respectively.
During 2000, the Lessee entered into various debt agreements with the Company.
In conjunction with the 2000 acquisitions, the Lessee borrowed from the Company
$105,750 for franchise fees and $23,500 for hotel supplies. In addition, in 2000
the Lessee borrowed $1,040,000 for working capital. The promissory notes
relating to these debt agreements bear interest at a rate of 9% per annum.
Principal and interest payments are due monthly.
During 2000, the Lessee entered into two additional license agreements with
Promus for the 2000 acquisitions to operate the hotels as Homewood Suites(R) by
Hilton. These agreements have terms of 20 years and expire in 2020.
(3) SHAREHOLDER'S EQUITY
The Lessee requires or may require funds to capitalize its business to satisfy
its obligations under Percentage Leases with the Company. To meet these
objectives, the Lessee has two funding commitment agreements of $1 million each
from Mr. Knight and Apple Suites Realty Group, Inc., ("ASRG"), respectively,
(together "Payor"). ASRG is owned by Mr. Knight. The funding commitments are
contractual obligations of the Payor to provide funds to the Lessee. Funds paid
to the Lessee under the commitments are to be used to satisfy any capitalization
or net worth requirements applicable to the Lessee or the Lessee's payment
obligations under the lease agreements and does not represent any indebtedness.
The funding commitments terminate upon the expiration of the Percentage Leases,
written agreement between the Payor and the Lessee, or payment of all
commitments amounts by the Payor to the Lessee. As of September 30, 2000, no
contributions have been made by the Payor to the Lessee.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1993, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance, or achievements of the Company to be materially different from any
future results, performance or achievement expressed or implied by such
forward-looking statements. Such factors include the ability of the Company to
implement its acquisition strategy and operating strategy; the Company's ability
to manage planned growth; changes in economic cycles; competitors within the
extended-stay industry; and the liquidity of the Lessee. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore there can be no assurance that such statements included in this
quarterly report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the results or conditions described in such
statements or the objectives and plans of the Company will be achieved.
General
We acquired 13 hotels with 1,453 suites (two hotels with 235 suites in 2000)
from Promus Hotels, Inc. (or its affiliates), which is now a wholly-owned
subsidiary of Hilton Hotels Corporation. All of our hotels are leased to Apple
Suites Management, Inc., or its subsidiary (the "Lessee") pursuant to two master
hotel lease agreements. Each master hotel lease agreement obligates the Lessee
to pay rent equal to the sum of an annual base rent, a quarterly percentage rent
and a quarterly sundry rent. The Lessee's ability to make these rent payments to
us is dependent primarily upon the operations of the hotels. See Note 5 to our
consolidated financial statements for further lease information.
The hotels are licensed to operate under the Homewood Suites(R) by Hilton
franchise pursuant to separate license agreements. The Lessee engages Promus
Hotels, Inc. to manage and operate the hotels under separate hotel management
agreements. We are externally advised and have contracted with Apple Suites
Advisors, Inc. (the "Advisor") to manage our day-to-day operations and to make
investment decisions. We have contracted with Apple Suites Realty Group, Inc.
("ASRG") to provide brokerage and acquisition services in connection with our
hotel acquisitions. The Lessee, the Advisor, and ASRG are all owned by Mr. Glade
Knight, our Chairman. See Note 5 to our consolidated financial statements for
further information on related-party transactions.
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RESULTS OF OPERATIONS
APPLE SUITES, INC.
Revenues
Because we commenced operations effective September 1, 1999, a comparison to the
same period of 1999 is not meaningful. During the three and nine months ended
September 30, 2000, we had lease revenues of $4,587,021 and $11,829,752,
respectively. During September 1999, we had lease revenues of $417,306. All of
our lease revenue is derived from the master hotel lease agreements.
Our other income for the three and nine months ended September 30, 2000 consists
of $35,701 and $136,862, respectively, of interest income earned from the
investments of our cash and cash reserves. During September 30, 2000, we earned
interest of $40,114 and $85,642, respectively, on the promissory notes payable
by the Lessee for our funding of franchise fees, hotel supplies and working
capital. During September 1999, we earned interest income of $64,370. The
promissory notes were not in place as of September 30, 1999.
Expenses
Our expenses consist of property taxes, insurance, general and administrative
expenses, interest on notes payable and depreciation on the hotels. Total
expenses, exclusive of interest and depreciation, for the three and nine months
ended September 30, 2000 were $539,626 and $2,454,303, respectively, or 12% and
20%, respectively, of total revenue. During September 1999, these expenses were
$115,757 or 24% of total revenue.
The interest expense was $1,963,591 and $5,023,329, respectively, for the three
and nine months ended September 30, 2000 or 42% of total revenues for both
periods. Interest expense represented interest on short-term notes payable to
Promus Hotels, Inc. at a rate of 8.5%, interest on the short-term loan with
First Union at a rate of 8.6% and interest on the secured notes with First Union
at a rate of 9%. We amortized as interest expense deferred financing costs of
$90,983 in the three and nine months ended September 30, 2000. Interest expense
during September 1999 was $229,701 or 48% of total revenue and represented
interest on short-term notes payable from Promus Hotels, Inc.
The depreciation expense was $800,496 and $2,019,742, respectively, for the
three and nine months ended September 30, 2000. During September 1999,
depreciation expense was $97,510.
Taxes, insurance, and other was $408,385 and $1,610,940 respectively, for the
three and nine months ended September 30, 2000 or 9% and 13%, respectively, of
total revenue. During September 1999, these expenses were $79,729 or 17% of
total revenue.
The general and administrative expense totaled 3% and 7%, respectively, for the
three and
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nine months ended September 30, 2000 of total revenues. During September 1999,
these expenses were 7% of total revenues. These expenses represent our
administrative expenses. We expect these percentages to decrease as our asset
base grows.
APPLE SUITES MANAGEMENT, INC.
Revenues
As operations commenced effective September 1, 1999, a comparison to 1999 is not
meaningful. Total revenues for the three and nine months ended September 30,
2000 were $10,652,538 and $27,706,275, respectively. Total revenues consist
primarily of suite revenue, which was $10,112,731 and $26,274,917 for the three
and nine months ended September 30, 2000, respectively. During September 1999,
total revenue was $1,021,152, which consists primarily of suite revenue of
$961,604.
For the three and nine months ended September 30, 2000 the average occupancy
rate was 78% and 78%, respectively, average daily rate was $96 and $93,
respectively, and revenue per available room was $75 and $73, respectively.
During September 1999, the average occupancy rate was 80%, the average daily
rate was $84, and revenue per available room was $67.
Expenses
Total expenses for the three and nine months ended September 30, 2000 were
$10,739,803 and $27,809,969. Rent expense represents $4,587,021 and $11,829,752
for the three and nine months ended September 30, 2000, respectively or 43% of
total revenue. During September 1999, total expenses were $976,076 or 96% of
total revenues and rent expense represented $417,306 or 41% of total revenues.
The Lessee has agreed to pay Promus Hotels, Inc. a fee of 4% of total revenue
for management of the hotels. The Lessee has also agreed to pay Promus Hotels,
Inc. 4% of suite revenue to cover fees for the Homewood Suites(R) by Hilton
franchise and 4% of suite revenue to participate in its reservation system and
benefit from its national brand marketing. Total expenses for these services
were $1,186,965 and $3,157,281 for the three and nine months ended September 30,
2000, respectively. During September 1999, these expenses were $117,697.
LIQUIDITY AND CAPITAL RESOURCES
During 2000, we sold 3,061,471 of our common shares, at $10 per share, to
investors (inclusive of reinvestment of distributions). The total gross sale
proceeds were $30,614,698, which netted $27,148,596 to us after the payment of
selling commissions and other offering costs.
The Lessee's obligations under the master hotel lease agreements are unsecured.
The Lessee has limited capital resources, and, accordingly its ability to make
rent payments is substantially dependent on the ability of the Lessee to
generate sufficient cash flow from operations of the hotels. We have certain
rights to cancel a master hotel lease agreement if
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the Lessee does not perform under the applicable terms.
On May 8, 2000, the Company acquired a 123-room hotel located in Malvern,
Pennsylvania for $15,489,000. On June 30, 2000, the Company acquired a 112-room
hotel located in Boulder, Colorado for $14,885,000.
To support the Lessee's obligations, the Lessee has received 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 master hotel 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, a written agreement between the Payor and the Lessee, or the payment
of all commitment amounts by the Payor to the Lessee. As of September 30, 2000,
no contributions have been made by the Payor to the Lessee under the funding
commitments.
Notes payable
In conjunction with our purchase of the 13 hotels, we made promissory notes
payable to the order of Promus Hotels, Inc. in the aggregate amount of
$91,350,000. The notes provide for an effective interest rate of 8.5% per annum.
On September 8, 2000, we refinanced much of this short-term debt with loans from
First Union in the amount of $60,000,000. These loans were used to repay the
four promissory notes we executed in 1999 when acquiring 11 of the hotels. Of
the $60,000,000 total, $50,000,000 is repayable over 10 years. The loan bears a
fixed interest rate of 9% per annum and is secured by 11 of our hotels.
Repayment will be made in monthly principal and interest installments over the
next 10 years. The remaining $10,000,000 represented a short-term loan of which
$6,500,000 was repaid during the quarter and the remaining was paid on October
25, 2000, with proceeds from our equity offering. This loan bore an interest
rate of 8.6% per annum.
Two notes (totaling $22,780,500) executed in conjunction with the Boulder and
Philadelphia acquisitions remain in place and mature on April 28, 2001. The
notes bear a fixed interest rate of 8.5% and are secured by the two hotels.
Interest payments are due monthly. Principal payments are to be made to the
extent of net equity proceeds from the offering of common shares.
The Company paid $5,175,944 in interest for the period ended September 30, 2000.
Cash and cash equivalents
Cash and cash equivalents totaled $2,314,096 at September 30, 2000.
Capital requirements
We have an ongoing capital commitment to fund our capital improvements. We are
required under the master lease agreement to make an amount up to 5% of suite
revenue available monthly to the Lessee for the repair, replacement, or
refurbishing of furniture, fixtures, and equipment on a cumulative basis,
provided that such amount may be used for capital expenditures made by us with
respect to the hotels. We expect that this amount will be adequate to fund the
required repair, replacement, and refurbishments and to maintain our hotels in a
competitive condition. At
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September 30, 2000, $388,467 was held by Promus for these capital improvement
reserves. In addition, in accordance with the franchise agreements, $294,873 was
held for the property improvement plan with a financial institution and treated
as restricted cash. We capitalized improvements of $1,818,608 in 2000.
We plan to have monthly equity closings in 2000, until the offering is fully
funded, or until such time as we may opt to discontinue the offering. We
anticipate that the equity funds will be invested in additional hotels and will
be used to make principal payments on the notes incurred in conjunction with our
current hotels.
Capital resources are expected to grow with the future sale of our common
shares. Approximately 44% of the 2000 common share dividend distribution, or
$1,201,600 was reinvested in additional common shares. In general, our liquidity
and capital resources are believed to be more than adequate to meet our cash
requirements during 2000, given current and anticipated financing arrangements.
Seasonality
The hotel industry historically has been seasonal in nature, reflecting higher
occupancy rates primarily during the first three quarters of the year. Seasonal
variations in occupancy at our hotels may cause quarterly fluctuations in our
lease revenues, particularly during the fourth quarter, to the extent that we
receive percentage rent. To the extent that cash flow from operations is
insufficient during any quarter, due to temporary or seasonal fluctuations in
lease revenue, we expect to utilize cash on hand or funds from equity raised
through our "best efforts" offering to make distributions.
Market Risk Disclosures
The Company is subject to changes in the fair market value of its fixed-rate
secured debt at September 30, 2000.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the information provided in the Company's Annual Report on Form 10-K under
Item 7-Management's Discussion and Analysis of Financial Condition and Results
of Operations. Also see the Market Risk Disclosure section under Item
2-Management's Discussion and Analysis of Financial Condition and Results of
Operations of this Form 10-Q.
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Part II, Item 2. Changes in Securities and Use of Proceeds
The following table set forth information concerning the Offering and the use of
proceeds from the Offering as of September 30, 2000:
<TABLE>
<CAPTION>
Common Shares Registered:
<S> <C> <C>
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
28,500,000.00 Common Shares $10 per Common Share $ 285,000,000
-------------
Totals: 30,166,666.67 Common Shares
-------------
Common Shares Sold:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
4,824,218.00 Common Shares $10 per Common Share $ 48,241,663
----------
Totals: 6,490,884.67 Common Shares $ 63,241,663
------------
Expenses of Issuance and Distribution of Common Shares
1. Underwriting discounts and commissions $ 6,324,166
2. Expenses of underwriter $ --
3. Direct or indirect payments to directors or officers
of the Company or their associates, to ten percent
shareholders, or to affiliates of the Company $ --
4. Fees and expenses of third parties $ 1,177,641
------------
Total Expenses of Issuance and Distribution of
Common Shares $ 7,501,807
Net Proceeds to the Company $ 55,739,856
1. Purchase of real estate (including repayment of
indebtedness incurred to purchase real estate) $ 45,519,500
2. Interest on indebtedness $ 5,023,329
3. Working capital $ 2,651,331
4. Fees to the following (all affiliates of officers of the Company):
a. Apple Suites Advisors, Inc. $ 109,696
b. Apple Suites Realty Group, Inc. $ 2,436,000
5. Fees and expenses of third parties: $ --
a. Legal --
b. Accounting --
6. Other ( ) $ --
---------------------- ------------
Total of Application of Net Proceeds to the Company $ 55,739,856
</TABLE>
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27- Financial Data Schedule
(b) Reports on Form 8-K
The following table lists the reports on Form 8-K filed by the Company during
the quarter ended September 30, 2000, the items reported and the financial
statements included in such filings.
<TABLE>
<CAPTION>
Type and Date Items
of Reports Reported Financials Statements Filed
<S> <C> <C>
Form 8-K dated June 30, 2000 2 and 7 None
and filed July 17, 2000
Form 8-K/A dated May 8, 2000 7 Historical Balance Sheets of
and filed July 18, 2000 December 31, 1999 and 1998;
Historical Income Statements for
the year ended December 31, 1999
and 1998; Historical Statements of
Cash Flows for the year ended December
31, 1999 and 1998; and Historical
Statements of Shareholders' Equity
for the year ended December 31, 1999
and 1998 (pertaining to Malvern, Pennsylvania
and Boulder, Colorado).
Form 8-K dated September 8, 2 and 7 None
2000 and filed September 25,
2000
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Apple Suites, Inc.
-----------------------
(Registrant)
DATE: 11-14-00 BY: /s/ Glade M. Knight
------------ ----------------------------------
Glade M. Knight
President
BY: /s/ Stanley J. Olander
----------------------------------
Stanley J. Olander
Secretary and Treasurer
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