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 June 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)
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)
(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 August 1, 2000, there were outstanding 5,336,812 shares of common stock, no
par value, of the registrant.
<PAGE>
APPLE SUITES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLE SUITES, INC. (The "Company")
Consolidated Balance Sheets - 4
June 30, 2000 and December 31, 1999
Consolidated Statement of Operations - 5
Three months ended June 30, 2000
Six months ended June 30, 2000
Consolidated Statement of Shareholders' 6
Equity - Six months ended June 30, 2000
Consolidated Statement of Cash Flows - 7
Six months ended June 30, 2000
Notes to Consolidated Financial Statements 8
APPLE SUITES MANAGEMENT, INC. (The "Lessee")
Consolidated Balance Sheets- 13
June 30, 2000 and December 31, 1999
Consolidated Statement of Operations- 14
Three months ended June 30, 2000
Six months ended June 30, 2000
Consolidated Statement of Cash Flows- 15
Six months ended June 30, 2000
Notes to Consolidated Financial Statements 16
Item 2. Management's Discussion and Analysis 18
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures 23
about Market Risk
2
<PAGE>
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings (not applicable).
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities
(not applicable).
Item 4. Submission of Matters to a Vote of 25
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>
June 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Investment in hotels -net of accumulated depreciation of
$1,715,455 and $496,209, respectively $ 125,100,974 $ 93,719,632
Cash and cash equivalents 3,445,125 581,344
Restricted cash 544,469 1,023,721
Rent receivable from Apple Suites Management, Inc. 1,996,479 2,123,136
Notes and other receivables from Apple Suites Management, Inc. 1,771,124 717,019
Capital improvement reserve 653,149 753,927
Prepaid expenses 194,185 270,229
Other assets 1,556,769 300,000
------------- ------------
Total Assets $ 135,262,274 $ 99,489,008
============= ============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable-secured $ 91,350,000 $ 68,569,500
Interest payable 576,173 466,140
Accounts payable 355,750 65,214
Accrued expenses 1,185,836 868,668
Account payable-affiliate 111,639 708,751
Distributions payable -- 712,735
------------- ------------
Total Liabilities 93,579,398 71,391,008
Shareholders' equity
Common stock, no par value, authorized 200,000,000 shares;
issued and outstanding 4,945,552 shares and 3,429,414, respectively $ 41,885,295 $ 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 than net income (226,419) (517,260)
------------- ------------
Total Shareholders' Equity 41,682,876 28,098,000
------------- ------------
Total Liabilities and Shareholders' Equity $ 135,262,274 $ 99,489,008
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
APPLE SUITES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 2000
------------------ ----------------
<S> <C> <C>
REVENUES:
Lease revenue $3,836,053 $7,242,731
Interest income and other revenue 98,682 146,689
EXPENSES:
Taxes, insurance and other 712,866 1,404,441
General and administrative 255,500 510,236
Depreciation of real estate owned 670,045 1,219,246
Interest 1,606,628 3,059,738
---------- ----------
Total expenses 3,245,039 6,193,661
---------- ----------
Net income $ 689,696 $1,195,759
========== ==========
Basic and diluted earnings per common share $ 0.16 $ 0.31
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Class B
Common Stock Convertible Stock Distributions
----------------------------------------------------------------------------------------------- Greater Total
Number Number 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 1,434,638 12,561,043 -- -- -- 12,561,043
Net income -- -- -- -- 1,195,759 1,195,759
Cash distributions declared and
paid to shareholders ($.25 per share) -- -- -- -- (904,918) (904,918)
Common stock issued through
reinvestment of distribution 81,500 732,992 -- -- -- 732,992
----------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 4,945,552 $41,885,295 240,000 $24,000 $ (226,419) $ 41,682,876
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000
----------------
<S> <C>
Cash flow from operating activities:
Net income $ 1,195,759
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation of real estate owned 1,219,246
Changes in operating assets and liabilities:
Prepaid expenses 76,044
Rent and notes receivable from Apple Suites Management, Inc. (830,930)
Other assets (11,769)
Accounts payable 290,536
Accounts payable-affiliates (597,112)
Accrued expenses 317,168
Interest payable 110,033
------------
Net cash used in operating activities 1,768,975
Cash flow from investing activities:
Cash paid for acquisitions of hotels (7,422,750)
Capital improvements (2,526,588)
Additions to capital improvements reserve held by third-party manager (724,300)
Reduction of capital improvements reserve held by third-party manager 1,203,552
Reduction in restricted cash for property improvement plan 100,778
Payments received on notes receivable 32,732
------------
Net cash used in investing activities (9,336,576)
Cash flow from financing activities:
Net proceeds from issuance of common shares 13,294,035
Cash distributions paid to shareholders (1,617,653)
Cash payments for deferred financing costs (1,245,000)
------------
Net cash provided by financing activities 10,431,382
Increase in cash and cash equivalents 2,863,781
Cash and cash equivalents, beginning of period 581,344
------------
Cash and cash equivalents, end of period $ 3,445,125
============
Supplemental cash flow information:
Interest paid $ 2,949,705
Non-cash transaction:
Notes payable-secured issued by seller in connection with
hotel acquisitions $ 22,780,500
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
APPLE SUITES, INC
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 six months ended
June 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.
The Company commenced operations in September 1999, therefore,
consolidated statements of operations and cash flows for the three and
six months period ended June 30, 1999 are not presented.
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 agreements
("Percentage Leases"). At June 30, 2000, the Lessee's rent payable to
the Company amounted to $1,996,479. The original terms under the
Percentage Leases allow monthly base rent to be paid in arrears and
quarterly percentage rent to be paid 15 days following the quarter-end.
Amounts were paid by the Lessee in July 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 June 30, 2000, the Company owned 13 hotels. Investment in hotels at
June 30, 2000 consist of the following:
Land $ 19,183,614
Building 104,571,526
Furniture and equipment 3,061,289
------------
$126,816,429
Less accumulated depreciation (1,715,455)
------------
$125,100,974
------------
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). The notes
bear a fixed interest rate of 8.5% per annum and are
cross-collateralized by the 13 hotels owned by the Company. Interest
payments are due monthly. Notes amounting to $64,185,000 mature during
the fourth quarter of 2000, $4,384,500 note matures in January 2001 and
the remaining matures in April 2001. Principal payments are to be made
to the extent of net equity proceeds from the offering of common
shares. The Company paid $2,949,705 in interest for the period ended
June 30, 2000. During July 2000, the Company paid a principal payment
of $5 million on the notes from net proceeds from the offering.
The Company is negotiating to refinance these notes on commercially
reasonable terms and conditions. The Company has applied for a
commercial loan from a national bank in the amount of $58 million to be
secured by the 11 hotels the Company purchased in 1999. There can be no
assurance that the loan will occur in accordance with the terms of the
loan application or at all.
The Company has made an aggregate deposit of $1 million in connection
with its loan application. If the closing on the loan does not occur
within 90 days after the date of the application (June 9, 2000), the
Company may be required to forfeit some or all of our deposit. The
Company also has entered into an agreement, dated as of June 5, 2000,
with the prospective lender, which guarantees the interest rate and
provides for the Company's payment of certain fees if the Company
terminates its loan application.
(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 $14,346,376 from the sale of 1,434,638 shares at $10
per share during the six month period ended June 30, 2000. The net
proceeds of the offering, after deducting selling commissions and other
offering costs were $12,561,043 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 June 30, 2000, $815,001 (net $732,992)
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 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
9
<PAGE>
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 $7,242,731 for the six
month period ended June 30, 2000.
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
June 30, 2000, $653,149 was held by Promus for these capital
improvement reserves. In addition, in accordance with the franchise
agreements, $544,469 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 each hotel. The Lessee
pays the manager a franchise fee and a marketing fee, equal to 4% of
gross revenues, respectively.
The Company loaned the Lessee $673,650 for franchise fees, $145,300 for
hotel supplies and $960,000 for working capital for the 13 hotels. The
debt agreements are evidenced by promissory notes bearing interest at a
rate of 9% per annum. Principal and interest payments are due monthly.
The promissory notes have various maturity dates through 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 six
months ended June 30, 2000, ASRG earned $607,480 under this agreement.
At June 30, 2000, the Company owed ASRG $84,140.
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 six months ended
June 30, 2000, ASA earned $50,032 under this agreement and $27,499 was
payable at June 30, 2000.
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.
10
<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 Six Months
Ended Ended
6/30/00 6/30/00
--------- ---------
<S> <C> <C>
Numerator:
Net income and
numerator for basic and Diluted earnings $ 689,696 $1,195,759
Denominator:
Denominator for basic
earnings per share-weighted-
average shares 4,225,582 3,916,520
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 4,227,782 3,918,720
---------------------------------------------------------------------------------------------
Basic and diluted earnings per
common share $ 0.16 $ 0.31
---------------------------------------------------------------------------------------------
</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.
11
<PAGE>
(7) ACQUISITIONS
The following unaudited pro forma information for the six months ended
June 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>
Six Months Six Months
Ended Ended
6/30/00 6/30/99
<S> <C> <C>
Lease revenue $8,891,505 $8,283,740
Net income 1,194,774 823,959
Net income per share-basic and diluted $ .25 $ .21
</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 July, 2000 the Company declared and distributed to its shareholders
approximately $1,086,640 ($.25625 per share) of which approximately
$520,676 was reinvested in the purchase of additional shares. On July
20, 2000, the Company closed the sale to investors of 391,261 shares at
$10 per share representing net proceeds to the Company of $3,521,340.
During July 2000, the Company paid a principal payment of $5 million on
the notes from net proceeds from the offering.
12
<PAGE>
APPLE SUITES MANAGEMENT, INC
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,819,898 $ 2,395,000
Accounts receivables, net 1,622,830 738,361
Inventories 145,300 121,801
Other assets 113,313 8,142
----------- -----------
Total Current Assets 4,701,341 3,263,304
Non-current assets
Deferred franchise fees 653,943 562,851
----------- -----------
Total Assets $ 5,355,284 $ 3,826,155
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities
Account payable $ 319,732 $ 48,586
Rent payable to Apple Suites, Inc. 1,996,479 2,123,136
Due to third party manager 507,542 454,147
Due to Apple Suites, Inc. 26,653 28,991
Accrued expenses 917,840 624,346
Current portion of note payable to Apple Suites, Inc. 71,028 56,939
----------- -----------
Total Current liabilities 3,839,274 3,336,145
Non-current liabilities
Note payable to Apple Suites, Inc. 1,673,443 631,014
----------- -----------
Total Liabilities 5,512,717 3,967,159
Shareholders' deficit
Common Stock, no par value, 5,000 authorized;
10 shares issued and outstanding 100 100
Retained deficit (157,533) (141,104)
----------- -----------
Total Shareholders' deficit (157,433) (141,004)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 5,355,284 $ 3,826,155
=========== ===========
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
APPLE SUITES MANAGEMENT, INC
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 2000 June 30, 2000
------------- -------------
<S> <C> <C>
REVENUE
Suite revenue $ 8,479,831 $ 16,162,186
Other revenue 470,735 891,551
----------- ------------
Total revenue 8,950,566 17,053,737
EXPENSES
Operating expense 2,501,943 4,797,335
General and administrative 738,655 1,409,598
Advertising and promotion 773,396 1,436,043
Utilities 318,158 601,421
Franchise fees 337,771 645,065
Management fees 356,606 679,372
Rent expense-Apple Suites, Inc. 3,836,053 7,242,731
Interest expense 30,312 45,587
Other 116,802 213,014
----------- ------------
Total expenses 9,009,696 17,070,166
Income before income taxes (59,130) (16,429)
Income tax expense -- --
----------- ------------
Net loss $ (59,130) $ (16,429)
=========== ============
Retained deficit, beginning of period $ (98,403) $ (141,104)
----------- ------------
Retained deficit, end of period $ (157,533) $ (157,533)
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000
----------------
<S> <C>
Cash flow from operating activities:
Net income $ (16,429)
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of deferred franchise fees 14,658
Changes in operating assets and liabilities:
Receivables (884,469)
Other assets (105,171)
Due to Apple Suites, Inc. (2,338)
Rent payable to Apple Suites, Inc. 833,268
Accounts payable 271,146
Due to third party manager 53,395
Accrued expenses 293,570
-----------
Net cash used in operating activities 457,630
Cash flow from financing activities:
Repayments of notes payable (32,732)
-----------
Net cash used in financing activities (32,732)
Decrease in cash and cash equivalents 424,898
Cash and cash equivalents, beginning of period 2,395,000
-----------
Cash and cash equivalents, end of period $ 2,819,898
===========
Supplemental cash flow information:
Non-cash transactions:
Notes payable-issued by Apple Suites, Inc. $ 1,089,250
Payment of working capital by Apple Suites, Inc. 960,000
Payment of deferred franchise fees by Apple Suites, Inc. 105,750
Acquisition of inventory by Apple Suites, Inc. 23,500
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
APPLE SUITES MANAGEMENT, INC
Notes to Consolidated Financial Statements (Unaudited)
June 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.
The Lessee commenced operations in September 1999, therefore,
consolidated statements of operations and cash flows for the three and
six month period ended June 30, 1999 are not presented.
(2) PERCENTAGE LEASES
The Percentage Leases expire in 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 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
16
<PAGE>
revenue for each of these functions, respectively. Total expenses
incurred by the Lessee for franchise fees, advertising and promotion
fees, and management fees for the six months ended June 30, 2000
totaled $1,970,316.
(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 June 30, 2000, no contributions have been made by the
Payor to the Lessee.
17
<PAGE>
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 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.
18
<PAGE>
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 possible. During the three and six months ended June
30, 2000, we had revenues of $3,934,735 and $7,389,420, respectively. All of our
lease revenue is derived from the master hotel lease agreements.
Our other income for the three and six months ended June 30, 2000 consists of
$68,429 and $101,161, respectively, of interest income earned from the
investments of our cash and cash reserves. For the same period in 2000, we
earned interest of $30,253 and $45,528, respectively, on the promissory notes
payable by the Lessee for our funding of franchise fees, hotel supplies and
working capital.
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 six months
ended June 30, 2000 were $968,366 and $1,914,677, respectively, or 25% and 26%,
respectively, of total revenue.
The interest expense was $1,606,628 and $3,059,738, respectively, for the three
and six months ended June 30, 2000 and represented interest on short-term notes
payable to Promus Hotels, Inc. at an interest rate of 8.5%.
The depreciation expense was $670,045 and $1,219,246, respectively, for the
three and six months ended June 30, 2000.
Taxes, insurance, and other was $712,866 and $1,404,441, respectively, for the
three and six months ended June 30, 2000 or 18% and 19%, respectively, of total
revenue.
The general and administrative expense totaled 6.5% and 7%, respectively, for
the three and six months ended June 30, 2000 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 the same
period of 1999 is not possible. Total revenues for the three and six months
ended June 30, 2000 were $8,950,566 and $17,053,737, respectively. Total
revenues consist primarily of suite revenue, which was $8,479,831 and
$16,162,186 for the three and six months ended June 30, 2000
For the three and six months ended June 30, 2000 the average occupancy rate was
79% and
19
<PAGE>
78%, respectively, average daily rate was $92 and $91, respectively, and revenue
per available room was $72 and $71, respectively.
Expenses
--------
Total expenses for the three and six months ended June 30, 2000 were $9,009,696
and $17,070,166. Rent expense represents $3,836,053 and $7,242,731 or 43% and
42%, respectively, respectively, for the three and six months ended June 30,
2000 of total revenue.
The Lessee has agreed to pay Promus Hotels, Inc. a fee of 4% of suite revenue
for management of the hotels. The Lessee has also agreed to pay Promus Hotels,
Inc. fees of 4% of suite revenue to cover fees for the Homewood Suites(R) by
Hilton franchise and to participate in its reservation system. Total expenses
for these services were $1,970,316 during the period. For the second quarter of
2000, these expenses were $1,032,962.
LIQUIDITY AND CAPITAL RESOURCES
During 2000, we sold 1,516,138 of our common shares, at $10 per share, to
investors. The total gross sale proceeds were $15,161,377, which netted
$13,294,035 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 the Lessee does not perform
under the applicable terms.
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 June30, 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.
Interest payments are due monthly. Principal payments are to be made from net
proceeds of our offering of common shares. At June 30, 2000, our borrowings were
$91,350,000. During July 2000, we paid a principal payment of $5 million on the
promissory notes from net proceeds from the offering.
20
<PAGE>
The promissory notes have various maturity dates. The approximate principal
amounts and their due dates are as follows: $34 million due on October 1, 2000,
$30.2 million due on November 1, 2000, $4.4 million due on January 1, 2001 and
$22.8 million due on April 28, 2001. Our goal is to pay these notes with the
proceeds from our continuous "best efforts" offering of common shares. Based on
the current rate at which equity is being raised by the offering, we may need to
seek other measures to repay these loans.
We are negotiating to refinance these notes on commercially reasonable terms and
conditions. We have applied for a commercial loan from a national bank in the
amount of $58 million to be secured by the 11 hotels we purchased in 1999. There
can be no assurance that the loan will occur in accordance with the terms of the
loan application or at all.
If the loan occurs in accordance with the application, repayment would be made
in monthly installments over 10 years, on an amortized basis, at a fixed annual
interest rate of 9.17%. If the loan closes, we expect the lender to impose
additional conditions or requirements that are customary for loans of this type.
The loan would represent a change to our borrowing policy because we would no
longer hold our properties over the long-term on an all-cash basis.
We have made an aggregate deposit of $1 million in connection with our loan
application. If the closing on the loan does not occur within 90 days after the
date of the application (June 9, 2000), we may be required to forfeit some or
all of our deposit. We also have entered into an agreement, dated as of June 5,
2000, with the prospective lender, which guarantees the interest rate and
provides for our payment of certain fees if we terminate our loan application.
We have entered into a letter agreement, dated May 8, 2000, with Promus Hotels,
Inc. in regard to potential refinancing. Under this letter agreement, if we
obtain refinancing, repay our initial four promissory notes in full, and are not
in default under the other promissory notes, the first 11 hotels we purchased
would be released as collateral. Furthermore, if our refinancing has both senior
and junior levels of priority, and if the junior level does not exceed $13
million, we would be permitted to apply the net equity proceeds from our "best
efforts" to the principal amount of such junior debt, rather than to our
promissory notes with respect to the Philadelphia/Great Valley hotel and the
Boulder hotel.
Cash and cash equivalents
-------------------------
Cash and cash equivalents totaled $3,445,125 at June 30, 2000.
Capital requirements
--------------------
We have an ongoing capital commitment to fund our capital improvements. We are
required under the master hotel lease agreements to make an amount equal 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. We capitalized improvements of $2,526,588 in 2000. At
June 30, 2000 a total of $653,149 was held for funding of these improvements.
21
<PAGE>
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 45% of the 2000 common share dividend distribution, or
$732,992 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.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 1999. 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.
23
<PAGE>
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 June 30, 2000:
<TABLE>
<S> <C> <C> <C>
Common Shares Registered:
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
3,278,885.00 Common Shares $10 per Common Share $ 32,788,853
------------- -------------
Totals: 4,945,551.67 Common Shares $ 47,788,853
-------------
Expenses of Issuance and Distribution of Common Shares
1. Underwriting discounts and commissions $ 4,778,885
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 $ 1,124,673
------------
Total Expenses of Issuance and Distribution of
Common Shares $ 5,903,558
Net Proceeds to the Company $ 41,885,295
1. Purchase of real estate (including repayment of
Indebtedness incurred to purchase real estate) $ 30,450,000
2. Interest on indebtedness $ 4,304,782
3. Working capital $ 4,620,907
4. Fees to the following (all affiliates of officers of the Company):
a. Apple Suites Advisors, Inc. $ 73,606
b. Apple Suites Realty Group, Inc. $ 2,436,000
5. Fees and expenses of third parties: $ -
a. Legal $ -
b. Accounting $ -
6. Other (specify ________________) $ -
Total of Application of Net Proceeds to the Company $ 41,885,295
</TABLE>
24
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
On May 15, 2000, the Company held an Annual Meeting of Shareholders for the
purpose of electing two directors to the Company's Board of Directors. The two
nominees to the Company's Board of Directors were Bruce H. Matson and Robert M.
Wiley. Each nominee was a current director of the Company and was nominated for
an additional three-year term on the Board of Directors. The election of
directors was uncontested and both nominees were elected.
The total number of votes represented at the Annual Meeting of Shareholders was
3,922,923. The voting results are summarized below:
Votes For: 3,897,008 Votes Withheld: 25,915
--------- ------
25
<PAGE>
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 June 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 May 8, 2000 and 2 and 7 None
filed May 23, 2000
</TABLE>
26
<PAGE>
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: 8/11/00 BY: /s/ Glade M. Knight
------------------- -------------------------------------
Glade M. Knight
President
BY: /s/ Stanley J. Olander
-------------------------------------
Stanley J. Olander
Secretary and Treasurer
27
