FILED PURSUANT TO RULE 424(B)(3)
FILE NUMBER: 333-77055
SUPPLEMENT NO. 6 DATED MAY 31, 2000 TO
BE USED WITH SUPPLEMENT NO. 5 DATED
MARCH 31, 2000 AND PROSPECTUS DATED
AUGUST 3, 1999
SUPPLEMENT NO. 6 DATED MAY 31, 2000
TO PROSPECTUS DATED AUGUST 3, 1999
APPLE SUITES, INC.
The following information supplements the prospectus of Apple Suites, Inc.
dated August 3, 1999 and is part of the prospectus. THIS SUPPLEMENT NO. 6
RELATES TO MATTERS THAT HAVE CHANGED OR OCCURRED SINCE MARCH 21, 2000. OTHER
IMPORTANT MATTERS WERE DISCUSSED IN SUPPLEMENT NO. 5, WHICH INCORPORATED AND
REPLACED ALL PRIOR SUPPLEMENTS. THIS SUPPLEMENT DOES NOT INCORPORATE OR REPLACE
ANY PRIOR SUPPLEMENT.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE PROSPECTUS, SUPPLEMENT
NO. 5 AND THIS SUPPLEMENT.
TABLE OF CONTENTS FOR SUPPLEMENT NO. 6
<TABLE>
<S> <C>
Status of the Offering .................................................... S-2
Recent Developments ....................................................... S-2
Our Properties ............................................................ S-3
Property Acquisition ...................................................... S-4
Overview ................................................................. S-4
Hotel Supplies and Franchise Fees ........................................ S-4
Description of Financing ................................................. S-5
Summary of Material Contracts ............................................. S-7
Description of Property ................................................... S-10
Index to Management's Discussion and Analysis and to Financial Statements.. F-1
</TABLE>
The prospectus and the supplements contain forward-looking statements
within the meaning of the federal securities laws which are intended to be
covered by the safe harbors created by those laws. These statements include our
plans and objectives for future operations, including plans and objectives
relating to future growth and availability of funds. These forward-looking
statements are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to these statements involve judgments with
respect to, among other things, the continuation of our offering of common
shares, our ability to repay or refinance our significant short-term debt,
future economic, competitive and market conditions and future business
decisions. All of these matters are difficult or impossible to predict
accurately and many of them are beyond our control. Although we believe the
assumptions underlying the forward-looking statements, and the forward-looking
statements themselves, are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that these forward-looking
statements will prove to be accurate. In light of the significant uncertainties
inherent in these forward-looking statements, the inclusion of this information
should not be regarded as a representation by us or any other person that our
objectives and plans, which we consider to be reasonable, will be achieved.
S-1
<PAGE>
STATUS OF THE OFFERING
We completed the minimum offering of common shares at $9 per share on
August 23, 1999. We are continuing the offering at $10 per common share in
accordance with the prospectus.
As of May 19, 2000, we had closed on the following sales of our common
shares:
<TABLE>
<CAPTION>
PROCEEDS NET OF SELLING
PRICE PER NUMBER OF GROSS COMMISSIONS AND MARKETING
COMMON SHARE COMMON SHARES SOLD PROCEEDS EXPENSE ALLOWANCE
-------------- -------------------- -------------- --------------------------
<S> <C> <C> <C>
$ 9 1,666,666.67 $15,000,000 $13,500,000
$ 10 2,862,737.00 28,627,370 25,764,633
------------ ----------- -----------
TOTAL 4,529,403.67 $43,627,370 $39,264,633
============ =========== ===========
</TABLE>
We have used the net proceeds of our offering to acquire, by deed or
lease, a total of 12 extended-stay hotels. We hold these hotels directly or
through wholly-owned subsidiaries. For simplicity, we will refer to these
hotels as "our hotels." All of our hotels have franchises with Homewood
Suites(Reg. TM) by Hilton, which is a registered service mark of Hilton Hotels
Corporation.
RECENT DEVELOPMENTS
As discussed in detail below, we have approximately $80 million in notes
payable in connection with our hotels. Our goal is to pay these notes with the
proceeds from our 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 holding discussions with several lenders to obtain
financing for the hotels and are exploring both unsecured and secured financing
arrangements.
Although no firm financing commitments have been received, we believe,
based on discussions with lenders and other market indicators, that we can
obtain sufficient financing prior to the maturity of the notes, if necessary.
Obtaining refinancing is dependent upon a number of factors, including: (a)
continued operation of the hotels at or near current occupancy and room rate
levels, as the hotel leases are based in part on a percentage of hotel suite
income; (b) the general level of interest rates, including credit spreads for
real estate based lending; and (c) general economic conditions.
There is no assurance that we will obtain financing to repay our current
outstanding debt. If we are unable to obtain such financing and if our offering
proceeds are insufficient, we would be subject to a number of default remedies,
including possible loss of the hotels through foreclosure. Depending on the
terms of any financing we obtain and the progress of our offering, we may need
to modify our borrowing policy, as described in the prospectus, of holding our
properties on an all-cash basis over the long-term.
S-2
<PAGE>
OUR PROPERTIES
(Map of United States shows general location of hotels)
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
MONTH OF NAME TOTAL MONTH OF NAME TOTAL
PURCHASE OF HOTEL SUITES PURCHASE OF HOTEL SUITES
---------------- ------------------------------- -------- --------------- --------------------------- -------
<S> <C> <C> <C> <C> <C>
September 1999 Dallas - Addison 120 November 1999 Baltimore - BWI Airport 147
September 1999 Dallas - Irving/Las Colinas 136 November 1999 Clearwater 112
September 1999 North Dallas - Plano 99 November 1999 Detroit - Warren 76
September 1999 Richmond - West End 123 November 1999 Salt Lake City - Midvale 98
October 1999 Atlanta - Galleria/Cumberland 124 December 1999 Jackson - Ridgeland 91
November 1999 Atlanta - Peachtree 92 May 2000 Philadelphia/Great Valley 123
---
TOTAL FOR ALL HOTELS 1,341
=====
</TABLE>
S-3
<PAGE>
PROPERTY ACQUISITION
OVERVIEW
We acquired the Philadelphia/Great Valley hotel, an existing Homewood
Suites(Reg. TM) by Hilton hotel, when we purchased a long-term leasehold
interest in the hotel, which is substantially equivalent to acquiring
ownership. This leasehold interest was purchased through an assignment and
assumption of lease, dated as of May 8, 2000 with respect to a ground lease,
dated as of July 1, 1996. The total purchase price was $15,489,000. We used the
net proceeds from our offering of common shares to pay 25% of this total, or
$3,872,250, at closing in cash. The balance of 75%, or $11,616,750, is being
financed by the seller, Promus Hotels, Inc., as short-term or "bridge
financing." The financing and the ground lease are described in further detail
in other sections below.
We made this purchase through a newly organized subsidiary, Apple Suites
Pennsylvania Business Trust (a business trust organized under Pennsylvania
law), based on business and tax planning considerations. We are the sole
trustee and sole beneficiary of Apple Suites Pennsylvania Business Trust. The
Philadelphia/Great Valley hotel has been leased to Apple Suites Management,
Inc. under a master hotel lease agreement dated as of May 8, 2000.
We paid a real estate commission on this purchase to Apple Suites Realty
Group, Inc., as our real estate broker. This corporation is owned by Glade M.
Knight, who is our president and chief executive officer. The total amount of
the real estate commission was $309,780, which equals 2% of the total purchase
price.
HOTEL SUPPLIES AND FRANCHISE FEES
We have provided Apple Suites Management, Inc. with funds for the purchase
of certain hotel supplies (such as sheets, towels and so forth) for the
Philadelphia/Great Valley hotel. Apple Suites Management, Inc. is obligated to
repay us under a promissory note made in the principal amount of $12,300. This
promissory note provides for an annual interest rate of nine percent (9%),
which would increase to twelve percent (12%) if a default occurs, and repayment
in monthly installments. The first installment consists of interest only and
has a due date of June 1, 2000. The remaining installments consist of principal
and interest on an amortized basis. The maturity date is June 1, 2005.
We have also provided Apple Suites Management, Inc. with funds for the
payment of hotel franchise fees to Promus Hotels, Inc. Apple Suites Management,
Inc. is obligated to repay us under a promissory note made in the principal
amount of $55,350. This promissory note is substantially similar to the one
described above, but has a maturity date of June 1, 2010.
S-4
<PAGE>
DESCRIPTION OF FINANCING
As indicated above, Promus Hotels, Inc. is financing 75% of the purchase
price with respect to the Philadelphia/Great Valley hotel. This financing is
substantially similar to the financing provided by Promus Hotels, Inc. when we
purchased our other hotels. The amounts we owe to Promus Hotels, Inc. are
evidenced by the following promissory notes:
<TABLE>
<CAPTION>
ORIGINAL
MONTH OF PRINCIPAL ANNUAL RATE DATE OF
PROMISSORY NOTE AMOUNT OF INTEREST MATURITY
----------------------------- -------------- ------------- -----------------
<S> <C> <C> <C>
September 1999 ......... $26,625,000 8.5% October 1, 2000
October 1999 ........... $ 7,350,000 8.5% October 1, 2000
November 1999 .......... $30,210,000 8.5% December 1, 2000
December 1999 .......... $ 4,384,500 8.5% January 1, 2001
May 2000 ............... $11,616,750 8.5% April 28, 2001
-----------
TOTAL ............... $80,186,250
===========
</TABLE>
We consider the financing from Promus Hotels, Inc. to be "bridge
financing" because of its short-term nature (that is, each promissory note
reaches maturity within approximately one year of its date of execution). The
promissory notes have several provisions in common, which include the
following:
o monthly interest payments, based on the actual number of days per
month
o our delivery of monthly notices to specify the net equity proceeds
from our offering, which will be the intended source of principal
payments, as explained below
o our right to prepay the notes, in whole or in part, without premium or
penalty
o a late payment premium of four percent for any payment not made within
10 days of its due date
Revenue from the hotels will be used to pay interest under the promissory
notes we have made to Promus Hotels, Inc. This revenue will include lease
payments made to us by Apple Suites Management, Inc. (or a subsidiary) under
the master hotel lease agreements.
The promissory notes contemplate that the "net equity proceeds" from our
offering of common shares will be the source of our principal payments. As
discussed above, however, we may need to seek alternate financing if the net
equity proceeds are not sufficient for this purpose. The phrase "net equity
proceeds" means the total proceeds from our offering of common shares, as
reduced by selling commissions, a marketing expense allowance, closing costs,
various fees and charges (legal, accounting, and so forth), a working capital
reserve and a reserve for renovations, repairs and replacements of capital
improvements.
Under a letter agreement dated May 8, 2000, we are permitted to use such
net equity proceeds to pay 25% of the purchase price for the leasehold interest
in the Philadelphia/Great Valley hotel. Otherwise, to the extent that we have
such net equity proceeds, we generally are obligated to make monthly principal
payments under the promissory notes listed above.
S-5
<PAGE>
We have made all scheduled interest payments under the promissory notes.
The aggregate amount of our interest payments through May 2000 is $2,948,444.
To date, we have not made any principal payments under any of the
promissory notes. There can be no assurance that the net equity proceeds from
our offering of common shares will be sufficient to enable us to make all
principal payments under the promissory notes when due. The following amounts
would be due on the maturity dates of the promissory notes, assuming that
interest payments continue to be made on schedule and that no payments of
principal are made before those maturity dates:
<TABLE>
<CAPTION>
MONTH OF DATE OF TOTAL DUE
PROMISSORY NOTE MATURITY AT MATURITY
----------------------------- ------------------ --------------
<S> <C> <C>
September 1999 ......... October 1, 2000 $26,811,010
October 1999 ........... October 1, 2000 $ 7,401,349
November 1999 .......... December 1, 2000 $30,421,056
December 1999 .......... January 1, 2001 $ 4,415,131
May 2000 ............... April 28, 2001 $11,697,908
-----------
TOTAL $80,746,454
===========
</TABLE>
In the event of a default under the promissory notes, various remedies are
available to Promus Hotels, Inc. under certain deeds of trust, which are
described below.
[Remainder of Page Intentionally Left Blank]
S-6
<PAGE>
SUMMARY OF MATERIAL CONTRACTS
DEEDS OF TRUST AND RELATED DOCUMENTS
Each of our hotels, including the Philadelphia/Great Valley hotel, is
encumbered. In general, the encumbrances consist of a mortgage on the hotel
building and its underlying real property, a security interest in any personal
property and an assignment of hotel rents and revenues, all in favor of Promus
Hotels, Inc. (As described above, Promus Hotels, Inc. provided financing for
our hotel purchases).
These encumbrances are created by substantially similar documents having a
variety of names, many of which depend on state law. For simplicity, we will
refer to each of these documents as a "deed of trust." At each closing on a
purchase with respect to a hotel or group of hotels, we further encumbered our
other hotels with additional deeds of trust or with negative pledges. These
additional encumbrances are designed to provide additional security for the
earlier promissory notes.
Each deed of trust corresponds to one of the promissory notes we made to
Promus Hotels, Inc., and secures the payment of principal and interest under
that promissory note. The encumbrance created by a particular deed of trust
will terminate when its corresponding promissory note is paid in full. Other
encumbrances created by additional deeds of trust or by negative pledges will
remain in effect until the promissory notes to which they correspond are also
paid in full.
We are subject to various requirements under the deeds of trust. For
instance, we must maintain adequate insurance on the hotels and we must not
grant any further encumbrances, or make any further assignments of rents or
leases, with respect to the hotels.
Each deed of trust contains a substantially similar definition of events
of default. In each case, the events of default include (without limitation)
any default that occurs under any of the promissory notes or under another deed
of trust, and any sale of the secured property without the prior consent of
Promus Hotels, Inc. Upon any event of default, various remedies are available
to Promus Hotels, Inc. Those remedies include, for example (a) declaring the
entire principal balance under the promissory notes, and all accrued and unpaid
interest, to be due and payable immediately; (b) taking possession of the
secured property, including the hotels; and (c) collecting hotel rents and
revenues, or foreclosing on the hotels, to satisfy unpaid amounts under the
promissory notes. Each deed of trust requires us to pay any costs that may be
incurred in exercising such remedies.
Negative pledges apply to the three hotels in Florida, Maryland and
Virginia. The negative pledges prohibit any transfer or further encumbrance of
the hotels, in whole or in part, without the prior written consent of Promus
Hotels, Inc. The negative pledges will terminate when our promissory notes to
Promus Hotels, Inc. are paid in full.
GROUND LEASE
The Philadelphia/Great Valley hotel is subject to a ground lease dated as
of July 1, 1996. We caused Apple Suites Pennsylvania Business Trust, in our
capacity as its sole trustee and sole beneficiary, to become the tenant under
the ground lease. This result
S-7
<PAGE>
was achieved through an assignment and assumption of lease dated as of May 8,
2000. For purposes of applicable state law, the long-term leasehold interest is
substantially equivalent to ownership and we expect to be treated as the owner
of the hotel building. We intend to take depreciation deductions with respect
to the hotel building for federal income tax purposes.
The ground lease applies to the hotel building, as well as the underlying
real property. The ground lease has an initial term of 30 years. The tenant has
the option to extend the ground lease for three additional periods of 10 years
each. When the ground lease expires, or is terminated in accordance with its
terms, the tenancy for the land terminates and the building and other
improvements become the property of the landlord. Therefore, unless we purchase
the landlord's interest, we will not own the hotel past the term of the ground
lease.
The ground lease provides for annual rent, payable by the tenant in
advance in monthly installments. The annual rent is $100,000 for each of the
first five years (that is, until August 1, 2000). Every five years, the annual
rent will be adjusted in proportion to the Consumer Price Index for the
metropolitan Philadelphia area, but will not be less than $100,000 for any
year.
The tenant has certain obligations under the ground lease. For example,
the tenant must operate the premises in accordance with applicable law and must
maintain general public liability insurance on the premises. For a default that
involves the tenant's failure to provide insurance and that continues for 10
days after written notice to the tenant, the landlord may arrange for
substitute insurance at the tenant's expense. Furthermore, because a hotel has
been constructed on the premises, the permitted uses of the premises during the
first 10 years under the ground lease are limited to hotel and related uses.
Under the ground lease, the tenant has 30 days after written notice to
cure any payment default under the ground lease, and 60 days after written
notice to cure any other default. If the default cannot be cured in 60 days,
the cure period will be extended if the tenant promptly begins to cure the
default and diligently continues to do so. In general, if a default occurs and
is not cured within the appropriate time period, the landlord's remedies
include terminating the ground lease and requiring the tenant to vacate the
premises. If the landlord terminates the ground lease following any uncured
default, we will remain obligated to pay the full amount of the remaining
purchase price to Promus Hotels, Inc. under the promissory note dated as of May
8, 2000, even though we will not be receiving further revenues with respect to
the hotel.
If the landlord wishes to sell the premises and the tenant is not in
default, the landlord must notify the tenant in writing and grant it the first
option to purchase the premises. If this option is declined, the landlord may
sell the premises within six months, but the terms and conditions of the sale
cannot be materially more favorable to the buyer than those offered to the
tenant.
MASTER HOTEL LEASE AGREEMENT
We have caused the tenant under the ground lease to further lease the
Philadelphia/Great Valley hotel to Apple Suites Management, Inc. pursuant to a
master
S-8
<PAGE>
hotel lease agreement dated as of May 8, 2000. This agreement is substantially
similar to the master hotel lease agreements, dated as of September 20, 1999,
that apply to our other hotels.
The agreement provides for an initial term of 10 years. Apple Suites
Management, Inc. has the option to extend the lease term for two additional
five-year periods, provided it is not in default at the end of the prior term
or at the time the option is exercised. The master hotel lease agreement
provides that Apple Suites Management, Inc. will pay an annual base rent, a
quarterly percentage rent and a quarterly sundry rent. Each type of rent is
explained below.
Annual base rent is payable in advance in equal monthly installments.
Beginning in 2001, the base rent will be adjusted each year in proportion to
the Consumer Price Index (based on the U.S. City Average). The annual base rent
for the Philadelphia/Great Valley hotel is currently $942,375.
Percentage rent is payable quarterly. Percentage rent depends on a formula
that compares fixed "suite revenue breakpoints" with a portion of "suite
revenue," which is equal to gross revenue from suite rentals less sales and
room taxes, credit card fees and sundry rent (as described below). Beginning in
2001, the suite revenue breakpoints will be adjusted each year in proportion to
the Consumer Price Index (based on the U.S. City Average). The suite revenue
breakpoints for the second, third and fourth quarters of 2000 are $196,669,
$529,219 and $861,769, respectively. Suite revenue breakpoints (before
adjustment) have been determined for the first quarter of the remaining years
during the initial term of the master hotel lease agreement. The suite revenue
breakpoints for subsequent quarters are determined by multiplying the first
quarter values by two, three or four, respectively. The following table shows
the other suite revenue breakpoints for the first quarter for 2001 through
2009, before any adjustment due to the Consumer Price Index:
SUITE REVENUE BREAKPOINTS FOR THE FIRST QUARTER
<TABLE>
<CAPTION>
2001 2002 2003 2004 2005 2006 2007 2008 2009
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$300,219 $309,456 $323,313 $332,550 $341,700 $351,025 $360,263 $369,500 $378,738
</TABLE>
Specifically, the percentage rent is equal to the sum of (a) 17% of all
year-to-date suite revenue, up to the applicable suite revenue breakpoint; plus
(b) 55% of the year-to-date suite revenue in excess of the applicable suite
revenue breakpoint, as reduced by base rent and the percentage rent paid year
to date.
The sundry rent is payable quarterly and equals 55% of all sundry revenue,
which consists of revenue other than suite revenue, less the amount of sundry
rent paid year-to-date.
OTHER AGREEMENTS
The Philadelphia/Great Valley hotel is subject to a license agreement and
a management agreement with Promus Hotels, Inc. We have entered into an
environmental indemnity agreement with Promus Hotels, Inc., as well as a
comfort letter agreement regarding the lease with Apple Suites Management, Inc.
and certain other issues. These agreements are substantially similar to
agreements that exist with respect to our other hotels.
S-9
<PAGE>
DESCRIPTION OF PROPERTY
OVERVIEW
Each of our hotels is an extended-stay hotel, and is licensed to operate
under a franchise with Homewood Suites(Reg. TM) by Hilton. We believe that the
majority of the guests at our hotels during the past 12 months have been
business travelers. We expect this pattern to continue.
Each suite consists of a bedroom and a living room, with an adjacent
kitchen area. The basic suite is known as a "Homewood Suite," which generally
has one double or king-size bed. Larger suites, known as "Master Suites" or
"Extended Double Suites" are also available. These suites have larger rooms,
with either one king-size bed or two smaller beds. The largest suites contain
two separate bedrooms. Wheelchair-accessible suites are available at each
hotel.
The suites have many features and amenities in common. Most suites have
ceiling fans and two color televisions (one in the bedroom and one in the
living room). Some suites have fireplaces. Typical living room furniture
includes a sofa (often a fold-out sleeper sofa), coffee table and work/dining
table with chairs. Some living rooms contain a recliner and a videocassette
player. The kitchens vary, but generally have a microwave, refrigerator,
dishwasher, coffee maker and stove, together with basic cookware and utensils.
The hotel are marketed, in part, through the web site for Homewood
Suites(Reg. TM) by Hilton (http://www.homewood-suites.com), which is generally
available 24 hours a day, seven days a week, around the world. Reservations may
be made directly through the web site. The reservation system and the web site
are linked to, and cross-marketed with, the reservation systems and web sites
for other hotel franchises that are owned and operated by Hilton Hotels
Corporation. Such cross-marketing may affect occupancy at our hotels by
directing travelers toward, or away from, Homewood Suites(Reg. TM) by Hilton.
Our hotels were actively conducting business at the time of purchase. We
believe that the purchases were conducted without materially disrupting any
daily hotel operations. During the past 12 months, the hotels have been covered
with property and liability insurance, and we have arranged to continue such
coverage. We believe our hotels are adequately covered by insurance.
PHILADELPHIA/GREAT VALLEY
The Philadelphia/Great Valley hotel has a franchise with Homewood
Suites(Reg. TM) by Hilton and is located on a 4.1 acre site at 12 East
Swedesford Road, Malvern, Pennsylvania 19355. The hotel is approximately 22
miles from downtown Philadelphia and 25 miles from the Philadelphia
International Airport.
S-10
<PAGE>
The hotel opened in January 1998. It was constructed with a masonry frame
and has a sand stucco exterior finish. The hotel consists of a single
four-story building. The hotel contains 123 suites, which have a combined
rentable area of 63,600 square feet. The following types of suites are
available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET/PER SUITE
------------------------------------- ------------------ ----------------------
<S> <C> <C>
Master Suite ...................... 95 500
Homewood Suite .................... 21 500
Two-Bedroom Suite ................. 7 800
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 136 spaces. The hotel provides complimentary shuttle service
within a 5-mile radius.
We believe that the hotel has been well maintained and is generally in
very good condition. Over the next 12 months, we plan to spend approximately
$100,000 on renovations or improvements. We expect that the principal
renovations and improvements will include the addition of exterior lighting and
the replacement or repair of sofas, interior doors and kitchen flooring. We
expect to pay for the costs of these renovations and improvements with proceeds
from our ongoing offering of common shares.
During 2000 (through April 30), the average stay at the hotel has been
approximately five nights, and approximately 59% of the guests have stayed for
five nights or more. In general, occupancy at the hotel is not significantly
affected by seasonal variations. The following table shows average daily
occupancy rates, expressed as a percentage, since the opening of the hotel:
AVERAGE DAILY OCCUPANCY RATE
<TABLE>
<CAPTION>
2000
1998 1999 (THROUGH APRIL 30)
------------ ---------- -------------------
<S> <C> <C>
66.7% 76.4% 74.4%
</TABLE>
During 2000 (through April 30), the average daily rate per suite has been
$122.01, and the average daily net revenue per suite has been $90.79. As
explained above, revenues from the hotel, including lease revenue that is paid
to us under the master hotel lease agreement, will be used to pay interest due
under the promissory note dated as of May 8, 2000. Our goal is to use the
proceeds of our offering of common shares to make principal payments. There can
be no assurance, however, the proceeds of the offering will be sufficient for
this purpose. Assuming that no principal payments are made until the maturity
of the promissory note, and that the hotel continues to have the level of net
revenue specified above, approximately 24.2% of the hotel's revenue would be
needed to cover its portion of the interest payments.
S-11
<PAGE>
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
----------------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 ................... $145 $145 $194
5 to 11 .................. 129 129 185
12 to 29 .................. 124 124 179
30 or more ................ 99 99 159
</TABLE>
The hotel offers a weekend discount. This discount varies by type of suite
and generally reduces the basic rate by 38%. The weekend discount is not
available to guests who stay for five nights or more. The hotel also offers
discounts to guests who stay under certain corporate accounts. These discounts
are often negotiated with the corporate customer and vary from account to
account. We estimate that approximately 43% of the hotel's guests during 2000
(through April 30) received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include: SAP, Astra Zeneca, Vanguard, Shared Medical Systems, Centocor, Unisys,
Wyeth, Supplyforce.com, Decision One, and SCT (Systems/Computer Training).
During 2000 (through April 30), the 10 largest corporate accounts were
responsible for approximately 43% of the hotel's occupancy. There can be no
assurance, however, that the hotel will continue to receive significant
occupancy, or any occupancy, from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
2000
1998 1999 (ANNUALIZED)
------------- ----------- -------------
<S> <C> <C>
$ 52.85 $ 59.58 $ 63.72
</TABLE>
The depreciable real property component of the hotel, based upon our
long-term leasehold interest, has a currently estimated Federal tax basis of
$14,898,789 and will be depreciated using the straight-line method over a life
of 39 years (or less, as permitted by the Internal Revenue Code). The basis of
the personal property component of the hotel will be depreciated in accordance
with the modified accelerated cost recovery system of the Internal Revenue
Code.
The following table summarizes the hotel's real estate tax information for
2000:
<TABLE>
<CAPTION>
TAX ASSESSED TAX RATE AMOUNT
JURISDICTION VALUE (PER $1000) OF TAX
------------------------------------------ -------------- ------------- -----------
<S> <C> <C> <C>
School District ................. $14,248,760 11.670 $166,283
County of Chester ............... 14,248,760 3.014 42,946
East Whiteland Township ......... 14,248,760 0.445 6,341
--------
TOTAL $215,570
========
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $1,600 or less.
At least seven competing hotels are located within eight miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks
S-12
<PAGE>
or trade names.) Of these competing hotels, two are newer than the hotel. The
newer competing hotels have franchises with Choice Hotels and Hampton Inn. The
other competing hotels have franchises with Marriott (in two cases), Sheraton,
Summerfield Suites and Wyndham. We believe that the rates charged by our hotel
are generally competitive with the rates charged by these other hotels. We are
aware of ongoing or proposed construction for two other extended-stay hotels
within approximately six miles of the hotel. We expect these new hotels to be
franchised with Residence Inn and Springhill Suites.
S-13
<PAGE>
APPLE SUITES, INC.
INDEX TO FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................................................... F-2
APPLE SUITES, INC.
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 .................... F-5
Consolidated Statement of Operations for the three months ended March 31, 2000 ............ F-6
Consolidated Statement of Shareholders' Equity for the three months ended March 31, 2000... F-6
Consolidated Statement of Cash Flows for the three months ended March 31, 2000 ............ F-7
Notes to Consolidated Financial Statements ................................................ F-8
APPLE SUITES MANAGEMENT, INC.
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 .................... F-13
Consolidated Statement of Operations for the three months ended March 31, 2000 ............ F-14
Consolidated Statement of Cash Flows for the three months ended March 31, 2000 ............ F-14
Notes to Consolidated Financial Statements ................................................ F-15
</TABLE>
F-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(By Apple Suites, Inc. for the Dates or Periods, as Applicable,
Addressed by the Following Financial Statements)
GENERAL
During 1999, we acquired 11 hotels with 1,218 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(Reg. TM) 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.
RESULTS OF OPERATIONS APPLE SUITES, INC.
Revenues: Because we commenced operations effective September 1, 1999, a
comparison to the first quarter of 1999 is not possible. During the three
months ended March 31, 2000, we had revenues of $3,454,685. All of our lease
revenue is derived from the master hotel lease agreements.
Our other income consists of $32,732 of interest income earned from the
investments of cash and cash reserves and $15,275 of interest on the promissory
notes payable by the Lessee to us for our funding of franchise fees and hotel
supplies.
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
months ended March 31, 2000 were $946,311 or 27% of total revenue. The interest
expense was $1,453,110 for the three months ended March 31, 2000 and
represented interest on short-term notes payable to Promus Hotels, Inc. at an
interest rate of 8.5%.
The depreciation expense was $549,201 for the three months ended March 31,
2000. Taxes, insurance, and other was $691,575 for the three months ended March
31, 2000 or 20% of total revenue. The general and administrative expense
totaled 7% of total revenues. These expenses represent our administrative
expenses. We expect these percentages to decrease as our asset base grows.
F-2
<PAGE>
APPLE SUITES MANAGEMENT, INC.
Revenues: As operations commenced effective September 1, 1999, a
comparison to the first quarter of 1999 is not possible. Total revenues were
$8,103,171. Total revenues consist primarily of suite revenue, which was
$7,682,355 for the three months ended March 31, 2000
For the three months ended March 31, 2000 the average occupancy rate was
78%, the average daily rate was $89, and the revenue per available room was
$69.
Expenses: Total expenses for the three months ended March 31, 2000 were
$8,060,470. Rent expense represents $3,406,678 or 42% 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 also has agreed to pay Promus Hotels, Inc.
a fee of 4% of suite revenue to cover fees for the Homewood Suites(Reg. TM) by
Hilton franchise and to participate in its reservation system. Total expenses
for these services were $937,354 during the period.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2000, we sold 493,509 of our common shares, at
$10 per share, to investors. The total gross sale proceeds were $4,935,083,
which netted $4,393,756 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 March 31, 2000, no
contributions had been made by the Payor to the Lessee under the funding
commitments.
Notes payable: In conjunction our purchase of the 11 hotels, we made
promissory notes payable to the order of Promus Hotels, Inc. in the aggregate
amount of $68,569,500. 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. The holder of the notes has
agreed to defer principal payments until the earlier of June 30, 2000 or such
time as we purchase two additional hotels. At March 31, 2000, we had not made
any principal payments under these promissory notes.
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
F-3
<PAGE>
million due on November 1, 2000, and $4.4 million due on January 1, 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 holding discussions with several lenders to obtain financing for
the hotels and are exploring both unsecured and secured financing arrangements.
Although no firm financing commitments have been received, we believe,
based on discussions with lenders and other market indicators, that we can
obtain sufficient financing prior to the maturity of the notes. Obtaining
refinancing is dependent upon a number of factors, including: (1) continued
operation of the hotels at or near current occupancy and room rate levels, as
the master hotel lease agreements are based in part on a percentage of hotel
suite income; (2) the general level of interest rates, including credit spreads
for real estate based lending; and (3) general economic conditions. In general,
for each of the notes payable, all of our 11 hotels serve as collateral.
Cash and cash equivalents: Cash and cash equivalents totaled $3,781,922 at
March 31, 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 $280,532 in 2000. At March 31, 2000, a total of
$696,869 was held for funding of these improvements.
We expect to acquire additional hotels during 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 the our current
hotels.
Capital resources are expected to grow with the future sale of our common
shares. Approximately 46% of the 2000 common share dividend distribution, or
$329,215, 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 the 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.
F-4
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- ------------------
<S> <C> <C>
ASSETS
Investment in hotel-net of accumulated depreciation of $1,045,410 and
$496,209, respectively.................................................. $ 93,450,963 $93,719,632
Cash and cash equivalents ............................................... 3,781,922 581,344
Restricted cash ......................................................... 696,869 1,023,721
Rent receivable from Apple Suites Management, Inc. ...................... 2,641,141 2,123,136
Notes and other receivables from Apple Suites Management, Inc. .......... 694,766 717,019
Capital improvement reserve ............................................. 753,927 753,927
Prepaid expenses ........................................................ 263,781 270,229
Other assets ............................................................ 531,470 300,000
------------ -----------
Total Assets ......................................................... $102,814,839 $99,489,008
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable -- secured ................................................ $ 68,569,500 $68,569,500
Interest payable ........................................................ -- 466,140
Accounts payable ........................................................ 161,258 65,214
Accrued expenses ........................................................ 554,977 868,668
Account payable -- affiliate ............................................ 531,285 708,751
Distributions payable ................................................... -- 712,735
------------ -----------
Total Liabilities .................................................... $ 69,817,020 $71,391,008
============ ===========
SHAREHOLDERS' EQUITY
Common stock, no par value, authorized 200,000,000 shares; issued and
outstanding 3,922,923 shares and 3,429,414, respectively ............... $ 32,985,016 $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 ................................... (11,197) (517,260)
------------ -----------
Total Shareholders' Equity ............................................. 32,997,819 28,098,000
------------ -----------
Total Liabilities and Shareholders' Equity ............................. $102,814,839 $99,489,008
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
APPLE SUITES INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------
<S> <C>
REVENUES:
Lease revenue ...................................... $ 3,406,678
Interest income and other revenue .................. 48,007
EXPENSES:
Taxes, insurance and other ......................... 691,575
General and administrative ......................... 254,736
Depreciation of real estate owned .................. 549,201
Interest ........................................... 1,453,110
-----------
Total expenses ................................... 2,948,622
-----------
Net income .......................................... $ 506,063
===========
Basic and diluted earnings per common share ......... $ 0.14
===========
</TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
CLASS B
CONVERTIBLE STOCK
COMMON STOCK ----------------------
------------------------- DISTRIBUTIONS TOTAL
NUMBER OF NUMBER OF GREATER THAN SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT NET INCOME EQUITY
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------
Balance at 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 ......................... 456,873 4,064,541 -- -- -- 4,064,541
Net income ............................. -- -- -- -- 506,063 506,063
Common stock issued through
reinvestment of distribution 36,636 329,215 -- -- -- 329,215
--------- ----------- ------- ------- ---------- -----------
Balance at March 31, 2000 .............. 3,922,923 $32,985,016 240,000 $24,000 $ (11,197) $32,997,819
========= =========== ======= ======= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000
-------------------
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ....................................................................... $ 506,063
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of real estate owned ................................................ 549,201
Changes in operating assets and liabilities:
Prepaid expenses ................................................................. 6,448
Rent and notes receivable from Apple Suites Management, Inc. ..................... (509,566)
Other assets ..................................................................... (31,395)
Accounts payable ................................................................. 96,044
Accounts payable -- affiliates ................................................... (177,466)
Accrued expenses ................................................................. (313,691)
Interest payable ................................................................. (466,140)
----------
Net cash used in operating activities .......................................... (340,502)
CASH FLOW FROM INVESTING ACTIVITIES:
Payments received on notes receivable ............................................ 13,739
Capital improvements ............................................................. (280,532)
Restricted cash for property improvement plan .................................... 326,852
Earnest deposit money for pending acquisitions ................................... (200,000)
----------
Net cash used in investing activities .......................................... (139,941)
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common shares ...................................... 4,394,265
Cash distributions paid to shareholders .......................................... (713,244)
----------
Net cash provided by financing activities ...................................... 3,681,021
Increase in cash and cash equivalents .......................................... 3,200,578
Cash and cash equivalents, beginning of period ................................... 581,344
----------
Cash and cash equivalents, end of period ......................................... $3,781,922
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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 months ended March 31, 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 month period
ended March 31, 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 during 1999.
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 March 31, 2000, the Lessee's rent payable
to the Company amounted to $2,641,141. 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.
The Company did not have any items of comprehensive income requiring
separate reporting and disclosure for the periods presented.
(2) INVESTMENT IN HOTELS
At March 31, 2000, the Company owned 11 hotels. Investment in hotels at
March 31, 2000 consist of the following:
<TABLE>
<S> <C>
Land ................................... $ 15,687,640
Building ............................... 77,336,538
Furniture and equipment ................ 1,472,195
------------
$ 94,496,373
Less accumulated depreciation .......... (1,045,410)
------------
$ 93,450,963
------------
</TABLE>
F-8
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(3) NOTES PAYABLE
In conjunction with the purchase of 11 hotels, notes were executed by the
Company made payable to the order of Hilton in the amount of $68,569,500. The
notes bear a fixed interest rate of 8.5% per annum and are cross-collateralized
by the 11 hotels owned by the Company. Interest payments are due monthly. Notes
amounting to $64,185,000 mature during the fourth quarter of 2000, and the
remaining $4,384,500 note matures in January 2001. Principal payments are to be
made to the extent of net equity proceeds from the offering of common shares.
Hilton has agreed to defer principal payments until the earlier of June 30,
2000 or such time as two additional hotels have been purchased by the Company.
The Company paid $1,453,110 in interest for the period ended March 31, 2000.
(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 $4,568,723 from the
sale of 456,873 shares at $10 per share during the three month period ended
March 31, 2000. The net proceeds of the offering, after deducting selling
commissions and other offering costs were $4,064,541 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 March 31, 2000, $366,360 (net $329,215) 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, 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 $3,406,678 for the three month period
ended March 31, 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
F-9
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(5) COMMITMENTS AND RELATED PARTIES -- (CONTINUED)
March 31, 2000, $753,927 was held by Promus for these capital improvement
reserves. In addition, in accordance with the franchise agreements, $696,869
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 $567,900 for franchise fees and $121,800 for
hotel supplies for the 11 hotels. The debt agreements are evidenced by
promissory notes bearing interest at a rate of 9% per annum. Principal and
interest payments are due monthly. The promissory notes have various maturity
dates through January 2010.
The Company has contracted with Apple Suites Realty Group, Inc. ("ASRG")
to acquire and dispose of real estate assets for the Company. In accordance
with the contract ASRG is to be paid a fee of 2% of the purchase price of any
acquisitions or sale price of any dispositions of real estate investments,
subject to certain conditions. At March 31, 2000, the Company owed ASRG
$490,238.
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 three months ended March 31, 2000, ASA earned
$22,533 under this agreement and $41,046 was payable at March 31, 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.
F-10
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(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
ENDED
3/31/00
-------------
<S> <C>
Numerator:
Net Income
Numerator for basic and diluted earnings ........................... $ 506,063
Denominator:
Denominator for basic earnings per share-weighted-average shares ... 3,607,458
Effect of dilutive securities:
Stock options ...................................................... 2,200
-----------
Denominator for diluted earnings per share-adjusted weighted-average
shares and assumed conversions ................................... 3,609,658
-----------
Basic and diluted earnings per common share ........................ $ 0.14
-----------
</TABLE>
(7) ACQUISITIONS
The following unaudited pro forma information for the three months ended
March 31, 1999 is presented as if the acquisition of the 11 hotels occurred on
January 1, 1999. The pro forma information does not purport to represent what
the Company's results of operations would actually have been if such
transactions, in fact, had occurred on January 1, 1999, nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
3/31/99
---------------
<S> <C>
Lease revenue .................................. $ 3,398,637
Net income ..................................... 748,633
Net income per share-basic and diluted ......... $ .22
</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 for the respective period in 1999 prior to acquisition by the Company. Net
income has been adjusted as follows: (1) depreciation has been adjusted based
on the Company's basis in the hotels; (2) advisory expenses have been adjusted
based on the Company's contractual arrangements; (3) interest expense has been
adjusted to reflect the acquisition as of the beginning of the periods; and (4)
common stock raised during 1999 to purchase these hotels has been adjusted to
reflect issuances as of January 1, 1999.
(8) SUBSEQUENT EVENTS
In April, 2000 the Company distributed to its shareholders approximately
$904,918 ($.25 per share) of which approximately $448,641 was reinvested in the
purchase of additional shares. On April 18, 2000, the Company closed the sale
to investors of 301,514 shares at $10 per share representing net proceeds to
the Company of $2,350,227.
F-11
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(8) SUBSEQUENT EVENTS -- (CONTINUED)
On May 8, 2000, the Company acquired a Homewood Suites(Reg. TM) hotel in
Malvern, Pennsylvania for $15,489,000. The hotel was purchased through a
combination of equity proceeds from the equity offering and a note in the
amount of $11,616,750 made payable to the order of Promus. The note has a fixed
interest rate of 8.5% per annum. Interest payments are due monthly and the
maturity date is May, 2001. This hotel will be leased by the Lessee and managed
by Promus in substantially the same manner as the other 11 Homewood Suites(Reg.
TM) hotels owned at March 31, 2000.
F-12
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ........................................ $2,329,310 $2,395,000
Accounts receivables, net ........................................ 1,514,431 738,361
Inventories ...................................................... 125,970 121,801
Other assets ..................................................... 2,188 8,142
---------- ----------
Total Current Assets ........................................... 3,971,899 3,263,304
NON-CURRENT ASSETS
Deferred franchise fees ........................................... 555,753 562,851
---------- ----------
Total Assets ................................................... $4,527,652 $3,826,155
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Account payable .................................................. $ 105,247 $ 48,586
Rent payable to Apple Suites, Inc. ............................... 2,641,141 2,123,136
Due to third party manager ....................................... 482,084 454,147
Due to Apple Suites, Inc. ........................................ 20,552 28,991
Accrued expenses ................................................. 704,153 624,346
Current portion of note payable to Apple Suites, Inc. ............ 58,350 56,939
---------- ----------
Total Current liabilities ...................................... 4,011,527 3,336,145
NON-CURRENT LIABILITIES
Note payable to Apple Suites, Inc. ................................ 615,864 631,014
---------- ----------
Total Liabilities .............................................. 4,627,391 3,967,159
SHAREHOLDERS' DEFICIT
Common Stock, no par value, 5,000 authorized; 10 shares issued and
outstanding .................................................... 100 100
Retained deficit ................................................. (99,839) (141,104)
---------- ----------
Total Shareholders' deficit .................................... (99,739) (141,004)
---------- ----------
Total Liabilities and Shareholders' Deficit .................... $4,527,652 $3,826,155
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 2000
---------------
<S> <C>
REVENUE
Suite revenue .............................. $7,682,355
Other revenue .............................. 420,816
----------
Total revenue ............................ 8,103,171
EXPENSES
Operating expense .......................... 2,295,392
General and administrative ................. 670,943
Advertising and promotion .................. 662,647
Utilities .................................. 283,263
Franchise fees ............................. 307,294
Management fees ............................ 322,766
Rent expense -- Apple Suites, Inc. ......... 3,406,678
Interest expense ........................... 15,275
Other ...................................... 96,212
----------
Total expenses ........................... 8,060,470
Income before income taxes ................. 42,701
Income tax expense ......................... --
----------
Net income ............................... $ 42,701
==========
</TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000
-------------------
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 42,701
Adjustments to reconcile net income to net cash used in operating activities
Amortization of deferred franchise fees ................................... 7,098
Changes in operating assets and liabilities:
Receivables ............................................................... (776,070)
Other assets .............................................................. 349
Due to Apple Suites, Inc. ................................................. (8,439)
Rent payable to Apple Suites, Inc. ........................................ 518,005
Accounts payable .......................................................... 56,661
Due to third party manager ................................................ 27,937
Accrued expenses .......................................................... 79,807
----------
Net cash used in operating activities ................................... (51,951)
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments of notes payable ............................................... (13,739)
----------
Net cash used in financing activities ................................... (13,739)
Decrease in cash and cash equivalents ................................... (65,690)
Cash and cash equivalents, beginning of period ............................ 2,395,000
----------
Cash and cash equivalents, end of period .................................. $2,329,310
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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(Reg. TM) by Hilton.
The Lessee commenced operations in September 1999, therefore, consolidated
statements of operations and cash flows for the three month period ended March
31, 1999 are not presented.
(2) PERCENTAGE LEASES
The Percentage Leases expire in 2009, 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(Reg. TM) by Hilton properties. These agreements have
terms of 20 years and expire in 2019. These agreements require the Lessee to,
among other things, pay monthly franchise fees equal to 4% of suite revenue.
License and franchise agreements contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the hotels
which are established by Promus to maintain uniformity in the system for
Homewood Suites(Reg. TM) 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
F-15
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(2) PERCENTAGE LEASES -- (CONTINUED)
system for Homewood Suites(Reg. TM) by Hilton. The Lessee pays Promus 4% of
monthly suite 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 three months ended March 31, 2000 totaled $937,354.
(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 March 31,
2000, no contributions have been made by the Payor to the Lessee.
(4) SUBSEQUENT EVENTS
Effective May 8, 2000, the Company acquired a hotel property in Malvern,
Pennsylvania. This hotel will be leased by the Lessee and managed by Promus in
substantially the same manner as the other 11 Homewood Suites(Reg. TM) hotels.
F-16