FILED PURSUANT TO RULE 424(B)(3)
FILE NUMBER: 333-77055
SUPPLEMENT NO. 9 DATED DECEMBER
19, 2000 TO BE USED WITH
PROSPECTUS DATED AUGUST 3, 1999
AND SUPPLEMENT NO.5,6,7,8 DATED
MARCH 21, MAY 31, JUNE 20 AND
SEPTMEBER 20, 2000,RESPECTIVELY.
SUPPLEMENT NO. 9 DATED DECEMBER 19, 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. 9
relates to matters that have changed or occurred since September 20, 2000. Other
important matters were discussed in Supplement No. 5 (which incorporated and
replaced all prior Supplements), Supplement No. 6, Supplement No. 7 and
Supplement No. 8.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE PROSPECTUS, SUPPLEMENT
NO. 5, SUPPLEMENT NO. 6, SUPPLEMENT NO. 7, SUPPLEMENT NO. 8 AND THIS SUPPLEMENT
NO. 9.
TABLE OF CONTENTS FOR SUPPLEMENT NO. 9
Status of the Offering ........................................... S-2
Recent Developments .............................................. S-2
Selected Financial Information ................................... S-4
Index to Financial Statements, Related Management's Discussion and
Analysis and Pro Forma Financial Statements ..................... F-1
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, 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 December 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 6,999,670.00 69,996,700 62,997,030
------------ ----------- -----------
TOTALS 8,666,336.67 $84,996,700 $76,497,030
============ =========== ===========
</TABLE>
We have used the net proceeds of our offering to acquire, by deed or lease,
a total of 13 extended-stay hotels, which collectively have 1,453 suites. We
hold these hotels directly or through our 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 described in Supplement No. 5 to the prospectus, under the heading
"Summary of Material Contracts - Master Hotel Lease Agreements," we lease our
hotels to Apple Suites Management, Inc. or a subsidiary of Apple Suites
Management, Inc. This is because under current income tax law, we are prohibited
from operating our hotels directly and can only operate them through the use of
an independent lessee. All of the stock of Apple Suites Management, Inc. is
owned by Glade M. Knight, our President and Chief Executive Officer.
As described in the section referred to in the previous paragraph as well
as in Supplement No. 5 under "Property Acquisitions - Potential Economic Risk
and Benefit Involving Apple Suites Management," the master hotel lease
agreements were structured to minimize, to the extent possible, the economic
benefit to Apple Suites Management, Inc. from operation of the hotels and to
maximize the rental income we receive from the hotels. However, as indicated in
that discussion, the leases are designed to have true economic substance and
accordingly can result in a net economic risk or benefit to Apple Suites
Management, Inc.
As described in Supplement No. 5 under the heading "Management's Discussion
and Analysis - REIT Modernization Act," in December 1999, the REIT Modernization
Act ("RMA") was signed into law. The most important feature of this legislation
to us is the ability under certain conditions to operate our hotels through a
taxable REIT subsidiary without using a third party lessee. This provision of
the RMA is effective after December 31, 2000. Our master hotel lease agreements
provide for termination of the lease agreements based on changes in the tax law
such as the RMA, subject to the payment by us to the lessees of the fair market
value of the leases as of the termination.
S-2
<PAGE>
In light of the RMA, our Board of Directors, in consultation with certain
third-party financial advisors, undertook an analysis of the potential
advantages to us of terminating the leases with the third-party lessees and
taking advantage of the provisions of RMA by operating the hotels directly
through one or more taxable REIT subsidiaries. Based on this evaluation, the
Board of Directors unanimously approved the termination of the leases with the
third-party lessees.
Based upon its evaluation and consultations with its financial advisors,
the Board of Directors (including all independent directors) concluded that the
fair market value to be paid to Apple Suites Management, Inc. for such
termination was $900,000. Accordingly, we will pay to Glade M. Knight, in
exchange for all of the issued and outstanding stock of Apple Suites Management,
Inc. the sum of $900,000 and Apple Suites Management, Inc. will thereby become a
wholly-owned subsidiary of ours. Thus, the hotels will be operated pursuant to
leases between us (or our subsidiaries), as lessor, and Apple Suites Management,
Inc., as lessee (with respect to all properties except those in Texas) or Apple
Suites Services Limited Partnership, as lessee (with respect to those properties
in Texas). We will directly own Apple Suites Management, Inc. and indirectly own
Apple Suites Services Limited Partnership, each of which will be a taxable REIT
subsidiary of ours.
Our Board of Directors determined that this purchase was in our best
interest because it provides the following advantages to us:
o It increases our control and influence over the hotels and the hotels'
manager since we will own and control the lessees directly, whereas
previously the lessee was owned and controlled by Mr. Knight.
o Previously, if total revenue from hotel operations exceeded required
rental payments under the lease agreements, the net revenue was the
property of Apple Suites Management, Inc. or its subsidiary (and thus
effectively belonged to Mr. Knight, as that company's sole
shareholder); under the revised structure the lessee will be
wholly-owned by us and no such net revenue will inure to any party
other than us.
o The purchase simplifies our overall organizational structure,
eliminates a conflict of interest between us and the lessee and
potentially reduces certain administrative costs relative to the
operation of the hotels and the administration of the leases.
The purchase of the stock of Apple Suites Management, Inc. by us is
expected to be effective as of January 1, 2001.
S-3
<PAGE>
SELECTED FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (EXCEPT AS NOTED)
<TABLE>
<S> <C>
INCOME STATEMENT DATA
REVENUES:
Lease revenue ...................................................... $ 11,829,752
Interest income and other revenue .................................. 222,504
------------
Total revenue ...................................................... 12,052,256
EXPENSES:
Taxes, insurance, and other ........................................ 1,610,940
General and administrative ......................................... 843,363
Depreciation ....................................................... 2,019,742
Interest ........................................................... 5,023,329
------------
Total expenses ..................................................... 9,497,374
Net income ......................................................... $ 2,554,882
============
Earnings per share - basic and diluted ............................. $ 0.58
Distributions to common shareholders ............................... $ 1,991,558
Weighted-average common shares outstanding ......................... 4,419,681
BALANCE SHEET DATA AT SEPTEMBER 30, 2000:
Cash and cash equivalents .......................................... $ 2,314,096
Investment in hotels, net .......................................... $124,911,597
Total assets ....................................................... $133,707,837
Notes payable - secured ............................................ $ 72,780,500
Shareholders equity ................................................ $ 55,809,920
OTHER DATA
CASH FLOW FROM:
Operating activities ............................................... $ 3,078,573
Investing activities ............................................... ($ 9,401,304)
Financing activities ............................................... $ 8,055,483
Number of hotels owned at September 30, 2000 ....................... 13
Number of hotel rooms (suites) owned at September 30, 2000 ......... 1,453
FUNDS FROM OPERATIONS CALCULATION
Net income ......................................................... $ 2,554,882
Depreciation of real estate owned .................................. 2,019,742
------------
Funds from operations (a) .......................................... $ 4,574,624
============
<FN>
----------
(a) Funds from operations is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. We consider funds
from operations in evaluating property acquisitions and operating
performance, and believe that funds from operations should be considered
along with, but not as an alternative to, net income and cash flows as a
measure of our operating performance and liquidity. Funds from operations,
which may not be comparable to other similarly titled measures of other
REITs, does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs.
</FN>
</TABLE>
S-4
<PAGE>
APPLE SUITES, INC.
INDEX TO FINANCIAL STATEMENTS,
RELATED MANAGEMENT'S DISCUSSION AND ANALYSIS
AND
PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ...................................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Apple Suites, Inc.
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 ..... F-6
Consolidated Statements of Operations for the three months ended
September 30, 2000 and September 30, 1999, for the nine months ended
September 30, 2000 and for the period March 26, 1999 through
September 30, 1999 ............................................................ F-7
Consolidated Statement of Shareholders' Equity for the nine months
ended September 30, 2000 ...................................................... F-7
Consolidated Statement of Cash Flows for the nine months ended
September 30, 2000 and for the period March 26, 1999 through
September 30, 1999 ............................................................ F-8
Notes to Consolidated Financial Statements ..................................... F-10
Apple Suites Management, Inc.
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 ..... F-15
Consolidated Statements of Operations and Retained Deficit for the three
months ended September 30, 2000, for the period September 1, 1999 through
September 30, 1999, for the nine months ended September 30, 2000, and for
the period September 1, 1999 through September 30, 1999 ....................... F-16
Consolidated Statement of Cash Flows for the nine months ended
September 30, 2000 and for the period September 1, 1999 through
September 30, 1999 ............................................................ F-17
Notes to Consolidated Financial Statements ..................................... F-18
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Apple Suites, Inc.
Pro Forma Condensed Consolidated Statements of Operations for the year ended
December 31, 1999 and the nine months ended September 30, 2000 ................. F-20
Notes to Pro Forma Condensed Consolidated Statements of Operations ............... F-23
Apple Suites Management, Inc.
Pro Forma Condensed Consolidated Statements of Operations for the year
ended December 31, 1999 and the nine months ended September 30, 2000 .......... F-24
Notes for Pro Forma Condensed Consolidated Statements of Operations ............ F-27
</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 Accompanying Financial Statements)
GENERAL
We acquired 13 hotels with 1,453 suites (two hotels with 235 suites in
2000) from Promus Hotels, Inc. (or its affiliates), which is now a wholly-owned
subsidiary of Hilton Hotels Corporation. All of our hotels are leased to Apple
Suites Management, Inc., or its subsidiary (the "Lessee") pursuant to two
master hotel lease agreements. Each master hotel lease agreement obligates the
Lessee to pay rent equal to the sum of an annual base rent, a quarterly
percentage rent and a quarterly sundry rent. The Lessee's ability to make these
rent payments to us is dependent primarily upon the operations of the hotels.
See Note 5 to our consolidated financial statements for further lease
information.
The hotels are licensed to operate under the Homewood Suites(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 same period of 1999 is not meaningful. During the three and
nine months ended September 30, 2000, we had lease revenues of $4,587,021 and
$11,829,752, respectively. During September 1999, we had lease revenues of
$417,306. All of our lease revenue is derived from the master hotel lease
agreements.
Our other income for the three and nine months ended September 30, 2000
consists of $35,701 and $136,862, respectively, of interest income earned from
the investments of our cash and cash reserves. During September 30, 2000, we
earned interest of $40,114 and $85,642, respectively, on the promissory notes
payable by the Lessee for our funding of franchise fees, hotel supplies and
working capital. During September 1999, we earned interest income of $64,370.
The promissory notes were not in place as of September 30, 1999.
Expenses: Our expenses consist of property taxes, insurance, general and
administrative expenses, interest on notes payable and depreciation on the
hotels. Total expenses, exclusive of interest and depreciation, for the three
and nine months ended September 30, 2000 were $539,626 and $2,454,303,
respectively, or 12% and 20%, respectively, of total revenue. During September
1999, these expenses were $115,757 or 24% of total revenue.
F-2
<PAGE>
The interest expense was $1,963,591 and $5,023,329, respectively, for the
three and nine months ended September 30, 2000 or 42% of total revenues for
both periods. Interest expense represented interest on short-term notes payable
to Promus Hotels, Inc. at a rate of 8.5%, interest on the short-term loan with
First Union at a rate of 8.6% and interest on the secured notes with First
Union at a rate of 9%. We amortized as interest expense deferred financing
costs of $90,983 in the three and nine months ended September 30, 2000.
Interest expense during September 1999 was $229,701 or 48% of total revenue and
represented interest on short-term notes payable from Promus Hotels, Inc.
The depreciation expense was $800,496 and $2,019,742, respectively, for
the three and nine months ended September 30, 2000. During September 1999,
depreciation expense was $97,510.
Taxes, insurance, and other was $408,385 and $1,610,940 respectively, for
the three and nine months ended September 30, 2000 or 9% and 13%, respectively,
of total revenue. During September 1999, these expenses were $79,729 or 17% of
total revenue.
The general and administrative expense totaled 3% and 7%, respectively,
for the three and nine months ended September 30, 2000 of total revenues.
During September 1999, these expenses were 7% of total revenues. These expenses
represent our administrative expenses. We expect these percentages to decrease
as our asset base grows.
APPLE SUITES MANAGEMENT, INC.
Revenues: As operations commenced effective September 1, 1999, a
comparison to 1999 is not meaningful. Total revenues for the three and nine
months ended September 30, 2000 were $10,652,538 and $27,706,275, respectively.
Total revenues consist primarily of suite revenue, which was $10,112,731 and
$26,274,917 for the three and nine months ended September 30, 2000,
respectively. During September 1999, total revenue was $1,021,152, which
consists primarily of suite revenue of $961,604.
For the three and nine months ended September 30, 2000 the average
occupancy rate was 78% and 78%, respectively, average daily rate was $96 and
$93, respectively, and revenue per available room was $75 and $73,
respectively. During September 1999, the average occupancy rate was 80%, the
average daily rate was $84, and revenue per available room was $67.
Expenses: Total expenses for the three and nine months ended September 30,
2000 were $10,739,803 and $27,809,969. Rent expense represents $4,587,021 and
$11,829,752 for the three and nine months ended September 30, 2000,
respectively or 43% of total revenue. During September 1999, total expenses
were $976,076 or 96% of total revenues and rent expense represented $417,306 or
41% of total revenues.
The Lessee has agreed to pay Promus Hotels, Inc. a fee of 4% of total
revenue for management of the hotels. The Lessee has also agreed to pay Promus
Hotels, Inc. 4% of suite revenue to cover fees for the Homewood Suites(Reg. TM)
by Hilton franchise and 4% of suite revenue to participate in its reservation
system and benefit from its national brand marketing. Total expenses for these
services were $1,186,965 and $3,157,281 for the three and nine months ended
September 30, 2000, respectively. During September 1999, these expenses were
$117,697.
F-3
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During 2000, we sold 3,061,471 of our common shares, at $10 per share, to
investors (inclusive of reinvestment of distributions). The total gross sale
proceeds were $30,614,698, which netted $27,148,596 to us after the payment of
selling commissions and other offering costs.
The Lessee's obligations under the master hotel lease agreements are
unsecured. The Lessee has limited capital resources, and, accordingly its
ability to make rent payments is substantially dependent on the ability of the
Lessee to generate sufficient cash flow from operations of the hotels. We have
certain rights to cancel a master hotel lease agreement if the Lessee does not
perform under the applicable terms.
On May 8, 2000, the Company acquired a 123-room hotel located in Malvern,
Pennsylvania for $15,489,000. On June 30, 2000, the Company acquired a 112-room
hotel located in Boulder, Colorado for $14,885,000.
To support the Lessee's obligations, the Lessee has received two funding
commitments of $1 million each from Mr. Knight and ASRG, respectively (together
"Payor"). The funding commitments are contractual obligations of the Payor to
pay funds to the Lessee. Funds paid to the Lessee under the commitments are to
be used to satisfy any capitalization or net worth requirements applicable to
the Lessee or the Lessee's payment obligations under the master hotel lease
agreements, do not represent indebtedness, and are not subject to interest. The
funding commitments terminate upon the expiration of the master hotel lease
agreements, a written agreement between the Payor and the Lessee, or the
payment of all commitment amounts by the Payor to the Lessee. As of September
30, 2000, no contributions have been made by the Payor to the Lessee under the
funding commitments.
Notes payable: In conjunction with our purchase of the 13 hotels, we made
promissory notes payable to the order of Promus Hotels, Inc. in the aggregate
amount of $91,350,000. The notes provide for an effective interest rate of 8.5%
per annum. On September 8, 2000, we refinanced much of this short-term debt
with loans from First Union in the amount of $60,000,000. These loans were used
to repay the four promissory notes we executed in 1999 when acquiring 11 of the
hotels. Of the $60,000,000 total, $50,000,000 is repayable over 10 years. The
loan bears a fixed interest rate of 9% per annum and is secured by 11 of our
hotels. Repayment will be made in monthly principal and interest installments
over the next 10 years. The remaining $10,000,000 represented a short-term loan
of which $6,500,000 was repaid during the quarter and the remaining was paid on
October 25, 2000, with proceeds from our equity offering. This loan bore an
interest rate of 8.6% per annum.
Two notes (totaling $22,780,500) executed in conjunction with the Boulder
and Philadelphia acquisitions remain in place and mature on April 28, 2001. The
notes bear a fixed interest rate of 8.5% and are secured by the two hotels.
Interest payments are due monthly. Principal payments are to be made to the
extent of net equity proceeds from the offering of common shares.
The Company paid $5,175,944 in interest for the period ended September 30,
2000.
Cash and cash equivalents: Cash and cash equivalents totaled $2,314,096 at
September 30, 2000.
F-4
<PAGE>
Capital requirements: We have an ongoing capital commitment to fund our
capital improvements. We are required under the master lease agreement to make
an amount up to 5% of suite revenue available monthly to the Lessee for the
repair, replacement, or refurbishing of furniture, fixtures, and equipment on a
cumulative basis, provided that such amount may be used for capital
expenditures made by us with respect to the hotels. We expect that this amount
will be adequate to fund the required repair, replacement, and refurbishments
and to maintain our hotels in a competitive condition. At September 30, 2000,
$388,467 was held by Promus for these capital improvement reserves. In
addition, in accordance with the franchise agreements, $294,873 was held for
the property improvement plan with a financial institution and treated as
restricted cash. We capitalized improvements of $1,818,608 in 2000.
We plan to have monthly equity closings in 2000, until the offering is
fully funded, or until such time as we may opt to discontinue the offering. We
anticipate that the equity funds will be invested in additional hotels and will
be used to make principal payments on the notes incurred in conjunction with
our current hotels.
Capital resources are expected to grow with the future sale of our common
shares. Approximately 44% of the 2000 common share dividend distribution, or
$1,201,600 was reinvested in additional common shares. In general, our
liquidity and capital resources are believed to be more than adequate to meet
our cash requirements during 2000, given current and anticipated financing
arrangements.
Seasonality: The hotel industry historically has been seasonal in nature,
reflecting higher occupancy rates primarily during the first three quarters of
the year. Seasonal variations in occupancy at our hotels may cause quarterly
fluctuations in our lease revenues, particularly during the fourth quarter, to
the extent that we receive percentage rent. To the extent that cash flow from
operations is insufficient during any quarter, due to temporary or seasonal
fluctuations in lease revenue, we expect to utilize cash on hand or funds from
equity raised through our "best efforts" offering to make distributions.
Market Risk Disclosures: The Company is subject to changes in the fair
market value of its fixed-rate secured debt at September 30, 2000.
F-5
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Investment in hotels -net of accumulated depreciation
of $2,515,951 and $496,209, respectively................... $ 124,911,597 $ 93,719,632
Cash and cash equivalents .................................. 2,314,096 581,344
Restricted cash ............................................ 294,873 1,023,721
Rent receivable from Apple Suites Management, Inc. ......... 2,425,809 2,123,136
Notes and other receivables from Apple Suites
Management, Inc. .......................................... 1,805,011 717,019
Capital improvement reserve ................................ 388,467 753,927
Prepaid expenses ........................................... 255,147 270,229
Other assets ............................................... 1,312,837 300,000
------------- ------------
Total Assets .............................................. $ 133,707,837 $ 99,489,008
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable-secured ...................................... $ 72,780,500 $ 68,569,500
Notes payable-unsecured .................................... 3,500,000 --
Interest payable ........................................... 222,542 466,140
Accounts payable ........................................... 255,120 65,214
Accrued expenses ........................................... 1,038,664 868,668
Account payable-affiliate .................................. 101,091 708,751
Distributions payable ...................................... -- 712,735
------------- ------------
Total Liabilities ......................................... 77,897,917 71,391,008
============= ============
SHAREHOLDERS' EQUITY
Common stock, no par value, authorized 200,000,000
shares; issued and outstanding 6,490,885 shares and
3,429,414, respectively ................................... 55,739,856 28,591,260
Class B convertible stock, no par value, authorized
240,000 shares; issued and outstanding 240,000 shares 24,000 24,000
Distributions (greater) less than net income ............... 46,064 (517,260)
------------- ------------
Total Shareholders' Equity ................................ 55,809,920 28,098,000
------------- ------------
Total Liabilities and Shareholders' Equity ................ $ 133,707,837 $ 99,489,008
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
APPLE SUITES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
THREE MONTHS THREE MONTHS NINE MONTHS MARCH 26, 1999
ENDED ENDED ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Lease revenue ...................... $ 4,587,021 $ 417,306 $ 11,829,752 $ 417,306
Interest income and other
revenue ........................... 75,815 64,370 222,504 64,370
EXPENSES:
Taxes, insurance and other ......... 408,385 79,729 1,610,940 79,729
General and administrative ......... 131,241 36,028 843,363 36,028
Depreciation of real estate
owned ............................. 800,496 97,510 2,019,742 97,510
Interest ........................... 1,963,591 229,701 5,023,329 229,701
------------ ---------- ------------- ----------
Total expenses .................... 3,303,713 442,968 9,497,374 442,968
------------ ---------- ------------- ----------
Net income ........................... $ 1,359,123 $ 38,708 $ 2,554,882 $ 38,708
============ ========== ============= ==========
Basic and diluted earnings per
common share ....................... $ 0.25 $ 0.02 $ 0.58 $ 0.02
============ ========== ============= ==========
Dividends declared per common
share .............................. $ 0.26 $ -- $ 0.76 $ --
============ ========== ============= ==========
</TABLE>
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 ..................... 2,927,903 25,946,996 -- -- -- 25,946,996
Net income .................. -- -- -- -- 2,554,882 2,554,882
Cash distributions
declared and paid to
shareholders ($.76 per
share) ..................... -- -- -- -- (1,991,558) (1,991,558)
Common stock issued
through reinvestment
of distribution ............ 133,568 1,201,600 -- -- -- 1,201,600
--------- ------------ ------- -------- ------------ ------------
Balance at
September 30, 2000 ......... 6,490,885 $ 55,739,856 240,000 $ 24,000 $ 46,064 $ 55,809,920
========= ============ ======= ======== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
NINE MONTHS MARCH 26, 1999
ENDED THROUGH
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------------- -------------------
<S> <C> <C>
Cash flow from operating activities:
Net income ............................................. $ 2,554,882 $ 38,708
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation of real estate owned ...................... 2,019,742 97,510
Amortization of deferred financing costs ............... 90,983 --
Changes in operating assets and liabilities:
Prepaid expenses .................................... 15,082 (4,522)
Rent and notes receivable from Apple Suites
Management, Inc. .................................. (1,326,259) (455,592)
Other assets ........................................ 215,499 (48,577)
Accounts payable .................................... 189,906 8,303
Accounts payable-affiliates ......................... (607,660) --
Accrued expenses .................................... 169,996 85,076
Interest payable .................................... (243,598) 69,205
------------- ------------
Net cash provided by (used in) operating
activities ...................................... 3,078,573 (209,889)
Cash flow from investing activities:
Cash paid for acquisitions of hotels ................... (8,741,849) (9,254,301)
Additions to restricted cash for property
improvement plan ...................................... (724,300) --
Loan to Apple Suites Management, Inc. .................. -- (263,350)
Payments received on notes receivable .................. 64,845 --
------------- ------------
Net cash used in investing activities ............. (9,401,304) (9,517,651)
Cash flow from financing activities:
Repayment of secured notes payable ..................... (68,569,500) --
Repayment of unsecured notes payable ................... (6,500,000) --
Proceeds from secured notes payable .................... 60,000,000 --
Net proceeds from issuance of common shares ............ 27,148,596 20,629,226
Payment from officer-shareholder for Class B
shares ................................................ -- 24,000
Cash distributions paid to shareholders ................ (2,704,293) --
Cash payments for deferred financing costs ............. (1,319,320) --
------------- ------------
Net cash provided by financing activities ......... 8,055,483 20,653,226
Increase in cash and cash equivalents ............. 1,732,752 10,925,686
Cash and cash equivalents, beginning of period ........... 581,344 100
------------- ------------
Cash and cash equivalents, end of period ................. $ 2,314,096 $ 10,925,786
============= ============
</TABLE>
F-8
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
NINE MONTHS MARCH 26, 1999
ENDED THROUGH
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------------- -------------------
<S> <C> <C>
Supplemental cash flow information:
Interest paid ........................................... $ 5,175,944 $ 7,159
Non-cash transaction:
Notes payable-secured issued by seller in
connection with hotel acquisitions ............. $ 22,780,500 $ 26,625,000
Capital improvements made from restricted
cash and capital improvement reserve ........... $ (1,818,608) $ --
Reduction in capital improvement reserve ......... 365,460 --
Reduction in restricted cash for property
improvement plan ............................... 1,453,148 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Apple Suites, Inc., together with its subsidiaries, (the "Company") is a
Virginia corporation formed in March of 1999 and commenced operations as a
hotel real estate investment trust on September 1, 1999, the effective date of
its first four hotel acquisitions. The accompanying consolidated financial
statements include the accounts of the Company along with its subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
required by generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the period ended
December 31, 2000. These consolidated financial statements should be read in
conjunction with the Company's December 31, 1999 Annual Report on Form 10-K.
Certain previously reported amounts have been reclassified to conform with
the current financial statement presentation.
Apple Suites, Inc., (the "Company") leased to Apple Suites Management,
Inc. or its subsidiary (the "Lessee") all of its hotels acquired to date.
The Lessee hired Promus Hotels, Inc. ("Promus"), a wholly owned subsidiary
of Hilton Hotels Corporation ("Hilton") to manage the Company's hotels under
the terms of a management agreement between Promus and the Lessee.
Relationship with Lessee
The Company must rely on the Lessee to generate sufficient cash flow from
the operation of the hotels to enable the Lessee to meet its rent obligation to
the Company under the master hotel lease agreement ("Percentage Leases"). At
September 30, 2000, the Lessee's rent payable to the Company amounted to
$2,425,809. The terms under the Percentage Leases allow quarterly percentage
rent to be paid 45 days following the quarter-end. Amounts were paid by the
Lessee in November 2000.
The Company did not have any items of comprehensive income requiring
separate reporting and disclosure for the periods presented.
F-10
<PAGE>
(2) INVESTMENT IN HOTELS
At September 30, 2000, the Company owned 13 hotels. Investment in hotels
at September 30, 2000 consists of the following:
<TABLE>
<S> <C>
Land .................................. $ 20,437,614
Building .............................. 104,665,801
Furniture and equipment ............... 2,324,133
------------
$127,427,548
Less accumulated depreciation ......... (2,515,951)
------------
$124,911,597
------------
</TABLE>
On May 8, 2000, the Company acquired a 123-room hotel located in Malvern,
Pennsylvania for $15,489,000. On June 30, 2000, the Company acquired a 112-room
hotel located in Boulder, Colorado for $14,885,000.
(3) NOTES PAYABLE
In conjunction with the purchase of 13 hotels, notes were executed by the
Company made payable to the order of Hilton in the amount of $91,350,000
($22,780,500 in 2000 and $68,569,500 in 1999). On September 8, 2000, the
Company refinanced much of this short-term debt with loans from First Union in
the amount of $60,000,000. These loans were used to repay the four promissory
notes the Company executed in 1999 when acquiring 11 of the hotels. Of the
$60,000,000 total, $50,000,000 is repayable over 10 years. The loan bears a
fixed interest rate of 9% per annum and is secured by 11 of our hotels.
Repayment will be made in monthly principal and interest installments over the
next 10 years. In connection with the loan, the Company incurred $1.3 million
of financing costs which will be amortized over a 10 year period. The remaining
$10,000,000 represented a short-term loan which was repaid on October 25, 2000,
with proceeds from the Company's equity offering. The loan bore an interest
rate of 8.6% per annum.
The aggregate maturities of the secured notes payable for the five years
subsequent to September 30, 2000 are as follows:
<TABLE>
<S> <C>
2000 .............. $ 76,936
2001 .............. 500,565
2002 .............. 548,201
2003 .............. 600,370
2004 .............. 644,604
Therafter ......... 47,629,324
-----------
$50,000,000
</TABLE>
Two notes (totaling $22,780,500) executed in conjunction with the Boulder
and Philadelphia acquisitions remain in place and mature on April 28, 2001. The
notes bear a fixed interest rate of 8.5% and are secured by the two hotels.
Interest payments are due monthly. Principal payments are to be made to the
extent of net equity proceeds from the offering of common shares.
F-11
<PAGE>
The Company paid $5,175,944 in interest for the period ended September 30,
2000. During the quarter, the Company made a principal payment of $6,500,000 on
the $10,000,000 First Union loan.
(4) SHAREHOLDERS' EQUITY
The Company is raising equity capital through a "best-efforts" offering of
shares by David Lerner Associates, Inc. (the "Managing Dealer"), which will
receive selling commissions and a marketing expense allowance based on proceeds
of the shares sold. The Company received gross proceeds of $29,279,030 from the
sale of 2,927,903 shares at $10 per share during the nine month period ended
September 30, 2000. The net proceeds of the offering, after deducting selling
commissions and other offering costs were $25,946,996 for the period.
The Company provides a plan which allows shareholders to reinvest
distributions in the purchase of additional shares of the Company ("Additional
Share Option"). Of the total proceeds raised from common shares during the
period ended September 30, 2000, $1,335,677 (net $1,201,600) was provided
through the reinvestment of distributions.
(5) COMMITMENTS AND RELATED PARTIES
The Company receives rental income from the Lessee under the Percentage
Leases which expire in 2009 and 2010, subject to earlier termination by the
Company with 30 days notice. The Leases contain two optional five-year
extensions. The rent due under the Percentage Leases is the sum of base rent
and percentage rent. Percentage rent is calculated by multiplying fixed
percentages by the total amounts of suite revenues with reference to specified
threshold amounts. Both the base rent and the revenue thresholds used in
computing percentage rents are subject to annual adjustments based on increases
in the Consumer Price Index ("CPI"). The Company earned rents of $11,829,752
and $417,306 for the nine month period ended September 30, 2000 and 1999,
respectively.
Under the Percentage Leases, the Company is obligated to pay the costs of
real estate and personal property taxes, property insurance, maintenance of
underground utilities and structural elements of the hotels. The Company is
committed under certain agreements to fund 5% of suite revenues per month for
capital expenditures to include periodic replacement or refurbishment of
furniture, fixtures, and equipment. At September 30, 2000, $388,467 was held by
Promus for these capital improvement reserves. In addition, in accordance with
the franchise agreements, $294,873 was held for the property improvement plan
with a financial institution and treated as restricted cash.
The Lessee engages Promus as a third-party manager to operate the hotels
leased by it and pays the manager based on a percentage fee of 4% of adjusted
gross revenues. During the first two years of the management agreement, a
portion of the management fee equal to 1% of adjusted gross revenues is
subordinated to the Lessee's receipt of a return equal to 11% of the purchase
price of the hotel
F-12
<PAGE>
(including property improvements required by the franchise agreements). The
Lessee pays the manager a franchise fee and a marketing fee, equal to 4% of
gross suite revenues, respectively.
The Company loaned the Lessee $673,650 for franchise fees, $145,300 for
hotel supplies and $1,040,000 for working capital for the 13 hotels since
inception. The debt agreements are evidenced by promissory notes bearing
interest at a rate of 9% per annum. Principal and interest payments are due
monthly. The promissory notes have various maturity dates through July 2010.
The Company has contracted with Apple Suites Realty Group, Inc. ("ASRG")
to acquire and dispose of real estate assets for the Company. In accordance
with the contract ASRG is to be paid a fee of 2% of the purchase price of any
acquisitions or sale price of any dispositions of real estate investments,
subject to certain conditions. For the nine months ended September 30, 2000 and
1999, ASRG earned $607,480 and $710,000, respectively, under this agreement.
The Company has contracted with Apple Suites Advisors, Inc. ("ASA") to
advise and provide day-to-day management services to the Company. In accordance
with the contract, the Company will pay ASA a fee equal to .1% to .25% of total
equity contributions received by the Company in addition to certain
reimbursable expenses. For the nine months ended September 30, 2000 and 1999,
ASA earned $86,122 and $4,928, respectively.
The Lessee, ASRG and ASA are 100% owned by Glade M. Knight, Chairman and
President of the Company. ASRG and ASA may purchase in the "best efforts"
offering up to 2.5% of the total number of shares of the Company sold in the
offering.
Mr. Knight also serves as the Chairman and Chief Executive Officer of
Cornerstone Realty Income Trust, Inc., an apartment REIT. During 2000,
Cornerstone Realty Income Trust, Inc. provided the Company with services and
rental space and was paid approximately $246,000.
(6) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with FAS 128:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
9/30/00 9/30/00 9/30/99 9/30/99
-------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Numerator:
Net income
Numerator for basic and
Diluted earnings ........... $ 1,359,123 $ 2,554,882 $ 38,708 $ 38,708
Denominator:
Denominator for basic
Earnings per share-weighted-
Average shares ............. 5,426,002 4,419,681 2,286,052 2,286,052
Effect of dilutive securities:
Stock options ............... 2,200 2,200 -- --
----------- ----------- ---------- ---------
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
9/30/00 9/30/00 9/30/99 9/30/99
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Class B Convertible Shares* .........
Denominator for diluted
earnings per share-adjusted
weighted- average shares and
assumed conversions ................ 5,428,202 4,421,881 2,286,052 2,286,052
--------- --------- --------- ---------
Basic and diluted earnings per
Common share ....................... $ 0.25 $ 0.58 $ 0.02 $ 0.02
--------- --------- ----------- ---------
</TABLE>
*Class B Convertible Shares are not included in earnings per common share
calculation until such time it becomes probable that such shares can be
converted to common shares.
(7) ACQUISITIONS
The following unaudited pro forma information for the nine months ended
September 30, 2000 and 1999 is presented as if the acquisition of the 13 hotels
occurred on January 1, 1999. The pro forma information does not purport to
represent what the Company's results of operations would actually have been if
such transactions, in fact, had occurred on January 1, 1999, nor does it
purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
9/30/00 9/30/99
---------------- ----------------
<S> <C> <C>
Lease revenue ................ $13,478,526 $12,456,122
Net income ................... 3,322,365 2,427,727
Net income per share-basic and
diluted ..................... $ .66 $ .55
</TABLE>
The pro forma information applies the Company's Percentage Lease
Agreements to actual suite revenue and expenses of the 11 hotels acquired in
1999 and 2 hotels acquired in 2000 for the respective period in 1999 prior to
acquisition by the Company. Net income also has been adjusted as follows: (1)
depreciation has been adjusted based on the Company's basis in the hotels; (2)
advisory expenses have been adjusted based on the Company's contractual
arrangements; and (3) interest expense has been adjusted to reflect the
acquisition as of the beginning of the periods; and (4) common stock raised
during 1999 and 2000 to purchase these hotels has been adjusted to reflect
issuances as of January 1, 1999.
(8) SUBSEQUENT EVENTS
In October 2000 the Company declared and distributed to its shareholders
approximately $1,394,865 ($.25625 per share) of which approximately $626,258
was reinvested in the purchase of additional shares. On October 26, 2000, the
Company closed the sale to investors of 655,149 shares at $10 per share
representing net proceeds to the Company of $5,896,336.
In October 2000, the Company paid the remaining $3,500,000 balance on the
$10,000,000 short-term loan in addition to $2,000,000 on the Hilton notes with
net proceeds from the offering.
F-14
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Current assets
Cash and cash equivalents ............................. $ 2,983,707 $ 2,395,000
Accounts receivables, net ............................. 1,619,391 738,361
Inventories ........................................... 145,300 121,801
Other assets .......................................... 243,057 8,142
----------- -----------
Total Current Assets ................................ 4,991,455 3,263,304
Non-current assets
Deferred franchise fees ............................... 618,971 562,851
----------- -----------
Total Assets .......................................... $ 5,610,426 $ 3,826,155
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities
Accounts payable ...................................... $ 299,181 $ 48,586
Rent payable to Apple Suites, Inc. .................... 2,425,809 2,123,136
Due to third party manager ............................ 461,605 454,147
Due to Apple Suites, Inc. ............................. 13,069 28,991
Accrued expenses ...................................... 863,518 624,346
Current portion of note payable to Apple Suites, Inc. 141,181 56,939
----------- -----------
Total Current liabilities ........................... 4,204,363 3,336,145
Non-current liabilities
Note payable to Apple Suites, Inc. .................... 1,650,761 631,014
----------- -----------
Total Liabilities ..................................... 5,855,124 3,967,159
Shareholders' deficit
Common Stock, no par value, 5,000 authorized;
10 shares issued and outstanding .................... 100 100
Retained deficit ...................................... (244,798) (141,104)
----------- -----------
Total Shareholders' deficit ........................... (244,698) (141,004)
----------- -----------
Total Liabilities and Shareholders' Deficit ........... $ 5,610,426 $ 3,826,155
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED DEFICIT (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
THREE MONTHS SEPTEMBER 1, NINE MONTHS SEPTEMBER 1,
ENDED 1999 THROUGH ENDED 1999 THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUE
Suite revenue .............. $10,112,731 $ 961,604 $26,274,917 $ 961,604
Other revenue .............. 539,807 59,548 1,431,358 59,548
------------ ---------- ------------ ----------
Total revenue ............ 10,652,538 1,021,152 27,706,275 1,021,152
EXPENSES
Operating expense .......... 3,056,886 259,098 8,010,921 259,098
General and administrative . 791,866 85,676 2,201,464 85,676
Advertising and promotion . 944,689 93,237 2,380,732 93,237
Utilities .................. 495,993 26,101 1,097,414 26,101
Franchise fees ............. 402,161 38,464 1,047,226 38,464
Management fees ............ 383,954 40,769 1,063,326 40,769
Rent expense-Apple Suites,
Inc. ..................... 4,587,021 417,306 11,829,752 417,306
Interest expense ........... 40,055 922 85,642 922
Other ...................... 37,178 14,503 93,492 14,503
------------ ---------- ------------ ----------
Total expenses ........... 10,739,803 976,076 27,809,969 976,076
Income before income taxes (87,265) 45,076 (103,694) 45,076
Income taxes ............... -- 18,030 -- 18,030
------------ ---------- ------------ ----------
Net loss ................... $ (87,265) $ 27,046 $ (103,694) $ 27,046
============ ========== ============ ==========
Retained deficit, beginning
of period ................ $ (157,533) -- $ (141,104) --
------------ ---------- ------------ ----------
Retained earnings (deficit),
end of period ............ $ (244,798) $ 27,046 $ (244,798) $ 27,046
============ ========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 1, 1999
NINE MONTHS ENDED THROUGH
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------------- -------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income ........................... $ (103,694) $ 27,046
Adjustments to reconcile net income to
net cash provided by operating
activities
Amortization of deferred franchise
fees ..................................... 49,630 --
Changes in operating assets and
liabilities:
Receivables ................................ (881,030) (454,004)
Inventories ................................ -- (64,164)
Other assets ............................... (234,915) (216,521)
Due to Apple Suites, Inc. .................. (15,922) --
Rent payable to Apple Suites, Inc. ......... 1,342,181 417,306
Accounts payable ........................... 250,595 15,915
Due to third party manager ................. 7,458 --
Accrued expenses ........................... 239,248 851,417
----------- ----------
Net cash used in operating
activities ............................ 653,551 576,995
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock.......... -- 100
Proceeds from promissory notes ............. -- 263,350
Repayments of notes payable ................ (64,845) --
----------- ----------
Net cash provided (used in)
financing activities .................. (64,845) 263,450
Decrease in cash and cash
equivalents ........................... 588,706 840,445
Cash and cash equivalents, beginning of
period ...................................... 2,395,000 --
----------- ----------
Cash and cash equivalents, end of period ...... $ 2,983,706 $ 840,445
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
NON-CASH TRANSACTIONS:
Notes payable-issued by Apple Suites, Inc. $ 1,169,250 $ 689,700
Payment of working capital by Apple
Suites, Inc. ................................ 1,040,000 --
Payment of deferred franchise fees by
Apple Suites, Inc. .......................... 105,750 567,900
Acquisition of inventory by Apple Suites,
Inc. ........................................ 23,500 121,800
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Apple Suites Management, Inc. (the "Lessee") operates in one business
segment. Each hotel is leased by the Company to the Lessee under a master hotel
lease agreement ("Percentage Lease") having an initial term of ten years,
subject to earlier termination at the option of the Company upon 30 days
notice. The lease agreement provides for two optional five-year extensions. The
Percentage Leases require base rent payments to be made to the Company on a
monthly basis and additional quarterly payments to be made based upon
percentages of suite and sundry revenue. Promus Hotels, Inc. or an affiliate
("Promus") manages the hotels under a management agreement with the Lessee.
Promus Hotels, Inc. is a wholly-owned subsidiary of Hilton Hotel Corporation
("Hilton"). The hotels are located throughout the United States and are
licensed with Homewood Suites(Reg. TM) by Hilton.
Certain previously reported amounts have been reclassified to conform with
the current financial statement presentation.
(2) COMMITMENTS AND RELATED PARTIES
The Percentage Leases expire in 2009 and 2010, subject to earlier
termination by the Company upon 30 days notice. The Percentage Leases provide
for two optional five-year extensions. The rent due for each hotel is the sum
of a base rent and a percentage rent. Percentage rent is calculated on a
quarterly basis by multiplying fixed percentages by the total amounts of
year-to-date suite revenues with reference to specified threshold amounts known
as breakpoints. Both the base rent and the breakpoints used in computing
percentage rents are subject to annual adjustments based on increases in the
Consumer Price Index ("CPI").
The Lessee has entered into license agreements with Promus to operate the
hotels as Homewood Suites(Reg. TM) by Hilton properties. These agreements have
terms of 20 years and expire in 2019 and 2020. These agreements require the
Lessee to, among other things, pay monthly franchise fees equal to 4% of suite
revenue. License and franchise agreements contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the hotels
which are established by Promus to maintain uniformity in the system for
Homewood Suites(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 system for
F-18
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(2) COMMITMENTS AND RELATED PARTIES - (CONTINUED)
Homewood Suites(Reg. TM) by Hilton. The Lessee pays Promus 4% of monthly suite
revenue for the reservation assessment and 4% of total revenue for the
management fee. Total expenses incurred by the Lessee for franchise fees,
advertising and promotion fees, and management fees for the nine months ended
September 30, 2000 and 1999 totaled $3,157,281 and $117,697, respectively.
During 2000, the Lessee entered into various debt agreements with the
Company. In conjunction with the 2000 acquisitions, the Lessee borrowed from
the Company $105,750 for franchise fees and $23,500 for hotel supplies. In
addition, in 2000 the Lessee borrowed $1,040,000 for working capital. The
promissory notes relating to these debt agreements bear interest at a rate of
9% per annum. Principal and interest payments are due monthly.
During 2000, the Lessee entered into two additional license agreements
with Promus for the 2000 acquisitions to operate the hotels as Homewood
Suites(Reg. TM) by Hilton. These agreements have terms of 20 years and expire
in 2020.
(3) SHAREHOLDER'S EQUITY
The Lessee requires or may require funds to capitalize its business to
satisfy its obligations under Percentage Leases with the Company. To meet these
objectives, the Lessee has two funding commitment agreements of $1 million each
from Mr. Knight and Apple Suites Realty Group, Inc., ("ASRG"), respectively,
(together "Payor"). ASRG is owned by Mr. Knight. The funding commitments are
contractual obligations of the Payor to provide funds to the Lessee. Funds paid
to the Lessee under the commitments are to be used to satisfy any
capitalization or net worth requirements applicable to the Lessee or the
Lessee's payment obligations under the lease agreements and does not represent
any indebtedness. The funding commitments terminate upon the expiration of the
Percentage Leases, written agreement between the Payor and the Lessee, or
payment of all commitments amounts by the Payor to the Lessee. As of September
30, 2000, no contributions have been made by the Payor to the Lessee.
F-19
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Suites, Inc. (the "Company") are presented as if the
acquisitions of the Homewood Suites hotels from Promus Hotels, Inc. or its
affiliates ("Promus"), which is now a wholly-owned subsidiary of Hilton Hotels
Corporation ("Hilton"), and the proceeds from the $50 million refinancing loan
and the $10 million short-term financing which paid off Hilton notes executed
in 1999, had occurred at the beginning of the periods presented for the
respective periods prior to acquisition by the Company and all of the hotels
had been leased to Apple Suites Management, Inc. or its subsidiary (the
"Lessee") pursuant to master hotel lease agreements. Such pro forma information
is based in part upon the Consolidated Statements of Operations of the Company,
the Pro Forma Statements of Operations of the Lessee and the historical
Statements of Operations of the acquired hotels. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the periods presented are not necessarily indicative of what
actual results of operations of the Company would have been assuming such
transactions had been completed as of the beginning of the periods presented,
nor does it purport to represent the results of operations for future periods.
The lease agreements between the Company and the Lessee were based on economic
conditions existing at the time of acquisition. Application of these agreements
to periods prior to the acquisition may not be meaningful.
F-20
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------------------------------------------------------
HOMEWOOD HOMEWOOD HOMEWOOD HOMEWOOD
HISTORICAL SUITES SUITES SUITES SUITES
STATEMENT OF ACQUISITION ACQUISITION ACQUISITION ACQUISITION
OPERATIONS (A I) (A II) (A III) (A IV)
-------------- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Lease revenue ........... $ 2,518,031 $ 4,162,371 (B) $ 5,480,272 (B) $ 1,035,841 (B) $ 3,487,608 (B)
Interest income and
other revenue .......... 169,086 -- -- -- --
Expenses:
Taxes, insurance and
other .................. 426,592 822,599 (C) 647,225 (C) 93,884 (C) 444,161 (C)
General and
administrative ......... 153,807 365,746 (D) 407,404 (D) 71,203 (D) 233,272 (D)
Depreciation of real
estate owned ........... 496,209 656,623 (E) 821,580 (E) 140,664 (E) 688,654 (E)
Interest ................ 1,245,044 -- -- -- 1,936,343 (F)
Rent expense ............ -- -- -- -- 100,000 (H)
----------- ------------- ------------ ------------ ------------
Total expenses ........... 2,321,652 1,844,968 1,876,209 305,751 3,402,430
----------- ------------- ------------ ------------ ------------
Net income ............... $ 365,465 2,317,403 3,604,063 730,090 85,178
=========== ============= ============ ============ ============
Earnings per
common share:
Basic and Diluted ........ $ 0.14
===========
Basic weighted average
common shares
outstanding ............. 2,648,196 -- (G) 450,165 (G) 331,053 (G) 916,311 (G)
===========
Diluted weighted
average common
shares outstanding ...... 2,650,396 -- (G) 450,165 (G) 331,053 (G) 916,311 (G)
===========
<CAPTION>
PRO FORMA TOTAL
ADJUSTMENTS PRO FORMA
---------------------- ----------------
<S> <C> <C>
Revenue:
Lease revenue ........... -- $ 16,684,123
Interest income and
other revenue .......... -- 169,086
Expenses:
Taxes, insurance and
other .................. -- 2,434,461
General and
administrative ......... -- 1,231,432
Depreciation of real
estate owned ........... -- 2,803,730
Interest ................ $ (1,245,044)(I)
4,784,788 (J)
207,033 (K) 6,928,164
Rent expense ............ -- 100,000
------------- ------------
Total expenses ........... 3,746,777 13,497,787
------------- ------------
Net income ............... (3,746,777) $ 3,355,422
============= ============
Earnings per
common share:
Basic and Diluted ........ $ 0.77
============
Basic weighted average
common shares
outstanding ............. -- (L) 4,345,725
============
Diluted weighted
average common
shares outstanding ...... -- (L) 4,347,925
============
</TABLE>
F-21
<PAGE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------------
HOMEWOOD
HISTORICAL SUITES
STATEMENT OF ACQUISITION TOTAL
OPERATIONS (A IV) PRO FORMA
----------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Revenue:
Lease revenue ...................... $ 11,829,752 $ 1,648,774 (B) -- $ 13,478,526
Interest income and other
revenue .......................... 222,504 -- -- 222,504
Expenses:
Taxes, insurance and other ......... 1,610,940 237,170 (C) -- 1,848,110
General and administrative ......... 843,363 33,790 (D) -- 877,153
Depreciation of real estate
owned ............................ 2,019,742 295,715 (E) -- 2,315,457
Interest ........................... 5,023,329 1,452,257 (F) $ (5,023,329)(I)
3,659,788 (J)
175,900 (K) 5,287,945
Rent expense ....................... -- 50,000 (H) -- 50,000
------------- --------------- -------------- -------------
Total expenses ...................... 9,497,374 2,068,932 (1,187,641) 10,378,665
Net income .......................... $ 2,554,882 $ 187,355 $ 1,187,641 $ 3,322,365
============= =============== ============== =============
Earnings per common share:
Basic and Diluted .................. $ 0.58 $ 0.66
============= =============
Basic weighted average common
shares outstanding ................. 4,419,681 532,996 (G) 80,894 (L) 5,033,571
============= =============== ============== =============
Diluted weighted average common
shares outstanding ................. 4,421,881 532,996 (G) 80,894 (L) 5,035,771
============= =============== ============== =============
</TABLE>
F-22
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents results of operations for the hotels acquired on a pro forma
basis as if the hotels were owned by the Company at the beginning of the
periods presented for the respective periods prior to acquisition by the
Company, see below.
<TABLE>
<CAPTION>
DATE COMMENCED DATE
PROPERTY OPERATIONS ACQUIRED
--------------------------------- ---------- --------
<S> <C> <C> <C>
I Homewood Suites-Dallas, TX 1990 September 1, 1999
I Homewood Suites-Las Colinas, TX 1990 September 1, 1999
I Homewood Suites-Plano, TX 1997 September 1, 1999
I Homewood Suites-Richmond. VA May 1998 September 1, 1999
I Homewood Suites-Atlanta, GA 1990 October 1, 1999
---------------------------------------------------------------------------
II Homewood Suites-Clearwater, FL February 1998 November 24, 1999
II Homewood Suites-Salt Lake, UT 1996 November 24, 1999
II Homewood Suites-Atlanta, GA 1990 November 24, 1999
II Homewood Suites-Detroit, MI 1990 November 24, 1999
II Homewood Suites-Baltimore, MD March 1998 November 24, 1999
---------------------------------------------------------------------------
III Homewood Suites-Jackson, MS February 1997 December 22, 1999
---------------------------------------------------------------------------
IV Homewood Suites-Malvern, PA January 1998 May 8, 2000
IV Homewood Suites-Boulder, CO January 1991 June 30, 2000
</TABLE>
(B) Represents lease payment from the Lessee to the Company calculated on a pro
foma basis by applying the rent provisions in the master hotel agreement to
the historical room revenue of the hotels as if the beginning of the period
was the beginning of the lease year. The base rent and the percentage rent
will be calculated and paid based on the terms of the lease agreement.
Refer to the Master Hotel Lease Agreement section to Report for details.
(C) Represents historical real estate and personal property taxes and insurance
which will be paid by the Company pursuant to the Percentage Lease
agreements. Such amounts are the historical amounts paid by the respective
hotels.
(D) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company for the year ended December 31, 1999 and the nine months ended
September 30, 2000 plus anticipated legal and accounting fees, employee
costs, salaries and other costs of operating as a public company for the
year ended December 31, 1999.
(E) Represents the depreciation on the hotels acquired based on the purchase
price, excluding amounts allocated to land, of $37,450,320 for the first
acquisition, $34,954,481 for the second acquisition, $5,485,886 for the
third acquisition, and $30,500,611 for the fourth acquisition for the
period of time not owned by the Company. The weighted average life of the
depreciable assets was 39 years. The estimated useful lives are based on
management's knowledge of the properties and the hotel industry in general.
(F) Represents the interest expense for the hotel acquisitions for the period
in which the hotels were not owned in 1999 and the entire nine months in
2000, interest was computed using the interest rates of 8.5% on mortgage
debt of $22,780,500 for the fourth acquisition that incurred at
acquisition.
(G) Represents additional common shares assuming the properties were acquired
at the beginning of the periods presented with the net proceeds from the
"best efforts" offering of $9 per share (net $8.06 per share) for the first
$15,000,000 and $10 per share (net $8.95 per share) for the remainder.
(H) Represents rent expense on the land lease at the Malvern, PA hotel. The
Company accounts for the land lease as a operating lease.
(I) Represents the elimination of the historical interest expense which was
replaced with the $60 million refinancing loan discussed in note J.
(J) Represents the interest expense on the Company's $50 million long-term
refinancing loan at an interest rate of 9% and a portion of the $10 million
short-term financing ($6,569,500) at an interest rate of one month LIBOR
plus 200 basis points (8.67%) for the term of the financing (6 months).
(K) Represents amortization of deferred financing costs.
(L) Represents additional common shares assuming the additions for the hotel
improvement plan.
F-23
<PAGE>
APPLE SUITES MANAGEMENT, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Suites Management, Inc. or its subsidiary (the "Lessee")
are presented as if the hotels purchased from Promus Hotels, Inc. or its
affiliates ("Promus") which is now a wholly-owned subsidiary of Hilton Hotels
Corporation, had been leased from Apple Suites, Inc. (the "Company") pursuant
to master hotel lease agreements from the beginning of periods presented for
the respective periods prior to acquisition by the Company. Further, the
results of operations reflect the Management Agreement and License Agreement
entered into between Promus and the Lessee or affiliate to operate the acquired
hotels. The lease agreements between the Company and the Lessee were based on
economic conditions existing at the time of of acquisition. Application of
these agreements to periods prior to the acquisition may not be meaningful.
Such pro forma information is based in part upon the Consolidated Statements of
Operations of the Lessee and the Homewood Suites Hotels and should be read in
conjunction with the financials statement contained herein.In management's
opinion, all adjustments necessary to reflect the effects of these transactions
have been made.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the periods are not necessarily indicative of what the actual
results of operations of the Lessee would have been assuming such transactions
had been completed as of the beginning of the periods presented, nor does it
purport to represent the results of operations for the future periods.
F-24
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------------------------------------------
HOMEWOOD HOMEWOOD HOMEWOOD HOMEWOOD
HISTORICAL SUITES SUITES SUITES SUITES
STATEMENT OF ACQUISITIONS ACQUISITIONS ACQUISITION ACQUISITION
OPERATIONS (A I) (A II) (A III) (A IV)
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Suite revenue ................. $5,335,925 $ 9,818,797 $ 12,082,374 $ 2,230,952 $ 7,419,101 --
Other income .................. 335,150 560,096 709,240 168,438 398,812 --
Expenses:
Operating expenses ............ 1,656,540 3,794,204 4,870,096 954,102 2,491,119 --
General and administrative..... 494,377 250,317 300,399 77,381 105,719 $ (131,000) (B)
50,000 (C)
Advertising and promotion...... 472,787 438,985 580,564 112,902 328,070 (1,262,049) (D)
1,262,049 (E)
Utilities ..................... 199,907 354,113 551,359 75,639 270,079 --
Taxes and insurance ........... -- 822,599 647,225 93,884 444,161 (2,007,869) (F)
Depreciation expense .......... -- 1,783,021 2,217,128 426,986 714,411 (5,141,546) (G)
Franchise fees ................ 213,437 392,757 483,295 89,238 296,764 (1,262,049) (H)
1,262,049 (I)
Management fees ............... 226,136 311,275 383,599 71,982 234,000 (1,000,856) (J)
1,467,512 (K)
Rent expense--Apple
Suites, Inc. ................. 2,518,031 -- -- -- -- 14,166,093 (L)
Interest expense .............. 10,915 -- -- -- -- --
Other ......................... 20,049 -- -- -- 100,000 (100,000) (M)
----------- ----------- ------------ ----------- ----------- ------------ ----
Total expenses ................ 5,812,179 8,147,271 10,033,665 1,902,114 4,984,323 7,302,334
Income before income tax....... (141,104) 2,231,622 2,757,949 497,276 2,833,590 (7,302,334)
Income tax expense ............ -- -- -- -- -- 350,800 (N)
----------- ----------- ------------ ----------- ----------- ------------
Net income .................... $ (141,104) $ 2,231,622 $ 2,757,949 $ 497,276 $ 2,833,590 $ (7,653,134)
=========== =========== ============ =========== =========== ============
<CAPTION>
TOTAL
PRO FORMA
---------------
<S> <C>
Revenues:
Suite revenue ................. $ 36,887,149
Other income .................. 2,171,736
Expenses:
Operating expenses ............ 13,766,061
General and administrative.....
1,147,193
Advertising and promotion......
1,933,308
Utilities ..................... 1,451,097
Taxes and insurance ........... --
Depreciation expense .......... --
Franchise fees ................
1,475,491
Management fees ...............
1,693,648
Rent expense--Apple
Suites, Inc. ................. 16,684,124
Interest expense .............. 10,915
Other ......................... 20,049
------------
Total expenses ................ 38,181,886
Income before income tax....... 876,999
Income tax expense ............ 350,800
------------
Net income .................... $ 526,199
============
</TABLE>
F-25
<PAGE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------------
HOMEWOOD
HISTORICAL SUITES
STATEMENT OF ACQUISITION TOTAL
OPERATIONS (A IV) PRO FORMA
---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Suite revenue ............................ $ 26,274,917 $ 3,683,872 -- $ 29,958,789
Other income ............................. 1,431,358 186,300 -- 1,617,658
Expenses:
Operating expenses ....................... 8,010,921 1,266,548 -- 9,277,469
General and administrative ............... 2,201,464 66,574 $ (12,000) (B)
25,000 (C) 2,281,038
Advertising and promotion ................ 2,380,732 165,562 (147,354) (D)
147,354 (E) 2,546,294
Utilities ................................ 1,097,414 130,722 -- 1,228,136
Taxes and insurance ...................... -- 237,170 (237,170) (F) --
Franchise fees ........................... 1,047,226 147,354 (147,354) (H)
147,354 (I) 1,194,580
Management fees .......................... 1,063,326 116,106 (116,106) (J)
165,307 (K) 1,228,633
Rent expense--Apple Suites, Inc. ......... 11,829,752 -- 1,648,774 (L) 13,478,526
Interest expense ......................... 85,642 -- -- 85,642
Other .................................... 93,492 50,000 (50,000) (M) 93,492
------------ ----------- ------------- ----- ------------
Total expenses ............................ 27,809,969 2,180,036 1,423,805 31,413,810
Income before income tax .................. (103,694) 1,690,136 (1,423,805) 162,637
Income tax expense ........................ -- -- 65,055 (N) 65,055
------------ ----------- ------------- ----- ------------
Net income (loss) ......................... $ (103,694) $ 1,690,136 $ (1,488,860) $ 97,582
============ =========== ============= ===== ============
</TABLE>
F-26
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents results of operations for the eleven Homewood Suites hotel
acquisitions on a pro forma basis as if the hotels acquired were leased and
operated by the Lessee at the beginning of the periods presented for the
respective periods prior to acquisition by the Company, see below. The
hotels acquired are as follows:
<TABLE>
<CAPTION>
DATE COMMENCED DATE
PROPERTY OPERATIONS ACQUIRED
--------------------------------- ---------------- ------------------
<S> <C> <C> <C>
I Homewood Suites-Dallas, TX 1990 September 1, 1999
I Homewood Suites-Las Colinas, TX 1990 September 1, 1999
I Homewood Suites-Plano, TX 1997 September 1, 1999
I Homewood Suites-Richmond. VA May 1998 September 1, 1999
I Homewood Suites-Atlanta, GA 1990 October 1, 1999
---------------------------------------------------------------------------
II Homewood Suites-Clearwater, FL February 1998 November 24, 1999
II Homewood Suites-Salt Lake, UT 1996 November 24, 1999
II Homewood Suites-Atlanta, GA 1990 November 24, 1999
II Homewood Suites-Detroit, MI 1990 November 24, 1999
II Homewood Suites-Baltimore, MD March 1998 November 24, 1999
---------------------------------------------------------------------------
III Homewood Suites-Jackson, MS February 1997 December 22, 1999
---------------------------------------------------------------------------
IV Homewood Suites-Malvern, PA January 1998 May 8, 2000
IV Homewood Suites-Boulder, CO January 1991 June 30, 2000
</TABLE>
(B) Represents the elimination of the historical accounting fee allocated to
the hotels by the prior owner.
(C) Represents the addition of the anticipated legal and accounting and other
expenses to operate as a stand alone company.
(D) Represents the elimination of the historical advertising, training and
reservation fee allocated to the hotels by the prior owner.
(E) Represents the addition of the marketing fee to be incurred under the new
license agreements. The marketing fee is calculated based on the terms of
the license agreements which is 4% of suite revenue.
(F) Represents the elimination of the taxes and insurance. Under the terms of
the lease these expenses will be incurred by the Company and, accordingly,
are reflected in the Company's Pro Forma Condensed Consolidated Statement
of Operations.
(G) Represents the elimination of the depreciation expense. This expense will
be reflected in the Company's Pro Forma Condensed Consolidated Statement of
Operations.
(H) Represents the elimination of the historical franchise fee allocated to the
hotels by the prior owner.
(I) Represents the addition of franchise fees to be incurred under the new
license agreements. The franchise fees are calculated based on the terms of
the agreement, which is 4% of suite revenue.
(J) Represents the elimination of the historical management fees allocated to
the hotels by the prior owner.
(K) Represents the addition of the management fees of 4% of suite and other
revenue and the accounting fee $1,000 per hotel per month to be incurred
under the new management agreements for the period presented.
(L) Represents lease payments from the Lessee to the Company calculated on a
pro forma basis by applying the rent provisions in the Percentage Leases to
the historical room revenue of the hotels as if the beginning of the period
was the beginning of the lease year. The base rent and the percentage rent
will be calculated and paid based on the terms of the lease agreement.
Refer to the Master Hotel Lease Agreement section to Report for details.
(M) Represents the elimination of rent expense for the land lease. The rent
expense related to the land lease will be reflected on the Company's Pro
Forma Condensed Consolidated Statement of Operations.
(N) Represents the combined state and federal income tax expense estimated on a
combined rate of 40%.
F-27
