FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-77055
PROSPECTUS
[APPLE SUITES LOGO]
1,666,666.67 COMMON SHARES
We plan to own extended-stay hotel properties and qualify as a real estate
investment trust. We are offering up to 30,166,666.67 of our common shares.
Purchasers must purchase a minimum of $5,000 in common shares. If a minimum of
1,666,666.67 common shares are not sold within one year after the date of this
prospectus, we will terminate this offering and all money received will be
promptly refunded to investors with interest. The common shares are being
offered on a best efforts, minimum offering basis through David Lerner
Associates, Inc. Until the minimum offering is achieved, all funds received
from investors will be deposited into an interest-bearing escrow account.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
THIS OFFERING INVOLVES MATERIAL RISKS AND INVESTMENT CONSIDERATIONS INCLUDING:
o There is no public trading market for the common shares.
o We will pay substantial compensation for advisory, acquisition,
disposition and other services which will reduce our return.
o There are conflicts of interest between us and our chairman and
president because he is the sole shareholder of companies with which
we will enter into contracts for services.
o We own no properties at this time.
o We may be unable to generate sufficient cash for distributions.
o Shareholders' interests will be diluted upon conversion of the Class B
Convertible shares.
o Seven partnerships previously organized by Glade M. Knight filed for
bankruptcy.
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PROCEEDS TO
PRICE TO COMMISSIONS & APPLE SUITES,
PUBLIC MARKETING EXPENSES INC.
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Per Share(1) ................... $ 9.00 $ .90 $ 8.10
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Total Minimum Offering ......... $ 15,000,000 $ 1,500,000 $ 13,500,000
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Total Maximum Offering ......... $300,000,000 $30,000,000 $270,000,000
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(1) Once the minimum offering of 1,666,666.67 common shares is achieved, the
per share offering price will rise to $10, the selling commission and
marketing expenses per share will become $1.00, and the proceeds per share
to Apple Suites, Inc. will be $9.00.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
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THE DATE OF THIS PROSPECTUS IS AUGUST 3, 1999.
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EXCEPT FOR THE STATES SPECIFICALLY DESCRIBED BELOW, EACH PURCHASER OF
COMMON SHARES MUST CERTIFY THAT HE HAS EITHER (1) A MAXIMUM ANNUAL GROSS INCOME
OF $50,000 AND A NET WORTH (EXCLUSIVE OF EQUITY IN A HOME, HOME FURNISHINGS AND
PERSONAL AUTOMOBILES) OF AT LEAST $50,000, OR (2) A NET WORTH (SIMILARY
DEFINED) OF AT LEAST $100,000.
EACH NEW HAMPSHIRE PURCHASER MUST CERTIFY THAT HE HAS EITHER (1) A MINIMUM
ANNUAL GROSS INCOME OF $50,000 AND A NET WORTH (SIMILARLY DEFINED) OF AT LEAST
$125,000, OR (2) A NET WORTH (SIMILARLY DEFINED) OF AT LEAST $250,000.
EACH KENTUCKY OR NORTH CAROLINA PURCHASER MUST CERTIFY THAT HE HAS EITHER
(1) A MINIMUM ANNUAL GROSS INCOME OF $50,000 AND A NET WORTH (SIMILARLY
DEFINED) OF AT LEAST $50,000, OR (2) A NET WORTH (SIMILARLY DEFINED) OF AT
LEAST $150,000.
EACH MAINE PURCHASER MUST CERTIFY THAT HE HAS EITHER (1) A MINIMUM ANNUAL
GROSS INCOME OF $50,000 AND A NET WORTH (SIMILARLY DEFINED) OF AT LEAST
$125,000, OR (2) A NET WORTH (SIMILARLY DEFINED) OF AT LEAST $200,000.
NO PURCHASER OF COMMON SHARES MAY PURCHASE COMMON SHARES COSTING MORE THAN
10% OF THE PURCHASER'S NET WORTH (SIMILARLY DEFINED).
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND IF
GIVEN OR MADE, ANY OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON, THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH AN
OFFER MAY NOT LEGALLY BE MADE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT INFORMATION CONTAINED IN THIS PROSPECTUS HAS NOT CHANGED AS OF
ANY TIME AFTER ITS DATE.
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TABLE OF CONTENTS
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SUMMARY ............................................................................ 1
Apple Suites, Inc. ............................................................... 1
Apple Suites Advisors, Inc. and Affiliates ....................................... 1
Risk Factors ..................................................................... 2
The Offering ..................................................................... 2
Use of Proceeds .................................................................. 3
Liquidity ........................................................................ 3
Borrowing Policy ................................................................. 4
Investment Policy ................................................................ 5
Distributions Policy ............................................................. 5
Capital Stock .................................................................... 5
Compensation ..................................................................... 5
RISK FACTORS ....................................................................... 7
There is no public market for our common shares, so investors may be unable
to dispose of their investment .................................................. 7
The board of directors may decide in its sole discretion to list our common
shares or dissolve us ........................................................... 7
The compensation to Apple Suites Advisors and Apple Suites Realty is
payable before distributions and will reduce investors'return ................... 7
There were no arms-length negotiations for our agreements with Apple
Suites Advisors, Apple Suites Realty and Apple Suites Management ................ 7
Commissions, acquisition, advisory and other fees and expenses will limit our
ability to make distributions to investors ...................................... 8
The Compensation to Apple Suites Realty and Apple Suites Advisors is
indeterminable and cannot be stated with certainty .............................. 8
There are conflicts of interest with our president and chairman of the board. 8
There are conflicts of interest with our advisor and broker ...................... 8
There are conflicts of interest with our lessee .................................. 9
Our management will spend time on other activities ............................... 9
We own no properties at this time ................................................ 9
We are not diversified and are dependent on our investment in a single
industry ........................................................................ 9
We will be dependent upon Apple Suites Management for our revenues ............... 10
There may be operational limitations associated with franchise agreements
affecting our properties ........................................................ 10
We have no operating history and we have no assurance of success ................. 10
There is a possible lack of diversification and lower return due to the
minimum size of our offering .................................................... 10
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There may be delays in investment in real property, and this delay may
decrease the return to shareholders ............................................. 11
The actual amount of proceeds available for investment in properties is
uncertain ....................................................................... 11
The per-share offering prices have been established arbitrarily by us and may
not reflect the true value of the common shares ................................. 11
We may be unable to make distributions ........................................... 11
We will face competition in the hotel industry ................................... 12
Investors may wait up to one year before receiving their common shares or
a refund of their money if the minimum offering is not achieved ................. 12
There would be significant adverse consequences of our failure to qualify as
a REIT .......................................................................... 12
Our real estate investments will be relatively illiquid .......................... 12
Our board may in its sole discretion determine the amount of our aggregate
debt ............................................................................ 13
We have no restriction on changes in our investment and financing policies. 13
There will be dilution of shareholder's interests upon conversion of the Class
B Shares ........................................................................ 13
Our shareholders'interests may be diluted in various ways ........................ 14
Seven partnerships previously organized by Glade M. Knight filed for
bankruptcy ...................................................................... 14
Our articles and bylaws contain antitakeover provisions and ownership limits. 15
We may become subject to environmental liabilities ............................... 15
We may incur significant costs complying with the Americans with
Disabilities Act and similar laws ............................................... 16
Our computer systems may not be Year 2000 compliant, which would lead to
operational difficulties and increased costs .................................... 16
We make forward-looking statements in this prospectus which may prove
to be inaccurate ................................................................ 16
USE OF PROCEEDS .................................................................... 17
COMPENSATION ....................................................................... 19
Acquisition Phase ................................................................ 19
Operational Phase ................................................................ 19
Disposition Phase ................................................................ 20
All Phases ....................................................................... 20
CONFLICTS OF INTERESTS ............................................................. 21
General .......................................................................... 21
Conflicts with respect to fees paid by us to Apple Suites Advisors
and Apple Suites Realty ......................................................... 22
Conflicts with Respect to Commissions ........................................... 22
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Conflicts with Respect to Asset Management Fees ............... 22
Policies to Address Conflicts .................................. 22
Transactions with Affiliates and Related Parties ............... 23
Competition Between Us and Mr. Knight .......................... 23
Competition for Management Services ............................ 24
INVESTMENT OBJECTIVES AND POLICIES ............................... 25
Investments in Real Estate or Interests in Real Estate ......... 25
Borrowing Policies ............................................. 25
Reserves ....................................................... 26
Sale Policies .................................................. 27
Changes in Objectives and Policies ............................. 27
DISTRIBUTIONS POLICY ............................................. 29
BUSINESS ......................................................... 30
General ........................................................ 30
Business Strategies ............................................ 30
Homewood Suites(Reg. TM) ....................................... 30
Description of Leases .......................................... 31
Term .......................................................... 31
Base Rent; Participating Rent ................................. 31
Other Real Estate Investments .................................. 32
Legal Proceedings .............................................. 32
Regulation ..................................................... 32
General ....................................................... 32
Americans With Disabilities Act ............................... 32
Environmental Matters .......................................... 33
Insurance ...................................................... 34
Available Information .......................................... 34
MANAGEMENT ....................................................... 36
Classification of the Board .................................... 37
Committees of the Board ........................................ 37
Director Compensation .......................................... 37
Indemnification and Insurance .................................. 38
Officer Compensation ........................................... 38
Stock Incentive Plans .......................................... 38
The Incentive Plan ............................................. 38
Directors' Plan ................................................ 40
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Stock Option Grants ........................................................ 41
APPLE SUITES ADVISORS, INC. AND AFFILIATES ................................. 42
General .................................................................. 42
The Advisory Agreement ................................................... 42
Apple Suites Realty Group, Inc ........................................... 44
Prior Performance of Programs Sponsored by Glade M. Knight ............... 45
Prior REITS - Cornerstone and Apple Residential .......................... 45
Additional Information on Cornerstone and Apple Residential Acquisitions. 46
Prior Partnerships ....................................................... 46
Publicly-Offered Partnerships ............................................ 47
Privately-Offered Partnerships ........................................... 47
Additional Information on Prior Programs ................................. 49
PRINCIPAL AND MANAGEMENT SHAREHOLDERS ...................................... 50
FEDERAL INCOME TAX CONSIDERATIONS .......................................... 51
General .................................................................. 51
REIT Qualification ....................................................... 52
Sources of Gross Income ................................................. 52
75% Gross Income Test ................................................... 53
95% Gross Income Test ................................................... 54
Failing the 75% or 95% Tests; Reasonable Cause .......................... 54
Character of Assets Owned ............................................... 55
Annual Distributions to Shareholders .................................... 55
Taxation as a REIT ....................................................... 56
Failure to Qualify as a REIT ............................................. 57
Taxation of Shareholders ................................................. 57
Backup Withholding ....................................................... 58
Taxation of Tax Exempt Entities .......................................... 59
Taxation of Foreign Investors ............................................ 60
State and Local Taxes .................................................... 60
ERISA CONSIDERATIONS ....................................................... 61
CAPITALIZATION ............................................................. 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................................... 63
Overview ................................................................. 63
Year 2000 Compliance ..................................................... 63
PLAN OF DISTRIBUTION ....................................................... 65
DESCRIPTION OF CAPITAL STOCK ............................................... 70
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Common Shares .............................................................. 70
Dividend and Distribution Rights ......................................... 70
Voting Rights ............................................................ 70
Class B Convertible Shares ................................................ 71
Preferred Shares .......................................................... 72
Restrictions on Transfer .................................................. 72
Facilities for Transferring Common Shares ................................. 74
Warrants .................................................................. 74
SUMMARY OF ORGANIZATIONAL DOCUMENTS ......................................... 75
Board of Directors ........................................................ 75
Responsibility of Board of Directors, Apple Suites Advisors, Inc., Officers
and Employees ............................................................ 76
Issuance of Securities .................................................... 77
Redemption and Restrictions on Transfer ................................... 77
Amendment ................................................................. 77
Shareholder Liability ..................................................... 78
SALES LITERATURE ............................................................ 78
REPORTS TO SHAREHOLDERS ..................................................... 78
LEGAL MATTERS ............................................................... 79
EXPERTS ..................................................................... 79
EXPERIENCE OF PRIOR PROGRAMS ................................................ 80
INDEX TO BALANCE SHEET ...................................................... F-1
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SUMMARY
The following information is not complete and should be read together with
the information contained in this prospectus.
APPLE SUITES, INC.
We will focus on purchasing and owning extended-stay hotel properties
located in selected metropolitan areas. However, we own no properties at this
time. We may but have no obligation to purchase extended-stay hotel properties
from Promus Hotels, Inc. if a minimum of 1,666,666.67 common shares are sold
within one year after the date of this prospectus. We may purchase additional
extended-stay hotel properties from Promus Hotels, Inc. if additional common
shares are sold. We are not affiliated with Promus Hotels, Inc.
We plan to elect to be treated as a real estate investment trust for
federal income tax purposes beginning with our taxable year ending December 31,
1999. As a real estate investment trust, we will generally not be subject to
federal income tax. We will, however, be subject to a number of organizational
and operational requirements and limitations.
We are located at 306 East Main Street, Richmond, Virginia and our
telephone number is (804) 643-1761.
APPLE SUITES ADVISORS, INC. AND AFFILIATES
Apple Suites Advisors, Inc. will provide us with our day-to-day
management. Apple Suites Advisors does not have any significant assets. Apple
Suites Realty Group, Inc. will provide us with property acquisition and
disposition services. Apple Suites Realty has no significant assets.
Because we are prohibited under federal tax laws from operating our
extended-stay hotel properties, we will enter into leases for each of our hotel
properties. We anticipate that substantially all our hotel properties will be
leased to Apple Suites Management, Inc. Apple Suites Management has no
significant assets.
All of the common shares of Apple Suites Advisors, Apple Suites Realty and
Apple Suites Management are owned by Glade M. Knight, who is our president and
chairman of the board.
The following chart illustrates the relationships among Apple Suites,
Inc., Apple Suites Advisors, Apple Suites Realty and Apple Suites Management.
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[GRAPHIC OMITTED]
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* Wholly-owned by Glade M. Knight, chairman and president of Apple Suites, Inc.
RISK FACTORS
We urge you to consider carefully the matters discussed under "Risk
Factors" beginning on page 7 before you decide to purchase our common shares.
An investment in our securities involves a number of risks including:
o There will be no public trading market for the common shares for an
indefinite period of time, if ever.
o We will pay substantial compensation established without the benefit
of arm's length negotiation for advisory, property acquisition,
disposition and other services.
o There are conflicts of interest between us and our chairman and
president because he is the sole shareholder of companies with which
we will enter into contracts for services.
o We own no properties at this time.
o We may be unable to generate sufficient cash for distributions.
o Shareholders' interests will be diluted upon conversion of the Class B
convertible shares.
o Seven partnerships previously organized by Glade M. Knight, our
president and chairman, filed for bankruptcy.
o We will primarily acquire extended-stay hotel properties and,
therefore, are subject to the risks inherent in investing in a single
industry.
o Due to federal income tax restrictions, we cannot operate our
properties directly.
o We do not have an operating history and, therefore, there is no
assurance that we will be successful in our operations.
THE OFFERING
We are offering common shares at $9 per common share until a minimum of
1,666,666.67 common shares have been sold. Thereafter, the common shares will
be offered at $10 per common share until a maximum of 30,166,666.67 common
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shares have been sold. Purchasers must purchase a minimum of $5,000 in common
shares except that certain benefit plans may purchase a minimum of $2,000 in
common shares. The common shares are being offered through David Lerner
Associates, Inc.
If at least 1,666,666.67 common shares have not been sold within one year
after the date of this prospectus, we will terminate this offering of common
shares and all moneys received will be promptly refunded to investors with
interest. Our officers and directors and those of apple suites advisors, apple
suites realty and apple suites management will not be permitted to purchase
common shares in order to reach the minimum offering of 1,666,666.67 common
shares.
This offering of common shares will continue until all the common shares
offered under this prospectus have been sold or until one year from the date of
this prospectus, unless we extend the offering for up to an additional year in
order to achieve the maximum offering of 30,166,666.67 common shares. In some
states, extension of the offering may not be allowed or may be allowed only
upon the filing of a new application with the appropriate state administrator.
This is a best efforts offering. Purchasers will be sold common shares at
one or more closings. An initial closing will occur after the minimum offering
of 1,666,666.67 common shares is achieved. Thereafter, additional closings are
expected to occur on a monthly basis as shares are sold during the offering
period.
USE OF PROCEEDS
The proceeds of the offering will be used
o to pay expenses and fees of selling the common shares;
o to invest in properties;
o to pay expenses and fees associated with acquiring properties; and
o to establish a working capital reserve.
On April 20, 1999, we obtained a line of credit in a principal amount of
up to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all accrued interest are due in
full on October 20, 1999. Glade M. Knight, our president and chairman of the
board, has guaranteed repayment of the loan. We expect to repay this debt with
proceeds from the sale of common shares.
LIQUIDITY
Before this offering there has been no public market for the common shares
and initially we do not expect a market to develop. Prospective shareholders
should view the common shares as illiquid and must be prepared to hold their
investment for an indefinite length of time.
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We do not plan to cause the common shares to be listed on any securities
exchange or quoted on any system or in any established market either
immediately or at any definite time in the future. We may cause the common
shares to be listed or quoted if the board of directors determines this action
to be prudent. However, there can be no assurance that this event will ever
occur. In order to provide liquidity to our shareholders, we expect that within
approximately three years from the initial closing, we intend either:
(1) to cause the common shares to be listed on a national securities
exchange or quoted on the NASDAQ National Market System or
(2) with shareholder approval, to dispose of all of our properties in a
manner which will permit distributions to shareholders of cash.
However, we are under no obligation to take any of these actions, and
these actions, if taken, might be taken after three years from the initial
closing.
BORROWING POLICY
We intend to purchase our properties either on an all-cash basis or using
interim borrowings. Any interim borrowings may come from Apple Suites Advisors
or its affiliates or from third-party, non-affiliated lenders. We will endeavor
to repay any interim borrowing with proceeds from the sale of common shares and
to hold our properties on an unleveraged basis. However, for the purpose of
flexibility in operations, we may, subject to the approval of the board of
directors, borrow.
After the initial closing of common shares, our bylaws will prohibit us
from incurring debt if the debt would result in our total debt exceeding 100%
of the value of our assets at cost. The value of our assets at cost means the
cost of the asset before deducting depreciation less liabilities. However, our
bylaws allow us to incur debt in excess of this limitation when the excess
borrowing is approved by a majority of the independent directors and disclosed
to the shareholders. The bylaws also will prohibit us from allowing total
borrowings to exceed 50% of the fair market value of our assets, before
subtracting liabilities, subject to the same exception Described in the
previous sentence. The two limitations on debt described in this paragraph are
applied separately and independently. For example, it is possible that
incurring debt may require approval by a majority of the independent directors
under one limitation even though the other limitation on debt does not apply.
In addition, the bylaws will provide that our borrowings must be reasonable in
relation to our net assets and must be reviewed quarterly by the directors.
Subject to these limitations on the permitted maximum amount of debt, there is
no limitation on the number of mortgages or deeds of trust which may be placed
against any particular property.
Assuming the independent directors approve, we may initially borrow in
excess of the debt limitations described in the previous paragraph in order to
acquire a portfolio of extended-stay hotel properties. If attainable, the
acquisition of a portfolio of properties early in our existence would, in the
opinion of our
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management, provide us with greater ability to acquire extended-stay hotel
properties in the future as proceeds from the sale of common shares are
received and provide us with economies of scale from the outset. We would
endeavor to use only interim borrowing for these acquisitions in order to
maintain our long-term policy of purchasing our properties on an all cash
basis. We would repay any interim borrowings with proceeds from the sale of
common shares.
INVESTMENT POLICY
The investment return to shareholders from ownership of our common shares
will likely be less than could be obtained by a shareholder's direct
acquisition and ownership of the same properties because:
(1) we will pay to David Lerner Associates, Inc. substantial fees to
sell the common shares which will reduce the net proceeds available for
investment in properties;
(2) we will pay to Apple Suites Realty substantial fees to acquire
properties which will reduce the net proceeds available for investment in
properties; and
(3) we will pay to Apple Suites Advisors substantial advisory and
related compensation which will reduce funds available for distribution to
shareholders.
DISTRIBUTIONS POLICY
We intend to make distributions in accordance with federal income tax
rules applicable to real estate investment trusts. We intend to pay regular
quarterly distributions to our shareholders.
CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 common shares, no par
value, 240,000 Class B convertible shares, no par value, and 15,000,000
preferred shares, no par value. As of the date of this prospectus, there were
10 common shares of our company issued and outstanding.
COMPENSATION
We do not pay our officers salaries. Mr. Knight is currently our sole
executive officer. In addition, he is the sole shareholder of Apple Suites
Advisors and Apple Suites Realty which are entitled to receive fees for
services rendered by them to us. Mr. Knight will not receive a salary from
those entities but will receive dividend income due to his ownership of those
entities. The compensation and reimbursements payable to Apple Suites Advisors
and Apple Suites Realty are listed below. Except as indicated, we cannot
determine the maximum dollar amount of this compensation and reimbursement.
Apple Suites Advisors is entitled to receive an annual asset management
fee of between 0.1% and 0.25% of the amount raised in this offering. The
percentage used to calculate the asset management fee is based on the ratio of
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funds from operations to the amount raised in this offering. This ratio is
referred to as the "return ratio." Funds from operations is defined as net
income excluding gains or losses from debt restructuring and sales of property,
plus depreciation of real property, after adjustments for significant
non-recurring items and unconsolidated partnerships and joint ventures, if any.
The percentage used to determine the asset management fee will be:
o 0.1% if the return ratio for the preceding calendar quarter is 6% or
less,
o 0.15% if the return ratio for the preceding calendar quarter is more
than 6% but not more than 8%, or
o 0.25% if the return ratio for the preceding calendar quarter is more
than 8%.
Assuming the minimum offering amount of $15,000,000 in common shares is
sold, the annual asset management fee would be:
o $15,000 if the return ratio is 6% or less,
o $22,500 if the return ratio is more than 6% but no more than 8%, or
o $37,500 if the return ratio is more than 8%.
Assuming the maximum offering amount of $300,000,000 in common shares is
sold, the annual asset management fee would be:
o $300,000 if the return ratio is 6% or less,
o $450,000 if the return ratio is more than 6% but no more than 8%, or
o $750,000 if the return ratio is more than 8%.
Apple Suites Realty will serve as the real estate advisor in connection
with our purchases and sales of properties, and will receive fees from us of up
to 2% of the gross purchase price , up to a maximum of $5,400,000, and up to 2%
of the gross sale price of each property.
If the person from whom we purchase or to whom we sell a property pays any
fee to Apple Suites Realty that amount will decrease the amount of our
obligation to Apple Suites Realty. Apple Suites Realty will not be entitled to
any disposition fee in connection with a sale of a property by us to any
affiliate of Apple Suites Realty, but will be reimbursed for its costs in
marketing the property.
We may request that Apple Suites Advisors and Apple Suites Realty provide
other services or property to us in exchange for fees. In order to do so, our
bylaws require that the transaction be approved by a majority of the directors
who are not affiliated with either Apple Suites Advisors or Apple Suites
Realty. We currently have no plans to request services or property of the type
described in this paragraph and, therefore, do not expect to incur any
additional fees.
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RISK FACTORS
An investment in our common shares involves various risks. You should
carefully consider the following information before making a decision to
purchase our common shares.
THERE IS NO PUBLIC MARKET FOR OUR COMMON SHARES, SO INVESTORS MAY BE UNABLE TO
DISPOSE OF THEIR INVESTMENT.
Prospective shareholders should view the common shares as illiquid and
must be prepared to hold their shares for an indefinite length of time. Before
this offering, there has been no public market for our common shares, and
initially we do not expect a market to develop. We do not plan to cause our
common shares to be listed on any securities exchange or quoted on any system
or in any established market either immediately or at any definite time in the
future. While we, acting through our board of directors, may cause the common
shares to be listed or quoted if the board of directors determines this action
to be prudent, there can be no assurance that this event will ever occur.
Shareholders may be unable to resell their common shares at all, or may be able
to resell them only later at a substantial discount from the purchase price.
Thus, the common shares should be considered a long-term investment.
THE BOARD OF DIRECTORS MAY DECIDE IN ITS SOLE DISCRETION TO LIST OUR COMMON
SHARES OR DISSOLVE US.
Currently, we expect that within approximately three years from the
initial closing of the minimum offering of 1,666,666.67 common shares we intend
either:
(1) to cause our common shares to be listed on a national securities
exchange or quoted on the NASDAQ National Market System or
(2) with shareholder approval, to dispose of all of our properties in a
manner which will permit distributions to our shareholders of cash.
Either type of action will be conditioned on the board of directors determining
the action to be prudent and in the best interests of our shareholders.
However, we are under no obligation to take any of these actions, and any
action, if taken, might be taken after the three-year period mentioned above.
THE COMPENSATION TO APPLE SUITES ADVISORS AND APPLE SUITES REALTY IS PAYABLE
BEFORE DISTRIBUTIONS AND WILL REDUCE INVESTORS' RETURN.
The payment of compensation to Apple Suites Advisors and Apple Suites
Realty from proceeds of the offering and property revenues will reduce the
amount of proceeds available for investment in properties, or the cash
available for distribution, and will therefore tend to reduce the return on our
shareholders' investments. In addition, this compensation is payable regardless
of our profitability, and is payable prior to, and without regard to whether we
have sufficient cash for distributions.
THERE WERE NO ARMS-LENGTH NEGOTIATIONS FOR OUR AGREEMENTS WITH APPLE SUITES
ADVISORS, APPLE SUITES REALTY AND APPLE SUITES MANAGEMENT.
Apple Suites Advisors and Apple Suites Realty will receive substantial
compensation from us in exchange for various services they have agreed to
render to us. This compensation has been established without the benefits of
arms-length
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negotiation. Apple Suites Management will enter into leases for our properties
and has agreed to pay us rent. This rent WILL BE established without the
benefit of arms-length negotiation.
COMMISSIONS, ACQUISITION, ADVISORY AND OTHER FEES AND EXPENSES WILL LIMIT OUR
ABILITY TO MAKE DISTRIBUTIONS TO INVESTORS.
The investment return to our shareholders likely will be less than could
be obtained by a shareholder's direct acquisition and ownership of the same
properties. We will pay to David Lerner Associates, Inc. substantial fees to
sell our common shares which will reduce the net proceeds available for
investment in properties. We will pay to Apple Suites Realty substantial
acquisition fees to acquire properties which will reduce the net proceeds
available for investment in properties. In addition, we will pay, principally
to Apple Suites Advisors, substantial advisory and related compensation, which
will reduce cash available for distribution to shareholders. Thus, for example,
if only 87% of the gross proceeds of the offering are available for investment
in properties, revenues may be reduced by 13% compared to revenues in the
absence of these fees.
THE COMPENSATION TO APPLE SUITES REALTY AND APPLE SUITES ADVISORS IS
INDETERMINABLE AND CANNOT BE STATED WITH CERTAINTY.
Apple Suites Realty and Apple Suites Advisors will receive compensation
for services rendered by them to us that cannot be determined with certainty.
Apple Suites Advisors will receive an asset management fee that may range from
$15,000 to $750,000 per year. The asset management fee will be based upon the
ratio of funds from operations to the amount raised in this offering. Apple
Suites Realty will receive a commission for each property purchased based upon
the purchase price of the properties we purchase. The total compensation to
Apple Suites Realty is therefore dependent upon (1) the number of properties we
purchase and (2) the cost of each property purchased. In addition, Apple Suites
Advisors and Apple Suites Realty will be reimbursed for their costs incurred on
our behalf and are entitled to compensation for other services and property we
may request that they provide to us. The dollar amount of the cost and the
compensation cannot now be determined.
THERE ARE CONFLICTS OF INTEREST WITH OUR PRESIDENT AND CHAIRMAN OF THE BOARD.
Generally, conflicts of interest between us and Glade M. Knight arise
because he is the sole shareholder of Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management. These companies will enter into contracts
with us to lease our properties or provide us with asset management and
property acquisition and disposition services. In addition, Glade M. Knight is
and will be a principal in other real estate investment transactions or
programs which may compete with us.
THERE ARE CONFLICTS OF INTEREST WITH OUR ADVISOR AND BROKER.
We will pay Apple Suites Realty an acquisition fee in connection with each
acquisition of a property, and a disposition fee in connection with property
dispositions. As a consequence, Apple Suites Realty may have an incentive to
8
<PAGE>
recommend the purchase or disposition of a property in order to receive a fee.
Apple Suites Advisors will receive a fee which is a percentage of the total
consideration we receive from sale of common shares and, therefore, it could
have an incentive to close the sales of shares as rapidly as possible.
THERE ARE CONFLICTS OF INTEREST WITH OUR LESSEE.
We will lease our extended-stay hotel properties to Apple Suites
Management. We may be less willing to enforce provisions of the lease contract
against Apple Suites Management than against a third-party non-affiliated
lessee. Our lessee may not be able to make its lease payments under the lease.
Although failure on the part of Apple Suites Management to materially comply
with the terms of a lease including failure to pay rent when due will give us
the right to terminate the lease, repossess the property and enforce the
payment obligations under the lease, we would then be required to find another
lessee to lease the property since we cannot operate extended-stay hotel
properties directly. In addition, it is possible that we would be unable to
enforce the payment obligations under the leases following any termination.
There can be no assurance that we would be able to find another lessee or that
we would be able to enter into a new lease on terms as favorable to us if
another lessee were found.
OUR MANAGEMENT WILL SPEND TIME ON OTHER ACTIVITIES.
The officers and directors of Apple Suites Advisors, Apple Suites Realty
and Apple Suites Management also serve as officers and directors of entities
which engage in the brokerage, sale, operation or management of real estate.
The officers and directors of Apple Suites Advisors, Apple Suites Realty and
Apple Suites Management may disproportionately allocate their time and
resources between us and these other entities.
WE OWN NO PROPERTIES AT THIS TIME.
We have not committed to purchasing any specific properties with the
proceeds of this offering as of the date of this prospectus. However, when at
any time during the offering period we believe that there is a reasonable
probability that any specific property will be acquired, this prospectus will
be supplemented to provide a description of the property and the anticipated
terms of its purchase, financing and management. A prospective shareholder will
only be able to evaluate information as to properties which are disclosed in a
prospectus supplement issued before the prospective shareholder makes its
investment.
WE ARE NOT DIVERSIFIED AND ARE DEPENDENT ON OUR INVESTMENT IN A SINGLE
INDUSTRY.
Our current strategy is to acquire interests primarily in extended-stay
hotel properties. As a result, we are subject to the risks inherent in
investing in a single industry. A downturn in the extended-stay hotel industry
may have more pronounced effects on the amount of cash available to us for
distribution or on the value of our assets than if we had diversified our
investments. We will also be subject to any downturns in the business,
commercial and tourism travel industry as a whole.
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WE WILL BE DEPENDENT UPON APPLE SUITES MANAGEMENT FOR OUR REVENUES.
Due to federal income tax restrictions, we cannot operate our properties
directly. Therefore, we intend to lease our extended-stay hotel properties to
Apple Suites Management who will manage the properties. Our revenues and our
ability to make distributions to our shareholders will depend solely upon the
ability of Apple Suites Management to make rent payments under its leases.
Apple Suites Management has no significant assets. Any failure by Apple Suites
Management to make rent payments would adversely affect our ability to make
distributions to our shareholders.
THERE MAY BE OPERATIONAL LIMITATIONS ASSOCIATED WITH FRANCHISE AGREEMENTS
AFFECTING OUR PROPERTIES.
Apple Suites Management will operate a substantial number of our
properties pursuant to franchise or license agreements with nationally
recognized hotel brands. These franchise agreements may contain specific
standards for, and restrictions and limitations on, the operation and
maintenance of our properties in order to maintain uniformity within the
franchisor system. We do not know whether those limitations may conflict with
our ability to create specific business plans tailored to each property and to
each market.
The standards are subject to change over time, in some cases at the
direction of the franchisor, and may restrict Apple Suites Management's
ability, as franchisee, to make improvements or modifications to a property
without the consent of the franchisor. In addition, compliance with the
standards could require us or Apple Suites Management, as franchisees, to incur
significant expenses or capital expenditures. Action or inaction on our part or
by Apple Suites Management could result in a breach of those standards or other
terms and conditions of the franchise agreements and could result in the loss
or cancellation of a franchise license.
In connection with terminating or changing the franchise affiliation of a
property, we may be required to incur significant expenses or capital
expenditures. Moreover, the loss of a franchise license could have a material
adverse effect upon the operations or the underlying value of the property
covered by the franchise because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor.
WE HAVE NO OPERATING HISTORY AND WE HAVE NO ASSURANCE OF SUCCESS.
We do not have an operating history. There is no assurance that we will
operate successfully or achieve our objectives.
THERE IS A POSSIBLE LACK OF DIVERSIFICATION AND LOWER RETURN DUE TO THE MINIMUM
SIZE OF OUR OFFERING.
We initially will be funded with contributions of not less than
$15,000,000. Our profitability could be affected if we do not sell more than
the minimum offering. In the event we receive only the minimum offering of
1,666,666.67 common shares, we will invest in fewer properties. The fewer
properties purchased, the greater the
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potential adverse effect of a single unproductive property upon our
profitability since a reduced degree of diversification will exist among our
properties. In addition, the returns on the common shares sold will be reduced
as a result of allocating our expenses among the smaller number of shares.
THERE MAY BE DELAYS IN INVESTMENT IN REAL PROPERTY, AND THIS DELAY MAY DECREASE
THE RETURN TO SHAREHOLDERS.
We may experience delays in finding suitable properties to acquire.
Pending investment of the proceeds of this offering in real estate, and to the
extent the proceeds are not invested in real estate, the proceeds may be
invested in permitted temporary investments such as U.S. government securities,
certificates of deposit, or commercial paper. The rate of return on those
investments has fluctuated in recent years and may be less than the return
obtainable from real property.
THE ACTUAL AMOUNT OF PROCEEDS AVAILABLE FOR INVESTMENT IN PROPERTIES IS
UNCERTAIN.
Although we estimate in this prospectus the net amount of offering
proceeds that will be available for investment in properties, the actual amount
available for investment may be less. For example, we might deem it necessary
to establish a larger than expected working capital or contingency reserve to
cover unexpected environmental liabilities from unexpected lawsuits or
governmental regulatory judgments or fines. Any liabilities of this sort, or
other unanticipated expenses or debts, would reduce the amount we have
available for investment in properties.
THE PER-SHARE OFFERING PRICES HAVE BEEN ESTABLISHED ARBITRARILY BY US AND MAY
NOT REFLECT THE TRUE VALUE OF THE COMMON SHARES.
If we were to list the common shares on a national securities exchange,
the common share price might drop below our shareholder's original investment.
Neither prospective investors nor shareholders should assume that the per-share
prices reflect the intrinsic or realizable value of the common shares or
otherwise reflect our value, earnings or other objective measures of worth. The
increase in the per-share offering price from $9 to $10 once the minimum
offering is achieved is also not based upon or reflective of any meaningful
measure of our share value.
WE MAY BE UNABLE TO MAKE DISTRIBUTIONS.
If our properties do not generate sufficient revenue to meet operating
expenses, our cash flow and our ability to make distributions to shareholders
may be adversely affected. Our properties are subject to all operating risks
common to hotel properties. These risks might adversely affect occupancy or
room rates. Increases in operating costs due to inflation and other factors may
not necessarily be offset by increased room rates. The local markets may limit
the extent to which room rates may be increased to meet increased operating
expenses without decreasing occupancy rates. In addition, a percentage of our
rents will be based on the gross income of Apple Suites Management from food
and beverage, telephone and other revenue of each property. If the gross income
from these sources decreases, our rental income will also decrease.
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WE WILL FACE COMPETITION IN THE HOTEL INDUSTRY.
The extended-stay hotel industry is highly competitive. This competition
could reduce occupancy levels and rental revenues at our properties, which
would adversely affect our operations. We expect to face competition from many
sources. We will face competition from other hotels both in the immediate
vicinity and the geographic market where our hotels will be located.
Over-building in the hotel industry will increase the number of rooms available
and may decrease occupancy and room rates. In addition, increases in operating
costs due to inflation may not be offset by increased room rates. We will also
face competition from nationally recognized hotel brands with which we will not
be associated.
We will also face competition for investment opportunities. these
competitors may be other real estate investment trusts, national hotel chains
and other entities that may have substantially greater financial resources than
we do. We will also face competition for investors from other hotel real estate
investment trusts and real estate entities.
INVESTORS MAY WAIT UP TO ONE YEAR BEFORE RECEIVING THEIR COMMON SHARES OR A
REFUND OF THEIR MONEY IF THE MINIMUM OFFERING IS NOT ACHIEVED.
Until the minimum offering of 1,666,666.67 common shares is achieved,
investors will not receive their common shares. If at least 1,666,666.67 common
shares have not been sold within one year after the date of this prospectus, we
will terminate this offering of common shares. If the minimum offering is sold
within one year, investors will receive their common shares plus interest on
their subscription monies at the time of closing. If the offering is
terminated, investor will have their money promptly refunded with interest.
THERE WOULD BE SIGNIFICANT ADVERSE CONSEQUENCES OF OUR FAILURE TO QUALIFY AS A
REIT.
Qualification as a real estate investment trust, or REIT, involves the
application of highly technical and complex Internal Revenue Code provisions
for which there are limited judicial or administrative interpretations. If we
were to fail to qualify as a REIT for any taxable year, we would be subject to
federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status
would reduce our net earnings available for investment or distribution to our
shareholders because of the additional tax liability. In addition,
distributions to our shareholders would no longer qualify for the dividends
paid deduction and we would no longer be required to make distributions. To the
extent we would have made distributions in anticipation of qualifying as a
REIT, we might be required to borrow funds or liquidate investments in order to
pay the applicable tax.
OUR REAL ESTATE INVESTMENTS WILL BE RELATIVELY ILLIQUID.
Real estate investments are, in general, relatively difficult to sell. Our
illiquidity will tend to limit our ability to promptly vary our portfolio in
response to changes in economic or other conditions. In addition, provisions of
the Internal Revenue Code
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relating to REITs limit our ability to sell properties held for fewer than four
years. This limitation may affect our ability to sell properties without
adversely affecting returns to our shareholders.
OUR BOARD MAY IN ITS SOLE DISCRETION DETERMINE THE AMOUNT OF OUR AGGREGATE DEBT.
Subject to the limitations in our bylaws on the permitted maximum amount
of debt, there is no limitation on the number of mortgages or deeds of trust
that may be placed against any particular property. Our bylaws will prohibit us
from incurring debt if the debt would result in our total debt exceeding 100%
of the value of our assets at cost. The bylaws also will prohibit us from
allowing total borrowings to exceed 50% of the fair market value of our assets.
However, our bylaws allow us to incur debt in excess of these limitations when
the excess borrowing is approved by a majority of the independent directors and
disclosed to the shareholders. In addition, the bylaws will provide that our
borrowings must be reasonable in relation to our net assets and must be
reviewed quarterly by the directors.
WE HAVE NO RESTRICTION ON CHANGES IN OUR INVESTMENT AND FINANCING POLICIES.
Our board of directors approves our investment and financing policies,
including our policies with respect to growth, debt, capitalization and payment
of distributions. Although the board of directors has no present intention to
amend or waive its current policies, it could do so at any time, or from time
to time, at its discretion without a vote of our shareholders. For example, our
board could determine without shareholder's approval that it is in the best
interests of the shareholders to cease all investments in extended-stay hotel
properties, to make investments in other types of assets or to dissolve the
business.
THERE WILL BE DILUTION OF SHAREHOLDER'S INTERESTS UPON CONVERSION OF THE CLASS
B SHARES.
Glade M. Knight, who is our director, chairman of the board and president,
and others will hold Class B convertible shares which are convertible into
common shares, as described under "principal and management shareholders." The
number of common shares into which the Class B convertible shares are
convertible depends on the gross proceeds of the offering. The conversion ratio
is one-to-one for gross proceeds of $50 million (5,166,666 common shares). The
conversion ratio increases to eight-to-one for gross proceeds of $300 million.
The conversion of Class B convertible shares into common shares will result in
dilution of the shareholders' interests.
o Assuming 5,166,666 common shares offered by this prospectus were sold,
and all of the Class B convertible shares were converted into common
shares, the holders of the Class B convertible shares would own
approximately 240,000 common shares or 4.44% of the total number of
common shares then outstanding in exchange for an aggregate payment of
24,000.
o If half of the offering is sold, this would represent the sale of
15,166,666 common shares. Assuming 15,166,666 common shares were sold,
and all of the Class B convertible shares were converted into common
shares, the
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holders of the Class B convertible shares would own approximately
840,000 common shares or 5.25% of the total number of common shares
then outstanding in exchange for an aggregate payment of $24,000.
o Assuming all common shares offered by this prospectus were sold, and
all of the authorized Class B convertible shares were converted into
common shares, the holders of the Class B convertible shares would own
approximately 1,920,000 common shares or 5.98% of the total number of
common shares outstanding in exchange for an aggregate payment of
$24,000.
OUR SHAREHOLDERS' INTERESTS MAY BE DILUTED IN VARIOUS WAYS.
The board of directors is authorized, without shareholder approval, to
cause us to issue additional common shares or to raise capital through the
issuance of preferred shares, options, warrants and other rights, on terms and
for consideration as the board of directors in its sole discretion may
determine. Any such issuance could result in dilution of the equity of the
shareholders. The board of directors may, in its sole discretion, authorize us
to issue common shares or other equity or debt securities, (1) to persons from
whom we purchase property, as part or all of the purchase price of the
property, or (2) to Apple Suites Advisors or Apple Suites Realty in lieu of
cash payments required under the Advisory Agreement or other contract or
obligation. The board of directors, in its sole discretion, may determine the
value of any common shares or other equity or debt securities issued in
consideration of property or services provided, or to be provided, to us,
except that while common shares are offered by us to the public, the public
offering price of the shares shall be deemed their value.
We have agreed to sell to David Lerner Associates, Inc. warrants to
purchase 10% of the shares sold, up to 3,000,000 common shares, at an exercise
price of $16.50 per share. To the extent that the warrants are exercised,
dilution will occur if the warrant exercise price is less than the value of the
common shares at the time of exercise.
We have adopted two stock incentive plans for the benefit of our directors
and a limited number of our employees and employees of Apple Suites Advisors
and Apple Suites Realty. The effect of the exercise of those options could be
to dilute the value of the shareholders' investments to the extent of any
difference between the exercise price of an option and the value of the shares
purchased at the time of the exercise of the option.
In addition, we expressly reserve the right to implement a dividend
reinvestment plan involving the issuance of additional shares by us, at an
issue price determined by the board of directors.
SEVEN PARTNERSHIPS PREVIOUSLY ORGANIZED BY GLADE M. KNIGHT FILED FOR BANKRUPTCY.
Several private partnerships previously organized by Glade M. Knight
experienced operating difficulties and adverse business developments. A
prospective investor may deem this relevant in evaluating the risk that we will
experience operating difficulties and adverse business developments. Seven
private partnerships previously organized by Mr. Knight filed for
reorganization under Chapter 11 of the
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United States Bankruptcy Code. These partnerships ceased all cash distributions
to their investors. In addition, the properties owned by other partnerships
organized by Mr. Knight were lost through foreclosure.
OUR ARTICLES AND BYLAWS CONTAIN ANTITAKEOVER PROVISIONS AND OWNERSHIP LIMITS.
Ownership Limits. Our bylaws contain restrictions on stock ownership which
may discourage third parties from making acquisition proposals. These same
antitakeover provisions may also impede our shareholders' ability to change our
management.
In order to maintain our qualification as a REIT, no more than 50% in
value of our outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals or entities. As a result, our bylaws
prohibit ownership, either directly or indirectly, of more than 9.8% of the
common shares by any shareholder. Our board may waive this ownership limitation
on a case-by-case basis. As a result, without our board's approval, no person
may acquire more than 9.8% of our outstanding common shares, limiting a
third-party's ability to acquire control of us.
Preferred Shares. Our articles of incorporation authorize the board to
issue up to 15,000,000 preferred shares and to establish the preference and
rights of those shares. Thus, our board could create a new class of preferred
shares with voting or other rights senior to any existing class of stock. These
rights could delay or prevent a change in control even if a change were in our
shareholders' best interest.
WE MAY BECOME SUBJECT TO ENVIRONMENTAL LIABILITIES.
Although we will subject our properties to an environmental assessment
prior to acquisition, we may not be made aware of all the environmental
liabilities associated with a property prior to its purchase. There may be
hidden environmental hazards that may not be discovered prior to acquisition.
The costs of investigation, remediation or removal of hazardous substances may
be substantial. In addition, the presence of hazardous substances on one of our
properties, or the failure to remediate properly a contaminated property, could
adversely affect our ability to sell or rent the property or to borrow using
the property as collateral.
Various federal, state and local environmental laws impose
responsibilities on an owner or operator of real estate and subject those
persons to potential joint and several liabilities. Typical provisions of those
laws include:
-- Responsibility and liability for the costs of removal or remediation
of hazardous substances released on or in real property, generally
without regard to knowledge of or responsibility for the presence of
the contaminants.
-- Liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for the
disposal or treatment of those substances.
-- Potential liability under common law claims by third parties based on
damages and costs of environmental contaminants.
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WE MAY INCUR SIGNIFICANT COSTS COMPLYING WITH THE AMERICANS WITH DISABILITIES
ACT AND SIMILAR LAWS.
Our properties will be required to meet federal requirements related to
access and use by disabled persons as a result of the Americans with
Disabilities Act of 1990. In addition, a number of additional federal, state
and local laws may require modifications to any properties we purchase, or may
restrict further renovations thereof, with respect to access by disabled
persons. Noncompliance with these laws or regulations could result in the
imposition of fines or an award of damages to private litigants. Additional
legislation could impose additional financial obligations or restrictions with
respect to access by disabled persons. If required changes involve greater
expenditures than we currently anticipate, or if the changes must be made on a
more accelerated basis, our ability to make expected distributions could be
adversely affected.
OUR COMPUTER SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT, WHICH WOULD LEAD TO
OPERATIONAL DIFFICULTIES AND INCREASED COSTS.
Many of the world's computer systems currently record years in a two-digit
format. Those computer systems will be unable to properly interpret dates
beyond the year 1999, which could lead to disruptions in our operations
commonly referred to as the "Year 2000" issue. We and Apple Suites Advisors,
Apple Suites Realty and Apple Suites Management do not have any computer
systems and are in the process of developing initiatives to address the Year
2000 issue. We cannot guarantee that our systems and those of Apple Suites
Advisors, Apple Suites Realty or Apple Suites Management will be Year 2000
compliant or that other companies on which we may rely will be timely
converted. As a result, our operations could be adversely affected.
WE MAKE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS WHICH MAY PROVE TO BE
INACCURATE.
This prospectus contains 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, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to
accurately predict and many of which 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.
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USE OF PROCEEDS
We intend to invest the net proceeds of this offering in equity ownership
interests in extended-stay hotel properties located in selected metropolitan
areas of the United States. Pending investment in real estate, the proceeds may
be invested in temporary investments consistent with our bylaws and the
Internal Revenue Code. These temporary investments include U.S. government
securities, certificates of deposit, or commercial paper. All proceeds of this
offering received by us must be invested in properties or allocated to working
capital reserves within the later of two years after commencement of the
offering or one year after termination of the offering. Any proceeds not
invested in properties or allocated to working capital reserves by the end of
this time period will be returned to investors within 30 days after the
expiration of the period. We may elect to return the proceeds earlier if
required by applicable law, including to the extent necessary to avoid
characterization as an "investment company". The proceeds of this offering will
be received and held in trust for the benefit of investors in compliance with
applicable securities laws, to be used only for the purposes set forth in this
prospectus.
Our bylaws prohibit our total organizational and offering expenses from
exceeding 15% of the amount raised in this offering. Organizational and
offering expenses are all expenses incurred in organizing us and offering and
selling the common shares, including: selling commissions and fees, legal fees
and accounting fees, and federal, state and other regulatory filing fees. The
bylaws also prohibit the total of all acquisition fees and acquisition expenses
paid in connection with an acquisition of a property from exceeding 6% of the
contract price for the property unless these excess fees or expenses are
approved by the board of directors. Acquisition fees are all fees and
commissions paid by any party in connection with our purchase of real property.
Acquisition expenses are all expenses related to the selection or acquisition
of properties by us. Any organizational and offering expenses or acquisition
fees and acquisition expenses incurred by us in excess of the permitted limits
will be payable by Apple Suites Advisors to us immediately upon our demand.
On April 20, 1999, we obtained a line of credit in a principal amount of
up to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all accrued interest are due in
full on October 20, 1999. Glade M. Knight, our president and chairman of the
board, has guaranteed repayment of the loan. We expect to repay this debt with
proceeds from the sale of common shares.
As indicated below, we expect, that once the minimum offering of
1,666,666.67 common shares is completed, that 84.5% of the gross offering
proceeds will be available for investment in properties and 0.5% will be
allocated to our working capital reserve. However, the percentage of gross
offering proceeds available for investment could be less if the offering
expenses are greater than the amounts indicated or if we feel it prudent to
establish a larger working capital reserve. For example, we might feel it
prudent to establish a larger working capital reserve to cover possible
unanticipated costs or liabilities. If we only receive the proceeds from the
minimum offering, we will invest in fewer properties than if we were to receive
the proceeds from the maximum offering of 30,166,666.67 common shares.
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The following table reflects the intended application of the proceeds from
the sale of the common shares.
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
----------------------------- ------------------------------
% OF % OF
GROSS GROSS
AMOUNT PROCEEDS AMOUNT PROCEEDS
-------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Gross Proceeds (1) ................ $15,000,000 100.00% $300,000,000 100.00%
Less
Offering Expenses (2) ........... 450,000 3.00% 1,500,000 0.50%
Selling Commissions (3) ......... 1,125,000 7.50% 22,500,000 7.50%
Marketing Expense Allowance
(3) ............................ 375,000 2.50% 7,500,000 2.50%
----------- ------ ------------ ------
Net Proceeds after Offering Costs $13,050,000 87.00% $268,500,000 89.50%
Less Acquisition Fees and
Expenses (4) .................... 300,000 2.00% 6,000,000 2.00%
----------- ------ ------------ ------
Proceeds Available for
Investment and Working
Capital ......................... $12,750,000 85.00% $262,500,000 87.50%
Less Working Capital Reserve
(5) ............................. 75,000 0.50% 1,500,000 0.50%
----------- ------ ------------ ------
Net Amount Available for
Investment in
Properties (6) .................. $12,675,000 84.50% $261,000,000 87.00%
----------- ------ ------------ ------
</TABLE>
- ----------
(1) The Shares are being offered on a "best-efforts" basis.
(2) These amounts reflect our estimate of offering expenses, exclusive of the
selling commissions and the marketing expense allowance payable to David
Lerner Associates, Inc. If the offering expenses are greater than the
amounts indicated, the amount of proceeds available for investment will
decrease, and if these expenses are less, the amount available for
investment will increase.
(3) Payable to David Lerner Associates, Inc.
(4) These amounts include a real estate commission payable to Apple Suites
Realty in an amount equal to 2% of the proceeds of the offering used to
pay the purchase price of each property acquired not including amounts
budgeted for repairs and improvements plus our estimates of other expenses
and fees which will be incurred in connection with property acquisitions.
(5) Until used, amounts in our working capital reserve, together with any other
proceeds not invested in properties or used for other company purposes,
will be invested in permitted temporary investments such as U.S.
Government securities or similar liquid instruments.
(6) We expect the investment properties to be extended-stay hotel properties
located in selected metropolitan areas of the United States.
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COMPENSATION
The table below describes all the compensation , fees, reimbursement and
other benefits which we will pay to Apple Suites Advisors and Apple Suites
Realty. Mr. Knight is the sole shareholder of Apple Suites Advisors and Apple
Suites Realty. Mr. Knight is also our sole executive officer. He will receive
no compensation from us. He will, however, receive dividend income from Apple
Suites Advisors and Apple Suites Realty.
We will pay David Lerner Associates, Inc. selling commissions equal to
7.5% of the purchase price of the common shares and a marketing expense
allowance equal to 2.5% of the purchase price of the common shares. If the
minimum offering of $15,000,000 is sold, the selling commissions would be
$1,125,000 and the marketing expense allowance would be $375,000. If the
maximum offering of $300,000,000 is sold, the selling commissions would be
$22,500,000 and the marketing expense allowance would be $7,500,000. David
Lerner Associates, Inc. is not related to nor an affiliate of either Apple
Suites Advisors or Apple Suites Realty.
<TABLE>
<CAPTION>
PERSON RECEIVING
COMPENSATION (1) TYPE OF COMPENSATION AMOUNT OF COMPENSATION (2)
- ---------------------- ---------------------------- -------------------------------
<S> <C> <C>
ACQUISITION PHASE
Apple Suites Realty Real estate commission 2% of the proceeds of the
Group, Inc. for acquiring our offering used to pay the
properties purchase prices of the
properties purchased by us for
a maximum of $5,400,000. (3)
OPERATIONAL PHASE
Apple Suites Asset management fee for Annual fee payable quarterly
Advisors, Inc managing a day-to-day based upon our ratio of funds
operations from operations to the
amount raised in this offering
ranging from 0.1% to 0.25%
of the amount raised in this
offering -- a maximum of
$37,500 per year if the
minimum offering is sold; a
maximum of $750,000 per
year if the maximum offering
is sold. (4)
Apple Suites Reimbursement for costs Amount is indeterminate (6)
Advisors, Inc. and and expenses incurred on
Apple Suites Realty our behalf, as described in
Group, Inc. Note (5)
</TABLE>
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<TABLE>
<CAPTION>
DISPOSITION PHASE
<S> <C> <C>
Apple Suites Realty Real estate commission for Up to 2% of the gross sales
Group, Inc. selling our properties prices of the properties sold by
us. (7)
ALL PHASES
Apple Suites Payment for services and Amount is indeterminate (9)
Advisors, Inc. and property (8)
Apple Suites Realty
Group, Inc.
</TABLE>
- ----------
(1) Apple Suites Advisors and Apple Suites Realty will receive different types
of compensation for services rendered in connection with the acquisition
and disposition of our properties, as well as the management of our
day-to-day operations. As discussed under "Conflicts of Interest," the
receipt of these fees could result in potential conflicts of interest for
persons who participate in decision making on behalf of both our company
and these other entities.
(2) Except as otherwise indicated in this table, the specific amounts of
compensation or reimbursement payable to Apple Suites Advisors and Apple
Suites Realty are not now known and generally will depend upon factors
determinable only at the time of payment. Compensation payable to these
entities may be shared or reallocated among them or their affiliates in
their sole discretion as they may agree. However, compensation and
reimbursements which would exceed specified limits or ceilings cannot be
recovered by them or their affiliates through reclassification into a
different category.
(3) Under a Property Acquisition/Disposition Agreement with us, Apple Suites
Realty has agreed to serve as the real estate advisor in connection with
both our purchases and sales of properties. In exchange for these
services, Apple Suites Realty will be entitled to a fee from us of 2% of
the gross purchase price of each property purchased by us not including
amounts budgeted for repairs and improvements. If the person from whom we
purchase or to whom we sell a property pays any fee to Apple Suites Realty
that amount will decrease the amount of our obligation to Apple Suites
Realty.
(4) Under an Advisory Agreement with Apple Suites Advisors we are obligated to
pay an asset management fee which is a percentage of the gross offering
proceeds which have been received from time to time from the sale of the
common shares. The percentage used to calculate the asset management fee
is based on the "return ratio." The return ratio is the ratio of funds
from operations to the amount raised in this offering for the preceding
calendar quarter. The per annum asset management fee is equal to the
following with respect to each calendar quarter: 0.1% of the amount raised
in this offering if the return ratio for the preceding calendar quarter is
6% or less; 0.15% of the amount raised in this offering if the return
ratio for the preceding calendar quarter is more than 6% but not more than
8%; and 0.25% of the amount raised in this offering if the return ratio
for the preceding calendar quarter is above 8%. Assuming the minimum
offering of $15,000,000 is sold, the annual asset management fee would be
between $15,000 and $37,500. Assuming the maximum offering of $300,000,000
is sold, the annual asset management fee would be between $300,000 and
$750,000.
(5) Apple Suites Advisors and Apple Suites Realty will be reimbursed for all
direct costs of acquiring and operating our properties and of goods and
materials used for or by us and obtained from entities that are not
affiliated with Apple Suites Advisors. These costs and expenses include,
but are not limited to, legal fees and expenses, travel and communication
expenses, expenses relating to shareholder communications, costs of
appraisals, non-refundable option payments on property not acquired,
accounting fees and expenses, title insurance, and all other fees, costs
and expenses directly attributable to the acquisition and ownership of our
properties. Operating expenses reimbursable to Apple Suites Advisors and
Apple Suites Realty are subject to the overall limitation on operating
expenses discussed under "Apple Suites Advisors and Affiliates -- The
Advisory Agreement," but the amount of reimbursement is not otherwise
limited.
(6) While we cannot determine with any certainty the future reimbursements for
costs and expenses that will be incurred on our behalf by Apple Suites
Advisors and Apple Suites Realty, we estimate based on the experience of
management in the organization and management of two other real estate
investment trusts that if that if the maximum offering is achieved the
total amount of reimbursements will equal $500,000 over the next three
calendar years. This amount is our best estimate of what those future
costs and expenses may be. We have no way of knowing at this time whether
this estimate will be accurate.
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(7) Under the Property Acquisition/Disposition Agreement described in note (3),
Apple Suites Realty also will be entitled to a fee from us in connection
with our sale of each property equal to 2% of the gross sales price of the
property if, and only if, the sales price exceeds the sum of (1) our cost
basis in the property (consisting of the original purchase price plus any
and all capitalized costs and expenditures connected with the property)
plus (2) 10% of the cost basis. For purposes of this calculation, our cost
basis will not be reduced by depreciation.
The compensation to Apple Suites Realty for dispositions of properties is
subject to multiple factors, including (a) whether any properties are ever
sold, (b) the price at which those future sales, if any, occur, (c)
whether the purchaser is an affiliate and (d) whether the purchaser paid a
fee to Apple Suites Realty. While we cannot determine with an certainty
the future compensation to Apple Suites Realty for disposition services,
we can estimate the fees on the assumptions that after three years all our
properties are sold to non-affiliates, at prices equal to our cost basis
plus 10% and the purchaser does not pay a fee to Apple Suites Realty.
Based on those assumptions, if (1) the minimum offering were achieved and
$12,675,000 were invested in properties, the fee payable to Apple Suites
Realty would be $278,850 and (2) if the maximum offering were achieved and
$261,000,000 were invested in properties, the fee payable to Apple Suites
Realty would be $5,742,000. We currently have no plan or intention to sell
any properties we may purchase.
(8) Apple Suites Advisors and Apple Suites Realty may provide other services or
property to us, and will be entitled under certain conditions to
compensation or payment for those services or property. Those conditions,
which are summarized under "Conflicts of Interest -- Transactions with
Affiliates and Related Parties," include the requirement that each
transaction be approved by the affirmative vote of a majority of the
independent directors. Currently, there are no arrangements or proposed
arrangements between us, on the one hand, and these two entities, on the
other hand, for the provision of other services or property to us or the
payment of compensation or reimbursement. If any other arrangements arise
in the future, the terms of the arrangements, including the compensation
or reimbursement payable, will be subject to the restrictions in our
bylaws. The compensation, reimbursement or payment could take the form of
cash or property, including common shares.
(9) We currently have no, and do not anticipate entering into any, arrangements
or proposed arrangements to pay compensation or reimbursements for other
services or properties.
CONFLICTS OF INTERESTS
GENERAL
We may be subject to various conflicts of interest arising from our
relationship with Apple Suites Advisors, Apple Suites Realty, Apple Suites
Management and Glade M. Knight, our chairman of the board. Mr. Knight is the
sole shareholder of Apple Suites Advisors, Apple Suites Realty and Apple Suites
Management.
Apple Suites Advisors, Apple Suites Realty, Apple Suites Management and
Mr. Knight are not restricted from engaging for their own account in business
activities of the type conducted by us. Occasions may arise when our interests
conflict with those of one or more of Mr. Knight, Apple Suites Advisors, Apple
Suites Realty and Apple Suites Management. Apple Suites Advisors, Apple Suites
Realty, Apple Suites Management and Mr. Knight are accountable to us and our
shareholders as fiduciaries, and consequently must exercise good faith and
integrity in handling our affairs.
Apple Suites Advisors, Apple Suites Realty and Apple Suites Management
will assist us in acquisition, organization, servicing, management and
disposition of investments. At this time, Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management will provide services exclusively to us, but
THEY may perform similar services for other parties, both affiliated and
unaffiliated, in the future.
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<PAGE>
CONFLICTS WITH RESPECT TO FEES PAID BY US TO APPLE SUITES ADVISORS AND APPLE
SUITES REALTY
The receipt of various fees from us by Apple Suites Advisors and Apple
Suites Realty may result in potential conflicts of interest for persons,
particularly Mr. Knight who participate in decision making on behalf of both us
and these other entities.
CONFLICTS WITH RESPECT TO COMMISSIONS. Apple Suites Realty will receive a
2% commission upon each purchase by us of a property, and a commission of 2%
upon each sale by us of a property. Therefore, its compensation will increase
in proportion to the number of properties purchased and sold by us and the
properties' purchase and sale prices. Apple Suites Realty has an incentive to
see that multiple properties are purchased and sold by us.
CONFLICTS WITH RESPECT TO ASSET MANAGEMENT FEES. Apple Suites Advisors
asset management fee is a percentage of total proceeds received from time to
time by us from the sales of our common shares. Accordingly, it has an
incentive to see that sales of common shares are closed as quickly as possible
by us.
Apple Suites Advisors and Apple Suites Realty do not intend to take any
action or make any decision on our behalf which is based, wholly or in part,
upon a consideration of the compensation payable to them as a consequence of
the action or decision. In addition, the presence on our board of directors of
independent directors is intended to ameliorate the potential impact of
conflicts of interest for persons such as Mr. Knight who participate in
decision making on behalf of both us and Apple Suites Advisors or Apple Suites
Realty.
POLICIES TO ADDRESS CONFLICTS
The board of directors, Apple Suites Advisors, Apple Suites Realty and
Apple Suites Management will also be subject to the various conflicts of
interest described below. Policies and procedures will be implemented to
ameliorate the effect of potential conflicts of interest. By way of
illustration, the bylaws place limitations on the terms of contracts between us
and Apple Suites Advisors, Apple Suites Realty or Apple Suites Management
designed to ensure that these contracts are not less favorable to us than would
be available from an unaffiliated party. However, some potential conflicts of
interest are not easily susceptible to resolution.
Prospective shareholders are entitled to rely on the general fiduciary
duties of the directors, Apple Suites Advisors, Apple Suites Realty and Apple
Suites Management as well as the specific policies and procedures designed to
ameliorate potential conflicts of interest. Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management believe that general legal principles
dealing with fiduciary and similar duties of corporate officers and directors,
combined with specific contractual provisions in the agreements between us, on
the one hand, and Apple Suites Advisors, Apple Suites Realty and Apple Suites
Management on the other hand, will provide substantial protection for the
interests of the shareholders. We do not believe that the potential conflicts
of interests described above will have a material adverse effect upon our
ability to realize our investment objectives.
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<PAGE>
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
At the time of initial closing, the board of directors will consist of
five members, all of whom, other than Mr. Knight, will be independent
directors. Our bylaws define an independent director as a director who is not
affiliated, directly or indirectly, with apple suites advisors, Apple Suites
Realty, and Apple Suites Management or an affiliate of any of these entities.
An affiliate of a company generally means a person who controls the company,
who owns 10% or more of the voting stock of the company, or who is an officer
or director of the company. Generally, our independent directors may perform no
other services for us, except as directors. However, any director who performs
legal services for us or Apple Suites Advisors, Apple Suites Realty or an
affiliate may qualify as an independent director. At all times on and after
initial closing, a majority of the board of directors must be independent
directors. Under our bylaws, any transaction between us, on the one hand, and
Apple Suites Advisors, Apple Suites Realty or Apple Suites Management on the
other hand is permitted only if the transaction has been approved by a majority
of all of the independent directors. However, the previous sentence does not
apply to the entering into, and the initial term under, the Advisory Agreement
and the Property Acquisition/Disposition Agreement, each of which is described
in this prospectus. In addition, under the bylaws, transactions between us and
Apple Suites Advisors, Apple Suites Realty, or Apple Suites Management must be
in all respects fair and reasonable to our shareholders. If any proposed
transaction involves the purchase of property, the purchase must be on terms
not less favorable to us than those prevailing for arm's-length transactions
concerning comparable property, and at a price to us no greater than the cost
of the asset to the seller unless a majority of the independent directors
determines that substantial justification for the excess exists. Examples of
substantial justification might include, without limitation, an extended
holding period or capital improvements by the seller which would support a
higher purchase price.
Apple Suites Advisors and Apple Suites Realty will receive compensation
from us for providing many different services. The fees payable and expenses
reimbursable are subject to the general limitation on operation expenses. The
board of directors will have oversight responsibility with respect to our
relationships with Apple Suites Advisors or Apple Suites Realty and will
attempt to ensure that they are structured to be no less favorable to us than
our relationships with unrelated persons or entities and are consistent with
our objectives and policies.
COMPETITION BETWEEN US AND MR. KNIGHT
We have obtained a $1 million loan to cover our start-up costs. This loan
is guaranteed by Glade M. Knight, our president and chairman of the board. We
expect to repay this loan with proceeds of this offering. Because Mr. Knight is
personally liable for repayment of this loan, he has an incentive to see that
at least the minimum offering is raised. This could present a conflict of
interest for Mr. Knight since his personal interests would be adversely
affected if the offering is not successful for any reason.
Mr. Knight or other companies organized by him, may form additional REITs,
limited partnerships and other entities to engage in activities similar to
ours. Mr.
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<PAGE>
Knight has no present intention of organizing any additional REITs. However,
until the time as more than 95% of the proceeds of this offering are invested,
Mr. Knight and Apple Suites Advisors, Apple Suites Realty and Apple Suites
Management shall present to us any suitable investment opportunity before
offering it to any other affiliated entity.
The competing activities of Apple Suites Advisors, Apple Suites Realty,
Apple Suites Management and Mr. Knight may involve conflicts of interest. For
example, Mr. Knight is interested in the continuing success of previously
formed ventures because he has fiduciary responsibilities to investors in those
ventures, he may be personally liable on obligations of those ventures and he
has equity and incentive interests in those ventures. Conflicts of interest
would also exist if properties acquired by us compete with properties owned or
managed by Mr. Knight or affiliates of Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management. Conflicts of interest may also arise in the
future if we sell, finance or refinance properties at the same time as ventures
developed by Mr. Knight or affiliates of Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management.
COMPETITION FOR MANAGEMENT SERVICES
Mr. Knight is and in the future will be an officer or director of one or
more entities, which engage in the brokerage, sale, operation, or management of
real estate. Accordingly, Mr. Knight may have conflicts of interest in
allocating management time and services between us and other entities.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following is a discussion of our current policies with respect to
investments, financing and other activities. These policies have been
established by our management. These policies may be amended or waived from
time to time at the discretion of our board of directors without a vote of our
shareholders. No assurance can be given that our investment objectives will be
attained.
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE.
Our primary business objective is to maximize shareholder value by
achieving long-term growth in cash distributions to our shareholders. We intend
to pursue this objective by acquiring extended-stay hotel properties for
long-term ownership. We intend to acquire fee ownership of our hotel
properties. We intend to lease these properties to hotel operating companies
for their management. We seek to maximize current and long-term net income and
the value of our assets. Our policy is to acquire assets where we believe
opportunities exist for acceptable investment returns.
We expect to pursue our objectives primarily through the direct ownership
of extended-stay hotel properties located in selected metropolitan areas.
However, future investment activities will not be limited to any geographic
area or product type or to a specified percentage of our assets.
Although we are not currently doing so, we may also participate with other
entities in property ownership, through joint ventures or other types of common
ownership. Equity investments may be subject to existing mortgage financing and
other indebtedness which have priority over our equity interests.
We reserve the right to dispose of any property if we determine the
disposition of a property is in our best interests and the best interests of
our shareholders.
BORROWING POLICIES
To maximize our potential cash flow and minimize our risk, we intend to
purchase our properties on an "all-cash" basis. However, we may initially use
limited interim borrowings in order to purchase properties. We will endeavor to
repay any interim borrowings with proceeds from the sale of common shares and
thereafter to hold our properties on an unleveraged basis. However, for the
purpose of flexibility in operations, we will have the right, subject to the
approval of the board of directors, to borrow.
One purpose of borrowing could be to permit our acquisition of additional
properties through the "leveraging" of shareholders' equity contributions.
Alternatively, we might find it necessary to borrow to permit the payment of
operating deficits at properties we already own. Furthermore, although not
anticipated, properties may be financed or refinanced if the board of directors
deems it in the best interests of shareholders because, for example,
indebtedness can be incurred on favorable terms and the incurring of
indebtedness is expected to improve the shareholders' after-tax cash return on
invested capital.
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<PAGE>
Loans we obtain may be evidenced by promissory notes secured by mortgages
on our properties. As a general policy, we would seek to obtain mortgages
securing indebtedness which encumber only the particular property to which the
indebtedness relates, but recourse on these loans may include all of our
assets. If recourse on any loan incurred by us to acquire or refinance any
particular property includes all of our assets, the equity in other properties
could be reduced or eliminated through foreclosure on that loan.
Subject to the approval of the board of directors, we may borrow from
Apple Suites Advisors or Apple Suites Realty or establish a line of credit with
a bank or other lender. Those entities are under no obligation to make any
loans, however. After the initial closing of $15,000,000, any loans made by
them must be approved by a majority of the independent directors as being fair,
competitive and commercially reasonable and no less favorable to us than loans
between unaffiliated lenders and borrowers under the same circumstances.
After the initial closing of $15,000,000, our bylaws will prohibit us from
incurring debt if the debt would result in aggregate debt exceeding 100% of
"Net Assets," defined generally to mean assets at cost, before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
independent directors and disclosed to the shareholders as required by the
bylaws. The bylaws also will prohibit us from allowing aggregate borrowings to
exceed 50% of our "Adjusted Net Asset Value," defined generally to mean assets
at fair market value, before subtracting liabilities, subject to the same
exception described in the previous sentence. In addition, the bylaws will
provide that the aggregate borrowings must be reasonable in relation to our net
assets and must be reviewed quarterly by the directors. Subject to the
limitations on the permitted maximum amount of debt, there is no limitation on
the number of mortgages or deeds of trust which may be placed against any
particular property.
Assuming the independent directors approve, we may initially borrow in
excess of the debt limitations described in the previous paragraph in order to
acquire a portfolio of extended-stay hotel properties. If attainable, the
acquisition of a portfolio of properties early in our existence would, in the
opinion of our management, provide us with greater ability to acquire
extended-stay hotel properties in the future as proceeds from the sale of
common shares are received and provide us with economies of scale from the
outset. We would endeavor to use only interim borrowing for these acquisitions
in order to maintain our long-term policy of purchasing our properties on an
all cash basis. We would repay any interim borrowings with proceeds from the
sale of common shares.
RESERVES
A portion of the proceeds of this offering will be reserved to meet
working capital needs and contingencies associated with our operations. We will
initially allocate to our working capital reserve not less than 0.5% of the
proceeds of the offering. As long as we own any properties, we will retain as
working capital reserves an amount equal to at least 0.5% of the proceeds of
the offering, subject to review and re-evaluation by the board of directors. If
reserves and any other
26
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available income become insufficient to cover our operating expenses and
liabilities, it may be necessary to obtain additional funds by borrowing,
refinancing properties or liquidating our properties on an all cash basis. We
would repay any interim borrowings with investment in one or more properties.
SALE POLICIES
We are under no obligation to sell our investment properties, and
currently anticipate that we will hold our investment properties for an
indefinite length of time. However, a sale of one or more properties may occur
at any time if Apple Suites Advisors deems it advisable for us based upon
current economic considerations, and the board of directors concurs with the
decision. In deciding whether to sell a property, Apple Suites Advisors will
also take into consideration factors such as: the amount of appreciation in
value, if any, to be realized; federal, state and local tax consequences; the
possible risks of continued ownership; and the anticipated advantages to be
gained for the shareholders from sale of a property versus continuing to hold
property.
Currently, we expect that within approximately three years from the
initial closing, we will either:
(1) cause the common shares to be listed on a national securities
exchange or quoted on the NASDAQ National Market System or
(2) with shareholder approval, dispose of all of our properties in a
manner which will permit distributions to our shareholders of cash.
The taking of either type of action would be conditioned on the board of
directors determining the action to be prudent and in the best interests of the
shareholders, and would be intended to provide shareholders with liquidity
either by initiating the development of a market for the common shares or by
disposing of properties and distributing to shareholders cash. Virginia law and
our articles of incorporation state that a majority of the common shares then
outstanding and entitled to vote is required to approve the sale of all or
substantially all our assets. However, we are under no obligation to take any
of these actions, and these actions, if taken, might be taken after the
three-year period.
CHANGES IN OBJECTIVES AND POLICIES
Subject to the limitations in the articles of incorporation, the bylaws
and the Virginia Stock Corporation Act, the powers of our company will be
exercised by or under the authority of, and the business and affairs of our
company will be controlled by, the board of directors. The board of directors
also has the right and power to establish policies concerning investments and
the right, power and obligation to monitor the procedures, investment
operations and performance of our company.
In general, the articles of incorporation and the bylaws can be amended
only with the affirmative vote of a majority of the outstanding common shares,
except that the bylaws may be amended by the board of directors if necessary to
comply
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with the real estate investment trust provisions of the Internal Revenue Code
or with other applicable laws, regulations or requirements of any state
securities regulator. The bylaws can also be amended by the board of directors
to:
o correct any ambiguity in the bylaws or resolve inconsistencies between
the bylaws and the Articles;
o make changes that are not materially adverse to the rights of
shareholders; or
o allow us to take any action or fulfill any obligation which we are
legally obligated or permitted to take.
Within the express restrictions and prohibitions of the bylaws, the
articles of incorporation and applicable law, however, the board of directors
has significant discretion to modify our investment objectives and policies, as
stated in this prospectus. We have no present intention to modify any of our
investment objectives and policies, and it is anticipated that any modification
would occur only if business and economic factors affecting us made our stated
investment objectives and policies unworkable or imprudent. By way of
illustration only, the board of directors could elect to acquire residential
apartment communities, or to acquire one or more commercial properties in
addition to extended-stay hotel properties.
Thus, while this prospectus accurately and fully discloses our current
investment objectives and policies, prospective shareholders must be aware that
the board of directors, acting consistently with our organizational documents,
applicable law and their fiduciary obligations, may elect to modify or expand
our objectives and policies from time to time. Any action by the board of
directors would be based upon the perceived best interests of our company and
the shareholders.
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DISTRIBUTIONS POLICY
Distributions will be at the discretion of our board of directors and will
depend upon factors including:
-- the gross revenues we receive from our properties,
-- our operating expenses,
-- our interest expense incurred in borrowing,
-- capital expenditures, and
-- our need for cash reserves.
While we intend to make quarterly distributions, there can be no assurance
that we will be able to make distributions at any particular rate, or at all.
In accordance with applicable real estate investment trust requirements,
we will make distributions in compliance with the Internal Revenue Code.
We anticipate distributions will exceed net income determined in
accordance with generally accepted accounting principles due to non-cash
expenses, primarily depreciation and amortization.
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BUSINESS
GENERAL
We are a Richmond, Virginia-based company. We plan to elect to be treated
as a real estate investment trust for federal income tax purposes beginning
with our taxable year ending December 31, 1999. We plan to purchase and own
extended-stay hotel properties located in selected metropolitan areas. However,
we currently own no properties.
BUSINESS STRATEGIES
Our primary business objective is to maximize shareholder value by
maintaining long-term growth in cash distributions to our shareholders. To
achieve this objective, we will focus on maximizing the internal growth of our
portfolio by selecting properties that have strong cash flow growth potential.
We intend to pursue this objective by acquiring extended-stay hotel properties
for long-term ownership by purchasing properties in fee simple. Because we are
prohibited under the federal tax laws pertaining to qualifying as a real estate
investment trust from operating our extended stay hotel properties, we will
lease each of our hotel properties to Apple Suites Management or another lessee
for their management. We anticipate that substantially all of our hotel
properties will be leased to Apple Suites Management, a Virginia corporation,
the sole shareholder and chief executive officer of which is Glade M. Knight.
We will seek associations with distinctive brands in the extended-stay
hotel market. We are currently negotiating a license agreement and management
agreement with Promus Hotels, Inc. with respect to extended-stay hotel
properties we may purchase from Promus Hotels, Inc. These agreements would
permit us to have our properties identified as Homewood Suites(Reg. TM)
properties.
HOMEWOOD SUITES(Reg. TM)
Consistent with our strategy to invest in extended-stay hotel properties,
we are in the process of negotiating an agreement to purchase a number of
Homewood Suites(Reg. TM) properties from Promus Hotels, Inc. No agreement
presently exists. If we are successful in negotiating an agreement with Promus
Hotels, Inc., any such agreement would have a number of conditions to each
party's obligations thereunder, including our achieving the minimum offering of
1,666,666.67 common shares. Accordingly, there can be no assurance we will
purchase any Homewood Suites(Reg. TM) properties.
If we are successful in negotiating an agreement with Promus Hotels, Inc.
and are able to sell the minimum offering of 1,666,666.67 common shares, we
expect that we would purchase five Homewood Suites(Reg. TM) properties for
approximately $50,000,000. Since the net proceeds of the minimum offering would
be approximately $12,675,000, our ability to purchase five Homewood Suites(Reg.
TM) properties would depend on our ability to arrange financing for the balance
of the purchase price either from Promus Hotels, Inc. or a bank.
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We have no commitments from either Promus Hotels, Inc. or a bank to
provide such financing and there can be no assurance that financing on
acceptable terms will be available. Furthermore, such financing, if available,
would require the approval of a majority of the independent directors if it
would exceed the limit on debt allowed in the bylaws in the absence of such
approval.
There are currently more than 70 Homewood Suites(Reg. TM) properties in
the United States. Homewood Suites(Reg. TM) offers upscale, all-suites,
high-quality, residential-style lodging with a comprehensive package of guest
services and amenities, for extended-stay business and leisure travelers.
Homewood Suites(Reg. TM) properties are designed to meet the needs of the
business and leisure traveler whose stay is typically five nights or more.
Homewood Suites(Reg. TM) was designed for people working on field assignments,
relocating to a new community, attending seminars and conventions,
participating in corporate training programs, taking an extended vacation or
attending a family event.
Homewood Suites(Reg. TM) properties consist of suites built around a
central hospitality center or lodge. Homewood Suites(Reg. TM) provides spacious
residential-style quarters with separate living and sleeping areas large enough
for work, study, entertaining or relaxation. Each suite features a fully
equipped kitchen and worksite with two telephones featuring data ports and
voice mail. Each lodge or hospitality center features a complete executive
center with fax machine and photocopier in addition to an exercise center,
swimming pool and other recreational facilities.
Homewood Suites(Reg. TM) is a service mark owned by Promus Hotels, Inc.
Promus Hotels, Inc., its subsidiaries or affiliates also own the following
trademarks and service marks: Doubletree(Reg. TM), Doubletree Guests
Suites(Reg. TM), Club Hotel by Doubletree(Reg. TM) Hampton Inn(Reg. TM),
Hampton Inn & Suites(Reg. TM), Embassy Vacation Resorts(Reg. TM) and Hampton
Vacation Resorts. SM Promus Hotels, Inc., its subsidiaries or affiliates serve
guests in more than 1,275 hotels and more than 186,000 rooms and suites. We are
not affiliated with Promus Hotels, Inc. or any of its affiliates.
DESCRIPTION OF LEASES
We expect to lease our properties to an operator under long-term leases.
We anticipate that substantially all of our properties will be leased to and
operated by Apple Suites Management on the following anticipated terms and
conditions.
TERM. We anticipate that each lease will provide for an initial term of
five years commencing on the date on which the property is acquired. Each lease
will provides the lessee with renewal options, provided that (a) the lessee
will not have the right to a renewal if there shall have occurred a change in
the tax law that would permit us to operate the hotel properties directly and
(b) the rent for each renewal term will be adjusted to reflect the then fair
market rental value of the property. If we are unable to agree upon the then
fair market rental value of a property, the lease will terminate upon the
expiration of the then current term and Apple Suites Management will have a
right of first refusal to lease the property from us on terms as we may have
agreed upon with a third-party lessee.
BASE RENT; PARTICIPATING RENT. Our rents will be based on a base amount
and a percentage of gross income. We anticipate that each lease will require
the lessee to
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pay (1) fixed monthly base rent, (2) on a monthly basis, the excess of
"participating rent" over base rent, with participating rent based on
percentages of room revenue, food and beverage revenue and telephone and other
revenue at each property, and (3) other amounts, including interest accrued on
any late payments or charges. Base rent may increase annually by a percentage
equal to the percentage increase in the consumer price index compared to the
prior year. Base rent will be payable monthly in advance. Participating rent
may be payable in arrears based on a monthly schedule adjusted to reflect the
seasonal variations in the property's revenue.
In addition to rent, the leases may require the lessee to pay many of the
following items: liability insurance; real estate and personal property taxes
and assessments; casualty insurance, including loss of income insurance; and
all costs and expenses and all utility and other charges incurred in the
operation of the properties. The leases may also provide for rent reductions
and abatements in the event of damage or destruction or a partial condemnation
of any property.
OTHER REAL ESTATE INVESTMENTS.
Although we anticipate that our focus will be on extended-stay hotel
properties our bylaws and articles of incorporation do not preclude us from
acquiring other residential properties. Although we currently own no properties
we may acquire other real estate assets including, but not limited to,
multi-family residential properties and other income producing properties in
addition to extended-stay hotel properties. The purchase of any property will
be based upon our perceived best interests and those of our shareholders.
Regardless of the mix of properties we may own, our primary business objective
is to maximize shareholder value by acquiring properties that have strong cash
flow growth potential.
LEGAL PROCEEDINGS
We are not presently subject to any material litigation. To our knowledge,
there is no material litigation threatened against us. We may become subject in
the future to litigation, including routine litigation arising in the ordinary
course of business.
REGULATION
GENERAL. Our properties may be subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities such as
swimming pools, activity centers and other common areas. We intend to acquire
the necessary permits and approvals under present laws, ordinances and
regulations to operate our business.
AMERICANS WITH DISABILITIES ACT. Our properties will need to comply with
Title III of the Americans with Disabilities Act of 1990 (the "ADA") to the
extent they are "public accommodations" and/or "commercial facilities" under
the ADA. Compliance with ADA requirements could require removal of structural
barriers to handicapped access in public areas of the properties where removal
is readily achievable.
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ENVIRONMENTAL MATTERS
Under federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and remediate hazardous or toxic substances or
petroleum product releases at a property. In addition, the owner or operator
may be held liable to a government entity or third party for property damage
and investigation and remediation costs incurred by parties in connection with
the contamination. These laws typically impose cleanup responsibility and
liability without regard to whether the owner or operator knew of, or caused
the presence of, the contaminants. The costs of investigation, remediation or
removal of substances may be substantial, and the presence of these substances,
or the failure to properly remediate these substances, may adversely affect the
owner's ability to sell or rent the real estate or to borrow using the real
estate as collateral.
In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs incurred in connection
with the contamination. Individuals who arrange for the disposal or treatment
of hazardous or toxic substances may be held liable for the costs of
investigation, remediation or removal of hazardous or toxic substances at or
from the disposal or treatment facility regardless of whether the facility is
owned or operated by the person. Finally, the owner of a site may be subject to
common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site.
Federal, state and local laws, ordinances and regulations also govern the
removal, encapsulation or disturbance of asbestos-containing materials ("ACMs")
when the materials are in poor condition or in the event of the remodeling,
renovation or demolition of a building. These laws may impose liability for the
release of ACMs and may provide for third parties to seek recovery from owners
or operators of real estate for personal injury associated with ACMs. In
connection with the ownership and operation of its properties, we may be
potentially liable for costs in connection with ACMs or other hazardous or
toxic substances.
Prior to acquisition, all of our properties will have been the subject of
environmental assessments, which are intended to reveal information regarding,
and to evaluate the environmental condition of, the surveyed properties and
surrounding properties.
These assessments will generally include:
-- a historical review,
-- a public records review,
-- a preliminary site investigation of the site and surrounding
properties,
-- examining for the presence of asbestos,
-- examining for equipment containing polychlorinated biphenyls,
-- examining for underground storage tanks, and
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-- the preparation of a written report.
These assessments generally will not include soil sampling or subsurface
investigations.
Nevertheless, it is possible that these assessments will not reveal all
environmental liabilities or that there are unknown material environmental
liabilities. Moreover, we cannot guarantee that
-- future laws, ordinances or regulations will not require any material
expenditures by or impose any material liabilities in connection with
environmental conditions by or on us or our properties,
-- the environmental condition of a property we purchase will not be
adversely affected by residents and occupants of the property, by the
condition of properties in the vicinity, such as the presence of
underground storage tanks, or by unrelated third parties, or
-- prior owners of any property we purchase will not have created unknown
environmental problems.
We will endeavor to ensure our properties will be in compliance in all
material respects with all Federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products.
INSURANCE
We will carry comprehensive liability, fire, extended coverage and rental
loss insurance with respect to any property we acquire, with policy
specifications, insured limits and deductibles customarily carried for similar
properties. There are, however, certain types of losses, such as losses arising
from earthquakes or wars, that are not generally insured because they are
either uninsurable or not economically insurable. Should an uninsured loss or a
loss in excess of insured limits occur, we could lose our capital invested in
the affected property, as well as the anticipated future revenues from the
property and would continue to be obligated on any mortgage indebtedness or
other obligations related to the property. We could be adversely affected by
any such loss.
AVAILABLE INFORMATION
We have filed a registration statement, of which this prospectus is a
part, on Form S-11 with the Securities and Exchange Commission (the
"Commission") relating to this offering of common shares. This prospectus does
not contain all of the information in the registration statement and the
exhibits and financial statements included with the registration statement. If
we describe the contents of any contract or other document in this prospectus,
the description may not necessarily be a complete description. You should refer
to the copy of the document filed as an exhibit to the registration statement
or incorporated by reference for a complete description.
You can obtain copies of the registration statement and the exhibits for a
fee from the Commission at its principal office in Washington, D.C.
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We will also file periodic reports, proxy statements and other information
with the Commission. You can review and copy these documents at the offices of
the Commission in Washington, D.C. and at the Commission's regional offices in
Chicago, Illinois and New York, New York. The Commission also maintains an
Internet web site that contains these documents and other information regarding
registrants that file electronically. The Internet address of the Commission's
web site is: http://www.sec.gov.
We will furnish our shareholders with annual reports containing financial
statements audited by our independent auditors.
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MANAGEMENT
We are managed by our board of directors, elected by our shareholders. The
directors are responsible for appointing our executive officers and for
determining our strategic direction. The executive officers serve at the
discretion of the board and are chosen annually by the board at its first
meeting following the annual meeting of shareholders. Currently, Glade M.
Knight is our sole director and executive officer. The following table sets
forth the names and ages of Mr. Knight and those additional persons who will be
elected as directors at the time of initial closing of the minimum 1,666,666.67
common shares. All of the directors set forth in the following table, other
than Mr. Knight, will be independent directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ----- -----------------------------------
<S> <C> <C>
Glade M. Knight ............ 55 Chairman, Chief Executive Officer,
President and Secretary
Lisa B. Kern ............... 38 Director*
Bruce H. Matson ............ 41 Director*
Michael S. Waters .......... 44 Director*
Robert M. Wily ............. 49 Director*
</TABLE>
- ----------
* To be elected at initial closing.
GLADE M. KNIGHT. Mr. Knight is our chairman of the board, chief executive
officer and President. He is also the chief executive officer and sole
shareholder of Apple Suites Advisors, Apple Suites Realty and Apple Suites
Management.
Mr. Knight founded and serves as chairman of the board and president of
Apple Residential Income Trust, Inc. and Cornerstone Realty Income Trust, Inc.,
which are real estate investment trusts. Cornerstone Realty Income Trust, Inc.,
a publicly traded company, which began operations in 1993, acquires, owns and
operates apartment complexes in the mid-Atlantic and southeastern regions of
the United States. Apple Residential Income Trust, Inc., which began operations
in 1996, acquires, owns and operates apartment complexes in Texas.
Mr. Knight is chairman of the board of trustees of Southern Virginia
College in Buena Vista, Virginia. Mr. Knight is also a member of the advisory
board to the Graduate School of Real Estate and Urban Land Development at
Virginia Commonwealth University. He has served on a National Advisory Council
for Brigham Young University and is a founding member of and active lecturer
for the university's Entrepreneurial Department of the Graduate School of
Business Management.
LISA B. KERN. Ms. Kern is a portfolio manager and vice president of
Davenport & Co., LLC, an investment banking firm, in Richmond, Virginia.
Previously, Ms. Kern was a Vice president with Crestar Bank's Trust and
Investment Management Group from 1989 to 1996. Ms. Kern was also a director of
Apple Residential Income Trust, Inc.
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BRUCE H. MATSON. Mr. Matson is a vice president and director of the law
firm of LeClair Ryan, a Professional Corporation, in Richmond, Virginia. He has
been with LeClair Ryan since 1994. Mr. Matson has practiced law since 1983. He
was also a director of Apple Residential Income Trust, Inc.
MICHAEL S. WATERS. Mr. Waters is president and co-founder of Partnership
Marketing, Inc. From 1995 through 1998, Mr. Waters served as a vice president
and general manager of GT Foods, a division of GoodTimes Home Video. From 1987
to 1995, he served as a vice president and general manager for two U.S.
subsidiaries (Instant Products of America and Chocolate Products) of George
Weston Ltd. (Canada), a fully-integrated food retailer and manufacturer.
ROBERT M. WILY. Mr. Wily is the Deputy Chief, Article III Judges Division,
of the Administrative Office of the U.S. Courts. He has served as the Clerk of
Court for both the United States Bankruptcy Court for the Eastern District of
Virginia from 1986 to 1999 and the District of Utah from 1981 to 1986. Prior to
those positions, Mr. Wily was in the private practice of law.
CLASSIFICATION OF THE BOARD
The board is divided into three classes. The terms of the first, second
and third classes expire in 2000, 2001, and 2002, respectively. Directors of
each class are elected for three year terms upon the expiration of the current
class' term. The staggered terms for directors may affect our shareholders'
ability to effect a change in control even if a change in control were in our
shareholders' best interest. Mr. Knight's term expires in 2002; Mr. Water and
Ms Kern's terms will expire in 2001 and Mr. Matson and Mr. Wily's terms will
expire in 2000.
COMMITTEES OF THE BOARD
The board has an Executive Committee, an Audit Committee and a
Compensation Committee.
The Executive Committee has all powers of the board except for those which
require action by all directors under our Articles or Bylaws or under
applicable law. The Executive Committee will consist of Messrs. Knight, Matson
and Wily.
The Audit Committee's function is to make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the plans and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of our internal accounting
controls. The Audit Committee will consist of Ms. Kern and Mr. Waters.
The Compensation Committee will administer our stock incentive plans. The
Compensation Committee will consist of Messrs. Matson and Wily.
DIRECTOR COMPENSATION
We will pay to each director who is not an affiliate of Apple Suites
Advisors an annual fee of $5,000 plus $500 for each meeting of the full board
of directors attended by each director in person ($100 if any are attended by
telephonic means).
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There will be no additional compensation for serving on a committee or
attending a committee meeting. We will, however, reimburse all directors for
their travel and other out-of-pocket expenses incurred in connection with
attending any meeting of the board of directors or any committee, and for
carrying on the business of our company, including reimbursement for expenses
for any on-site review of properties presented for acquisition or of new
markets. Directors who are affiliates of Apple Suites Advisors receive no
compensation from us for their service as directors. These directors, however,
are remunerated indirectly by their relationship to Apple Suites Advisors and
its affiliated companies and are reimbursed by us for their expenses in
attending meetings of the board of directors or a committee and in carrying on
our business.
INDEMNIFICATION AND INSURANCE
We intend to obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (1) the directors and officers from
any claim arising out of an alleged wrongful act by the directors and officers
in their respective capacities as directors and officers of our company, and
(2) us to the extent that we have indemnified the directors and officers for
loss.
OFFICER COMPENSATION
Our officers are not paid salaries by us. Mr. Knight is currently our sole
executive officer. In addition, he is the sole shareholder of Apple Suites
Advisors and Apple Suites Realty which are entitled to fees for services
rendered by them to us. Mr. Knight will not receive any compensation from Apple
Suites Advisors and Apple Suites Realty but will receive dividend income due to
his ownership of those entities. See "Compensation" for a description of the
fees payable to Apple Suites Advisors and Apple Suites Realty.
STOCK INCENTIVE PLANS
We plan to adopt two stock incentive plans which are described below. For
purposes of the description below, the term "Offering" means the Initial
Offering plus all additional offerings and sales of common shares which may
occur during the five-year period beginning July 1, 1999 and ending June 30,
2004. The term "Initial Offering" means the offering of common shares made
pursuant to this prospectus.
The aggregate number of common shares reserved for issuance under the two
stock incentive plans is (1) 80,000 shares, plus (2) 6.425% of the number of
shares sold in the Initial Offering in excess of the minimum offering, plus (3)
6.2% of the number of shares sold in the Offering above the Initial Offering.
THE INCENTIVE PLAN
Under one plan (the "Incentive Plan"), incentive awards may be granted to
employees (including officers and directors who are employees) of us, or of
Apple Suites Advisors or Apple Suites Realty (the latter two companies being
sometimes referred to herein as "Apple Suites Companies"). Of the directors,
initially Mr. Knight will be a participant in the Incentive Plan. Incentive
awards may be in the
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form of stock options or restricted stock. Under the Incentive Plan, the number
of Shares reserved for issuance is equal to an aggregate of (1) 35,000 common
shares, plus (2) 4.625% of the number of Shares sold in the Initial Offering in
excess of the minimum offering, plus (3) 4.4% of the number of the shares sold
in the Offering above the Initial Offering. If an option is canceled,
terminates or lapses unexercised, any unissued common shares allocable to the
option may be subjected again to an incentive award. The purpose of the
Incentive Plan is to attract and retain the services of experienced and
qualified employees who are acting on behalf of us, either directly or through
the Apple Suites Companies, in a way that enhances the identification of the
employees' interests with those of the shareholders.
The Incentive Plan will be administered by a Compensation Committee of the
board of directors (the "Committee"). Notwithstanding anything to the contrary
in this prospectus, the Committee must have a minimum of two members who are
not eligible to participate in the Incentive Plan or any similar plan other
than the Directors' Plan (described below).
Subject to the provisions of the Incentive Plan, the Committee has
authority to determine (1) when to grant incentive awards, (2) which eligible
employees will receive incentive awards, and (3) whether the award will be an
option or restricted stock, and the number of common shares to be allocated to
each incentive award. The Committee may impose conditions on the exercise of
options and upon the transfer of restricted stock received under the Plan, and
may impose other restrictions and requirements as it may deem appropriate.
Stock Options
An option granted under the Incentive Plan will not be transferable by the
option holder except by will or under the intestacy laws, and will be
exercisable only at the times specified by the Committee. During the lifetime
of the option holder the option may be exercised only while the option holder
is in our employ or in the employ of one of the Apple Suites Companies, or
within 60 days after termination of employment. In the event the termination is
due to death or disability, the option will be exercisable for a 180-day period
thereafter.
The exercise price of the options will be not less than 100% of the fair
market value of the common shares as of the date of grant of the option. Unless
the common shares are listed, the fair market value will be determined by the
Committee using any reasonable method in good faith.
The Committee has discretion to take action as it deems appropriate with
respect to outstanding options in the event of a sale of substantially all of
our stock or assets, a merger of the Apple Suites Companies in which an option
holder is employed, or the occurrence of similar events. Adjustments will be
made in the terms of options and the number of common shares which may be
issued under the Incentive Plan in the event of a future stock dividend, stock
split or similar pro rata change in the number of outstanding shares or the
future creation or issuance to shareholders generally of rights, options or
warrants for the purchase of common shares.
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Options granted under the Incentive Plan are non-qualified stock options.
Non-qualified stock options are options that are not intended to qualify for
favorable incentive stock option tax treatment under the Internal Revenue Code.
Restricted Stock
Restricted stock issued pursuant to the Incentive Plan is subject to the
following general restrictions: (1) none of those shares may be sold,
transferred, pledged, or otherwise encumbered or disposed of until the
restrictions on those shares shall have lapsed or been removed under the
provisions of the Incentive Plan, and (2) if a holder of restricted stock
ceases to be employed by us or one of the Apple Suites Companies, he will
forfeit any shares of restricted stock on which the restrictions have not
lapsed or been otherwise removed.
The Committee will establish as to each share of restricted stock issued
under the Incentive Plan the terms and conditions upon which the restrictions
on those shares shall lapse. The terms and conditions may include, without
limitation, the lapsing of those restrictions at the end of a specified period
of time, or as a result of the disability, death or retirement of the
participant. In addition, the Committee may, at any time, in its sole
discretion, accelerate the time at which any or all restrictions will lapse or
remove any or all restrictions.
Amendment of the Incentive Plan and Incentive Awards
The board of directors may amend the Incentive Plan as it deems advisable;
provided that our shareholders must approve any amendment that would (1)
materially increase the benefits accruing to participants under the Incentive
Plan, (2) materially increase the number of common shares that may be issued
under the Incentive Plan, or (3) materially modify the requirements of
eligibility for participation in the Incentive Plan. Incentive awards granted
under the Incentive Plan may be amended with the consent of the recipient so
long as the amended award is consistent with the terms of the Plan.
DIRECTORS' PLAN
We also plan to adopt a stock option plan for members of our board of
directors who are not our employees or employees of the Apple Suites Companies
(the "Directors' Plan"). Under the Directors' Plan, the number of shares
reserved for issuance is equal to 45,000 shares plus 1.8% of the number of
Shares sold in the Offering in excess of the minimum offering of 1,666,666.67
common shares.
A director is eligible to receive an option under the Directors' Plan if
the director is not otherwise our employee or an employee of any of the Apple
Suites Companies or any subsidiary of ours and was not an employee of any of
these entities for a period of at least one year before the date of grant of an
option under the Plan. Four members of the board (all of the directors except
Mr. Knight) are expected initially to qualify to receive options under the
Directors' Plan.
The Directors' Plan will be administered by the board of directors. Grants
of stock options to eligible directors under the Plan will be automatic.
However, the board of directors has powers vested in it by the terms of the
Plan, including,
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without limitation, the authority to prescribe the form of the agreement
embodying awards of stock options under the Plan, to construe the Plan, to
determine all questions arising under the Plan, and to adopt and amend rules
and regulations for the administration of the Plan as it may deem desirable.
Any decision of the board of directors in the administration of the Directors'
Plan will be final and conclusive. The board of directors may act only by a
majority of its members in office, except members thereof may authorize any one
or more of their number, or any officer, to execute and deliver documents on
behalf of the board of directors.
The Directors' Plan provides for the following automatic option awards:
(1) As of the initial closing of the common shares, each eligible
director will receive an option to purchase 5,500 shares plus 0.0125% of
the number of shares in excess of the minimum offering sold by the initial
closing.
(2) As of each June 1 during the years 2000 through 2004 (inclusive),
each eligible director shall automatically receive an option to purchase
0.02% of the number of common shares issued and outstanding on that date.
(3) As of the election as a director of any new person who qualifies as
an eligible director, the eligible director will automatically receive an
option to purchase 5,000 Shares.
The purpose of the Directors' Plan is to enhance the identification of the
participating directors' interests with those of the shareholders.
The exercise price for each option granted under the Directors' Plan will
be 100% of the fair market value on the date of grant; no consideration will be
paid to us for the granting of the option. Options granted under the Directors'
Plan will have a term of 10 years and will be fully exercisable six months
after the date of grant. If an optionee ceases to serve as a director prior to
the expiration of the six-month period following the date of grant, the option
will terminate on the date of termination of service as a director. If an
optionee ceases to serve as a director after the expiration of the six-month
period following the date of grant, the option will terminate three years after
the date of termination of service, or on expiration of the option, whichever
is earlier.
Options granted under the Directors' Plan are non-transferable other than
by will or the laws of descent and distribution upon the death of the optionee
and, during the lifetime of the optionee, are exercisable only by him. Payment
upon exercise of an option under the Directors' Plan may be made in cash or
with our common shares of equivalent value.
The board of directors may suspend or discontinue the Directors' Plan or
revise or amend the Plan in any respect; provided, however, that without
approval of the shareholders no revision or amendment may increase the number
of common shares subject to the Plan or materially increase the benefits
accruing under the Plan. In addition, the Directors' Plan may not be amended
more than once every six months other than to comply with changes in the
Internal Revenue Code or ERISA.
STOCK OPTION GRANTS
As of the date of this prospectus, there have been no grants under the
Incentive Plan or the Directors' Plan.
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APPLE SUITES ADVISORS, INC. AND AFFILIATES
GENERAL
On or before the initial closing of the minimum offering of $15,000,000,
we will enter into an advisory agreement with Apple Suites Advisors, who will,
among other things, seek to obtain, investigate, evaluate and recommend
property investment opportunities for us, serve as property investment advisor
and consultant in connection with investment policy decisions made by the board
of directors and, subject to its direction, supervise our day-to-day
operations. Apple Suites Advisors is a Virginia corporation all of the common
shares of which are owned by Glade M. Knight. Glade M. Knight is the sole
director of Apple Suites Advisors and also its sole officer.
The term "affiliate" as used in this document refers generally to a person
or entity which is related to another specific person or entity through common
control, through significant (10% or more) equity ownership, or by serving as
an officer or director with the specified entity. Affiliates of Apple Suites
Advisors include Apple Suites Realty and Glade M. Knight.
THE ADVISORY AGREEMENT
The advisory agreement will have a five-year term and will be renewable
for additional two-year terms thereafter by the board of directors. The
advisory agreement provides that it may be terminated at any time by a majority
of the independent directors or Apple Suites Advisors upon 60 days' written
notice. Under the advisory agreement, Apple Suites Advisors undertakes to use
its best efforts (1) to supervise and arrange for the day-to-day management of
our operations and (2) to assist us in maintaining a continuing and suitable
property investment program consistent with our investment policies and
objectives. Under the advisory agreement, generally, Apple Suites Advisors is
not required to, and will not, advise us on investments in securities, i.e.,
the temporary investment of offering proceeds pending investment of those
proceeds in real property. It is expected that we will generally make our own
decisions with respect to temporary investments.
Pursuant to the advisory agreement, Apple Suites Advisors will be entitled
to an annual asset management fee. The asset management fee is payable
quarterly in arrears. The amount of the asset management fee is a percentage of
the amount raised in this offering. The applicable percentage used to calculate
the asset management fee is based on the ratio of funds from operations to the
amount raised in this offering for the preceding calendar quarter. This ratio
is referred to as the "return ratio." The per annum asset management fee is
initially equal to the following with respect to each calendar quarter:
o 0.1% if the return ratio for the preceding calendar quarter is 6% or
less;
o 0.15% if the return ratio for the preceding calendar quarter is more
than 6% but not more than 8%; and
o 0.25% if the return ratio for the preceding calendar quarter is above
8%.
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Funds from operations is defined as net income excluding gains or losses
from debt restructuring and sales of property, plus depreciation of real
property, after adjustments for significant non-recurring items and
unconsolidated partnerships and joint ventures, if any. This definition
conforms to the recommendations set forth in a White Paper adopted by the
National Association of Real Estate Investment Trusts (NAREIT) in 1995.
Although we have adopted the NAREIT definition of funds from operations, we
caution that the calculation of funds from operations may vary from entity to
entity and as such the presentation of funds from operations by us may not be
comparable to other similarly titled measures of other reporting companies.
We believe that "funds from operations" is an appropriate measure to use
in determining the fees to be paid to Apple Suites Advisors because it ties
compensation to an important and widely accepted measure of operating
performance of REITs which provides a relevant basis for comparison to other
REITs. Funds from operations does not represent cash flow from operating,
investing or financing activities in accordance with GAAP and is not indicative
of cash available to fund all of our cash needs. Funds from operations should
not be considered as an alternative to net income or any other GAAP measure as
an indicator of performance and should not be considered as an alternative to
cash flow as a measure of liquidity or the ability to service debt or to pay
dividends.
The bylaws require our independent directors to monitor Apple Suites
Advisors' performance under the advisory agreement and to determine at least
annually that the amount of compensation we pay to Apple Suites Advisors is
reasonable, based on factors as they deem appropriate, including:
o the amount of the asset management fee in relation to the size,
composition and profitability of our investments;
o the success of Apple Suites Advisors in selecting opportunities that
meet our investment objectives;
o the rates charged by other investment advisors performing comparable
services;
o the amount of additional revenues realized by it for other services
performed for us;
o the quality and extent of service and advice furnished by it;
o the performance of our investments; and
o the quality of our investments in relation to any investments
generated by it for its own account.
Our bylaws generally prohibit our operating expenses from exceeding in any
year the greater of 2% of our total "Average Invested Assets" or 25% of our
"Net Income" for the year. Operating expense means, generally, all operating,
general and administrative expenses, but excluding depreciation and similar
non-cash items and expenses of raising capital, interest, taxes and costs
related to asset acquisition, operation and disposition. Average Invested
Assets means, generally, the monthly
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average of the aggregate book value of assets invested in real estate, before
deducting depreciation. Net Income means, generally, the revenues for any
period, less expenses other than depreciation or similar non-cash items.
Unless the independent directors conclude that a higher level of expenses
is justified based upon unusual and nonrecurring factors which they deem
sufficient, Apple Suites Advisors must reimburse us for the amount of any
excess operating expenses. It must make reimbursement within 120 days from the
end of our fiscal year. Apple Suites Advisors will be entitled to be repaid
reimbursements in succeeding fiscal years to the extent actual operating
expenses are less than the permitted levels. In determining that unusual and
nonrecurring factors are present, the independent directors will be entitled to
consider all relevant factors pertaining to our business and operations, and
will be required to explain their conclusion in written disclosure to the
shareholders. Apple Suites Advisors generally would expect to pay any required
reimbursement out of compensation received from us in the current or prior
years. However, there can be no assurance that it would have the financial
ability to fulfill its reimbursement obligations.
Our bylaws further prohibit the total organizational and offering
expenses, including selling commissions from exceeding 15% of the amount raised
in this offering. Furthermore, the total of all acquisition fees and
acquisition expenses paid by us in connection with the purchase of a property
by us shall be reasonable and shall in no event exceed an amount equal to 6% of
the contract price for the property, unless a majority of the board of
directors, including a majority of the independent directors, not otherwise
interested in the transaction approves the transaction as being commercially
competitive, fair and reasonable to us. For purposes of this limitation, the
"contract price for the property" means the amount actually paid or allocated
to the purchase, development, construction or improvement of the property,
exclusive of acquisition fees and acquisition expenses. Any organizational and
offering expenses or acquisition fees and acquisition expenses incurred by us
in excess of the permitted limits shall be payable by Apple Suites Advisors
immediately upon our demand.
This discussion is only a summary of the Advisory Agreement. A copy of the
form of agreement has been filed as an exhibit to the registration statement of
which this prospectus is a part. Please refer to the agreement for a complete
statement of its provisions.
APPLE SUITES REALTY GROUP, INC.
Apple Suites Realty is engaged in the business of management of real
property and the solution of financial and marketing problems related to
investments in real property. Glade M. Knight is the sole shareholder and
director of Apple Suites Realty as well as its sole officer.
We will enter into a Property Acquisition/Disposition Agreement with Apple
Suites Realty under which Apple Suites Realty has agreed to act as a real
estate broker in connection with our purchases and sales of properties. Under
the agreement, Apple Suites Realty is entitled to a real estate commission
equal to 2%
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of the gross purchase prices of our properties, payable by us in connection
with each purchase; provided that during the course of this offering, the total
real estate commission payable to Apple Suites Realty cannot exceed $5,400,000.
Under the agreement, Apple Suites Realty is also entitled to a real estate
commission equal to 2% of the gross sales prices of our properties, payable by
us in connection with each property sale if, but only if, any property is sold
and the sales price exceeds the sum of (1) our cost basis in the property plus
(2) 10% of the cost basis. The cost basis is the original purchase price plus
any and all capitalized costs and expenditures connected with the property. For
purposes of this calculation, our cost basis will not be reduced by
depreciation. If the sales price of a particular property does not equal the
required amount, no real estate commission is payable, but Apple Suites Realty
is still entitled to payment from us of its "direct costs" incurred in
marketing the property. "Direct costs" refers to a reasonable allocation of all
costs, including salaries of personnel, overhead and utilities, allocable to
services in marketing a property. If the person from whom we purchase or to
whom we sell a property pays any fee to Apple Suites Realty that amount will
decrease the amount of our obligation to Apple Suites Realty. The agreement
will have an initial term of five years and will renew automatically for
successive terms of five years unless either party to the agreement elects not
to renew by notice sent to the other party within 60 days before the end of any
term.
This discussion is only a summary of the Property Acquisition/Disposition
Agreement. A copy of the form of Property Acquisition/Disposition Agreement has
been filed as an exhibit to the registration statement of which this prospectus
is a part. Please refer to the agreement for a complete description of its
provisions.
Subject to the conditions applicable generally to transactions between us
and affiliates of Apple Suites Advisors, Apple Suites Realty or an affiliate
may render services to us in connection with our financings or refinancings,
and would be entitled to compensation for those services. As of the date of
this prospectus, there are no specific agreements for any of these services.
PRIOR PERFORMANCE OF PROGRAMS SPONSORED BY GLADE M. KNIGHT
The following paragraphs contain information on prior programs sponsored
by Glade M. Knight to invest in real estate. This discussion is a narrative
summary of Mr. Knight's experience with all other programs sponsored by him,
both public and nonpublic, that have invested in real estate regardless of the
investment objectives of the program. The information set forth is current as
of June 15, 1999. This information should not be considered to be indicative of
our capitalization or operations. Purchasers of our common shares will not have
any interest in the entities referred to in this section or in any of the
properties owned by those entities.
PRIOR REITS - CORNERSTONE AND APPLE RESIDENTIAL
Mr. Knight was responsible for the organization of Cornerstone Realty
Income Trust, Inc. ("Cornerstone"), a real estate investment trust organized to
acquire, own and operate apartment complexes in the mid-Atlantic and
southeastern regions of
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the country. Mr. Knight is the chairman, chief executive officer and president
of Cornerstone. Between December 1992 and October 1996, Cornerstone sold
approximately $300 million in common shares in a continuous best-efforts
offering to approximately 12,000 investors. Since that initial offering,
Cornerstone has completed additional firm-commitment offerings. Cornerstone
currently has approximately 20,000 investors and its common shares are traded
on the New York Stock Exchange under the symbol "TCR." The net proceeds of the
Cornerstone best-efforts public offering and subsequent offerings were used to
acquire apartment communities in Virginia, North and South Carolina, and
Georgia. Cornerstone currently owns 58 apartment communities. We will, upon
request of any investor or prospective investor, provide at no cost a copy of
the most recent Report on Form 10-K filed by Cornerstone with the Securities
and Exchange Commission. For a reasonable charge, We will also provide copies
of the exhibits to the Report on Form 10-K.
In addition, Mr. Knight was responsible for the organization of Apple
Residential Income Trust, Inc. ("Apple Residential"), a real estate investment
trust organized to acquire, own and operate apartment complexes in the
southwestern region of the country. Mr. Knight is the chairman, chief executive
officer and president of Apple Residential. Between January 1997 and February
1999, Apple Residential sold approximately $300 million in common shares in a
continuous best-effort offering to approximately 11,000 investors. The net
proceeds of the Apple Residential public offering were used to acquire 28
apartment communities in Texas. We will, upon request of any investor or
prospective investor, provide at no cost a copy of the most recent Report on
Form 10-K filed by Apple Residential with the Securities and Exchange
Commission. For a reasonable charge, We will also provide copies of the
exhibits to the Report on Form 10-K.
Merger of Cornerstone and Apple Residential. On March 30, 1999,
Cornerstone and Apple Residential announced that they had entered into a
definitive merger agreement. Under this agreement, Apple Residential would
merge into a subsidiary of Cornerstone. Cornerstone would survive as a
corporation and Apple Residential would cease to exist. The merger was closed
on July 23, 1999.
ADDITIONAL INFORMATION ON CORNERSTONE AND APPLE RESIDENTIAL ACQUISITIONS
Part II of our registration statement (which is not a part of this
prospectus) contains a more detailed summary of the 58 property acquisitions by
Cornerstone and 25 property acquisitions by Apple Residential which occurred on
or before December 31, 1998. Neither Cornerstone nor Apple Residential has sold
any properties. We will provide a copy of the summary without charge upon
request of any investor or prospective investor.
PRIOR PARTNERSHIPS
Mr. Knight, between 1981 and 1987, organized 40 partnerships for the
purpose of investing in real estate. Interests in 38 of these partnerships, in
which Mr. Knight served as a general partner and all but one of which were
limited partnerships, were sold to investors in privately-offered transactions.
Two of the partnerships were publicly-offered.
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PUBLICLY-OFFERED PARTNERSHIPS
Two partnerships sponsored by Mr. Knight were issuers in public offerings
of assignee units of limited partnership interest. One publicly-offered
partnership, Southeastern Income Properties Limited Partnership ("Southeastern
I"), was organized in 1987 and raised $25,000,000 from 2,714 investors.
Southeastern I acquired four apartment complexes comprising 833 apartment
units. The other publicly-offered partnership, Southeastern Income Properties
II Limited Partnership ("Southeastern II"), was also organized in 1987 and
raised $17,883,780 from 1,710 investors. Southeastern II acquired four
apartment complexes comprising 794 apartment units. The aggregate cost of the
eight properties purchased by Southeastern I and Southeastern II, including
capital improvements thereto, was approximately $41,178,606. The affiliates of
Mr. Knight which originally served as the general partners for these two
partnerships transferred management control over these partnerships to a third
party in February 1992 by converting to limited partner status. Thus,
affiliates of Mr. Knight ceased to serve as the general partners.
PRIVATELY-OFFERED PARTNERSHIPS
The 38 privately-offered partnerships were all organized in the 1980's,
and a majority of them were organized before 1985. The privately-offered
partnerships collectively owned and operated 40 apartment complexes with a
total of 5,972 apartment units and one motel with 144 rooms. A total of 733
investors in these partnerships contributed an aggregate of approximately
$47,788,965 to the capital of the partnerships. The aggregate cost of the 41
properties purchased by these 38 privately-offered partnerships was
approximately $129,088,000. All of the privately-offered partnerships were
formed before and had investment objectives dissimilar to those of Apple
Suites, Inc. The dissimilar nature of the investment objectives is described
below in this section.
The privately-offered partnerships used borrowing which varied from
substantial to 100% of required funds in the acquisition of their properties.
In addition, a significant objective of the privately-offered partnerships was
the realization of tax losses which could be used to offset some or all of
investors' other sources of income. The investment objectives of these
partnerships were dissimilar to our investment objectives in that we do not
seek to generate tax losses based in part on high levels of borrowing. Rather,
we seek to realize increasing cash distribution to shareholders with no or low
levels of debt.
Certain Bankruptcy Reorganizations. Seven of these partnerships with
investment objectives dissimilar to ours filed for reorganization under Chapter
11 of the United States Bankruptcy Code. Five of these seven partnerships
subsequently reached agreements with their lenders to allow foreclosure on
their properties on terms which were more favorable to the partnerships than
were available before the filing of the petition for reorganization. The other
two of the seven partnerships emerged from their chapter 11 reorganizations
with restructured debt. In addition, two other partnerships in which Mr. Knight
formerly served as a general partner filed for reorganization under Chapter 11
of the United States Bankruptcy Code within two years after Mr. Knight ceased
to serve as general partner.
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Certain Foreclosures. Six of the dissimilar partnerships acquiesced to
negotiated foreclosures on their properties upon terms which were more
favorable to the partners than would have been available in the absence of
negotiation.
Causes and Effects of Bankruptcies and Foreclosures. Each of the
partnerships described in the preceding two paragraphs owned a single property,
and the adverse business development affecting the partnership therefore
resulted in the partnership ceasing all cash distributions to investors. Mr.
Knight believes the bankruptcy filings and foreclosures described above were
attributable to a combination of high borrowing, a downturn in economic
conditions generally and the real estate industry in particular, a fundamental
change in tax laws, which decreased the perceived value of real estate to
potential buyers and lenders, and the unavailability of favorable financing. As
a result of these factors, each of the partnership was unable to meet debt
obligations or dispose of its property on terms that would allow repayment of
its debt obligations.
Mr. Knight does not expect that the combination of factors applicable to
the privately-offered partnerships will be applicable to our operations. The
privately-offered partnerships that experienced adverse business developments
were "tax-shelter" investments, a principal objective of which was to generate
tax losses for investors. A large portion of the tax losses resulted from
interest deductions on mortgage debt on the properties. Since more mortgage
debt resulted in higher tax losses to investors, there was an incentive to
place a large amount of debt on the properties. We do not have as an objective
to, and as a real estate investment trust we cannot, generate tax losses for
shareholders. Our policy is to own properties on an all-cash basis, or use
limited interim borrowing to be repaid with proceeds from this offering.
The properties owned by the privately-offered partnerships were purchased
by those partnerships when federal income tax laws permitted partnership
investors to use partnership losses to offset their income from other sources.
When this law was changed in 1986 to, in effect, prohibit the use of such
losses, the value of such real estate decreased, making sale or refinancing of
the properties at an amount sufficient to pay off the high mortgage debt
difficult or impossible. Again, since our objectives do not include the
generation of tax losses to shareholders, we do not expect this to be a risk
for us.
In the private partnerships, the generation of tax losses was in general a
much more important investment objective than the making of cash distributions
to partners, either from operations or property dispositions. Our principal
business objective is to maximize shareholder value by achieving long-term
growth in cash distributions to our shareholders, and we do not plan to
generate tax losses for investors. The fact that our investment objectives are
radically different from those of the privately-offered partnerships means that
we expect key operating policies (such as the amount of debt) to be
substantially different and that the basic causes of the operating difficulties
of the privately-offered partnerships should not be present in our operations.
Finally, the privately-offered partnerships, which incurred much debt, had
little equity investment (some had no equity investment while the equity
investment in others was less than $1 million). The privately-offered
partnerships had no property
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diversification and small, if any, reserves to fund operational difficulties.
Even if only our minimum offering is raised, we expect to have some property
diversification and a reasonable reserve fund. To the extent more than our
minimum offering is raised, property diversification and reserve amounts will
increase.
As of June 15, 1999, Mr. Knight had ceased to hold an interest in all but
one of the 40 partnerships sponsored by him. That one partnership is Liberty
West Apartments Limited Partnership, which owns a single residential apartment
complex. Mr. Knight has entered into a contract for the sale of his interest in
that partnership.
ADDITIONAL INFORMATION ON PRIOR PROGRAMS
Prospective investors should also refer to the tabular information on
prior programs sponsored by Mr. Knight appearing under the heading "Experience
of Prior Programs" in this prospectus.
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PRINCIPAL AND MANAGEMENT SHAREHOLDERS
Beneficial ownership of our common shares, and options to purchase our
common shares, held by our directors and officers as of the date of this
prospectus, are indicated in the table below. Each person named in the table
has sole voting and investment powers as to the shares or shares those powers
with his spouse and minor children, if any.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF AGGREGATE
NAME BENEFICIALLY OWNED OUTSTANDING SHARES OWNED
- ----------------------------- -------------------- -------------------------
<S> <C> <C>
Apple Suites Advisors, Inc. 10 100%
</TABLE>
Mr. Knight is the sole shareholder of Apple Suites Advisors In addition to
the foregoing, Glade M. Knight, who is our director, chairman of the board and
president, will own 202,500 Class B convertible shares. In addition, Mr.
Stanley J. Olander, Jr. and Ms. Debra A. Jones, business associates of Mr.
Knight, will each own 18,750 Class B convertible shares. The Class B
convertible shares are convertible into common shares pursuant to the formula
and on the terms and conditions set forth below. We plan to issue the Class B
convertible shares to Mr. Knight and others on or before the initial closing of
the minimum offering of $15,000,000, in exchange for the payment by them of
$0.10 per Class B convertible share, or an aggregate of $24,000.
There are no dividends payable on the Class B convertible shares. Upon our
liquidation, the holder of the Class B convertible shares is entitled to a
liquidation payment of $0.10 per Class B convertible share before any
distribution of liquidation proceeds to the holders of the common shares.
Holders of more than two-thirds of the Class B convertible shares must approve
any proposed amendment to the Articles of incorporation that would adversely
affect the Class B convertible shares. The Class B convertible shares are
convertible into common shares upon and for 180 days following the occurrence
of either of the following events: (1) substantially all of our assets, stock
or business is sold or otherwise transferred, whether through sale, exchange,
merger, consolidation, lease, share exchange or otherwise, or (2) the Advisory
Agreement with Apple Suites Advisors is terminated or not renewed. Upon the
occurrence of either triggering event, each Class B convertible share is
convertible into a number of common shares based upon the gross proceeds raised
through the date of conversion in the offering made by this prospectus
according to the following formula:
<TABLE>
<CAPTION>
GROSS PROCEEDS RAISED FROM NUMBER OF COMMON SHARES
SALES OF COMMON SHARES THROUGH THROUGH CONVERSION OF ONE
DATE OF CONVERSION CLASS B CONVERTIBLE SHARE
- --------------------------------- --------------------------
<S> <C>
$50 million ................... 1.0
$100 million .................. 2.0
$150 million .................. 3.5
$200 million .................. 5.3
$250 million. ................. 6.7
$300 million .................. 8.0
</TABLE>
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No additional consideration is due upon the conversion of the Class B
convertible shares. The conversion into common shares of the Class B
convertible shares will result in dilution of the shareholders' interests.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of material federal income tax considerations that
may be relevant to a holder of common shares is based on current law and is not
intended as tax advice. The statements of law and legal conclusions set forth
in this summary represents the opinion of McGuire, Woods, Battle & Boothe LLP,
special tax counsel to Apple Suites, Inc. The following discussion, which is
not exhaustive of all possible tax considerations, does not include a detailed
discussion of any state, local or foreign tax considerations. Nor does it
discuss all of the aspects of federal income taxation that may be relevant to a
prospective shareholder in light of his or her particular circumstances or to
certain types of shareholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) who are subject
to special treatment under the federal income tax laws.
The statements in this discussion are based on current provisions of the
Internal Revenue Code, existing, temporary and currently proposed Treasury
Regulations under the Code, the legislative history of the Code, existing
administrative rulings and practices of the IRS and judicial decisions. No
assurance can be given that legislative, judicial or administrative changes
will not affect the accuracy of any statements in this prospectus with respect
to transactions entered into or contemplated prior to the effective date of the
changes.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
EACH PROSPECTIVE PURCHASER OF COMMON SHARES IS ADVISED TO CONSULT WITH HIS OR
HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON SHARES IN AN ENTITY ELECTING
TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
We will elect to be treated as a REIT for federal income tax purposes
commencing with our taxable year ended December 31, 1999. Based on assumptions
and representations summarized below, McGuire, Woods, Battle & Boothe LLP, our
legal counsel, is of the opinion that beginning with our taxable year ended
December 31, 1999:
-- we are organized in conformity with the requirements for qualification
and taxation as a REIT under the Code, and
-- our proposed method of operations described in this prospectus will
enable us to satisfy the requirements for qualification as a REIT.
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The rules governing REITs are highly technical and require ongoing
compliance with a variety of tests that depend, among other things, on future
operating results. McGuire, Woods, Battle & Boothe LLP will not monitor our
compliance with these requirements. While we expect to satisfy these tests, and
will use our best efforts to do so, we cannot ensure we will qualify as a REIT
for any particular year, or that the applicable law will not change and
adversely affect us and our shareholders. The following is a summary of the
material federal income tax considerations affecting us as a REIT and our
shareholders:
REIT QUALIFICATION
In order to maintain our REIT qualification, we must meet the following
criteria:
-- We must be organized as an entity that would, if we did not maintain
our REIT status, be taxable as a regular corporation;
-- We must be managed by one or more directors;
-- Our taxable year must be the calendar year;
-- Our beneficial ownership must be evidenced by transferable shares;
-- Our capital stock must be held by at least 100 persons during at least
335 days of a taxable year of 12 months or during a proportionate part
of a taxable year of less than 12 months; and
-- Not more than 50% of the value of our shares of capital stock may be
held, directly or indirectly, applying constructive ownership rules,
by five or fewer individuals at any time during the last half of each
our taxable years.
To protect against violations of these requirements, our bylaws provide
restrictions on transfers of our common shares, as well as provisions that
automatically convert shares of stock into nonvoting, non-dividend paying
excess stock to the extent that the ownership otherwise might jeopardize our
REIT status.
To monitor our compliance with the share ownership requirements, we are
required to and will maintain records disclosing the actual ownership of common
shares. To do so, we will demand written statements each year from the record
holders of certain percentages of shares in which the record holders are to
disclose the actual owners of the shares. A list of those persons failing or
refusing to comply with this demand will be maintained as part of our records.
Shareholders who fail or refuse to comply with the demand must submit a
statement with their tax returns disclosing the actual ownership of the shares
and other information.
We expect to satisfy each of the requirements discussed above. We also
expect to satisfy the requirements that are separately described below
concerning the nature and amounts of our income and assets and the levels of
required annual distributions.
SOURCES OF GROSS INCOME. In order to qualify as a REIT for a particular
year, we also must meet two tests governing the sources of our income. These
tests are designed to ensure that a REIT derives its income principally from
passive real estate investments. In evaluating a REIT's income, the REIT will
be treated as receiving its
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proportionate share of the income produced by any partnership in which the REIT
holds an interest as a partner, and that income will retain the character that
it has in the hands of the partnership. The Code allows us to own and operate a
number of our properties through wholly-owned subsidiaries which are "qualified
REIT subsidiaries." The Code provides that a qualified REIT subsidiary is not
treated as a separate corporation, and all of its assets, liabilities and items
of income, deduction and credit are treated as assets, liabilities and items of
the REIT.
75% GROSS INCOME TEST. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to us
are:
-- rents from real property;
-- interest on loans secured by real property;
-- gain from the sale of real property or loans secured by real property
(excluding gain from the sale of property held primarily for sale to
customers in the ordinary course of a company's trade or business,
referred to below as "dealer property");
-- income from the operation and gain from the sale of property acquired
in connection with the foreclosure of a mortgage securing that
property ("foreclosure property");
-- distributions on, or gain from the sale of, shares of other qualifying
REITs;
-- abatements and refunds of real property taxes; and
-- "qualified temporary investment income" (described below).
In evaluating our compliance with the 75% gross income test, as well as
the 95% gross income test described below, gross income does not include gross
income from "prohibited transactions." In general, a prohibited transaction is
one involving a sale of dealer property, not including foreclosure property and
dealer property held by us for at least four years.
We expect that substantially all of our operating gross income will be
considered rent from real property. Rent from real property is qualifying
income for purposes of the gross income tests only if certain conditions are
satisfied. Rent from real property includes charges for services customarily
rendered to tenants, and rent attributable to personal property leased together
with the real property so long as the personal property rent is less than 15%
of the total rent. We do not expect to earn material amounts in these
categories. Rent from real property generally does not include rent based on
the income or profits derived from the property. We do not intend to lease
property and receive rentals based on the tenant's net income or profit.
However, rent based on a percentage of gross income is permitted as rent from
real property and we will have leases where rent is based on a percentage of
gross income.
Also excluded from "rents from real property" is rent received from a
person or corporation in which we (or any of its 10% or greater owners)
directly or indirectly through the constructive ownership rules contained in
section 318 of the Code, owns
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a 10% or greater interest. A third exclusion covers amounts received with
respect to real property if we furnish services to the tenants or manage or
operate the property, other than through an "independent contractor" from whom
we do not derive any income. The obligation to operate through an independent
contractor generally does not apply, however, if the services provided by us
are usually or customarily rendered in connection with the rental of space for
occupancy only and are not considered rendered primarily for the convenience of
the tenant. Further, if the value of the non-customary service income with
respect to a property (valued at no less than 150% of our direct cost of
performing the services) is 1% or less of the total income derived from the
property, then all rental income from that property except the non-customary
service income will qualify as rents from real property.
Upon the ultimate sale of any of our properties, any gains realized also
are expected to constitute qualifying income, as gain from the sale of real
property (not involving a prohibited transaction).
95% GROSS INCOME TEST. In addition to earning 75% of its gross income from
the sources listed above, at least an additional 20% of our gross income for
each taxable year must come either from those sources, or from dividends,
interest or gains from the sale or other disposition of stock or other
securities that do not constitute dealer property. This test permits a REIT to
earn a significant portion of its income from traditional "passive" investment
sources that are not necessarily real estate related. The term "interest"
(under both the 75% and 95% tests) does not include amounts that are based on
the income or profits of any person, unless the computation is based only on a
fixed percentage of receipts or sales.
FAILING THE 75% OR 95% TESTS; REASONABLE CAUSE. As a result of the 75% and
95% tests, REITs generally are not permitted to earn more than 5% of their
gross income from active sources such as brokerage commissions or other fees
for services rendered. We may receive this type income. This type of income
will not qualify for the 75% test or 95% test but is not expected to be
significant and this income, together with other non-qualifying income, is
expected to be at all times less than 5% of our annual gross income. While we
do not anticipate we will earn substantial amounts of non-qualifying income, if
non-qualifying income exceeds 5% of our gross income, we could lose our status
as a REIT. We may in the future establish subsidiaries in which we will hold
less than 10% of the voting stock. The gross income generated by these
subsidiaries would not be included in our gross income. However, dividends from
subsidiaries to us would be included in our gross income and qualify for the
95% income test.
If we fail to meet either the 75% or 95% income tests during a taxable
year, we may still qualify as a REIT for that year if
-- we report the source and nature of each item of our gross income in our
federal income tax return for that year;
-- the inclusion of any incorrect information in our return is not due to
fraud with intent to evade tax; and
-- the failure to meet the tests is due to reasonable cause and not to
willful neglect.
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However, in that case we would be subject to a 100% tax based on the
greater of the amount by which we fail either the 75% or 95% income tests for
the year, multiplied by a fraction intended to reflect our profitability.
CHARACTER OF ASSETS OWNED. On the last day of each calendar quarter, we
also must meet two tests concerning the nature of our investments. First, at
least 75% of the value of our total assets generally must consist of real
estate assets, cash, cash items and government securities. For this purpose,
real estate assets include interests in real property, interests in loans
secured by mortgages on real property or by interests in real property, shares
in other REITs and certain options, but excluding mineral, oil or gas royalty
interests. The temporary investment of new capital in debt instruments also
qualifies under this 75% asset test, but only for the one-year period beginning
on the date we receive the new capital.
Second, although the balance of our assets generally may be invested
without restriction, we will not be permitted to own (1) securities of any one
non-governmental issuer that represent more than 5% of the value of our total
assets or (2) more than 10% of the outstanding voting securities of any single
issuer. A REIT, however, may own 100% of the stock of a qualified REIT
subsidiary, in which case the assets, liabilities and items of income,
deduction and credit of the subsidiary are treated as those of the REIT. In
evaluating a REIT's assets, if the REIT invests in a partnership, it is deemed
to own its proportionate share of the assets of the partnership. We expect to
satisfy these asset tests.
ANNUAL DISTRIBUTIONS TO SHAREHOLDERS To maintain REIT status, we generally
must distribute to our shareholders in each taxable year at least 95% of our
net ordinary income. More precisely, we must distribute an amount equal to (1)
95% of the sum of (a) our REIT taxable income before deduction of dividends
paid and excluding any net capital gain and (b) any net income from foreclosure
property less the tax on the income, minus (2) limited categories of excess
noncash income (including, cancellation of indebtedness and original issue
discount income).
REIT taxable income is defined to be the taxable income of the REIT,
computed as if it were an ordinary corporation, with modifications. For
example, the deduction for dividends paid is allowed, but neither net income
from foreclosure property, nor net income from prohibited transactions, is
included. In addition, the REIT may carry over, but not carry back, a net
operating loss for 20 years following the year in which it was incurred.
A REIT may satisfy the 95% distribution test with dividends paid during
the taxable year and with dividends paid after the end of the taxable year if
the dividends fall within one of the following categories:
-- Dividends paid in January that were declared during the last calendar
quarter of the prior year and were payable to shareholders of record
on a date during the last calendar quarter of that prior year are
treated as paid in the prior year for ourselves and our shareholders.
-- Dividends declared before the due date of our tax return for the
taxable year (including extensions) also will be treated as paid in
the prior year for ourselves if they are paid (1) within 12 months of
the end of the taxable year and (2) no later than our next regular
distribution payment.
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Dividends that are paid after the close of a taxable year that do not
qualify under the rule governing payments made in January (described above)
will be taxable to the shareholders in the year paid, even though we may take
them into account for a prior year. A nondeductible excise tax equal to 4% will
be imposed on a company for each calendar year to the extent that dividends
declared and distributed or deemed distributed before December 31 are less than
the sum of (a) 85% of a company's "ordinary income" plus (b) 95% of a company's
capital gain net income plus (c) any undistributed income from prior periods.
Dividends that are paid after the close of a taxable year that do not
qualify under the rule governing payments made in January described above will
be taxable to our shareholders in the year paid, even though we may be able to
take them into account for a prior year. We will incur a nondeductible excise
tax equal to 4% will for each calendar year to the extent that dividends
declared and distributed or deemed distributed before December 31 are less than
the sum of (a) 85% of our "ordinary income" plus (b) 95% of our capital gain
net income plus (c) any undistributed income from prior periods.
We will be taxed at regular corporate rates to the extent we retain any
portion of our taxable income. It is possible that we may not have sufficient
cash or other liquid assets to meet the distribution requirement. This could
arise because of competing demands for our funds, or because of timing
differences between tax reporting and cash receipts and disbursements. Although
we do not anticipate any difficulty in meeting this requirement, no assurance
can be given that necessary funds will be available. In the event this occurs,
we may arrange for short-term, or possibly long-term, borrowings to permit the
payment of required dividends and meet the 95% distribution requirement.
If we fail to meet the 95% distribution requirement because of an
adjustment to our taxable income by the IRS, we may be able to retroactively
cure the failure by paying a deficiency dividend, as well as applicable
interest and penalties, within a specified period.
TAXATION AS A REIT
As a REIT, we generally will not be subject to corporate income tax to the
extent we currently distribute our REIT taxable income to our shareholders.
This treatment effectively eliminates the double taxation imposed on
investments in most corporations. We generally will be taxed only on the
portion of our taxable income which we retain, including any undistributed net
capital gain, because we will be entitled to a deduction for dividends paid to
shareholders during the taxable year. A dividends paid deduction is not
available for dividends that are considered preferential within any given class
of shares or as between classes except to the extent a class is entitled to a
preference. We do not anticipate we will pay any preferential dividends.
Even as a REIT, we will be subject to tax in the following circumstances:
-- any income or gain from foreclosure property will be taxed at the
highest corporate rate;
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-- a tax of 100% applies to any net income from prohibited transactions,
which are, in general, sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business;
-- if we fail to meet either the 75% or 95% source of income tests, a
100% tax would be imposed equal to the amount obtained by multiplying
(1) the greater of the amount, if any, by which we failed either the
75% income test or the 95% income test, times (2) the ratio of our
REIT taxable income to our gross income (excluding capital gain and
other items);
-- items of tax preference, excluding items specifically allocable to our
shareholders, will be subject to the alternative minimum tax;
-- if we fail to distribute with respect to each calendar year at least
the sum of (1) 85% of our REIT ordinary income for the year, (2) 95%
of our REIT capital gain net income for the year, and (3) any
undistributed taxable income from prior years, we would be subject to
a 4% excise tax on the excess of the required distribution over the
amounts actually distributed; and
-- under regulations that are to be promulgated, we also may be taxed at
the highest regular corporate tax rate on any built-in gain
attributable to assets we acquire in tax-free corporate transactions,
to the extent the gain is recognized during the first ten years after
we acquire the assets.
FAILURE TO QUALIFY AS A REIT
If we fail to qualify as a REIT and are not successful in seeking relief,
we will be taxed at regular corporate rates on all of our taxable income.
Distributions to our shareholders would not be deductible in computing that
taxable income, and we would no longer be required to make distributions. Any
corporate level taxes generally would reduce the amount of cash available for
distribution to our shareholders and, because our shareholders would continue
to be taxed on any distributions they receive, the net after tax yield to our
shareholders likely would be substantially reduced.
As a result, our failure to qualify as a REIT during any taxable year
could have a material adverse effect upon us and our shareholders. If we lose
our REIT status, unless we are able to obtain relief, we will not be eligible
to elect REIT status again until the fifth taxable year which begins after the
taxable year during which our election was terminated.
TAXATION OF SHAREHOLDERS
In general, distributions will be taxable to shareholders as ordinary
income to the extent of our earnings and profits. Specifically, dividends and
distributions will be treated as follows:
-- Dividends declared during the last quarter of a calendar year and
actually paid during January of the immediately following calendar
year are generally treated as if received by the shareholders on
December 31 of the calendar year during which they were declared.
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-- Distributions paid to shareholders will not constitute passive
activity income, and as a result generally cannot be offset by losses
from passive activities of a shareholder who is subject to the passive
activity rules.
-- Distributions we designate as capital gains dividends generally will
be taxed as long term capital gains to shareholders to the extent that
the distributions do not exceed our actual net capital gain for the
taxable year. Corporate shareholders may be required to treat up to
20% of any capital gains dividends as ordinary income.
-- If we elect to retain and pay income tax on any net long-term capital
gain, our shareholders would include in their income as long-term
capital gain their proportionate share of net long-term capital gain.
Our shareholders would receive a credit for the shareholder's
proportionate share of the tax paid by us on retained capital gains
and an increase in basis in their shares in an amount equal to the
difference between the undistributed long-term capital gains and the
amount of tax we paid.
-- Any distributions we make, whether characterized as ordinary income or
as capital gains, are not eligible for the dividends received
deduction for corporations.
-- Shareholders are not permitted to deduct our losses or loss
carry-forwards.
We may generate cash in excess of our net earnings. If we distribute cash
to our shareholders in excess of our current and accumulated earnings and
profits, other than as a capital gain dividend, the excess cash will be deemed
to be a return of capital to each shareholder to the extent of the adjusted tax
basis of the shareholder's shares. Distributions in excess of the adjusted tax
basis will be treated as gain from the sale or exchange of the shares. A
shareholder who has received a distribution in excess of our current and
accumulated earnings and profits may, upon the sale of the shares, realize a
higher taxable gain or a smaller loss because the basis of the shares as
reduced will be used for purposes of computing the amount of the gain or loss.
Generally, gain or loss realized by a shareholder upon the sale of common
shares will be reportable as capital gain or loss. If a shareholder receives a
long-term capital gain dividend and has held the shares for six months or less,
any loss incurred on the sale or exchange of the shares is treated as a
long-term capital loss to the extent of the corresponding long-term capital
gain dividend received.
In any year in which we fail to qualify as a REIT, our shareholders
generally will continue to be treated in the same fashion described above,
except that none of our dividends will be eligible for treatment as capital
gains dividends, corporate shareholders will qualify for the dividends received
deduction and the shareholders will not be required to report any share of our
tax preference items.
BACKUP WITHHOLDING
We will report to our shareholders and the IRS the amount of dividends
paid during each calendar year and the amount of tax withheld, if any. If a
shareholder is subject to backup withholding, we will be required to deduct and
withhold from any dividends payable to that shareholder a tax of 31%. These
rules may apply in the following circumstances:
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-- when a shareholder fails to supply a correct taxpayer identification
number,
-- when the IRS notifies us that the shareholder is subject to the rules
or has furnished an incorrect taxpayer identification number, or
-- in the case of corporations or others within exempt categories, when
they fail to demonstrate that fact when required.
A shareholder that does not provide a correct taxpayer identification
number may also be subject to penalties imposed by the IRS. Any amount withheld
as backup withholding may be credited against the shareholder's federal income
tax liability. We also may be required to withhold a portion of capital gain
distributions made to shareholders who fail to certify their non-foreign
status.
The United States Treasury has recently issued final regulations regarding
the withholding and information reporting rules discussed above. In general,
the final regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and clarify
reliance standards. The final regulations are generally effective for payments
made on or after January 1, 2001, subject to transition rules. Prospective
investors should consult their own tax advisors concerning the adoption of the
final regulations and the potential effect on their ownership of common shares.
TAXATION OF TAX EXEMPT ENTITIES
In general, a tax exempt entity that is a shareholder will not be subject
to tax on distributions with respect to our shares or gain realized on the sale
of our shares. In Revenue Ruling 66-106, the IRS confirmed that a REIT's
distributions to a tax exempt employees' pension trust did not constitute
unrelated business taxable income ("UBTI"). A tax exempt entity may be subject
to UBTI, however, to the extent that it has financed the acquisition of its
shares with acquisition indebtedness within the meaning of the Code. The
Revenue Reconciliation Act of 1993 has modified the rules for tax exempt
employees' pension and profit sharing trusts which qualify under section 401(a)
of the Code and are exempt from tax under section 501(a) of the Code for tax
years beginning after December 31, 1993. In determining the number of
shareholders a REIT has for purposes of the "50% test" described above, any
stock held by a qualified trust will be treated as held directly by its
beneficiaries in proportion to their actuarial interests in the trust and will
not be treated as held by the trust.
A qualified trust owning more than 10% of a REIT may be required to treat
a percentage of dividends from the REIT as UBTI. The percentage is determined
by dividing the REIT's gross income, less direct expenses related thereto,
derived from an unrelated trade or business for the year (determined as if the
REIT were a qualified trust) by the gross income of the REIT for the year in
which the dividends are paid. However, if this percentage is less than 5%,
dividends are not treated as UBTI. These UBTI rules apply only if the REIT
qualifies as a REIT because of the change in the 50% test discussed above and
if the trust is predominantly held by qualified trusts. A REIT is predominantly
held by qualified trusts if at least one pension trust owns more
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than 25% of the value of the REIT or a group of pension trusts each owning more
than 10% of the value of the REIT collectively own more than 50% of the value
of the REIT.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt
from federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and
(c)(20) of the Code, respectively, income from an investment our securities
will constitute UBTI unless the organization is able to deduct an amount
properly set aside or placed in reserve for certain purposes so as to offset
the unrelated business taxable income generated by the investment our
securities. These prospective investors should consult their own tax advisors
concerning the set aside and reserve requirements.
TAXATION OF FOREIGN INVESTORS
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders are complex. Prospective Non-U.S. Shareholders should consult with
their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in common shares, including any
reporting requirements, as well as the tax treatment of an investment under the
laws of their home country.
STATE AND LOCAL TAXES
We may be subject to state or local taxation in various state or local
jurisdictions, including those in which we transact business. In addition, our
shareholders may also be subject to state or local taxation. Consequently,
prospective shareholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in our securities.
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ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement employee benefit
plan, individual retirement account ("IRA"), or Keogh Plan (each, a "Plan")
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), should consider the fiduciary standards under ERISA in the context
of the Plan's particular circumstances before authorizing an investment of a
portion of a Plan's assets in common shares. In particular, the fiduciary
should consider:
-- whether the investment satisfies the diversification requirements of
Section 404(a)(1)(c) of ERISA,
-- whether the investment is in accordance with the documents and
instruments governing the Plan as required by Section 404(a)(1)(D) of
ERISA,
-- whether the investment is for the exclusive purpose of providing
benefits to participants in the Plan and their beneficiaries, or
defraying reasonable administrative expenses of the Plan, and
-- whether the investment is prudent under ERISA.
In addition to the general fiduciary standards of investment prudence and
diversification, specific provisions of ERISA and the Internal Revenue Code of
1986 (the "Code") prohibit a wide range of transactions involving the assets of
a Plan and transactions with persons who have specified relationships to the
Plan. These persons are referred to as "parties in interest" in ERISA and as
"disqualified persons" in the Code. Thus, a fiduciary of a Plan considering an
investment in common shares should also consider whether acquiring or
continuing to hold common shares, either directly or indirectly, might
constitute a prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the
"Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under these Regulations, if a Plan acquires an equity interest that is
neither a "publicly offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, as amended, then
for purposes of fiduciary and prohibited transaction provisions under ERISA and
the Code, the assets of the Plan would include both the equity interest and an
undivided interest in each of the entity's underlying assets, unless an
exemption applies.
The Regulations define a publicly-offered security as a security that is:
-- "widely held"
-- "freely transferable," and
-- either part of a class of securities registered under the Exchange
Act, or sold pursuant to an effective registration statement under the
Securities Act, provided the securities are registered under the
Exchange Act within 120 days after the end of the fiscal year of the
issuer during which the offering occurred.
The Regulations provide that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. However, a security will not fail
to be "widely held" if the
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number of independent investors falls below 100 subsequent to the initial
public offering as a result of events beyond the issuer's control. The
Regulations further provide that whether a security is "freely transferable" is
a factual question to be determined on the basis of all relevant facts and
circumstances. The Regulations also provide that when a security is part of an
offering in which the minimum investment is $10,000 or less, the existence of
certain restrictions ordinarily will not, alone or in combination, affect the
finding that the securities are freely transferable.
We believe that the restrictions imposed under our bylaws on the transfer
common shares are limited to the restrictions on transfer generally permitted
under the Regulations, and are not likely to result in the failure of the
common shares to be "freely transferable." We also believe that the
restrictions that apply to the common shares held by us, or which may be
derived from contractual arrangements requested by David Lerner Associates in
connection with common shares are unlikely to result in the failure of the
common shares to be "freely transferable." Nonetheless, no assurance can be
given that the DOL and/or the U.S. Treasury Department could not reach a
contrary conclusion. Finally, the common shares offered are securities that
will be registered under the Securities Act and are or will be registered under
the Exchange Act.
Assuming that the common shares satisfy the definition of publicly-offered
securities, described above, the underlying assets will not be deemed to be
"plan assets" of any Plan that invests in the securities offered in this
prospectus.
Notwithstanding the above, the Regulations provide that even if a security
offered hereunder were not a publicly-traded security, investment by a Plan
would not include the underlying assets if equity participation by benefit plan
investors will not be significant. Under the Regulations, equity participation
is significant if 25 percent or more in the security is held by benefit plan
investors. The term "benefit plan investors" generally includes the plans
described above.
CAPITALIZATION
Our capitalization as of March 31, 1999, and as adjusted to reflect the
issuance and sale of the common shares offered assuming the minimum offering
and maximum offering and after deducting anticipated offering expenses, selling
commissions and the marketing expense allowance is as follows:
<TABLE>
<CAPTION>
AS ADJUSTED
-------------------------------------------
MINIMUM MAXIMUM
ACTUAL OFFERING OFFERING
-------- -------------- ---------------
<S> <C> <C> <C>
Common Shares; no par value; 10
shares issued, 1,666,666.67 and
30,166,666.67 shares issued as
adjusted, respectively ......... $100 $13,050,100 $268,500,100
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were organized on March 5, 1999 and have no significant operations to
date. In addition, we currently own no properties. We intend to qualify as a
REIT under the Internal Revenue Code.
The proceeds of this offering and the cash flow generated from properties
we will acquire and any short term investments will be our principal source of
liquidity. In addition, we may borrow funds, subject to the approval of our
board of directors.
On April 20, 1999, we obtained a line of credit in a principal amount of
up to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all accrued interest are due in
full on October 20, 1999. Glade M. Knight, our president and Chairman of the
Board, has guaranteed repayment of the loan. We expect to repay this debt with
proceeds from the sale of common shares.
We anticipate that our cash flow will be adequate to cover our operating
expenses and to permit us to meet our anticipated liquidity requirements,
including distribution requirements. Inflation may increase our operating
costs, including our costs on bank borrowings, if any.
We intend to establish a working capital reserve of at least 0.5% of the
proceeds from this offering. This reserve, in combination with income from our
properties and short term investments, is anticipated to satisfy our liquidity
requirements.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. We will evaluate
systems we may employ to determine if any of the computer programs or hardware
that may be purchased have date-sensitive software or embedded chips that
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
We will undertake several initiatives to address the Year 2000 issue after
we commence operations. As part of our hotel acquisition due diligence process,
we will perform assessments of the information technology ("IT") and non-IT
systems of potential acquisitions for Year 2000 compliance. We will perform
similar assessments for any IT and non-IT systems that will be acquired for
internal use. In situations where these assessments indicate non-compliance
with Year 2000 issues a program of remediation, testing and implementation will
be developed and performed. We will request assurances from Apple Suites
Advisors, Apple Suites Realty and Apple Suites Management that, as they
implement IT and non-IT systems. They also implement appropriate steps to
ensure that they address the Year 2000 issue.
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We will also assess the Year 2000 compliance of vendors and other external
relationships to determine the extent to which we may be vulnerable to these
parties' failure to resolve their own Year 2000 issues. We cannot ensure timely
compliance of third parties and; therefore, could be adversely affected by
failure of a significant third party to become Year 2000 compliant. We cannot
estimate the effect, if any, on us from the failure of third parties to be Year
2000 compliant.
These initiatives may not detect all Year 2000 issues. We will along with
Apple Suites Advisors, Apples Suites Realty and Apple Suites Management, Inc.
develop contingency plans intended to mitigate the possible disruption in
business operations that may result from the Year 2000 issue. We believe a
worst case scenario may be a lack of readiness by electrical and water
utilities, financial institutions, governmental agencies or other providers of
general infrastructure which could pose significant impediments to our ability
to carry on our normal operations. We have not incurred any cost to date
implementing the Year 2000 initiatives and do not believe the cost of
implementation will be material.
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PLAN OF DISTRIBUTION
We are offering to sell the common shares using the service of David
Lerner Associates, Inc. as the managing dealer, and other broker-dealers
selected by the managing dealer. The common shares are being offered on a "best
efforts" basis, meaning that the managing dealer and other broker-dealers are
not obligated to purchase any common shares. No common shares will be sold
unless at least a minimum of 1,666,666.67 shares has been sold no later than
one year after the date of this prospectus. Our officers and directors and
those of Apple Suites Advisors, Apple Suites Realty and Apple Suites Management
will not be permitted to purchase common shares in order to reach the minimum
offering of 1,666,666.67 common shares. If the minimum offering of shares is
not sold by that date, the offering will terminate and all funds deposited by
investors into the interest-bearing escrow account will be promptly refunded in
full, with interest. First Union National Bank will act as escrow agent for the
escrow account until the minimum offering of shares is sold.
The common shares are offered at $9 per share until the minimum offering
of $15,000,000 in shares is achieved and the minimum 1,666,666.67 common shares
have been sold. Thereafter, the common shares will be offered at $10 per share.
The offering of common shares is expected to terminate when all shares
offered by this prospectus have been sold or one year from the date hereof,
unless extended by us for up to an additional year in order to achieve the
maximum offering of 30,166,666.67 common shares. In some states, extension of
the offering may not be allowed, or may be allowed only upon the filing of a
new application with the appropriate state administrator.
Purchasers will be sold common shares at one or more closings. Following
the sale of the minimum offering, additional closings will be held monthly
during the offering period as orders are received. The final closing will be
held shortly after the termination of the offering period or, if earlier, upon
the sale of all the common shares. It is expected that after the initial
closing of the sale of the minimum offering, purchasers will be sold common
shares no later than the last day of the calendar month following the month in
which their orders are received. Funds received during the offering but after
the initial disbursement of funds will be held in escrow for the benefit of
purchasers until the next closing, and then disbursed to us.
In no event are we required to accept the subscription of any prospective
investor, and no subscription shall become binding on us until a properly
completed subscription agreement prepared and executed by the prospective
investor has been accepted by our duly authorized representative. We will
either accept or reject each subscription within four business days from the
receipt of the subscription by David Lerner Associates, Inc. or other
broker-dealer.
We intend to hold investors' funds in escrow in an interest-bearing
account with First Union National Bank until the minimum offering of
1,666,666.67 common shares is achieved and the initial closing has occurred.
The account will pay interest to investors from the date the investor's funds
are received until the date of the initial closing. First Union National Bank
will remit the aggregate interest on escrowed funds to David Lerner Associates,
Inc., and David Lerner Associates, Inc.
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will pay the individual investors their interest. After the initial closing,
investors' funds will be held in an interest-bearing account with David Lerner
Associates, Inc. or other broker-dealers pending each applicable closing. That
account will provide the investor with interest based on a then current money
market fund rate. We and David Lerner Associates, Inc. reserve the right to
formulate and adopt reasonable simplifying conventions in determining each
investor's share of interest earned pending each closing. For example, we and
David Lerner Associates, Inc. may average interest rates on escrowed funds over
a given period of time or treat all investors subscribing during a given period
of time (such as during a particular month or other period) as having
subscribed on the same day during such period. These simplifying conventions
would be designed to avoid costs necessary to compute interest amounts
precisely where the costs are not commensurate with the amount of interest
involved. Investors' subscriptions will be revocable by written notice
delivered to the escrow agent at least five days before the initial closing. An
investor's subscription funds may remain in escrow for an indefinite period of
time.
Each investor who desires to purchase common shares will be required to
complete and sign a Subscription Agreement in the form attached to this
prospectus as Exhibit A. In addition to requesting basic identifying
information concerning the investor, such as his or her name and address, the
number of common shares subscribed for, and the manner in which ownership will
be held, the Subscription Agreement requires the investor to make a series of
representations to us set forth in paragraphs designated "(a)" through "(h)."
We ask for these representations to help us determine whether you have
received the disclosure materials pertaining to the investment, meet certain
suitability requirements we have established, and understand what you are
investing in. Should a dispute later arise between you and us concerning
matters that are the subject of any representation, we would expect to rely
upon your making of that representation in the Subscription Agreement if you
later claim that that representation is not correct.
Set forth below is a brief summary of the nature of each representation in
the lettered paragraphs of the Subscription Agreement. You should, however,
carefully review the Subscription Agreement in its entirety.
(a) You acknowledge that you have received a copy of the prospectus and
that you understand that your investment will be governed by the terms of that
prospectus.
(b) You represent that you are of majority age and, therefore, can enter
into a binding contract to purchase the common shares.
(c) You represent that you have adequate financial resources, understand
the financial risks of an investment in common shares, and understand that
there is no ready ability to sell or otherwise dispose of your investment in
common shares.
(d) You specifically represent that you either have a net worth (excluding
home, furnishings and automobiles) of at least $50,000 (higher in certain
states) and gross income of $50,000, or a net worth (with the same exclusions)
of at least $100,000 (higher in certain states).
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You further represent that your investment in common shares is 10% or less
of your net worth (with the indicated exclusions). This representation helps us
determine that your proposed investment is suitable for you based on your
financial condition.
(e) If you are acting on behalf on an entity, you represent that you have
authority to bind the entity.
(f) You represent that the taxpayer identification number (social security
number in the case of an individual) provided is correct and that you are not
subject to backup withholding. This representation allows us to make
distributions to you without any requirement to withhold for income tax
purposes.
(g) You understand that we have the right, in our sole discretion, to
accept or reject your subscription for common shares.
(h) You agree to settle by arbitration any controversy between you and
your broker concerning the Subscription Agreement and the investment
represented by the Subscription Agreement.
It is expected that shareholders will be able to elect to reinvest any
distributions from us in additional common shares available in this offering,
for as long as this offering continues. This option is referred to as the
"Additional Share Option." Any purchase by reinvestment of distributions would
be at the same price per share and on the same terms applicable generally to
subscriptions in this offering effective at the time of reinvestment. We
reserve the right to establish rules governing reinvestment, as well as the
right to modify or terminate the Additional Share Option at any time. We
estimate that approximately 500,000 common shares offered through this
prospectus will be purchased through shareholders' reinvestment of
distributions in common shares pursuant to the Additional Share Option, but the
number of shares which will be purchased cannot be determined at this time.
Subject to the Additional Share Option being available through the
broker-dealer which initially sells a shareholder its common shares, a
shareholder will be able to elect the option by directing, on its subscription
agreement, that cash distributions be reinvested in additional shares.
Distributions attributable to any calendar quarter will then be used to
purchase common shares in this offering. As described under "Federal Income Tax
Consequences -- Federal Income Taxation of the Shareholders," a shareholder who
elects the Additional Share Option will be taxed as if it had received its
distributions which are used to purchase additional shares. A shareholder may
elect to terminate its participation in the Additional Share Option at any time
by written notice sent by it to the broker-dealer through which the shareholder
initially purchased shares. The notice will be effective with respect to
distributions attributable to any calendar quarter if it is sent at least 10
days before the end of that calendar quarter.
Funds not invested in real properties may only be invested by us in United
States government securities, certificates of deposit of banks located in the
United States having a net worth of at least $50,000,000, bank repurchase
agreements covering the securities of the United States Government or United
States governmental agencies issued by banks located in the United States
having a new
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worth of at least $50,000,000, bankers' acceptances, prime commercial paper or
similar highly liquid investments, such as money market funds selected by us,
or evidences of indebtedness.
We will pay to David Lerner Associates, Inc. selling commissions on all
sales made in an amount equal to 7.5% of the purchase price of the common
shares or $0.675 per share purchased at $9 per share and $0.75 per share
purchased at $10 per share. We will also pay to David Lerner Associates, Inc. a
marketing expense allowance equal to 2.5% of the purchase price of the shares,
as a non-accountable reimbursement for expenses incurred by it in connection
with the offer and sale of the common shares. The marketing expense allowance
will equal $0.225 per share purchased at $9 per share and $0.25 per share
purchased at $10 per share. The maximum selling commission payable to David
Lerner Associates, Inc. is $22,500,000. The maximum marketing expense allowance
payable to David Lerner Associates, Inc. is $7,500,000. The selling commissions
and marketing expense allowance are payable to David Lerner Associates, Inc. at
the times of the issuance of common shares to purchasers.
The following table reflects the compensation payable to David Lerner
Associates, Inc.
<TABLE>
<CAPTION>
MARKETING EXPENSE
PRICE TO PUBLIC COMMISSIONS ALLOWANCE
----------------- --------------- ------------------
<S> <C> <C> <C>
Per Share Minimum
Offering ......... $ 9.00 $ 0.675 $ 0.225
Per Share Maximum
Offering ......... $ 10.00 $ 0.75 $ 0.25
Total Minimum
Offering ......... $ 15,000,000 $ 1,125,000 $ 375,000
Total Maximum
Offering ......... $300,000,000 $22,500,000 $7,500,000
</TABLE>
Prospective investors are advised that David Lerner Associates, Inc.,
reserves the right to purchase common shares, on the same terms applicable
generally to sales pursuant to this prospectus, for its own account, at any
time and in any amounts, to the extent not prohibited by relevant law. However,
it is not expected that the managing dealer or other broker-dealers will
purchase common shares.
The Agency Agreement between us and David Lerner Associates, Inc. permits
David Lerner Associates, Inc. to use the services of other broker-dealers in
offering and selling the common shares, subject to our approval. David Lerner
Associates, Inc. will pay the compensation owing to the broker-dealers out of
the selling commissions or marketing expense allowance payable to it. Sales by
the broker-dealers will be carried on in accordance with customary securities
distribution procedures. David Lerner Associates, Inc. may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 in connection with
this offering. Until the minimum offering is achieved, investors must provide
their subscription payment either by authorizing the liquidation of funds in
their money market account with the managing dealer or by providing a check
made payable to "First Union National
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Bank, Escrow Agent." Following the initial closing, investors will provide
their subscription payment as directed by the managing dealer.
Purchasers are required to purchase a minimum of $5,000 in common shares
or $2,000 in common shares for plans. After the minimum offering is achieved,
Apple Suites Advisors and Apple Suites Realty may purchase in this offering up
to 2.5% of the total number of shares sold in the offering, on the same terms
and conditions as the public. If Apple Suites Advisors and Apple Suites Realty
purchase any common shares, they will be permitted to vote on any matters
submitted to a vote of holders of the common shares. Any purchase of shares in
this offering by Apple Suites Advisors and Apple Suites Realty must be for
investment, and not for resale or distribution. The shares described in this
paragraph are exclusive of the shares which may be issued under our stock
incentive plans.
There has been no previous market for any of our common shares. The
initial offering price for the common shares is arbitrary and was determined on
the basis of our proposed capitalization, market conditions and other relevant
factors.
We have agreed to indemnify David Lerner Associates, Inc. and other
broker-dealers against a limited number of liabilities under the Securities
Act. These liabilities include liabilities arising out of untrue statements of
a material fact contained in this registration statement or arising out of the
omission of a material fact required to be stated in this registration
statement. We will also indemnify David Lerner Associates, Inc. for losses from
a breach of any warranties made by us in the agency agreement.
As part of the compensation negotiated between us and the managing dealer
we have agreed to sell to David Lerner Associates, Inc. for an aggregate of
$100, warrants to purchase 10% of the shares sold up to 3,000,000 common shares
at an exercise price of $16.50 per common share or 165% of the public offering
price per common share. The warrants may not be sold, transferred, assigned or
hypothecated for one year from the date of their issuance, except to the
officers of David Lerner Associates, Inc. and are exercisable at any time and
from time to time, in whole or in part, during the five-year period commencing
on the date of the final closing after the termination of this offering (the
"Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the
warrants are given, at nominal cost, the opportunity to profit from a rise in
the market price of the common shares. To the extent that the warrants are
exercised, dilution to the interests of the shareholders will occur if the
warrant exercise price is less than the value of the common shares at the time
of exercise. Further, the terms upon which we may be able to obtain additional
equity capital may be adversely affected since the holders of the warrants can
be expected to exercise them at a time when we would, in all likelihood, be
able to obtain any needed capital on terms more favorable to us than those
provided in the warrants. Any profit realized by David Lerner Associates on the
sale of the warrants may be deemed additional underwriting compensation. We
have agreed, at the request of the holders of a majority of the warrants, at
our expense, to register the warrants under the Securities Act of 1933 on one
occasion during the Warrant Exercise Term and to include the warrants in any
appropriate registration statement which is filed by us during the seven years
following the date of this prospectus.
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DESCRIPTION OF CAPITAL STOCK
The information set forth below is only a summary of our terms of our
common shares. You should refer to our articles of incorporation, and bylaws
for a complete description of the common shares.
Our authorized capital stock consists of 200,000,000 common shares, no par
value, 240,000 Class B convertible shares, no par value and 15,000,000
preferred shares. Each common share will be fully paid and nonassessable upon
issuance and payment therefor. As of the date of this prospectus, there were 10
common shares issued and outstanding. All 240,000 authorized Class B
convertible shares will initially be held by Glade M. Knight, Stanley J.
Olander, Jr., and Debra A. Jones.
COMMON SHARES
DIVIDEND AND DISTRIBUTION RIGHTS
Our common shares have equal rights in connection with:
-- dividends
-- distributions, and
-- liquidations.
If our board of directors determines, in its sole discretion, to declare a
dividend, the right to a dividend is subject to the following restrictions:
-- the dividend rights of the common shares may be subordinate to any other
of our shares ranking senior to the common shares, and
-- the amount of the dividend may be limited by law.
If we liquidate our assets or dissolve entirely, the holders of the common
shares will share, on a pro rata basis, in the assets we are legally allowed to
distribute. We must pay all of our known debts and liabilities or have made
adequate provision for payment of these debts and liabilities before holders of
common shares can share in our assets.
Holders of common shares do not have the right to convert or redeem their
shares. In addition, they do not have rights to a sinking fund or to subscribe
for any of our securities.
VOTING RIGHTS
Each outstanding common share entitles the holder to one vote on all
matters submitted to a vote of shareholders. The holders of common shares have
exclusive voting power with respect to the election of directors, except as
otherwise required by law or except as provided with respect to any other class
or series of stock. There is no cumulative voting in the election of directors.
Therefore the holders of a majority of the outstanding common shares can elect
all of the directors then standing for election and the holders of the
remaining shares will not be able to elect any directors.
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Our articles state that a majority of common shares outstanding and
entitled to vote on a matter may approve our company to take any of the
following actions:
-- dissolve,
-- amend our charter or articles of incorporation,
-- merge,
-- sell all or substantially all of our assets, or
-- engage in a share exchange or similar transactions;
except for amendments to our articles of incorporation relating to the
classification of the board of directors. This matter requires the approval of
at least two-thirds of the shares entitled to vote.
The transfer agent and registrar for the common shares is First Union
National Bank.
CLASS B CONVERTIBLE SHARES
Our authorized capital stock includes 240,000 Class B convertible shares.
There are no dividends payable on the Class B convertible shares. Upon our
liquidation, the holder of the Class B convertible shares is entitled to a
liquidation payment of $0.10 per Class B convertible share before any
distribution of liquidation proceeds to the holders of the common shares.
Holders of more than two-thirds of the Class B convertible shares must approve
any proposed amendment to the Articles of incorporation that would adversely
affect the Class B convertible shares.
The Class B convertible shares are convertible into common shares upon and
for 180 days following the occurrence of either of the following events:
(1) substantially all of our assets, stock or business is sold or
otherwise transferred, whether through sale, exchange, merger,
consolidation, lease, share exchange or otherwise, or
(2) the Advisory Agreement with Apple Suites Advisors is terminated or
not renewed.
Upon the occurrence of either triggering event, each Class B convertible
share is convertible into a number of common shares based upon the gross
proceeds raised through the date of conversion in the offering made by this
prospectus according to the following formula:
<TABLE>
<CAPTION>
GROSS PROCEEDS RAISED FROM SALES NUMBER OF COMMON SHARES
OF COMMON SHARES THROUGH DATE OF THROUGH CONVERSION OF ONE
CONVERSION CLASS B CONVERTIBLE SHARE
- ---------------------------------- --------------------------
<S> <C>
$50 million.................... 1.0
$100 million................... 2.0
$150 million................... 3.5
$200 million................... 5.3
$250 million................... 6.7
$300 million................... 8.0
</TABLE>
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No additional consideration is due upon the conversion of the Class B
convertible shares. The conversion into common shares of the Class B
convertible shares will result in dilution of the shareholders' interests.
PREFERRED SHARES
Our articles of incorporation authorize our issuance of up to 15 million
preferred shares. No preferred shares have been issued.
We believe that the authorization to issue preferred shares benefit us and
our shareholders by permitting flexibility in financing additional growth,
giving us additional financing options in our corporate planning and in
responding to developments in our business, including financing of additional
acquisitions and other general corporate purposes. Having authorized preferred
shares available for issuance in the future gives us the ability to respond to
future developments and allow preferred shares to be issued without the expense
and delay of a special shareholders' meeting.
At present, we have no specific financing or acquisition plans involving
the issuance of preferred shares and we do not propose to fix the
characteristics of any series of preferred shares in anticipation of issuing
preferred shares. We cannot now predict whether or to what extent, if any,
preferred shares will be used or if so used what the characteristics of a
particular series may be.
The voting rights and rights to distributions of the holders of common
shares will be subject to the prior rights of the holders of any
subsequently-issued preferred shares. Unless otherwise required by applicable
law or regulation, the preferred shares would be issuable without further
authorization by holders of the common shares and on such terms and for such
consideration as may be determined by the board of directors. The preferred
shares could be issued in one or more series having varying voting rights,
redemption and conversion features, distribution (including liquidating
distribution) rights and preferences, and other rights, including rights of
approval of specified transactions. A series of preferred shares could be given
rights that are superior to rights of holders of common shares and a series
having preferential distribution rights could limit common share distributions
and reduce the amount holders of common shares would otherwise receive on
dissolution.
RESTRICTIONS ON TRANSFER
To qualify as a REIT under the Code, our common shares must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of twelve months or during a proportionate part of a shorter taxable year.
Further, not more than 50% of the value of our issued and outstanding common
shares may be owned, directly or indirectly, by five or fewer individuals or,
in limited circumstances, entities such as qualified private pension plans,
during the last half of a taxable year or during a proportionate part of a
shorter taxable year.
Since our board of directors believes it is essential that we maintain our
REIT status, our bylaws provide that no person may own or be deemed to own more
than 9.8% of the issued and outstanding shares of any class or series. The
board may
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exempt a proposed transferee from this ownership limit. The board may require
opinions of counsel, affidavits, undertakings or agreements as it may deem
necessary or advisable in order to determine or ensure our status as a REIT.
Any acquisition or transfer of common shares that would: (1) result in the
common shares and any other stock being owned by fewer than 100 persons or (2)
result in our being "closely-held" within the meaning of section 856(h) of the
Code, will be null and void, and the intended transferee will acquire no rights
to the common shares. These restrictions on transferability and ownership will
not apply if the board determines it is no longer in our best interests to
attempt to qualify, or to continue to qualify, as a REIT and our articles are
amended accordingly.
Any purported transfer of common shares or any other stock that would
result in a person owning shares of capital stock in excess of the ownership
limit will result in the transfer being declared null and void. The shares
subject to the purported transfer will be considered to be "excess shares."
Under our bylaws, excess shares will be deemed to have been acquired and to be
held on our behalf. The excess shares will not be considered to be outstanding
for quorum and voting purposes. The excess shares will not be entitled to
receive dividends or any other distributions. Any dividends or distributions
paid to a purported transferee of excess shares prior to our discovery that the
shares have been transferred in violation of our bylaws must be repaid to us
upon demand.
Our bylaws provide that we may redeem any excess shares. The redemption
price for any excess share will be equal to:
-- the price paid for the excess shares by the intended transferee, or
-- if no consideration was paid, the fair market value of the shares
measured on the last business day prior to date on which we elect to
redeem the excess shares.
Fair market value means the average daily closing price of a share if
listed on a national securities exchange. If the shares are quoted on the NASD
National Market System, fair market value will be the average of closing bid
prices and closing asked prices. If there have been no sales or published bid
and asked quotations with respect to the shares, the fair market value will be
as determined in good faith by our board.
In addition, each shareholder shall, upon demand, be required to disclose
in writing all information regarding the direct and indirect beneficial
ownership of shares of capital stock as our board deems reasonably necessary to
comply with the provisions of the Internal Revenue Code applicable to a REIT,
to comply with the requirements of any taxing authority or governmental agency
or to determine any compliance with those provisions or requirements.
These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of
shares of capital stock might receive a premium for their shares over the
then-prevailing market price or which these holders might believe to be
otherwise in their best interest.
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FACILITIES FOR TRANSFERRING COMMON SHARES
David Lerner Associates may, but is not obligated to, assist shareholders
who desire to transfer their common shares. In the event David Lerner
Associates provides assistance, it will be entitled to receive compensation as
specified by it. Any assistance offered by David Lerner Associates may be
terminated or modified at any time without notice, and any fee charged for
transfer assistance may be modified or terminated at any time and without
notice. David Lerner Associates currently has no plans for rendering the type
of assistance referred to in this paragraph. This assistance, if offered, would
likely consist of informally matching isolated potential buyers and sellers,
and would not represent the creation of any "market" for the common shares.
No public market for the common shares currently exists. We do not plan to
cause the common shares to be listed on any securities exchange or quoted on
any system or in any established market either immediately or at any definite
time in the future. While we may cause the common shares to be listed or quoted
if our board of directors determines that action to be prudent, there can be no
assurance that this event will ever occur. Prospective shareholders should view
the common shares as illiquid and must be prepared to hold their investment for
an indefinite length of time.
WARRANTS
We have agreed to sell to David Lerner Associates, Inc. for an aggregate
of $100, warrants to purchase 10% of the shares sold in this offering, up to
3,000,000 common shares at an exercise price of $16.50 per common share or 165%
of the public offering price per common share. The warrants may not be sold,
transferred, assigned or hypothecated for one year from the date of this
prospectus, except to the officers of David Lerner Associates, Inc. and are
exercisable at any time and from time to time, in whole or in part, during the
Warrant Exercise Term. During the Warrant Exercise Term, the holders of the
warrants are given, at nominal cost, the opportunity to profit from a rise in
the market price of the common shares. To the extent that the warrants are
exercised, dilution to the interests of the shareholders will occur if the
warrant exercise price is less than the value of the common shares at the time
of exercise. We have agreed, at the request of the holders of a majority of the
Warrants, at our expense, to register the Warrants under the Securities Act of
1933 on one occasion during the Warrant Exercise Term and to include the
Warrants in any appropriate registration statement which is filed by us during
the seven years following the date of this prospectus.
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SUMMARY OF ORGANIZATIONAL DOCUMENTS
The following is a summary of the principal provisions of our articles of
incorporation and bylaws, some of which may be described or referred to
elsewhere in this prospectus. Neither this summary nor the descriptions
appearing elsewhere in this prospectus purport to be, or should be considered,
a complete statement of the terms and conditions of the articles of
incorporation or bylaws or any specific provision thereof, and this summary and
all the descriptions are qualified in their entirety by reference to, and the
provisions of, the articles of incorporation and bylaws, which have been filed
as exhibits to the registration statement of which this prospectus is a part.
Our articles of incorporation have been reviewed and approved unanimously by
the board of directors.
BOARD OF DIRECTORS
The board of directors, subject to specific limitations in the articles of
incorporation and those imposed by law, has full, exclusive, and absolute
power, control and authority over our property and business. The board of
directors, without approval of the shareholders, may alter our investment
policies in view of changes in economic circumstances and other relevant
factors, subject to the investment restrictions set forth in the bylaws.
A director may be removed if the director is declared of unsound mind by
an order of court or if the director has pled guilty to or been convicted of a
felony involving moral turpitude. In addition, a director may be removed (1)
for cause by the vote or written consent of all directors other than the
director whose removal is being considered, or (2) with or without cause at a
special meeting of the shareholders by vote of a majority of the outstanding
common shares. "For cause" is defined as willful violations of the articles of
incorporation or bylaws, or gross negligence in the performance of a director's
duties. Any vacancies in the office of director may be filled by a majority of
the directors continuing in office or at a special meeting of shareholders by
vote of a majority of the common shares present at a meeting at which there is
a quorum. Any director so elected shall hold office for the remainder of his
predecessor's term. The number of directors shall not be less than three nor
more than 15. At the time of initial closing, there will be five directors, a
majority of whom are independent directors. The holders of the common shares
are entitled to vote on the election or removal of the board of directors, with
each common share entitled to one vote.
The board of directors is empowered to fix the compensation of all
officers and the board of directors. Under the bylaws, directors may receive
reasonable compensation for their services as directors and officers and
reimbursement of their expenses, and we may pay a director such compensation
for special services, including legal and accounting services, as the board of
directors deems reasonable. The board of directors may delegate some of its
powers to one or more committees, each comprised of at least three directors,
the majority of whom are independent directors. At all times a majority of the
directors and a majority of the members of any board committee shall be
independent directors, except that upon the death, removal, or resignation of
an independent director this requirement shall not be applicable for 60 days.
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RESPONSIBILITY OF BOARD OF DIRECTORS, APPLE SUITES ADVISORS, INC., OFFICERS AND
EMPLOYEES
Our articles of incorporation provide that the directors and officers
shall have no liability to us or our shareholders in actions by or in the right
of the company unless the officer or director has engaged in willful misconduct
or a knowing violation of the criminal law or of any federal or state
securities laws. The advisory agreement provides that Apple Suites Advisors
shall have no liability to us or our shareholders unless it has engaged in
gross negligence or willful misconduct. Generally, claimants must look solely
to our property for satisfaction of claims arising in connection with our
affairs. The articles of incorporation and the advisory agreement,
respectively, provide that we shall indemnify any present or former director,
officer, employee or agent and Apple Suites Advisors against any expense or
liability in an action brought against the person if the directors, excluding
the indemnified party, determine in good faith that the director, officer,
employee or agent or Apple Suites Advisors was acting in good faith within what
he or it reasonably believed to be the scope of his or its employment or
authority and for a purpose which he or it reasonably believed to be in our
best interests or of our shareholders, and that the liability was not the
result of willful misconduct, bad faith, reckless disregard of duties or
violation of the criminal law. Indemnification is not allowed for any liability
imposed by judgment, and costs associated therewith, including attorneys' fees,
arising from or out of a violation of federal or state securities laws
associated with the public offering of the common shares unless (1) there has
been a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnity, or (2) the claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnity, or (3) a court of competent
jurisdiction approves a settlement of the claims against a particular
indemnity. To the extent that the indemnification provisions purport to include
indemnification for liabilities arising under the Securities Act of 1933, in
the opinion of the Securities and Exchange Commission, the indemnification is
contrary to public policy and therefore unenforceable.
The exculpation and indemnification provisions in the articles of
incorporation and the advisory agreement have been adopted to help induce the
beneficiaries of these provisions to agree to serve on our behalf or the behalf
of Apple Suites Advisors by providing a degree of protection from liability for
alleged mistakes in making decisions and taking actions. The exculpation and
indemnification provisions have been adopted, in part, in response to a
perceived increase generally in shareholders' litigation alleging director and
officer misconduct. The exculpation and indemnification provisions in the
articles of incorporation and the advisory agreement may result in a
shareholder or our company having a more limited right of action against a
director, Apple Suites Advisors or its affiliates than he or it would otherwise
have had in the absence of the provisions. Conversely, the presence of these
provisions may have the effect of conferring greater discretion upon the
directors, Apple Suites Advisors and its affiliates in making decisions and
taking actions with respect to us. Subject to the exculpation and
indemnification provisions in the articles of incorporation, the advisory
agreement, and as otherwise provided by law, Apple Suites Advisors and the
directors and officers are accountable to us
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and our shareholders as fiduciaries and must exercise good faith and integrity
in handling our affairs. As noted above, however, the exculpation and
indemnification provisions in the articles of incorporation and the advisory
agreement represent a material change from the accountability which would be
imposed upon the directors, officers, Apple Suites Advisors and its affiliates
in the absence of the contractual provisions. Thus, the fiduciary duties will
be materially different from the fiduciary duties as they would exist in the
absence of the provisions of the articles of incorporation and the advisory
agreement.
ISSUANCE OF SECURITIES
The board of directors may in its discretion issue additional common
shares or other equity or debt securities, including options, warrants, and
other rights, on such terms and for such consideration as it may deem
advisable. The board of directors may, in its sole discretion, issue shares of
stock or other equity or debt securities, (1) to persons from whom we purchases
property, as part or all of the purchase price of the property, or (2) to Apple
Suites Advisors and Apple Suites Realty in lieu of cash payments required under
the advisory agreement or other contract or obligation. The board of directors,
in its sole discretion, may determine the value of any shares or other equity
or debt securities issued in consideration of property or services provided, or
to be provided, to us, except that while shares are offered by us to the
public, the public offering price of the common shares shall be deemed their
value.
We have adopted two stock incentive plans for the benefit of our directors
and employees and for the benefit of employees of Apple Suites Advisors and
Apple Suites Realty.
REDEMPTION AND RESTRICTIONS ON TRANSFER
For us to qualify as a REIT under the Internal Revenue Code, not more than
50% of our outstanding shares may be owned directly or indirectly by five or
fewer individuals during the last half of any year other than the first year,
and after the first year all shares must be owned by 100 or more persons during
at least 335 days of a taxable year of 12 months or during a proportionate part
of a shorter taxable year. As a means of attempting to ensure compliance with
these requirements, the bylaws provide that we may prohibit any person from
directly or indirectly acquiring ownership, beneficial or otherwise, of more
than 9.8% of the issued and outstanding shares of any class or series.
AMENDMENT
The articles of incorporation and the bylaws may be amended or altered or
we may be dissolved by the affirmative vote of the holders of a majority of the
outstanding common shares, with each shareholder entitled to cast one vote per
common share held. Our articles and bylaws may not be amended unless approved
by the vote of the holders of a majority of the common shares except that the
directors may amend the bylaws if they determine the amendment to be necessary
to comply with the REIT provisions of the Internal Revenue Code or other
applicable
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laws and regulations or the requirements of any state securities regulator or
similar official. The bylaws can also be amended by the board of directors to:
correct any ambiguity in the bylaws or resolve inconsistencies between the
bylaws and the Articles; make changes that are not materially adverse to the
rights of shareholders; or allow us to take any action or fulfill any
obligation which we are legally obligated or permitted to take. No amendment
that would change any rights with respect to any outstanding common shares, or
diminish or eliminate any voting rights pertaining thereto, may be made unless
approved by the vote of the holders of two-thirds of the outstanding common
shares so affected.
SHAREHOLDER LIABILITY
The holders of our shares shall not be liable personally on account of any
of our obligations.
SALES LITERATURE
We may use sales or marketing literature in connection with the offering
of the common shares. Sales or marketing materials which may be used include
sales brochures highlighting our company, our properties or other aspects of
our business. The literature may also include a brochure describing Apple
Suites Advisors, Apple Suites Realty or affiliates and a "tombstone"
advertisement, mailer and introductory letter. We may, from time to time, also
utilize brochures describing completed or proposed property acquisitions,
summaries of our company or of the offering of the common shares, and
discussions of REIT investments generally.
The offering is, however, made only by means of this prospectus. Except as
described, we have not authorized the use of other supplemental literature in
connection with the offering other than marketing bulletins to be used
internally by broker-dealers. Although the information contained in the
literature does not conflict with any of the information contained in this
prospectus, the material does not purport to be complete, and should not be
considered as a part of this prospectus or the registration statement of which
this prospectus is a part, as incorporated in this prospectus or the
registration statement by reference, or as forming the basis of the offering of
the common shares.
REPORTS TO SHAREHOLDERS
Financial information contained in all reports to shareholders will be
prepared in accordance with generally accepted accounting principles. The
annual report, which will contain financial statements audited by a nationally
recognized accounting firm, will be furnished within 120 days following the
close of each fiscal year. The annual report will contain a complete statement
of compensation and fees paid or accrued by us to Apple Suites Advisors and
Apple Suites Realty together with a description of any new agreements. Under
the bylaws, we are also obligated to send to our shareholders quarterly reports
after the end of the first three calendar quarters of each year. Quarterly
reports will include unaudited financial statements prepared in accordance with
generally accepted accounting principles, a statement of fees paid
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during the quarter to Apple Suites Advisors and Apple Suites Realty and a
reasonable summary of our activities during the quarter. The shareholders also
have the right under applicable law to obtain other information about us.
We will file a report meeting the requirements of Form 8-K under the
Securities Exchange Act of 1934 if, after the termination of the offering, a
commitment is made involving the use of 10 percent or more of the net proceeds
of the offering and will provide the information contained in the report to the
shareholders at least once each quarter after the termination of this offering.
LEGAL MATTERS
Certain legal matters in connection with the common shares will be passed
upon for us by McGuire, Woods, Battle & Boothe LLP, Richmond, Virginia.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our balance sheet at
March 26, 1999, as set forth in their report. We've included our balance sheet
in the prospectus and in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
79
<PAGE>
EXPERIENCE OF PRIOR PROGRAMS
The tables following this introduction set forth information with respect
to prior real estate programs sponsored by Glade M. Knight, who is sometimes
referred to as the "prior program sponsor." These tables provide information
for use in evaluating the programs, the results of the operations of the
programs, and compensation paid by the programs. Information in the tables is
current as of December 30, 1998. The tables are furnished solely to provide
prospective investors with information concerning the past performance of
entities formed by Glade M. Knight. Regulatory filings and annual reports of
Cornerstone Realty Income Trust, Inc. ("Cornerstone") and Apple Residential
Income Trust, Inc. ("Apple Residential") will be provided upon request for no
cost (except for exhibits, for which there is a minimal charge). In addition,
Part II of our Registration Statement contains detailed information on the
property acquisitions of Cornerstone and Apple Residential and is available
without charge upon request of any investor or prospective investor. Please
send all requests to Cornerstone Realty Income Trust, Inc., 306 East Main
Street, Richmond, VA 23219; telephone: 804-643-1761.
In the five years ending December 30, 1998, Glade M. Knight sponsored only
Cornerstone and Apple Residential, which have investment objectives similar to
ours. Cornerstone and Apple Residential were formed to invest in existing
residential properties on a substantially debt-free basis for the purpose of
providing regular quarterly distributions to shareholders and the possibility
of long-term appreciation in the value of properties and shares.
The information in the following tables should not be considered as
indicative of our capitalization or operations. Purchasers of shares offered by
our offering will not have any interest in the entities referred to in the
following tables or in any of the properties owned by those entities as a
result of the acquisition of shares in us.
See "Apple Suites Advisors, Inc., and Affiliates -- Prior Performance of
Programs Sponsored by Glade M. Knight" in the prospectus for additional
information on certain prior real estate programs sponsored by Mr. Knight,
including a description of the investment objectives which are deemed by Mr.
Knight to be similar and dissimilar to those of the Company.
The following tables use certain financial terms. The following paragraphs
briefly describe the meanings of these terms.
o "Acquisition Costs" means fees related to the purchase of property,
cash down payments, acquisition fees, and legal and other costs
related to property acquisitions.
o "Cash Generated From Operations" means the excess (or the deficiency
in the case of a negative number) of operating cash receipts,
including interest on investments, over operating cash expenditures,
including debt service payments.
o "GAAP" refers to "Generally Accepted Accounting Principles."
o "Recapture" means the portion of taxable income from property sales or
other dispositions that is taxed as ordinary income.
o "Reserves" refers to offering proceeds designated for repairs and
renovations to properties and offering proceeds not committed for
expenditure and held for potential unforeseen cash requirements.
o "Return of Capital" refers to distributions to investors in excess of
net income.
80
<PAGE>
TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds by
Cornerstone and Apple Residential, whose investment objectives are similar to
those of Apple Suites and whose offerings closed within three years ending
December 31, 1998.
<TABLE>
<CAPTION>
CORNERSTONE APPLE
----------------- -----------------
<S> <C> <C>
Dollar Amount Offered ........................ $409,409,897 $300,000,000
Dollar Amount Raised ......................... $409,409,897 $281,228,183
LESS OFFERING EXPENSES:
Selling Commissions and Discounts .......... 6.79% 10.00%
Organizational Expenses .................... 2.82% 1.00%
Other ...................................... 0.00% 0.00%
Reserves ..................................... 3.00% 0.50%
Percent Available from Investment ............ 87.39% 88.50%
ACQUISITION COSTS:
Prepaid items and fees to purchase
property .................................. 86.27% 86.50%
Cash down payment .......................... 0.00% 0.00%
Acquisition fees ........................... 1.12% 2.00%
Other ...................................... 0.00% 0.00%
Total Acquisition Costs ...................... 87.39% 88.50%
Date offering began .......................... May 1993 January 1997
Length of offering (in months) ............... 54 24
Months to invest amount available for
investment ................................. 54 24
</TABLE>
81
<PAGE>
TABLE II: COMPENSATION TO SPONSOR AND ITS AFFILIATES
Table II summarizes the compensation paid to the prior program sponsor and its
affiliates (i) by programs organized by it and closed within three years ended
December 31, 1998, and (ii) by all other programs during the three years ended
December 31, 1998.
<TABLE>
<CAPTION>
OTHER
CORNERSTONE APPLE PROGRAMS
---------------- --------------- -------------
<S> <C> <C> <C>
Date offering commenced .................. May 1993 January 1997 Various
Dollar amount raised ..................... $ 409,409,897 $281,228,183 $9,868,220
AMOUNTS PAID TO PRIOR PROGRAM SPONSOR
FROM PROCEEDS OF OFFERING:
Acquisition fees
Real estate commission ................ $ 4,075,337 $ 4,320,548 $ --
Advisory fees ......................... $ 515,689 $ 718,248 $ --
Other ................................. $ -- $ -- $ --
Cash generated from operations before
deducting payments to prior program
sponsor ................................ $ 111,550,382 $ 21,265,581 $5,293,228
AGGREGATE COMPENSATION TO PRIOR
PROGRAM SPONSOR
Management and accounting fees ......... $ 3,088,348 $ 2,388,954 $2,828,330
Reimbursements ......................... $ 2,717,655 $ -- $ --
Leasing fees ........................... $ -- $ -- $ --
Other fees ............................. $ -- $ -- $ --
</TABLE>
There have been no fees from property sales or refinancings
82
<PAGE>
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for Cornerstone
and Apple Residential, the offerings closed in the five years ending December
31, 1998. Table III is shown on both an income tax basis as well as in
accordance with generally accepted accounting principles, the only significant
difference being the methods of calculating depreciation.
<TABLE>
<CAPTION>
1998 1997
CORNERSTONE APPLE CORNERSTONE
----------------- --------------- ---------------
<S> <C> <C> <C>
Capital contributions by year ........... $ 38,905,636 $142,800,094 $ 63,485,868
Gross revenue ........................... $ 93,637,948 $ 30,764,904 $ 71,970,624
Operating expenses ...................... $ 33,797,439 $ 14,958,699 $ 27,339,955
Interest income (expense) ............... $ (12,175,940) $ 900,669 $ (7,230,205)
Depreciation ............................ $ 20,741,130 $ 5,788,476 $ 15,163,593
Net income (loss) GAAP basis ............ $ 23,210,642 $ 10,079,908 $ 19,225,553
Taxable income .......................... $ -- $ -- $ --
Cash generated from operations .......... $ 45,027,655 $ 17,122,276 $ 34,973,533
Less cash distributions to investors..... $ 38,317,602 $ 13,040,936 $ 31,324,870
Cash generated after cash distribution $ 6,710,053 $ 4,081,340 $ 3,648,663
Special items ...........................
Capital contributions, net ............. $ 38,905,636 $142,800,094 $ 63,485,868
Fixed asset additions .................. $ 97,863,162 $125,017,627 $157,859,343
Line of credit ......................... $ 50,323,852 $ -- $ 96,166,147
Cash generated .......................... $ (1,923,622) $ 15,910,626 $ 1,331,335
End of period cash ...................... $ 2,590,364 $ 40,073,198 $ 4,513,986
Tax and distribution data per $1,000
invested
<CAPTION>
1996 1995 1994
APPLE CORNERSTONE CORNERSTONE CORNERSTONE
--------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Capital contributions by year ........... $109,090,359 $ 144,798,035 $71,771,027 $23,496,784
Gross revenue ........................... $ 12,005,968 $ 40,261,674 $16,266,610 $ 8,177,576
Operating expenses ...................... $ 5,993,492 $ 17,198,882 $ 7,457,574 $ 3,894,657
Interest income (expense) ............... $ (235,708) $ (1,140,667) $ (68,061) $ 110,486
Depreciation ............................ $ 1,898,003 $ 8,068,063 $ 2,788,818 $ 1,210,818
Net income (loss) GAAP basis ............ $ 3,499,194 $ (4,169,849) $ 5,229,715 $ 2,386,303
Taxable income .......................... $ -- $ -- $ -- $ --
Cash generated from operations .......... $ 7,075,025 $ 20,162,776 $ 9,618,956 $ 3,718,086
Less cash distributions to investors..... $ 3,249,098 $ 15,934,901 $ 6,316,185 $ 2,977,136
Cash generated after cash distribution $ 3,825,927 $ 4,227,875 $ 3,302,771 $ 740,950
Special items ...........................
Capital contributions, net ............. $109,090,359 $ 144,798,035 $71,771,027 $23,496,784
Fixed asset additions .................. $ 88,753,814 $ 194,519,406 $75,589,089 $28,557,568
Line of credit ......................... $ -- $ 41,603,000 $ 3,300,000 $ 5,000,000
Cash generated .......................... $ 24,162,472 $ (3,890,496) $ 2,784,709 $ 680,166
End of period cash ...................... $ 24,162,572 $ 3,182,651 $ 7,073,147 $ 4,288,438
Tax and distribution data per $1,000
invested
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
CORNERSTONE APPLE CORNERSTONE APPLE CORNERSTONE CORNERSTONE CORNERSTONE
------------- ------- ------------- ------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Federal income tax results
Cornerstone and Apple are REITs
and thus are not taxed at the
corporate level
Cash distributions to investors
Source (on GAAP basis)
Investment income ............. $ 82 $-- $ 77 $-- $85 $80 $70
Return of capital ............. $ 21 $82 $ 23 $60 $14 $16 $19
Source (on Cash basis) .........
Sales ......................... $ -- $-- $ -- $-- $-- $-- $--
Refinancings .................. $-- $ -- $-- $-- $-- $--
Operations .................... $103 $82 $100 $60 $99 $96 $89
Other ......................... $ -- $-- $ -- $-- $-- $-- $--
</TABLE>
84
<PAGE>
TABLE IV: RESULTS OF COMPLETED PROGRAMS
Table IV shows the results of programs sponsored by Mr. Knight which completed
operations in the five years ending December 31, 1998. All of these programs
had investment objectives dissimilar to those of Apple Suites.
<TABLE>
<CAPTION>
MOUNTAIN TEAL
PROGRAM NAME VIEW WESTFIELD SUNSTONE POINT
- ------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Dollar amount raised ................ $2,605,800 $1,825,600 $1,890,000 $3,310,620
Number of properties ................ 1 1 1 1
Date of closing of offering ......... OCT 1984 NOV 1984 JULY 1984 DEC 1989
Date of sale of property ............ AUG 1995 APR 1996 NOV 1995 DEC 1997
Tax and Distribution data per $1,000
investment through-
Federal income tax results:
Ordinary income
From operations .................. $ 68 $ 80 $ 122 $ (4)
From recapture ................... $ 1,200 $ 1,302 $ 526 $ --
Capital gain ...................... $ -- $ -- $ -- $ 2,126
Deferred gain .....................
Capital .......................... $ -- $ -- $ -- $ --
Ordinary ......................... $ -- $ -- $ -- $ --
Cash distributions to investors
Source(On GAAP basis)
Investment income ................ $ 68 $ 80 $ 122 $ (4)
Return of capital ................ $ 38 $ 233 $ -- $ --
Source (On cash basis)
Sales ............................ $ 38 $ 233 $ 122 $ 2,126
Refinancing ...................... $ -- $ -- $ -- $ --
Operations ....................... $ 68 $ 80 $ -- $ (4)
Other ............................ $ -- $ -- $ -- $ --
Receivable on net purchase money
financing ......................... $ -- $ -- $ -- $ --
</TABLE>
85
<PAGE>
TABLE V: SALES OR DISPOSALS OF PROPERTIES
Table V is not applicable. Cornerstone and Apple Residential (the sole prior
programs with investment objectives similar to our investment objectives) have
not sold or disposed of any properties as required for inclusion in the Table
(sale or disposals of properties by programs with similar investment objectives
within the most recent three years).
86
<PAGE>
APPLE SUITES, INC.
INDEX TO BALANCE SHEET
MARCH 26, 1999
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors ........... F-2
Balance Sheet at March 26, 1999 .......... F-3
Notes to Balance Sheet ................... F-4
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder of
Apple Suites, Inc.
We have audited the accompanying balance sheet of Apple Suites, Inc. as of
March 26, 1999. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Apple Suites, Inc. at March
26, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Richmond, Virginia
April 21, 1999
F-2
<PAGE>
APPLE SUITES, INC.
BALANCE SHEET
MARCH 26, 1999
<TABLE>
<S> <C>
ASSETS
Cash ......................................................... $100
====
STOCKHOLDER'S EQUITY
Preferred stock, authorized 15,000,000 shares; none issued and
outstanding ................................................ --
Class B convertible stock, no par value, authorized 240,000
shares; none issued and outstanding ........................ --
Common stock, no par value authorized 200,000,000 shares;
issued and outstanding 10 shares ........................... $100
----
$100
====
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Apple Suites, Inc. (the "Company") is a Virginia corporation that intends
to qualify as a real estate investment trust ("REIT") for federal income tax
purposes. The Company, which has no operating history, was formed to invest
primarily in extended stay hotels in the southeastern and southwestern United
States. Initial capitalization occurred on March 5, 1999, when 10 shares of
common stock were purchased by Apple Suites Advisors, Inc. (see Note 3).
SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The Company intends to make an election to be treated, and expects to
qualify, as a REIT under the Internal Revenue Code of 1986, as amended. As a
REIT, the Company will be allowed a deduction for the amount of dividends paid
to its shareholders, thereby subjecting the distributed net income of the
Company to taxation only at the shareholder level. The Company's continued
qualification as a REIT will depend on its compliance with numerous
requirements, including requirements as to the nature of its income and
distribution of dividends.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Start Up Costs
Start up costs incurred other than offering costs will be expensed upon
the successful completion of the minimum offering (see Note 3).
2. OFFERING OF SHARES
The Company intends to raise 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.
A minimum offering of 1,666,666 shares ($15,000,000) must be sold within
one year from the beginning of this offering or the offering will terminate and
investors' subscription payments, with interest, will be refunded to investors.
Pending sale of such minimum offering amount, investors' subscription payments
will be placed in an escrow account.
F-4
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET - (CONTINUED)
3. RELATED PARTIES
The Company has negotiated, but not signed, a Property Acquisition and
Disposition Agreement with Apple Suites Realty Group, Inc. ("ASRG"), to acquire
and dispose of real estate assets for the Company. A fee of 2% of the purchase
price or sale price in addition to certain reimbursable expenses will be
payable for these services.
The Company has negotiated, but not signed, an Advisory Agreement with
Apple Suites Advisors, Inc. ("ASA") to provide management of the Company and
its assets. An annual fee ranging from .1% to .25% of total contributions
received by the Company in addition to certain reimbursable expenses will be
payable for these services.
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 sold in the offering.
Affiliates of the Company have incurred certain organization and offering
costs on behalf of the Company. Upon successful completion of the minimum
offering (see Note 2), the Company will reimburse the affiliates for these
organizational and offering costs. The Company is not responsible for these
costs in the event that the offering is not successfully completed.
On April 20, 1999, the Company obtained a line of credit in a principal
amount of up to $1 million to fund certain offering costs. The loan bears
interest at LIBOR plus 1.50%. Interest is payable monthly and the principal
balance and all accrued interest are due in full on October 20, 1999. Glade M.
Knight has guaranteed repayment of the loan.
4. STOCK INCENTIVE PLANS
The Company intends to adopt two stock incentive plans (the "Incentive
Plan" and "Directors' Plan") to provide incentives to attract and retain
directors, officers and key employees. The plans provide for the grant of
options to purchase a specified number of shares of common stock ("Options") or
grants of restricted shares of common stock ("Restricted Stock") to selected
employees and directors of the Company and certain affiliates. Following
consummation of the offering, a Compensation Committee ("Committee") will be
established to implement and administer the plans. The Committee will be
responsible for granting Options and shares of Restricted Stock and for
establishing the exercise price of Options and the terms and conditions of
Restricted Stock.
5. CLASS B CONVERTIBLE STOCK
The Company has authorized 240,000 shares of Class B Convertible Stock.
The Company will issue 202,500 Class B Convertible Shares to Glade M. Knight,
Chairman and President of the Company, and a combined 37,500 Class B
F-5
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET - (CONTINUED)
5. CLASS B CONVERTIBLE STOCK - (CONTINUED)
Convertible Shares to two other individuals. The Class B Convertible Shares
will be issued by the Company on or before the initial closing of the minimum
offering of $15,000,000, in exchange for payment of $.10 per Class B
Convertible Share, or an aggregate of $24,000. There will be no dividends
payable on the Class B Convertible Shares. On liquidation of the Company, the
holders of the Class B Convertible Shares will be entitled to a liquidation
payment of $.10 per share before any distribution of liquidation proceeds to
holders of the Common Shares. Holders of more than two-thirds of the Class B
Convertible Shares must approve any proposed amendment to the Articles of
Incorporation that would adversely affect the Class B Convertible Shares or
create a new class of stock senior to, or on a parity with, the Class B
Convertible Shares. The Class B Convertible Shares may not be redeemed by the
Company.
Each holder of outstanding Class B Convertible Shares shall have the right
to convert any of such shares into Common Shares of the Company upon and for
180 days following the occurrence of either of the following conversion events:
(1) the sale or transfer of substantially all of the Company's assets,
stock or business, whether through sale, exchange, merger,
consolidation, lease, share exchange or otherwise, or
(2) the termination or expiration without renewal of the Advisory
Agreement with ASA, and if the Company ceases to use ASRG to provide
substantially all of its property acquisition and disposition
services.
Upon the occurrence of either conversion event, each Class B Convertible
Share may be converted into a number of Common Shares based upon the gross
proceeds raised through the date of conversion in the public offering or
offerings of the Company's Common Shares made by the Company's prospectus
according to the following formula:
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES
GROSS PROCEEDS RAISED FROM THROUGH CONVERSION OF ONE
SALES OF COMMON SHARES THROUGH CLASS B CONVERTIBLE SHARE
DATE OF CONVERSION (THE INITIAL "CONVERSION RATIO")
- -------------------------------- ---------------------------------
<S> <C>
$ 50 million................... 1.0
$100 million................... 2.0
$150 million................... 3.5
$200 million................... 5.3
$250 million................... 6.7
$300 million................... 8.0
</TABLE>
F-6
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET - (CONTINUED)
5. CLASS B CONVERTIBLE STOCK - (CONTINUED)
No additional consideration is due upon the conversion of the Class B
Convertible Shares. Upon the probable occurrence of a conversion event, the
Company will record expense for the difference between the market value of the
Company's Common Stock and issue price of the Class B Convertible Shares.
6. WARRANTS
The Company has agreed to sell to the Managing Dealer for an aggregate of
$100, warrants (the "Warrants") to purchase 10% of the shares sold in this
offering, up to 3,000,000 common shares at an exercise price of $16.50 per
common share (165% of the public offering price per common share). The Warrants
may not be sold, transferred, assigned or hypothecated for one year from the
date of the "best-efforts" offering prospectus, except to the officers and
employees of the Managing Dealer and are exercisable at any time and from time
to time, in whole or in part, during the five-year period commencing on the
date of the final closing after the termination of the offering (the "Warrant
Exercise Term"). At the Company's expense, the Company intends to register the
Warrants under the Securities Act on one occasion during the Warrant Exercise
Term and to include the Warrants in any appropriate registration statement
which is filed by the Company during the seven years following the date of the
"best efforts" offering prospectus.
F-7
<PAGE>
EXHIBIT A
SUBSCRIPTION AGREEMENT
To: Apple Suites, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Suites, Inc. ("REIT")
at a purchase price of and 00/100 Dollars ($ ) per Share. By executing or
having executed on my (our) behalf this Subscription Agreement and submitting
payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Suites, Inc.,
of which this Subscription Agreement is a part, and understand that the shares
being acquired will be governed by the terms of such Prospectus and any
amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home,
home furnishings and automobiles) of at least $50,000 ($125,000 in the case of
Maine and New Hampshire purchasers) and estimate that (without regard to
investment in the REIT) I (we) will have gross income during the current year
of $50,000, or (ii) a net worth (excluding home, home furnishings and
automobiles) of at least $100,000 ($150,000 in the case of Kentucky and North
Carolina purchasers, $200,000 in the case of Maine purchasers, and $250,000 in
the case of New Hampshire purchasers); and, in either event, further represent
that the purchase amount is 10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative
capacity) that I (we) have due authority to execute the Subscription Agreement
and to thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer
identification number shown on the signature page of this Subscription
Agreement is true, correct and complete (or I am (we are) waiting for a number
to be issued to me (us)), and (ii) that I am (we are) not subject to backup
withholding either because (a) I am (we are) exempt from backup withholding, or
(b) I (we) have not been notified by the Internal Revenue Service that I am (we
are) subject to backup withholding as a result of a failure to report all
interest or distributions, or (c) the Internal Revenue Service has notified me
(us) that I am (we are) no longer subject to backup withholding; and
(g) it is understood that the REIT shall have the right to accept or
reject this subscription in whole or in part in its sole and absolute
discretion. The REIT will either accept or reject this subscription within four
business days from the receipt of the subscription by the Managing Dealer or
Selected Dealer.
To the extent permitted by applicable law, the REIT intends to assert the
foregoing representations as a defense to any claim based on factual assertions
contrary to those set forth above.
(H) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE
THE FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR
RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION,
OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS OPTED OUT OF THE
CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS
ACTION UNTIL: (1) THE CLASS CERTIFICATION IS DENIED; OR (II) THE CLASS
IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM THE CLASS BY THE
COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL NOT
CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN
HIM/HER AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR
ACCOUNT TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH
BROKER WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH
ARBITRATION WILL BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER
SELF-REGULATORY ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR
THE CUSTOMER MAY INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE
CUSTOMER DOES NOT DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND
IN WRITING WITHIN 5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES
BROKER TO DESIGNATE THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER
SUBMITS HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF
SUCH COURT.
<PAGE>
APPLE SUITES, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s) ---------------------------------------------------
Tax ID Number(s)----------------------------------------------------------------
Account # (If applicable)
2. Name(s) in which shares are to be registered:
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community
Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
[ ] As Custodian for ----------------------------------------------------------
[ ] For Estate of -------------------------------------------------------------
[ ] Other ---------------------------------------------------------------------
4. Address for correspondence --------------------------------------------------
- --------------------------------------------------------------------------------
5. Are you a non-resident alien individual (other than a non-resident alien
who has elected to be taxed as a resident), a foreign corporation, a
foreign partnership, a foreign trust, a foreign estate, or otherwise not
qualified as a United States person? If so, transaction will not be
executed without a completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $--------------- for ------------------- Shares
(Investment must be for a minimum of $5,000 in Shares or $2,000 in Shares
for qualified plans). Make check payable to: First Union National Bank,
Escrow Agent (or as otherwise instructed). [ ] Liquidate funds from money
market [ ] Check enclosed
7. Instructions for cash distributions [ ] Deposit to money market
[ ] Reinvest in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (H).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal
document, before signing.)
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE INVESTOR IS NOT WAIVING ANY
RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
x -----------------------------------------------------------------------------
Signature Date
x -----------------------------------------------------------------------------
Signature Date
10. Broker/Dealer Information:
x ---------------------------------- ----------------------------------------
Registered Representative's Name Second Registered Representative's Name
x ---------------------------------- ------------------------------------------
Broker/Dealer Firm Registered Representative's Office Address
x ---------------------------------- ------------------------------------------
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of
the NASD's Rules of Fair Practice, the undersigned Registered
Representative hereby certifies: I have reasonable grounds to believe,
based on information obtained from the investor(s) concerning investment
objectives, other investments, financial situation and needs and any other
information known by me, that investment in the REIT is suitable for such
investor(s) in light of financial position, net worth and other
suitability characteristics.
- --------------------------------------------------------------------------------
Registered Representative Date
- --------------------------------------------------------------------------------
General Securities Principal Date
- --------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Signature
page will not be an effective agreement until
it is signed by a duly authorized agent of Agreed and accepted by:
Apple Suites, Inc. Apple Suites, Inc.
By ----------------------------
Date --------------------------
<PAGE>
SUBSCRIPTION AGREEMENT
To: Apple Suites, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Suites, Inc. ("REIT")
at a purchase price of and 00/100 Dollars ($ ) per Share. By executing or
having executed on my (our) behalf this Subscription Agreement and submitting
payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Suites, Inc.,
of which this Subscription Agreement is a part, and understand that the shares
being acquired will be governed by the terms of such Prospectus and any
amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home,
home furnishings and automobiles) of at least $50,000 ($125,000 in the case of
Maine and New Hampshire purchasers) and estimate that (without regard to
investment in the REIT) I (we) will have gross income during the current year
of $50,000, or (ii) a net worth (excluding home, home furnishings and
automobiles) of at least $100,000 ($150,000 in the case of Kentucky and North
Carolina purchasers, $200,000 in the case of Maine purchasers, and $250,000 in
the case of New Hampshire purchasers); and, in either event, further represent
that the purchase amount is 10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative
capacity) that I (we) have due authority to execute the Subscription Agreement
and to thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer
identification number shown on the signature page of this Subscription
Agreement is true, correct and complete (or I am (we are) waiting for a number
to be issued to me (us)), and (ii) that I am (we are) not subject to backup
withholding either because (a) I am (we are) exempt from backup withholding, or
(b) I (we) have not been notified by the Internal Revenue Service that I am (we
are) subject to backup withholding as a result of a failure to report all
interest or distributions, or (c) the Internal Revenue Service has notified me
(us) that I am (we are) no longer subject to backup withholding; and
(g) it is understood that the REIT shall have the right to accept or
reject this subscription in whole or in part in its sole and absolute
discretion. The REIT will either accept or reject this subscription within four
business days from the receipt of the subscription by the Managing Dealer or
Selected Dealer.
To the extent permitted by applicable law, the REIT intends to assert the
foregoing representations as a defense to any claim based on factual assertions
contrary to those set forth above.
(H) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE
THE FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR
RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION,
OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS OPTED OUT OF THE
CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS
ACTION UNTIL: (1) THE CLASS CERTIFICATION IS DENIED; OR (II) THE CLASS
IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM THE CLASS BY THE
COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL NOT
CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN
HIM/HER AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR
ACCOUNT TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH
BROKER WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH
ARBITRATION WILL BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER
SELF-REGULATORY ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR
THE CUSTOMER MAY INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE
CUSTOMER DOES NOT DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND
IN WRITING WITHIN 5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES
BROKER TO DESIGNATE THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER
SUBMITS HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF
SUCH COURT.
<PAGE>
APPLE SUITES, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
APPLE SUITES, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s) ---------------------------------------------------
Tax ID Number(s)----------------------------------------------------------------
Account # (If applicable)
2. Name(s) in which shares are to be registered:
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community
Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
[ ] As Custodian for ----------------------------------------------------------
[ ] For Estate of -------------------------------------------------------------
[ ] Other ---------------------------------------------------------------------
4. Address for correspondence --------------------------------------------------
- --------------------------------------------------------------------------------
5. Are you a non-resident alien individual (other than a non-resident alien
who has elected to be taxed as a resident), a foreign corporation, a
foreign partnership, a foreign trust, a foreign estate, or otherwise not
qualified as a United States person? If so, transaction will not be
executed without a completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $--------------- for ------------------- Shares
(Investment must be for a minimum of $5,000 in Shares or $2,000 in Shares
for qualified plans). Make check payable to: First Union National Bank,
Escrow Agent (or as otherwise instructed). [ ] Liquidate funds from money
market [ ] Check enclosed
7. Instructions for cash distributions [ ] Deposit to money market
[ ] Reinvest in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (H).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal
document, before signing.)
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE INVESTOR IS NOT WAIVING ANY
RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
x -----------------------------------------------------------------------------
Signature Date
x -----------------------------------------------------------------------------
Signature Date
10. Broker/Dealer Information:
x ---------------------------------- ----------------------------------------
Registered Representative's Name Second Registered Representative's Name
x ---------------------------------- ------------------------------------------
Broker/Dealer Firm Registered Representative's Office Address
x ---------------------------------- ------------------------------------------
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of
the NASD's Rules of Fair Practice, the undersigned Registered
Representative hereby certifies: I have reasonable grounds to believe,
based on information obtained from the investor(s) concerning investment
objectives, other investments, financial situation and needs and any other
information known by me, that investment in the REIT is suitable for such
investor(s) in light of financial position, net worth and other
suitability characteristics.
- --------------------------------------------------------------------------------
Registered Representative Date
- --------------------------------------------------------------------------------
General Securities Principal Date
- --------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Signature
page will not be an effective agreement until
it is signed by a duly authorized agent of Agreed and accepted by:
Apple Suites, Inc. Apple Suites, Inc.
By ----------------------------
Date --------------------------
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
======================================= =========================================
NO DEALER, SALESMAN OR OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS IN APPLE SUITES LOGO
CONNECTION WITH THE OFFERING MADE BY
THIS PROSPECTUS, AND, IF GIVEN OR
MADE, ANY OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY STATE IN
WHICH AN OFFER MAY NOT LEGALLY BE
MADE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT
INFORMATION CONTAINED IN THIS
PROSPECTUS HAS NOT CHANGED AS OF ANY
TIME AFTER ITS DATE.
-----------------------------------
TABLE OF CONTENTS ----------------------------
PROSPECTUS
----------------------------
PAGE
--------
Summary ............................... 1
Risk Factors .......................... 7
Use of Proceeds ....................... 17
Compensation .......................... 19
Conflicts of Interests ................ 21
Investment Objectives and
Policies ........................... 25
Distribution Policy ................... 29
Business .............................. 30
Management ............................ 36
Apple Suites Advisors, Inc. and
Affiliates ......................... 42
Principal and Management
Shareholders ....................... 50
Federal Income Tax
Considerations ..................... 51
ERISA Considerations .................. 61
Capitalization ........................ 62
Management's Discussion and
Analysis of Financial Condition
and Results of Operations .......... 63
Plan of Distribution .................. 65
Description of Capital Stock .......... 70
Summary of Organizational DAVID LERNER ASSOCIATES, INC.
Documents .......................... 75 AS MANAGING DEALER
Sales Literature ...................... 78
Reports to Shareholders ............... 78
Legal Matters ......................... 79
Experts ............................... 79
Experience of Prior Programs .......... 80
Index to Balance Sheet ................ F-1
Subscription Agreement ................ Exhibit A AUGUST 3, 1999
======================================= =========================================
</TABLE>
