AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1999
REGISTRATION NO. 333-77055
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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APPLE SUITES, INC.
(Exact name of Registrant as specified in its charter)
306 East Main Street
Richmond, Virginia 23219
(804)643-1761
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Virginia (Address, including zip code, and telephone 54-1933472
(State or other jurisdiction of number, including area code, of (I.R.S. Employer
incorporation or organization) Registrant's Principal Executive Offices) Identification No.)
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Glade M. Knight
Chairman of the Board of Directors
Apple Suites, Inc.
306 East Main Street
Richmond, Virginia 23219
(804) 643-1761
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
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Copies to:
Leslie A. Grandis, Esq.
McGuire, Woods, Battle & Boothe LLP
One James Center
901 East Cary Street
Richmond, Virginia 23219
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Approximate Date of Commencement of Proposed Sale to Public From time to time
following the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If the delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED JUNE 16, 1999
PROSPECTUS
APPLE SUITES, INC.
1,666,666.67 COMMON SHARES
We plan to own extended-stay hotel properties and qualify as a real
estate investment trust. We own no properties at this time.
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 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
arms-length negotiation for advisory, acquisition, disposition and other
services.
o The chairman of our board and our officers are principals of companies with
which we will enter into leases and contracts for asset management,
property acquisition and disposition services and these arrangements
involve conflicts of interest.
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Price to Public Commissions & Proceeds to Apple
Marketing Expenses Suites, 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 THAT
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.
THE DATE OF THIS PROSPECTUS IS JUNE 16, 1999.
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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...................................................................................................3
Use of Proceeds................................................................................................3
Liquidity......................................................................................................3
Borrowing Policy...............................................................................................4
Investment Policy..............................................................................................4
Distributions Policy...........................................................................................5
Capital Stock..................................................................................................5
Compensation...................................................................................................5
RISK FACTORS......................................................................................................7
There is no public market for our common shares................................................................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 was no arms-length negotiations with Apple Suites Advisors, Apple
Suites Realty and Apple Suites Management..................................................................8
Commissions, acquisition, advisory and other fees and expenses will reduce our return..........................8
There are multiple conflicts of interest.......................................................................8
The compensation to Apple Suites Realty and Apple Suites Advisors is indeterminable and cannot be stated
with certainty.................................................................................................8
Our management will spend time on other activities.............................................................9
We are dependent on our investment in a single industry........................................................9
We cannot directly operate our extended-stay hotel properties..................................................9
There may be operational limitations associated with franchise agreements.....................................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
There are no specified properties.............................................................................10
There may be delays in investment in real property............................................................11
The per-share offering prices have been established arbitrarily by us.........................................11
We may be unable to make distributions........................................................................11
We will face competition in the hotel industry................................................................11
There are significant adverse consequences of failure to qualify as a REIT....................................11
Real estate investments are relatively illiquid...............................................................12
We have no restriction on changes in our investment and financing policies....................................12
There will be dilution of shareholder's interests upon conversion of the Class B Shares.......................12
Our shareholders'interests may be diluted in various ways.....................................................12
Our articles and bylaws contain antitakeover provisions and ownership limits..................................13
We may become subject to environmental liabilities............................................................13
There may be significant costs of compliance with the Americans with Disabilities Act and similar laws........14
Our computer systems may not be Year 2000 compliant...........................................................14
There are forward-looking statements are included in this prospectus..........................................14
USE OF PROCEEDS..................................................................................................16
COMPENSATION.....................................................................................................18
Acquisition Phase.............................................................................................18
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Operational Phase.............................................................................................18
Disposition Phase.............................................................................................19
All Phases....................................................................................................19
CONFLICTS OF INTERESTS...........................................................................................22
General.......................................................................................................22
Transactions with Affiliates and Related Parties..............................................................22
Conflicts with Apple Suites Advisors and Apple Suites Realty..................................................22
Policies to Address Conflicts.................................................................................22
Competition Between Us and Affiliates.........................................................................22
Competition for Management Services...........................................................................23
INVESTMENT OBJECTIVES AND POLICIES...............................................................................24
Investments in Real Estate or Interests in Real Estate........................................................24
Borrowing Policies............................................................................................24
Reserves......................................................................................................25
Sale Policies.................................................................................................25
Changes in Objectives and Policies............................................................................26
DISTRIBUTIONS POLICY.............................................................................................28
BUSINESS.........................................................................................................29
General.......................................................................................................29
Business Strategies...........................................................................................29
Homewood Suites(R)............................................................................................29
Description of Leases.........................................................................................30
Term.......................................................................................................30
Base Rent; Participating Rent..............................................................................30
Other Real Estate Investments.................................................................................31
Legal Proceedings.............................................................................................31
Regulation....................................................................................................31
General....................................................................................................31
Americans With Disabilities Act............................................................................31
Environmental Matters.........................................................................................31
Insurance.....................................................................................................33
Available Information.........................................................................................33
MANAGEMENT.......................................................................................................34
Classification of the Board...................................................................................35
Committees of the Board.......................................................................................35
Director Compensation.........................................................................................35
Indemnification and Insurance.................................................................................36
Officer Compensation..........................................................................................36
Stock Incentive Plans.........................................................................................36
The Incentive Plan............................................................................................36
Directors' Plan...............................................................................................38
Stock Option Grants...........................................................................................39
APPLE SUITES ADVISORS, INC. AND AFFILIATES.......................................................................40
General.......................................................................................................40
The Advisory Agreement........................................................................................40
Apple Suites Realty Group, Inc................................................................................42
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Prior Performance of Programs Sponsored by Glade M. Knight....................................................43
PRINCIPAL AND MANAGEMENT SHAREHOLDERS............................................................................46
FEDERAL INCOME TAX CONSIDERATIONS................................................................................48
General.......................................................................................................48
REIT Qualification............................................................................................49
Sources of Gross Income....................................................................................49
75% Gross Income Test......................................................................................50
95% Gross Income Test......................................................................................51
Failing the 75% or 95% Tests; Reasonable Cause.............................................................51
Character of Assets Owned..................................................................................52
Annual Distributions to Shareholders.......................................................................52
Taxation as a REIT............................................................................................53
Failure to Qualify as a REIT..................................................................................54
Taxation of Shareholders......................................................................................54
Backup Withholding............................................................................................56
Taxation of Tax Exempt Entities...............................................................................56
Taxation of Foreign Investors.................................................................................57
State and Local Taxes.........................................................................................57
ERISA CONSIDERATIONS.............................................................................................58
CAPITALIZATION...................................................................................................60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF..........................................................................61
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................61
Overview......................................................................................................61
Year 2000 Compliance..........................................................................................63
PLAN OF DISTRIBUTION.............................................................................................63
DESCRIPTION OF CAPITAL STOCK.....................................................................................68
Common Shares.................................................................................................68
Dividend and Distribution Rights..............................................................................68
Class B Convertible Shares....................................................................................69
Preferred Shares..............................................................................................70
Restrictions on Transfer......................................................................................71
Facilities for Transferring Common Shares.....................................................................72
Warrants......................................................................................................72
SUMMARY OF ORGANIZATIONAL DOCUMENTS..............................................................................74
Board of Directors............................................................................................74
Responsibility of Board of Directors, Apple Suites Advisors, Inc., Officers and Employees.....................75
Issuance of Securities........................................................................................76
Redemption and Restrictions on Transfer.......................................................................76
Amendment.....................................................................................................76
Shareholder Liability.........................................................................................77
SALES LITERATURE.................................................................................................78
REPORTS TO SHAREHOLDERS..........................................................................................78
LEGAL MATTERS....................................................................................................78
EXPERTS..........................................................................................................79
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EXPERIENCE OF PRIOR PROGRAMS.....................................................................................80
INDEX TO FINANCIAL
STATEMENTS......................................................................................................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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* 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 The chairman of our board and our officers are principals of
companies with which we will enter into leases, contracts for asset
management, property acquisition and disposition services and these
arrangements involve conflicts of interest.
o The chairman of the board and the officers of Apple Suites Advisors,
Apple Suites Realty and Apple Suites Management also serve as
officers and directors of other entities and may have conflicts of
interest in allocating their time and service between us and these
other entities.
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.
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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 shares
have been sold. 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.
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 limited conditions. An initial closing will occur after the minimum
offering of 1,666,666.67 common shares is achieved. Thereafter, 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.
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
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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) to dispose of substantially 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, before subtracting liabilities, unless 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. 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.
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.
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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 gross proceeds from the sale of the common
shares. 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%.
o Assuming the minimum offering amount of $15,000,000 in common shares
is sold, the annual asset management fee would be between $15,000
and $37,500.
o Assuming the maximum offering amount of $300,000,000 in common
shares is sold, the annual asset management fee would be between
$300,000 and $750,000.
The Return Ratio is the ratio of Funds from Operations to total
contributions. Total contributions means the gross proceeds from the sale of the
common shares. 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.
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 of each property and up to 2% of the gross
sale prices.
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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.
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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.
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) to dispose of substantially all of our properties in a manner which
will permit distributions to our shareholders of cash or marketable securities.
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.
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THERE WAS NO ARMS-LENGTH NEGOTIATIONS 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 negotiation. Apple Suites Management will enter into leases for our
properties and has agreed to pay us rent. This rent has been established without
the benefit of arms-length negotiation.
COMMISSIONS, ACQUISITION, ADVISORY AND OTHER FEES AND EXPENSES WILL
REDUCE OUR RETURN.
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 total contributions. 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 MULTIPLE CONFLICTS OF INTEREST.
CONFLICTS WITH OUR CHAIRMAN OF THE BOARD. Apple Suites Advisors, Apple
Suites Realty and Apple Suites Management will be subject to various conflicts
of interest in their dealings with us. Generally, the conflicts of interest
arise because Glade M. Knight is the sole shareholder of Apple Suites Advisors,
Apple Suites Realty and Apple Suites Management which will enter into contracts
with us to lease our properties or provide us with asset management , property
acquisition and disposition services. Glade M. Knight is, and will in the future
be, a principal in other real estate investment transactions or programs which
may compete with us.
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Other possible transactions involving conflicts of interest include our
acquisition of properties or borrowings from Apple Suites Advisors or an
affiliate.
CONFLICTS 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 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.
CONFLICTS WITH OUR LESSEE. 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, if another lessee were found, we would be able to enter into a
new lease on terms as favorable to us. In addition our chairman and president is
the sole shareholder of Apple Suites Management.
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 have conflicts of interest in allocating
management time and service between us and these other entities.
WE 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 CANNOT DIRECTLY OPERATE OUR EXTENDED-STAY HOTEL PROPERTIES.
Due to federal income tax restrictions, we can not 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.
9
<PAGE>
THERE MAY BE OPERATIONAL LIMITATIONS ASSOCIATED WITH FRANCHISE
AGREEMENTS.
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 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 ARE NO SPECIFIED PROPERTIES.
The specific properties in which the proceeds of this offering are to
be invested have not been identified 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
10
<PAGE>
properties which are disclosed in a prospectus supplement issued before the
prospective shareholder makes its investment.
THERE MAY BE DELAYS IN INVESTMENT IN REAL PROPERTY.
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 PER-SHARE OFFERING PRICES HAVE BEEN ESTABLISHED ARBITRARILY BY US.
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. 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.
WE MAY BE UNABLE TO MAKE DISTRIBUTIONS.
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. 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.
WE WILL FACE COMPETITION IN THE HOTEL INDUSTRY.
Our properties will compete directly with other hotel properties in
markets in which our properties will be located. We plan to compete on the basis
of location, quality and rates. In addition, we plan to compete based on our
association with nationally recognized hotel brands. This competition could
reduce our occupancy levels and rental revenues, which could adversely affect
our operations.
THERE ARE SIGNIFICANT ADVERSE CONSEQUENCES OF 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
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<PAGE>
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.
REAL ESTATE INVESTMENTS ARE 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 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.
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 conversion by them of Class B convertible shares into common shares will
result in dilution of the shareholders' interests. Assuming all common shares
offered by this prospectus are sold, and all of the authorized Class B
convertible shares are 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
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<PAGE>
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.
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.
LIABILITY FOR HAZARDOUS SUBSTANCES. 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:
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- 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.
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
latent 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 properly remediate a contaminated property, could
adversely affect our ability to sell or rent the property or to borrow using the
property as collateral.
THERE MAY BE SIGNIFICANT COSTS OF COMPLIANCE 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.
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. Although we are in the process of
developing initiatives to address the Year 2000 issue, we cannot guarantee that
all of our systems and those of Apple Suites Advisors, Apple Suites Realty or
Apple Suites Management will be year 2000 complaint or that other companies on
which we rely will be timely converted. As a result, our operations could be
adversely affected.
THERE ARE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS.
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
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<PAGE>
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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<PAGE>
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 total contributions. 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 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> <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 the compensation and reimbursement 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)
---------------- -------------------- --------------------------
ACQUISITION PHASE
<S> <C> <C>
Apple Suites Realty Group, Inc. Real estate commission for acquiring 2% of the proceeds of the offering used
our properties to pay the purchase prices of the
properties purchased by us for a maximum
of $5,400,000. (3)
OPERATIONAL PHASE
Apple Suites Advisors, Inc Asset management fee for managing Annual fee payable quarterly based upon a
our day-to-day operations ratio of Funds From Operations to Total
Contributions ranging from 0.1%
of Total Contributions to 0.25% of Total
Contributions - 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)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Apple Suites Advisors, Inc. Reimbursement for costs and expenses Amount is indeterminate
and Apple Suites Realty incurred on our behalf, as described
Group, Inc. in Note (5)
DISPOSITION PHASE
Apple Suites Realty Group, Inc. Real estate commission for selling Up to 2% of the gross sales prices of the
our properties properties sold by us. (6)
ALL PHASES
Apple Suites Advisors, Inc. and Payment for services and property (7) Amount is indeterminate
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 Total Contributions.
"Total Contributions" means the gross offering proceeds which have been
received from time to
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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 Total Contributions 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 Total
Contributions if the Return Ratio for the preceding calendar quarter is 6%
or less; 0.15% of Total Contributions if the Return Ratio for the preceding
calendar quarter is more than 6% but not more than 8%; and 0.25% of Total
Contributions 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) 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.
(7) 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.
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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
it may perform similar services for other parties, both affiliated and
unaffiliated, in the future.
CONFLICTS WITH 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. For example, because 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, its compensation will increase in proportion
to the number of properties purchased and sold by us and the properties'
purchase and sale prices. In addition, 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 or eliminate 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
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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.
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.
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 AFFILIATES
Affiliates of Apple Suites Advisors, Apple Suites Realty and Apple
Suites Management, including Mr. Knight or other companies organized by him, may
form additional REITs, limited
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partnerships and other entities to engage in activities similar to ours. Apple
Suites Advisors, Apple Suites Realty and Apple Suites Management have no present
intention of organizing any additional REITs. However, until the time as more
than 95% of the proceeds of this offering are invested, 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 and affiliates of Apple Suites Advisors, Apple Suites Realty
and Apple Suites Management are interested in the continuing success of
previously formed ventures because they have fiduciary responsibilities to
investors in those ventures, they may be personally liable on obligations of
those ventures and they have 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
Officers and directors of Apple Suites Advisors, Apple Suites Realty
and Apple Suites Management are or may be also officers or directors of one or
more entities, which engage in the brokerage, sale, operation, or management of
real estate. Accordingly, the officers and directors of Apple Suites Advisors,
Apple Suites Realty and Apple Suites Management may have conflicts of interest
in allocating management time and services between us and other entities.
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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 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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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. 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.
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 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 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.
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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) dispose of substantially 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 . 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 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: 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.
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
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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.
There can be no assurance that we will be able to make distributions at
any particular rate.
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 ended 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. We will lease these properties to Apple Suites
Management for their management.
Because we are prohibited under the 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 of our hotel properties will be
leased to Apple Suites Management.
Apple Suites Management, Inc. is a Virginia corporation, the sole
shareholder and chief executive officer of which is Glade M. Knight. Apple
Suites Management is currently negotiating a license agreement and management
agreement with Promus Hotels, Inc. with respect to the extended-stay hotel
properties we anticipate we will purchase from Promus Hotels, Inc. These
agreements will permit Apple Suites Management to have our properties identified
as Homewood Suites(R) properties. We will seek associations with distinctive
brands in the extended-stay hotel market.
HOMEWOOD SUITES(R)
Consistent with our strategy to invest in extended-stay hotel
properties, we may but are not obligated to purchase a number of Homewood
Suites(R) properties. These purchases would be contingent on our achieving the
minimum offering of 1,666,666.67 common shares. We may, but have no obligations
to, purchase additional Homewood Suites(R) properties as additional common
shares are sold. There are currently more than 70 Homewood Suites(R) properties
in the United States.
Homewood Suites(R) 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(R)
properties are designed to meet the needs of the business and leisure traveler
whose stay is typically five nights or more. Homewood Suites(R) 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.
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Homewood Suites(R) properties consist of suites built around a central
hospitality center or lodge. Homewood Suites(R) 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(R) is a service mark owned by Promus Hotels, Inc.
Promus Hotels, Inc., its subsidiaries or affiliates own the following trademarks
and service marks: Doubletree(R), Doubletree Guests Suites(R), Club Hotel by
Doubletree(R) Hampton Inn(R), Hampton Inn & Suites(R), Embassy Vacation
Resort(R) 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 plan to enter into a lease for each of our properties. 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 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 and participating rent may increase
annually by a percentage equal to the percentage increase in the consumer price
index compared to the price 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 taking of any
property.
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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.
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
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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
- 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
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- 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.
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.
NAME AGE POSITION
---- --- --------
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*
- ----------
*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 is also a director of
Apple Residential Income Trust, Inc.
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
is also a director of Apple Residential Income Trust, Inc.
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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). 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
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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 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
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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.
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.
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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, 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
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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 2001 through 2005 (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
total contributions. The applicable percentage used to calculate the asset
management fee is based on the ratio of funds from operations to total
contributions 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% of total contributions if the Return Ratio for the preceding
calendar quarter is 6% or less;
o 0.15% of total contributions if the Return Ratio for the preceding
calendar quarter is more than 6% but not more than 8%; and
o 0.25% of total contributions if the Return Ratio for the preceding
calendar quarter is above 8%.
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The Return Ratio is the ratio of Funds from Operations to Total
Contributions. Total Contributions means the gross proceeds from the sale of the
common shares. 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 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.
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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 total
contributions. 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% 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
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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. 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 the 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.
Mr. Knight previously 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. The 38
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 partnerships were formed before, and have
investment objectives dissimilar to those of, Apple Suites, Inc.
Seven of the dissimilar partnerships filed for reorganization under
Chapter 11 of the United States Bankruptcy Code. Five of these 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. Two of the
partnerships emerged from their Chapter 11 reorganizations and in one of those
partnerships, an unaffiliated entity became the new general partner as part of a
partnership recapitalization. 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
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Mr. Knight ceased to serve as general partner. 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. Each of the partnerships described in this
paragraph owned a single property, and the adverse business development
affecting the partnership therefore resulted in the partnership ceasing all cash
distributions to investors.
The dissimilar 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 dissimilar partnerships was the
realization of tax losses which could be used to offset some or all of
investors' other sources of income. In the opinion of Mr. Knight, the bankruptcy
filing and foreclosures described above which were experienced by various
dissimilar partnerships were attributable to a combination of high borrowing, a
downturn in economic conditions generally and the real estate industry in
particular, changes in tax laws, which decreased the perceived value of real
estate to potential buyers and lenders, and the unavailability of favorable
financing. We do not expect that this combination of factors will be applicable
to our operations. In particular, we expect to acquire our properties on an
all-cash basis, or using interim borrowing planned to be repaid with proceeds
from the sale of common shares. Also our investment objectives do not include
the generation of tax losses for investors.
As of June 15, 1999, Mr. Knight had ceased to hold an interest in all
but one of the partnerships described above.
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"), 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"), 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 their general
partners.
Mr. Knight was also responsible for the organization of Cornerstone
Realty Income Trust, Inc. ("Cornerstone"), a real estate investment trust
organized to acquire and own apartment complexes in the mid-Atlantic and
southeastern regions of 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. 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
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. Apple Suites Advisors 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
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Commission. For a reasonable charge, Apple Suites Advisors 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"), a real estate investment trust
organized to acquire and own apartment complexes in the southwestern region of
the country. Mr. Knight is the chairman, chief executive officer and president
of Apple. Between January 1997 and February 1999, Apple sold approximately $300
million in common shares in a continuous best-effort offering to approximately
11,000 investors. The net proceeds of the Apple public offering were used to
acquire 28 apartment communities in Texas. Apple Suites Advisors 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 with the Securities and
Exchange Commission. For a reasonable charge, Apple Suites Advisors will also
provide copies of the exhibits to the Report on Form 10-K.
On March 30, 1999, Cornerstone and Apple announced that they had
entered into a definitive merger agreement. Under this agreement, Apple would
merge into a subsidiary of Cornerstone. Cornerstone would survive as a
corporation and Apple would cease to exist. The merger is subject to the
approval of Cornerstone's and Apple's shareholders, as well as other customary
closing conditions.
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. Neither Cornerstone nor Apple
has sold any properties. Apple Suites Advisors will provide a copy of the
summary without charge upon request of any investor or prospective investor.
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.
NUMBER OF SHARES PERCENT OF AGGREGATE
NAME BENEFICIALLY OWNED OUTSTANDING SHARES OWNED
---- ------------------ --------------------------
Apple Suites Advisors, Inc. 10 100%
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:
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<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>
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.
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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.
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
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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 proportionate share of the income
produced by any partnership in which the REIT holds an interest as a partner,
and that income
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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 a 10% or greater
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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
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they are paid (1) within 12 months of the end of the taxable year
and (2) no later than our next regular distribution payment.
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
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as if received by the shareholders on December 31 of the calendar
year during which they were declared.
- 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.
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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:
- 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
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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 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.
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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 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.
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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 it commences 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 they have
implemented appropriate steps to ensure that they addressed 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 have been sold no later than
one year after the date of this prospectus. 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 limited conditions.
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
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. 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
pay the investors interest on those funds. 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. 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.
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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 and gross
income of $50,000, or a net worth (with the same exclusions) of at least
$100,000 (higher in certain states). 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.
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(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 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.
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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 $.675 $.225
Per Share Maximum Offering $10.00 $.75 $.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. Purchasers' checks are to be made payable to
"First Union National Bank, Escrow Agent" or following the initial closing, as
directed by David Lerner Associates, Inc.
Purchasers are required to purchase a minimum of $5,000 in common
shares or $2,000 in common shares for Qualified Plans. 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.
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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
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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.
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:
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GROSS PROCEEDS RAISED FROM SALES NUMBER OF COMMON SHARES
OF COMMON SHARES THROUGH DATE OF THROUGH CONVERSION OF ONE
CONVERSION CLASS B CONVERTIBLE SHARE
---------- -------------------------
$50 million...................................... 1.0
$100 million..................................... 2.0
$150 million..................................... 3.5
$200 million..................................... 5.3
$250 million..................................... 6.7
$300 million..................................... 8.0
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,
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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 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.
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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.
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
72
<PAGE>
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.
73
<PAGE>
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.
74
<PAGE>
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 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
75
<PAGE>
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 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.
76
<PAGE>
SHAREHOLDER LIABILITY
The holders of our shares shall not be liable personally on account of
any of our obligations.
77
<PAGE>
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 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.
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<PAGE>
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 and Apple 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 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, which have investment objectives similar to ours.
Cornerstone and Apple 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.
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<PAGE>
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.
81
<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, whose investment objectives are similar to those of the
Company 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>
<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 $ -- $ -- $ --
There have been no fees from property sales or refinancings
</TABLE>
<PAGE>
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for Cornerstone and
Apple, 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 APPLE
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
Capital contributions by year $ 38,905,636 $142,800,094 $ 63,485,868 $109,090,359
Gross revenue $ 93,637,948 $ 30,764,904 $ 71,970,624 $ 12,005,968
Operating expenses $ 33,797,439 $ 14,958,699 $ 27,339,955 $ 5,993,492
Interest income (expense) $(12,175,940) $ 900,669 $ (7,230,205) $ (235,708)
Depreciation $ 20,741,130 $ 5,788,476 $ 15,163,593 $ 1,898,003
Net income (loss) GAAP basis $ 23,210,642 $ 10,079,908 $ 19,225,553 $ 3,499,194
Taxable income $ -- $ -- $ -- $ --
Cash generated from operations $ 45,027,655 $ 17,122,276 $ 34,973,533 $ 7,075,025
Less cash distributions
to investors $ 38,317,602 $ 13,040,936 $ 31,324,870 $ 3,249,098
Cash generated after cash
distribution $ 6,710,053 $ 4,081,340 $ 3,648,663 $ 3,825,927
Special items
Capital contributions, net $ 38,905,636 $142,800,094 $ 63,485,868 $109,090,359
Fixed asset additions $ 97,863,162 $125,017,627 $157,859,343 $ 88,753,814
Line of credit $ 50,323,852 $ -- $ 96,166,147 $ --
Cash generated $(1,923,622) $ 15,910,626 $ 1,331,335 $ 24,162,472
End of period cash $ 2,590,364 $ 40,073,198 $ 4,513,986 $ 24,162,572
Tax and distribution data per $1,000 invested
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 $ --
Return of capital $ 21 $ 82 $ 23 $ 60
Source (on Cash basis)
Sales $ -- $ -- $ -- $ --
Refinancings $ -- $ --
Operations $ 103 $ 82 $ 100 $ 60
Other $ -- $ -- $ --
<CAPTION>
1996 1995 1994
CORNERSTONE CORNERSTONE CORNERSTONE
----------- ----------- -----------
<S> <C> <C> <C>
Capital contributions by year $144,798,035 $71,771,027 $23,496,784
Gross revenue $ 40,261,674 $16,266,610 $ 8,177,576
Operating expenses $ 17,198,882 $ 7,457,574 $ 3,894,657
Interest income (expense) $ (1,140,667) $ (68,061) $ 110,486
Depreciation $ 8,068,063 $ 2,788,818 $ 1,210,818
Net income (loss) GAAP basis $ (4,169,849) $ 5,229,715 $ 2,386,303
Taxable income $ -- $ -- $ --
Cash generated from operations $ 20,162,776 $ 9,618,956 $ 3,718,086
Less cash distributions
to investors $ 15,934,901 $ 6,316,185 $ 2,977,136
Cash generated after cash
distribution $ 4,227,875 $ 3,302,771 $ 740,950
Special items
Capital contributions, net $144,798,035 $71,771,027 $23,496,784
Fixed asset additions $194,519,406 $75,589,089 $28,557,568
Line of credit $ 41,603,000 $ 3,300,000 $ 5,000,000
Cash generated $ (3,890,496) $ 2,784,709 $ 680,166
End of period cash $ 3,182,651 $ 7,073,147 $ 4,288,438
Tax and distribution data per $1,000 invested
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 $ 85 $ 80 $ 70
Return of capital $ 14 $ 16 $ 19
Source (on Cash basis)
Sales $ -- $ -- $ --
Refinancings $ -- $ -- $ --
Operations $ 99 $ 96 $ 89
Other $ -- $ -- $ --
</TABLE>
<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 the Company.
<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>
<PAGE>
TABLE V: SALES OR DISPOSALS OF PROPERTIES
Table V is not applicable. Cornerstone and Apple (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).
<PAGE>
APPLE SUITES, INC.
INDEX TO BALANCE SHEET
MARCH 26, 1999
PAGE
-----
Report of Independent Auditors ........................................ F-2
Balance Sheet at March 26, 1999 ....................................... F-3
Notes to Balance Sheet ................................................ F-4
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.
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.
F-4
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET - (CONTINUED)
3. RELATED PARTIES - (CONTINUED)
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 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:
F-5
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET - (CONTINUED)
5. CLASS B CONVERTIBLE STOCK - (CONTINUED)
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")
- -------------------------------- ---------------------------------
$ 50 million ................. 1.0
$100 million ................. 2.0
$150 million ................. 3.5
$200 million ................. 5.3
$250 million ................. 6.7
$300 million ................. 8.0
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 $16.50 per
common share (165% of the public offering price per common share). The Warrants
may not be sold, transferred, assigned or hypothecated for one year from the
date of the "best-efforts" offering prospectus, except to the officers and
employees of the Managing Dealer and are exercisable at any time and from time
to time, in whole or in part, during the five-year period commencing on the date
of the final closing after the termination of the offering (the "Warrant
Exercise Term"). At the Company's expense, the Company intends to register the
Warrants under the Securities Act on one occasion during the Warrant Exercise
Term and to include the Warrants in any appropriate registration statement which
is filed by the Company during the seven years following the date of the "best
efforts" offering prospectus.
F-6
<PAGE>
[SPECIMEN]
EXHIBIT A
SUBSCRIPTION AGREEMENT
To: Apple Suites, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Suites, Inc. ("REIT")
at a purchase price of and 00/100 Dollars ($ ) 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 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); 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>
[SPECIMEN]
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).
<TABLE>
<S> <C> <C> <C>
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
</TABLE>
[ ] 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:
__________________________________ __________________________________________
Registered Representative's Name Second Registered Representative's Name
__________________________________ __________________________________________
Broker/Dealer Firm Registered Representative's Office Address
__________________________________ __________________________________________
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 Agreed and accepted by:
Signature page will not be an Apple Suites, Inc.
effective agreement until it is By _________________________________
signed by a duly authorized agent Date________________________________
of Apple Suites, Inc.
<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 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); 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).
<TABLE>
<S> <C> <C> <C>
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
</TABLE>
[ ] 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:
__________________________________ __________________________________________
Registered Representative's Name Second Registered Representative's Name
__________________________________ __________________________________________
Broker/Dealer Firm Registered Representative's Office Address
__________________________________ __________________________________________
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 Agreed and accepted by:
Signature page will not be an Apple Suites, Inc.
effective agreement until it is By _________________________________
signed by a duly authorized agent Date________________________________
of Apple Suites, Inc.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are estimates of the expenses to be incurred in connection
with the issuance and distribution of the securities to be registered:
SEC registration fee ...................... $ 83,400
NASD filing fee ........................... 30,500
Printing and engraving fees ............... 300,000
Legal fees and expenses ................... 350,000
Accounting fees and expenses .............. 100,000
Blue Sky fees and expense ................. 45,000
Transfer Agent and Registrar fees ......... 10,000
Registrant travel expense ................. 30,000
Marketing Expense Allowance ............... 7,500,000
Expense reserve ........................... 551,100
----------
Total .............................................. $9,000,000
==========
ITEM 31. SALES TO SPECIAL PARTIES.
On March 5, 1999, the Registrant sold 10 Common Shares to Apple Suites
Advisors, Inc. ("ASA") for $100 cash.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
On March 5, 1999, the Registrant sold 10 Common Shares to ASA for $100
cash, in a transaction that was exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2) thereof. The Registrant has
agreed to sell to David Lerner Associates, Inc. for an aggregate of $100,
warrants to purchase 10% of the Common Shares sold pursuant to this Registration
Statement, up to a maximum of 3,000,000 Common Shares. The warrants will be
issued from time to time as Common Shares are sold pursuant to this Registration
Statement. The warrants will permit the purchase of Common Shares at a purchase
price of $16.50 per Common Share. The warrants will be issued in a transaction
that is exempt from registration under the Securities Act of 1933, as amended,
pursuant to Section 4(2).
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company will obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (i) the directors and officers of the
Company from any claim arising out of an alleged wrongful act by the directors
and officers of the Company in their respective capacities as directors and
officers of the Company, and (ii) the Company to the extent that the Company has
indemnified the directors and officers for such loss.
The Virginia Stock Corporation Act (the "Virginia Act") permits, and the
Registrant's Articles of Incorporation and Bylaws require, indemnification of
the Registrant's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933. Under Section 13.1-697 of
the Virginia Act, a Virginia corporation generally is authorized to indemnify
its directors in civil or criminal actions if they acted in good faith and
believed their conduct to be in the best interests of the corporation and, in
the case of criminal actions, had no reasonable cause to believe that the
conduct was unlawful. The Registrant's Articles of Incorporation and Bylaws
require indemnification of officers and directors with respect to any action
except in the case of willful misconduct, bad faith, reckless disregard of
duties or violations of the criminal law. In addition, the Registrant may carry
insurance on behalf of directors, officers, employees or agents that may cover
liabilities under the Securities Act of 1933. The
II-1
<PAGE>
Registrant's Articles of Incorporation, as permitted by the Virginia Act,
eliminate the damages that may be assessed against a director or officer of the
Registrant in a shareholder or derivative proceeding. This limit on liability
will not apply in the event of willful misconduct or a knowing violation of the
criminal law or of federal or state securities laws. Reference also is made to
the indemnification provisions set forth in the form of Agency Agreement filed
as Exhibit 1 hereto.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
None of the proceeds will be credited to an account other than the
appropriate capital share account.
ITEM 35. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(a) Financial Statements. See Index to Financial Statements in the Prospectus
for the financial statements which are included in this Registration
Statement.
(b) Financial Statement Schedules:
All financial statement schedules have been omitted because they are not
applicable.
(c) Exhibits. Except as expressly noted otherwise, the Exhibits have been
previously filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- --------------------------------------------------------------------------------------------
<S> <C>
1 Form of Agency Agreement between the Registrant and David Lerner Associates, Inc. with
form of Selected Dealer Agreement attached as Exhibit A thereto.
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3 Form of Amended and Restated Bylaws of the Registrant.
4.1 Credit Agreement between the Registrant and First Union National Bank.
4.2 Promissory Note to First Union National Bank.
4.3 Guaranty of Glade M. Knight.
5 Form of Opinion of McGuire, Woods, Battle & Boothe LLP as to the
legality of the securities being registered.
8 Form of Opinion of McGuire, Woods, Battle & Boothe LLP as to certain tax matters.
10.1 Form of Advisory Agreement between the Registrant and Apple Suites Advisors, Inc.
10.2 Form of Property Acquisition/Disposition Agreement between the Registrant and Apple
Suites Realty Group, Inc.
10.3 Form of Apple Suites, Inc. 1999 Incentive Plan.
10.4 Form of Apple Suites, Inc. 1999 Non-Employee Directors Stock Option Plan.
23.1 Consent of McGuire, Woods, Battle & Boothe LLP (included in Exhibits 5 and 8).
23.2 Consent of Ernst & Young LLP. FILED HEREWITH.
</TABLE>
II-2
<PAGE>
ITEM 36. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) That all post-effective amendments will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendments are filed.
(d) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The Registrant undertakes to send to each Shareholder at least on an annual
basis a detailed statement of any transactions with the Advisor or its
Affiliates, and of fees, commissions, compensation and other benefits paid or
accrued to the Advisor or its Affiliates for the fiscal year completed, showing
the amount paid or accrued to each recipient and the services performed.
The Registrant undertakes to provide to the Shareholders the financial
statements required by Form 10-K for the first full fiscal year of operations of
the Registrant.
The Registrant undertakes to file during the offering period a sticker
supplement pursuant to Rule 424(c) under the Act describing each property not
identified in the Prospectus at such time as there arises a reasonable
probability of investment in such property by the Registrant and to consolidate
all such stickers into a post-effective amendment filed at least once every
three months with the information contained in such amendment provided
simultaneously to the existing Shareholders. Each sticker supplement will also
disclose all compensation and fees received by the Advisor or its Affiliates in
connection with any such investment. The post-effective amendment shall include
audited financial statements meeting the requirements of Rule 3-14 of Regulation
S-X only for properties acquired during the distribution period.
The Registrant undertakes to file, after the end of the offering period, a
current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X, to reflect each
commitment not previously disclosed in the Prospectus or a supplement thereto
involving the use of 10% or more (on a cumulative basis) of the net proceeds of
the offering and to provide the information contained in such report to the
Shareholders at least once each quarter after the end of the offering period.
II-3
<PAGE>
Offers and sales of the interests may continue after the filing of a
post-effective amendment containing information previously disclosed in sticker
supplements to the prospectus, as long as the information disclosed in a current
sticker supplement accompanying the prospectus is as complete as the information
contained in the most recently filed post-effective amendment.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers, directors and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commis- sion
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than for expenses incurred in a
successful defense) is asserted by such officer, director or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
TABLE VI: ACQUISITIONS OF PROPERTIES BY CORNERSTONE AND APPLE
The following is a summary of rental property owned by Cornerstone at
December 31, 1998. All properties are residential communities and are owned on a
mortgage-free basis. Cornerstone has not disposed of any properties since
inception.
<TABLE>
<CAPTION>
INITIAL AVERAGE
ACQUISITION TOTAL DATE NUMBER SQUARE FT.
DESCRIPTION COST INVESTMENT* ACQUIRED OF UNITS OF UNITS
- ----------------------------------- ------------- ------------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
NORTH CAROLINA
Raleigh/Durham, North Carolina
The Hollows .................... $ 4,200,000 $ 6,173,553 June 1993 176 903
The Trestles ................... 10,350,000 11,498,537 December 1994 280 776
The Landing .................... 8,345,000 10,055,764 May 1996 200 960
Highland Hills ................. 12,100,000 14,421,444 September 1996 264 1,000
Parkside at Woodlake ........... 14,663,886 15,119,409 September 1996 266 865
Deerfield ...................... 10,675,000 11,218,179 November 1996 204 888
Paces Arbor .................... 5,588,219 5,970,315 March 1997 101 899
Paces Forest ................... 6,473,481 6,958,627 March 1997 117 883
Clarion Crossing ............... 10,600,000 11,076,591 September 1997 228 769
St. Regis ...................... 9,800,000 10,135,730 October 1997 180 840
Remington Place ................ 7,900,000 8,457,508 October 1997 136 1,098
The Timbers .................... 8,100,000 8,352,596 June 1998 176 745
Charlotte, North Carolina
Hanover Landing ................ 5,725,000 7,449,266 August 1995 192 832
Sailboat Bay ................... 9,100,000 13,464,303 November 1995 358 906
Bridgetown Bay ................. 5,025,000 5,845,929 April 1996 120 867
Meadow Creek ................... 11,100,000 12,504,352 May 1996 250 860
Beacon Hill .................... 13,579,203 14,695,613 May 1996 349 734
Summerwalk ..................... 5,660,000 7,538,671 May 1996 160 963
Paces Glen ..................... 7,425,000 8,129,400 July 1996 172 907
Heatherwood .................... 17,630,457 23,397,697 ** 476 1,186
Charleston Place ............... 9,475,000 10,210,482 May 1997 214 806
Stone Point .................... 9,700,000 10,176,529 January 1998 192 848
Winston-Salem, North Carolina
Mill Creek ..................... 8,550,000 9,584,482 September 1995 220 897
Glen Eagles .................... 7,300,000 9,033,017 October 1995 166 952
Wilmington, North Carolina
Wimbledon Chase ................ 3,300,000 5,674,978 February 1994 192 818
Chase Mooring .................. 3,594,000 5,764,709 August 1994 224 867
Osprey Landing ................. 4,375,000 7,248,041 November 1995 176 981
Other North Carolina
Wind Lake ...................... 8,760,000 11,085,542 April 1995 299 727
The Meadows .................... 6,200,000 7,442,434 January 1996 176 1,068
Signature Place ................ 5,462,948 7,258,310 August 1996 171 1,037
Pinnacle Ridge ................. 5,731,150 6,048,013 April 1998 168 885
GEORGIA
Atlanta, Georgia
Ashley Run ..................... 18,000,000 19,482,278 April 1997 348 1,150
Carlyle Club ................... 11,580,000 12,854,800 April 1997 243 1,089
Dunwoody Springs ............... 15,200,000 18,224,312 July 1997 350 948
Stone Brooke ................... 7,850,000 8,711,137 October 1997 188 937
Spring Lake .................... 9,000,000 9,363,025 August 1998 188 1,009
Other Georgia
West Eagle Greens .............. 4,020,000 6,344,127 March 1996 165 796
Savannah West .................. 9,843,620 13,289,356 July 1996 450 877
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
INITIAL AVERAGE
ACQUISITION TOTAL DATE NUMBER SQUARE FT.
DESCRIPTION COST INVESTMENT* ACQUIRED OF UNITS OF UNITS
- ---------------------------------- --------------- --------------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
VIRGINIA
Richmond, Virginia
Ashley Park ................... 12,205,000 13,147,418 March 1996 272 765
Trolley Square ................ 10,242,575 13,262,283 *** 325 589
Hampton Glen .................. 11,599,931 12,746,609 August 1996 232 788
The Gables .................... 11,500,000 11,804,432 July 1998 224 700
Virginia Beach, Virginia
Mayflower Seaside ............. 7,634,144 10,191,359 October 1993 263 698
Harbour Club .................. 5,250,000 6,246,147 May 1994 214 813
Bay Watch Pointe .............. 3,372,525 4,996,481 July 1995 160 911
Tradewinds .................... 10,200,000 11,078,865 November 1995 284 930
Arbor Trace ................... 5,000,000 6,022,029 March 1996 148 850
Other Virginia
County Green .................. 3,800,000 5,299,670 December 1993 180 1,000
Trophy Chase .................. 3,710,000 6,729,365 April 1996 185 803
Greenbrier .................... 11,099,525 12,491,834 October 1996 258 251
SOUTH CAROLINA
Greenville, South Carolina
Polo Club ..................... 4,300,000 7,505,936 June 1993 365 807
Breckinridge .................. 5,600,000 7,062,749 June 1995 236 726
Magnolia Run .................. 5,500,000 6,909,344 June 1995 212 993
Columbia, South Carolina
Stone Ridge ................... 3,325,000 5,814,292 December 1993 191 1,047
The Arbors at Windsor Lake .... 10,875,000 11,519,973 January 1997 228 966
Other South Carolina
Westchase ..................... 11,000,000 12,811,352 January 1997 352 806
Hampton Pointe ................ 12,225,000 14,273,203 March 1998 304 1,035
Cape Landing .................. 17,100,000 17,265,961 October 1998 288 933
========== ========== =============== === =====
$497,520,664 $587,438,358
------------ ------------
</TABLE>
- ----------
* Includes real estate commissions, closing costs, and improvements
capitalized since the date of acquisition.
** Heatherwood Apartments is comprised of Heatherwood and Italian Village/Villa
Marina Apartments acquired in September 1996 and August 1997, respectively,
at a cost of $10,205,457 and $7,425,000. They are adjoining properties and
are operated as one apartment community.
*** Trolley Square Apartments is comprised of Trolley Square East and Trolley
Square West Apartments acquired in June 1996 and December 1996,
respectively, at a cost of $6,000,000 and $4,242,575. They are adjacent
properties and are operated as one apartment community.
II-6
<PAGE>
The following is a summary of rental property owned by Apple at December
31, 1998. All properties are residential communities. Except as indicated, all
properties are located in the Dallas/Fort Worth, Texas market. Apple has not
disposed of any properties since inception.
<TABLE>
<CAPTION>
INITIAL AVERAGE
ACQUISITION TOTAL DATE NUMBER SQUARE FT.
DESCRIPTION COST INVESTMENT* ACQUIRED** ENCUMBRANCES OF UNITS OF UNITS
- --------------------------------- --------------- --------------- --------------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Brookfield ...................... $ 5,458,485 $ 6,583,990 January 1997 -- 232 714
Eagle Crest ..................... 15,650,000 17,862,629 January 1997 -- 484 887
Aspen Hills ..................... 5,690,560 7,502,434 January 1997 -- 240 671
Mill Crossing ................... 4,544,121 5,458,746 February 1997 -- 184 691
Polo Run ........................ 6,858,974 8,061,726 March 1997 -- 224 854
Wildwood ........................ 3,963,519 4,684,813 March 1997 -- 120 755
Toscana ......................... 5,854,531 6,792,187 March 1997 -- 192 601
The Arbors on Forest Ridge . 7,748,907 8,632,706 April 1997 -- 210 804
Pace's Cove ..................... 9,277,355 9,833,200 June 1997 -- 328 670
Remington at Las Colinas ........ 13,100,000 15,295,457 August 1997 -- 362 957
Copper Crossing ................. 9,275,000 10,965,314 November 1997 -- 400 739
Main Park ....................... 8,000,000 8,650,550 February 1998 -- 192 939
Timberglen ...................... 12,000,000 13,126,845 February 1998 -- 304 728
Silverbrook ..................... 18,210,000 20,144,422 May 1998 $ 3,047,994 642 791
Summer Tree ..................... 5,700,000 6,415,878 June 1998 -- 232 575
Park Village .................... 7,000,000 7,477,425 July 1998 -- 238 647
Cottonwood Crossing ............. 5,700,000 6,147,288 July 1998 -- 200 751
Devonshire ...................... 5,205,000 6,699,709 July 1998 3,627,425 144 876
Pace's Point .................... 11,405,000 12,869,988 July 1998 7,679,619 300 762
Emerald Oaks .................... 10,930,000 11,768,594 July 1998 6,635,025 250 850
Newport (Austin, Texas) ......... 6,330,000 6,741,792 July 1998 3,020,775 200 741
Estrada Oaks .................... 9,350,000 9,867,652 July 1998 -- 248 771
Burney Oaks ..................... 9,300,000 9,679,771 October 1998 -- 240 794
Cutter's Point .................. 8,100,000 8,690,442 October 1998 -- 196 1,010
The Courts on Pear Ridge ........ 11,500,000 11,806,367 November 1998 242 774
============ ============ =============== ============ === =====
$216,151,452 $241,759,925 $24,010,838
------------ ------------ -----------
</TABLE>
- ----------
* Includes real estate commissions, closing costs, and improvements capitalized
since the date of acquisition.
** Date listed is the date which the property was first acquired. The subsequent
acquisition of adjacent properties has been combined in the other categories.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Amendment No. 1 to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Richmond, Commonwealth of Virginia, on
June 16, 1999.
APPLE SUITES, INC.
By: /s/ Glade M. Knight
------------------------------------
Glade M. Knight
President, and as President, the
Registrant's Principal Executive
Officer, Principal Financial Officer
and Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this Registration Statement has been signed by the following person on behalf
of the Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES DATE
- --------------------------- --------------------------------------- -------------
<S> <C> <C>
/s/ Glade M. Knight Director and President, and As June 16, 1999
- ------------------------- President, the Registrant's Principal
Glade M. Knight Executive Officer, Principal Financial
Officer and Principal Accounting
Officer
</TABLE>
II-8
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 21, 1999, in Amendment No. 1 to the Registration
Statement (Form S-11 No. 333-77055) and related Prospectus of Apple Suites, Inc.
for the registration of 30,166,666.67 shares of its common stock.
Ernst & Young LLP
Richmond, Virginia
June 11, 1999
