AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1999
REGISTRATION NO. 333-77055
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
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)
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306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
VIRGINIA (804) 643-1761 54-1933472
(State or other jurisdiction of (Address, including zip code, and telephone number, (I.R.S. Employer
incorporation or organization) including area code, of 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 JULY 26, 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 are offering up to 30,166,666.67 of our common shares.
Purchasers must purchase a minimum of $5,000 in common shares. If a minimum of
1,666,666.67 common shares are not sold within one year after the date of this
prospectus, we will terminate this offering and all money received will be
promptly refunded to investors with interest. The common shares are being
offered on a best efforts, minimum offering basis through David Lerner
Associates, Inc. Until the minimum offering is achieved, all funds received from
investors will be deposited into an interest-bearing escrow account.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
THIS OFFERING INVOLVES MATERIAL RISKS AND INVESTMENT CONSIDERATIONS INCLUDING:
o There is no public trading market for the common shares.
o We will pay substantial compensation for advisory, acquisition,
disposition and other services which will reduce our return.
o There are conflicts of interest between us and our chairman and
president because he is the sole shareholder of companies with which
we will enter into contracts for services.
o We own no properties at this time.
o We may be unable to generate sufficient cash for distributions.
o Shareholders' interests will be diluted upon conversion of the class b
convertible shares.
o Seven partnerships previously organized by Glade M. Knight filed for
bankruptcy.
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PROCEEDS TO
PRICE TO COMMISSIONS & APPLE SUITES,
PUBLIC MARKETING EXPENSES INC.
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Per Share(1) ................... $ 9.00 $ .90 $ 8.10
Total Minimum Offering ......... $ 15,000,000 $ 1,500,000 $ 13,500,000
Total Maximum Offering ......... $300,000,000 $30,000,000 $270,000,000
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(1) Once the minimum offering of 1,666,666.67 common shares is achieved, the per
share offering price will rise to $10, the selling commission and marketing
expenses per share will become $1.00, and the proceeds per share to Apple
Suites, Inc. will be $9.00.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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THE DATE OF THIS PROSPECTUS IS JULY 26, 1999.
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EXCEPT FOR THE STATES SPECIFICALLY DESCRIBED BELOW, EACH PURCHASER OF
COMMON SHARES MUST CERTIFY THAT HE HAS EITHER (1) A MAXIMUM ANNUAL GROSS INCOME
OF $50,000 AND A NET WORTH (EXCLUSIVE OF EQUITY IN A HOME, HOME FURNISHINGS AND
PERSONAL AUTOMOBILES) OF AT LEAST $50,000, OR (2) A NET WORTH (SIMILARY DEFINED)
OF AT LEAST $100,000.
EACH NEW HAMPSHIRE PURCHASER MUST CERTIFY THAT HE HAS EITHER (1) A MINIMUM
ANNUAL GROSS INCOME OF $50,000 AND A NET WORTH (SIMILARLY DEFINED) OF AT LEAST
$125,000, OR (2) A NET WORTH (SIMILARLY DEFINED) OF AT LEAST $250,000.
EACH KENTUCKY OR NORTH CAROLINA PURCHASER MUST CERTIFY THAT HE HAS EITHER
(1) A MINIMUM ANNUAL GROSS INCOME OF $50,000, OR (2) A NET WORTH (SIMILARLY
DEFINED) OF AT LEAST $150,000.
NO PURCHASER OF COMMON SHARES MAY PURCHASE COMMON SHARES COSTING MORE THAN
10% OF THE PURCHASER'S NET WORTH (SIMILARLY DEFINED).
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND IF GIVEN
OR MADE, ANY OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON, THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH AN OFFER MAY NOT
LEGALLY BE MADE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
INFORMATION CONTAINED IN THIS PROSPECTUS HAS NOT CHANGED AS OF ANY TIME AFTER
ITS DATE.
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TABLE OF CONTENTS
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SUMMARY .................................................................................. 1
Apple Suites, Inc. ...................................................................... 1
Apple Suites Advisors, Inc. and Affiliates .............................................. 1
Risk Factors ............................................................................ 2
The Offering ............................................................................ 2
Use of Proceeds ......................................................................... 2
Liquidity ............................................................................... 3
Borrowing Policy ........................................................................ 3
Investment Policy ....................................................................... 4
Distributions Policy .................................................................... 4
Capital Stock ........................................................................... 4
Compensation ............................................................................ 4
RISK FACTORS ............................................................................. 6
There is no public market for our common shares, so investors may be unable to dispose of
their investment ...................................................................... 6
The board of directors may decide in its sole discretion to list our common shares or
dissolve us ........................................................................... 6
The compensation to Apple Suites Advisors and Apple Suites Realty is payable before
distributions and will reduce investors'return ........................................ 6
There were no arms-length negotiations for our agreements with Apple Suites Advisors,
Apple Suites Realty and Apple Suites Management ....................................... 6
Commissions, acquisition, advisory and other fees and expenses will limit our ability to
make distributions to investors ....................................................... 6
The Compensation to Apple Suites Realty and Apple Suites Advisors is indeterminable and
cannot be stated with certainty ....................................................... 7
There are conflicts of interest with our president and chairman of the board ............ 7
There are conflicts of interest with our advisor and broker ............................. 7
There are conflicts of interest with our lessee ......................................... 7
Our management will spend time on other activities ...................................... 7
We own no properties at this time ....................................................... 8
We are not diversified and are dependent on our investment in a single industry ......... 8
We will be dependent upon Apple Suites Management for our revenues ...................... 8
There may be operational limitations associated with franchise agreements affecting our
properties ............................................................................ 8
We have no operating history and we have no assurance of success ........................ 8
There is a possible lack of diversification and lower return due to the minimum size of
our offering .......................................................................... 8
There may be delays in investment in real property, and this delay may decrease the
return to shareholders ............................................................... 9
The actual amount of proceeds available for investment in properties is uncertain ....... 9
The per-share offering prices have been established arbitrarily by us and may not
reflect the true value of the common shares ........................................... 9
We may be unable to make distributions .................................................. 9
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We will face competition in the hotel industry .......................................... 9
Investors may wait up to one year before receiving their common shares or a refund of
their money if the minimum offering is not achieved ................................... 10
There would be significant adverse consequences of our failure to qualify as a REIT ..... 10
Our real estate investments will be relatively illiquid ................................. 10
Our board may in its sole discretion determine the amount of our aggregate debt ......... 10
We have no restriction on changes in our investment and financing policies .............. 10
There will be dilution of shareholder's interests upon conversion of the Class B Shares . 10
Our shareholders'interests may be diluted in various ways ............................... 11
Seven partnerships previously organized by Glade M. Knight filed for bankruptcy ......... 11
Our articles and bylaws contain antitakeover provisions and ownership limits ............ 11
We may become subject to environmental liabilities ...................................... 11
We may incur significant costs complying with the Americans with Disabilities Act and
similar laws .......................................................................... 12
Our computer systems may not be Year 2000 compliant, which would lead to operational
difficulties and increased costs ...................................................... 12
We make forward-looking statements in this prospectus which may prove
to be inaccurate ...................................................................... 12
USE OF PROCEEDS .......................................................................... 13
COMPENSATION ............................................................................. 15
Acquisition Phase ....................................................................... 15
Operational Phase ....................................................................... 15
Disposition Phase ....................................................................... 15
All Phases .............................................................................. 15
CONFLICTS OF INTERESTS ................................................................... 17
General ................................................................................. 17
Conflicts with respect to fees paid by us to Apple Suites Advisors
and Apple Suites Realty ............................................................... 17
Conflicts with Respect to Commissions ................................................... 17
Conflicts with Respect to Asset Management Fees ....................................... 17
Policies to Address Conflicts ......................................................... 17
Transactions with Affiliates and Related Parties ........................................ 18
Competition Between Us and Mr. Knight ................................................... 18
Competition for Management Services ..................................................... 19
INVESTMENT OBJECTIVES AND POLICIES ....................................................... 20
Investments in Real Estate or Interests in Real Estate .................................. 20
Borrowing Policies ...................................................................... 20
Reserves ................................................................................ 21
Sale Policies ........................................................................... 21
Changes in Objectives and Policies ...................................................... 22
DISTRIBUTIONS POLICY ..................................................................... 23
BUSINESS ................................................................................. 24
General ................................................................................. 24
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Business Strategies ................................................ 24
Homewood Suites(Reg. TM) ........................................... 24
Description of Leases .............................................. 25
Term ............................................................. 25
Base Rent; Participating Rent .................................... 25
Other Real Estate Investments ...................................... 25
Legal Proceedings .................................................. 25
Regulation ......................................................... 26
General .......................................................... 26
Americans With Disabilities Act .................................. 26
Environmental Matters .............................................. 26
Insurance .......................................................... 27
Available Information .............................................. 27
MANAGEMENT .......................................................... 28
Classification of the Board ........................................ 29
Committees of the Board ............................................ 29
Director Compensation .............................................. 29
Indemnification and Insurance ...................................... 29
Officer Compensation ............................................... 29
Stock Incentive Plans .............................................. 30
The Incentive Plan ................................................. 30
Directors' Plan .................................................... 31
Stock Option Grants ................................................ 32
APPLE SUITES ADVISORS, INC. AND AFFILIATES .......................... 33
General ............................................................ 33
The Advisory Agreement ............................................. 33
Apple Suites Realty Group, Inc ..................................... 35
Prior Performance of Programs Sponsored by Glade M. Knight ......... 35
Prior REITS - Cornerstone and Apple Residential .................... 35
Prior Partnerships ................................................. 36
Additional Information on Prior Programs ........................... 37
PRINCIPAL AND MANAGEMENT SHAREHOLDERS ............................... 38
FEDERAL INCOME TAX CONSIDERATIONS ................................... 38
General ............................................................ 38
REIT Qualification ................................................. 39
Sources of Gross Income .......................................... 40
75% Gross Income Test ............................................ 40
95% Gross Income Test ............................................ 41
Failing the 75% or 95% Tests; Reasonable Cause ................... 41
Character of Assets Owned ........................................ 41
Annual Distributions to Shareholders ............................. 42
Taxation as a REIT ................................................. 43
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Failure to Qualify as a REIT .............................................. 43
Taxation of Shareholders .................................................. 43
Backup Withholding ........................................................ 44
Taxation of Tax Exempt Entities ........................................... 45
Taxation of Foreign Investors ............................................. 45
State and Local Taxes ..................................................... 45
ERISA CONSIDERATIONS ....................................................... 46
CAPITALIZATION ............................................................. 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ..................................................... 49
Overview .................................................................. 49
Year 2000 Compliance ...................................................... 49
PLAN OF DISTRIBUTION ....................................................... 50
DESCRIPTION OF CAPITAL STOCK ............................................... 54
Common Shares ............................................................. 54
Dividend and Distribution Rights .......................................... 54
Voting Rights ............................................................. 54
Class B Convertible Shares ................................................ 55
Preferred Shares .......................................................... 55
Restrictions on Transfer .................................................. 56
Facilities for Transferring Common Shares ................................. 57
Warrants .................................................................. 57
SUMMARY OF ORGANIZATIONAL DOCUMENTS ........................................ 58
Board of Directors ........................................................ 58
Responsibility of Board of Directors, Apple Suites Advisors, Inc., Officers
and Employees ........................................................... 58
Issuance of Securities .................................................... 59
Redemption and Restrictions on Transfer ................................... 59
Amendment ................................................................. 60
Shareholder Liability ..................................................... 60
SALES LITERATURE ........................................................... 60
REPORTS TO SHAREHOLDERS .................................................... 60
LEGAL MATTERS .............................................................. 61
EXPERTS .................................................................... 61
EXPERIENCE OF PRIOR PROGRAMS ............................................... 62
INDEX TO BALANCE SHEET ..................................................... F-1
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SUMMARY
The following information is not complete and should be read together with
the information contained in this prospectus.
APPLE SUITES, INC.
We will focus on purchasing and owning extended-stay hotel properties
located in selected metropolitan areas. However, we own no properties at this
time. We may but have no obligation to purchase extended-stay hotel properties
from Promus Hotels, Inc. if a minimum of 1,666,666.67 common shares are sold
within one year after the date of this prospectus. We may purchase additional
extended-stay hotel properties from Promus Hotels, Inc. if additional common
shares are sold. We are not affiliated with Promus Hotels, Inc.
We plan to elect to be treated as a real estate investment trust for
federal income tax purposes beginning with our taxable year ending December 31,
1999. As a real estate investment trust, we will generally not be subject to
federal income tax. We will, however, be subject to a number of organizational
and operational requirements and limitations.
We are located at 306 East Main Street, Richmond, Virginia and our
telephone number is (804) 643-1761.
APPLE SUITES ADVISORS, INC. AND AFFILIATES
Apple Suites Advisors, Inc. will provide us with our day-to-day
management. Apple Suites Advisors does not have any significant assets. Apple
Suites Realty Group, Inc. will provide us with property acquisition and
disposition services. Apple Suites Realty has no significant assets.
Because we are prohibited under federal tax laws from operating our
extended-stay hotel properties, we will enter into leases for each of our hotel
properties. We anticipate that substantially all our hotel properties will be
leased to Apple Suites Management, Inc. Apple Suites Management has no
significant assets.
All of the common shares of Apple Suites Advisors, Apple Suites Realty and
Apple Suites Management are owned by Glade M. Knight, who is our president and
chairman of the board.
The following chart illustrates the relationships among Apple Suites, Inc.,
Apple Suites Advisors, Apple Suites Realty and Apple Suites Management.
[GRAPHIC OMITTED]
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* Wholly-owned by Glade M. Knight, chairman and president of Apple Suites, Inc.
RISK FACTORS
We urge you to consider carefully the matters discussed under "Risk
Factors" beginning on page 7 before you decide to purchase our common shares. An
investment in our securities involves a number of risks including:
o There will be no public trading market for the common shares for an
indefinite period of time, if ever.
o We will pay substantial compensation established without the benefit of
arm's length negotiation for advisory, property acquisition, disposition
and other services.
o There are conflicts of interest between us and our chairman and president
because he is the sole shareholder of companies with which we will enter
into contracts for services.
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o We own no properties at this time.
o We may be unable to generate sufficient cash for distributions.
o Shareholders' interests will be diluted upon conversion of the Class B
convertible shares.
o Seven partnerships previously organized by Glade M. Knight, our president
and chairman, filed for bankruptcy.
o We will primarily acquire extended-stay hotel properties and, therefore,
are subject to the risks inherent in investing in a single industry.
o Due to federal income tax restrictions, we cannot operate our properties
directly.
o We do not have an operating history and, therefore, there is no assurance
that we will be successful in our operations.
THE OFFERING
We are offering common shares at $9 per common share until a minimum of
1,666,666.67 common shares have been sold. Thereafter, the common shares will be
offered at $10 per common share until a maximum of 30,166,666.67 common shares
have been sold. Purchasers must purchase a minimum of $5,000 in common shares
except that certain benefit plans may purchase a minimum of $2,000 in common
shares. The common shares are being offered through David Lerner Associates,
Inc.
If at least 1,666,666.67 common shares have not been sold within one year
after the date of this prospectus, we will terminate this offering of common
shares and all moneys received will be promptly refunded to investors with
interest. Our officers and directors and those of apple suites advisors, apple
suites realty and apple suites management will not be permitted to purchase
common shares in order to reach the minimum offering of 1,666,666.67 common
shares.
This offering of common shares will continue until all the common shares
offered under this prospectus have been sold or until one year from the date of
this prospectus, unless we extend the offering for up to an additional year in
order to achieve the maximum offering of 30,166,666.67 common shares. In some
states, extension of the offering may not be allowed or may be allowed only upon
the filing of a new application with the appropriate state administrator.
This is a best efforts offering. Purchasers will be sold common shares at
one or more closings. An initial closing will occur after the minimum offering
of 1,666,666.67 common shares is achieved. Thereafter, additional closings are
expected to occur on a monthly basis as shares are sold during the offering
period.
USE OF PROCEEDS
The proceeds of the offering will be used
o to pay expenses and fees of selling the common shares;
o to invest in properties;
o to pay expenses and fees associated with acquiring properties; and
o to establish a working capital reserve.
On April 20, 1999, we obtained a line of credit in a principal amount of up
to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all
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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 determines this action to be prudent.
However, there can be no assurance that this event will ever occur. In order to
provide liquidity to our shareholders, we expect that within approximately three
years from the initial closing, we intend either:
(1) to cause the common shares to be listed on a national securities
exchange or quoted on the NASDAQ National Market System or
(2) with shareholder approval, to dispose of all of our properties in a
manner which will permit distributions to shareholders of cash.
However, we are under no obligation to take any of these actions, and these
actions, if taken, might be taken after three years from the initial closing.
BORROWING POLICY
We intend to purchase our properties either on an all-cash basis or using
interim borrowings. Any interim borrowings may come from Apple Suites Advisors
or its affiliates or from third-party, non-affiliated lenders. We will endeavor
to repay any interim borrowing with proceeds from the sale of common shares and
to hold our properties on an unleveraged basis. However, for the purpose of
flexibility in operations, we may, subject to the approval of the board of
directors, borrow.
After the initial closing of common shares, our bylaws will prohibit us
from incurring debt if the debt would result in our total debt exceeding 100% of
the value of our assets at cost. The value of our assets at cost means the cost
of the asset before deducting depreciation less liabilities. However, our bylaws
allow us to incur debt in excess of this limitation when the excess borrowing is
approved by a majority of the independent directors and disclosed to the
shareholders. The bylaws also will prohibit us from allowing total borrowings to
exceed 50% of the fair market value of our assets, before subtracting
liabilities, subject to the same exception Described in the previous sentence.
The two limitations on debt described in this paragraph are applied separately
and independently. For example, it is possible that incurring debt may require
approval by a majority of the independent directors under one limitation even
though the other limitation on debt does not apply. In addition, the bylaws will
provide that our borrowings must be reasonable in relation to our net assets and
must be reviewed quarterly by the directors. Subject to these limitations on the
permitted maximum amount of debt, there is no limitation on the number of
mortgages or deeds of trust which may be placed against any particular property.
Assuming the independent directors approve, we may initially borrow in
excess of the debt limitations described in the previous paragraph in order to
acquire a portfolio of extended-stay hotel properties. If attainable, the
acquisition of a portfolio of properties early in our existence would, in the
opinion of our management, provide us with greater ability to acquire
extended-stay hotel properties in the future as proceeds from the sale of common
shares are received and provide us with economies of scale from the outset. We
would endeavor to use
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only interim borrowing for these acquisitions in order to maintain our long-term
policy of purchasing our properties on an all cash basis. We would repay any
interim borrowings with proceeds from the sale of common shares.
INVESTMENT POLICY
The investment return to shareholders from ownership of our common shares
will likely be less than could be obtained by a shareholder's direct acquisition
and ownership of the same properties because:
(1) we will pay to David Lerner Associates, Inc. substantial fees to sell
the common shares which will reduce the net proceeds available for investment
in properties;
(2) we will pay to Apple Suites Realty substantial fees to acquire
properties which will reduce the net proceeds available for investment in
properties; and
(3) we will pay to Apple Suites Advisors substantial advisory and related
compensation which will reduce funds available for distribution to
shareholders.
DISTRIBUTIONS POLICY
We intend to make distributions in accordance with federal income tax rules
applicable to real estate investment trusts. We intend to pay regular quarterly
distributions to our shareholders.
CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 common shares, no par
value, 240,000 Class B convertible shares, no par value, and 15,000,000
preferred shares, no par value. As of the date of this prospectus, there were 10
common shares of our company issued and outstanding.
COMPENSATION
We do not pay our officers salaries. Mr. Knight is currently our sole
executive officer. In addition, he is the sole shareholder of Apple Suites
Advisors and Apple Suites Realty which are entitled to receive fees for services
rendered by them to us. Mr. Knight will not receive a salary from those entities
but will receive dividend income due to his ownership of those entities. The
compensation and reimbursements payable to Apple Suites Advisors and Apple
Suites Realty are listed below. Except as indicated, we cannot determine the
maximum dollar amount of this compensation and reimbursement.
Apple Suites Advisors is entitled to receive an annual asset management fee
of between 0.1% and 0.25% of the amount raised in this offering. The percentage
used to calculate the asset management fee is based on the ratio of funds from
operations to the amount raised in this offering. This ratio is referred to as
the "return ratio." Funds from operations is defined as net income excluding
gains or losses from debt restructuring and sales of property, plus depreciation
of real property, after adjustments for significant non-recurring items and
unconsolidated partnerships and joint ventures, if any.
The percentage used to determine the asset management fee will be:
o 0.1% if the return ratio for the preceding calendar quarter is 6% or
less,
o 0.15% if the return ratio for the preceding calendar quarter is more
than 6% but not more than 8%, or
o 0.25% if the return ratio for the preceding calendar quarter is more
than 8%.
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Assuming the minimum offering amount of $15,000,000 in common shares is
sold, the annual asset management fee would be:
o $15,000 if the return ratio is 6% or less,
o $22,500 if the return ratio is more than 6% but no more than 8%, or
o $37,500 if the return ratio is more than 8%.
Assuming the maximum offering amount of $300,000,000 in common shares is
sold, the annual asset management fee would be:
o $300,000 if the return ratio is 6% or less,
o $450,000 if the return ratio is more than 6% but no more than 8%, or
o $750,000 if the return ratio is more than 8%.
Apple Suites Realty will serve as the real estate advisor in connection
with our purchases and sales of properties, and will receive fees from us of up
to 2% of the gross purchase price , up to a maximum of $5,400,000, and up to 2%
of the gross sale price of each property.
If the person from whom we purchase or to whom we sell a property pays any
fee to Apple Suites Realty that amount will decrease the amount of our
obligation to Apple Suites Realty. Apple Suites Realty will not be entitled to
any disposition fee in connection with a sale of a property by us to any
affiliate of Apple Suites Realty, but will be reimbursed for its costs in
marketing the property.
We may request that Apple Suites Advisors and Apple Suites Realty provide
other services or property to us in exchange for fees. In order to do so, our
bylaws require that the transaction be approved by a majority of the directors
who are not affiliated with either Apple Suites Advisors or Apple Suites Realty.
We currently have no plans to request services or property of the type described
in this paragraph and, therefore, do not expect to incur any additional fees.
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RISK FACTORS
An investment in our common shares involves various risks. You should
carefully consider the following information before making a decision to
purchase our common shares.
THERE IS NO PUBLIC MARKET FOR OUR COMMON SHARES, SO INVESTORS MAY BE UNABLE TO
DISPOSE OF THEIR INVESTMENT.
Prospective shareholders should view the common shares as illiquid and must
be prepared to hold their shares for an indefinite length of time. Before this
offering, there has been no public market for our common shares, and initially
we do not expect a market to develop. We do not plan to cause our common shares
to be listed on any securities exchange or quoted on any system or in any
established market either immediately or at any definite time in the future.
While we, acting through our board of directors, may cause the common shares to
be listed or quoted if the board of directors determines this action to be
prudent, there can be no assurance that this event will ever occur. Shareholders
may be unable to resell their common shares at all, or may be able to resell
them only later at a substantial discount from the purchase price. Thus, the
common shares should be considered a long-term investment.
THE BOARD OF DIRECTORS MAY DECIDE IN ITS SOLE DISCRETION TO LIST OUR COMMON
SHARES OR DISSOLVE US.
Currently, we expect that within approximately three years from the initial
closing of the minimum offering of 1,666,666.67 common shares we intend either:
(1) to cause our common shares to be listed on a national securities
exchange or quoted on the NASDAQ National Market System or
(2) with shareholder approval, to dispose of all of our properties in a
manner which will permit distributions to our shareholders of cash.
Either type of action will be conditioned on the board of directors determining
the action to be prudent and in the best interests of our shareholders. However,
we are under no obligation to take any of these actions, and any action, if
taken, might be taken after the three-year period mentioned above.
THE COMPENSATION TO APPLE SUITES ADVISORS AND APPLE SUITES REALTY IS PAYABLE
BEFORE DISTRIBUTIONS AND WILL REDUCE INVESTORS' RETURN.
The payment of compensation to Apple Suites Advisors and Apple Suites
Realty from proceeds of the offering and property revenues will reduce the
amount of proceeds available for investment in properties, or the cash available
for distribution, and will therefore tend to reduce the return on our
shareholders' investments. In addition, this compensation is payable regardless
of our profitability, and is payable prior to, and without regard to whether we
have sufficient cash for distributions.
THERE WERE NO ARMS-LENGTH NEGOTIATIONS FOR OUR AGREEMENTS WITH APPLE SUITES
ADVISORS, APPLE SUITES REALTY AND APPLE SUITES MANAGEMENT.
Apple Suites Advisors and Apple Suites Realty will receive substantial
compensation from us in exchange for various services they have agreed to render
to us. This compensation has been established without the benefits of
arms-length negotiation. Apple Suites Management will enter into leases for our
properties and has agreed to pay us rent. This rent WILL BE established without
the benefit of arms-length negotiation.
COMMISSIONS, ACQUISITION, ADVISORY AND OTHER FEES AND EXPENSES WILL LIMIT OUR
ABILITY TO MAKE DISTRIBUTIONS TO INVESTORS.
The investment return to our shareholders likely will be less than could be
obtained by a shareholder's direct acquisition and ownership of the same
properties. We will pay to David Lerner Associates, Inc. substantial fees to
sell our common shares which will reduce the net proceeds
6
<PAGE>
available for investment in properties. We will pay to Apple Suites Realty
substantial acquisition fees to acquire properties which will reduce the net
proceeds available for investment in properties. In addition, we will pay,
principally to Apple Suites Advisors, substantial advisory and related
compensation, which will reduce cash available for distribution to shareholders.
Thus, for example, if only 87% of the gross proceeds of the offering are
available for investment in properties, revenues may be reduced by 13% compared
to revenues in the absence of these fees.
THE COMPENSATION TO APPLE SUITES REALTY AND APPLE SUITES ADVISORS IS
INDETERMINABLE AND CANNOT BE STATED WITH CERTAINTY.
Apple Suites Realty and Apple Suites Advisors will receive compensation for
services rendered by them to us that cannot be determined with certainty. Apple
Suites Advisors will receive an asset management fee that may range from $15,000
to $750,000 per year. The asset management fee will be based upon the ratio of
funds from operations to the amount raised in this offering. Apple Suites Realty
will receive a commission for each property purchased based upon the purchase
price of the properties we purchase. The total compensation to Apple Suites
Realty is therefore dependent upon (1) the number of properties we purchase and
(2) the cost of each property purchased. In addition, Apple Suites Advisors and
Apple Suites Realty will be reimbursed for their costs incurred on our behalf
and are entitled to compensation for other services and property we may request
that they provide to us. The dollar amount of the cost and the compensation
cannot now be determined.
THERE ARE CONFLICTS OF INTEREST WITH OUR PRESIDENT AND CHAIRMAN OF THE BOARD.
Generally, conflicts of interest between us and Glade M. Knight arise
because he is the sole shareholder of Apple Suites Advisors, Apple Suites Realty
and Apple Suites Management. These companies will enter into contracts with us
to lease our properties or provide us with asset management and property
acquisition and disposition services. In addition, Glade M. Knight is and will
be a principal in other real estate investment transactions or programs which
may compete with us.
THERE ARE CONFLICTS OF INTEREST WITH OUR ADVISOR AND BROKER.
We will pay Apple Suites Realty an acquisition fee in connection with each
acquisition of a property, and a disposition fee in connection with property
dispositions. As a consequence, Apple Suites Realty may have an incentive to
recommend the purchase or disposition of a property in order to receive a fee.
Apple Suites Advisors will receive a fee which is a percentage of the total
consideration we receive from sale of common shares and, therefore, it could
have an incentive to close the sales of shares as rapidly as possible.
THERE ARE CONFLICTS OF INTEREST WITH OUR LESSEE.
We will lease our extended-stay hotel properties to Apple Suites
Management. We may be less willing to enforce provisions of the lease contract
against Apple Suites Management than against a third-party non-affiliated
lessee. Our lessee may not be able to make its lease payments under the lease.
Although failure on the part of Apple Suites Management to materially comply
with the terms of a lease including failure to pay rent when due will give us
the right to terminate the lease, repossess the property and enforce the payment
obligations under the lease, we would then be required to find another lessee to
lease the property since we cannot operate extended-stay hotel properties
directly. In addition, it is possible that we would be unable to enforce the
payment obligations under the leases following any termination. There can be no
assurance that we would be able to find another lessee or that we would be able
to enter into a new lease on terms as favorable to us if another lessee were
found.
OUR MANAGEMENT WILL SPEND TIME ON OTHER ACTIVITIES.
The officers and directors of Apple Suites Advisors, Apple Suites Realty
and Apple Suites Management also serve as officers and directors of entities
which engage in the brokerage, sale, operation or management of real estate. The
officers and directors of Apple Suites Advisors, Apple Suites Realty and Apple
Suites Management may disproportionately allocate their time and resources
between us and these other entities.
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WE OWN NO PROPERTIES AT THIS TIME.
We have not committed to purchasing any specific properties with the
proceeds of this offering as of the date of this prospectus. However, when at
any time during the offering period we believe that there is a reasonable
probability that any specific property will be acquired, this prospectus will be
supplemented to provide a description of the property and the anticipated terms
of its purchase, financing and management. A prospective shareholder will only
be able to evaluate information as to properties which are disclosed in a
prospectus supplement issued before the prospective shareholder makes its
investment.
WE ARE NOT DIVERSIFIED AND ARE DEPENDENT ON OUR INVESTMENT IN A SINGLE INDUSTRY.
Our current strategy is to acquire interests primarily in extended-stay
hotel properties. As a result, we are subject to the risks inherent in investing
in a single industry. A downturn in the extended-stay hotel industry may have
more pronounced effects on the amount of cash available to us for distribution
or on the value of our assets than if we had diversified our investments. We
will also be subject to any downturns in the business, commercial and tourism
travel industry as a whole.
WE WILL BE DEPENDENT UPON APPLE SUITES MANAGEMENT FOR OUR REVENUES.
Due to federal income tax restrictions, we CANNOT operate our properties
directly. Therefore, we intend to lease our extended-stay hotel properties to
Apple Suites Management who will manage the properties. Our revenues and our
ability to make distributions to our shareholders will depend solely upon the
ability of Apple Suites Management to make rent payments under its leases. Apple
Suites Management has no significant assets. Any failure by Apple Suites
Management to make rent payments would adversely affect our ability to make
distributions to our shareholders.
THERE MAY BE OPERATIONAL LIMITATIONS ASSOCIATED WITH FRANCHISE AGREEMENTS
AFFECTING OUR PROPERTIES.
Apple Suites Management will operate a substantial number of our properties
pursuant to franchise or license agreements with nationally recognized hotel
brands. These franchise agreements may contain specific standards for, and
restrictions and limitations on, the operation and maintenance of our properties
in order to maintain uniformity within the franchisor system. We do not know
whether those limitations may conflict with our ability to create specific
business plans tailored to each property and to each market.
The standards are subject to change over time, in some cases at the
direction of the franchisor, and may restrict Apple Suites Management's ability,
as franchisee, to make improvements or modifications to a property without the
consent of the franchisor. In addition, compliance with the standards could
require us or Apple Suites Management, as franchisees, to incur significant
expenses or capital expenditures. Action or inaction on our part or by Apple
Suites Management could result in a breach of those standards or other terms and
conditions of the franchise agreements and could result in the loss or
cancellation of a franchise license.
In connection with terminating or changing the franchise affiliation of a
property, we may be required to incur significant expenses or capital
expenditures. Moreover, the loss of a franchise license could have a material
adverse effect upon the operations or the underlying value of the property
covered by the franchise because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor.
WE HAVE NO OPERATING HISTORY AND WE HAVE NO ASSURANCE OF SUCCESS.
We do not have an operating history. There is no assurance that we will
operate successfully or achieve our objectives.
THERE IS A POSSIBLE LACK OF DIVERSIFICATION AND LOWER RETURN DUE TO THE MINIMUM
SIZE OF OUR OFFERING.
We initially will be funded with contributions of not less than
$15,000,000. Our profitability could be affected if we do not sell more than the
minimum offering. In the event we receive only the minimum offering of
1,666,666.67 common shares, we will invest in fewer properties. The fewer
8
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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 MAY BE DELAYS IN INVESTMENT IN REAL PROPERTY, AND THIS DELAY MAY DECREASE
THE RETURN TO SHAREHOLDERS.
We may experience delays in finding suitable properties to acquire. Pending
investment of the proceeds of this offering in real estate, and to the extent
the proceeds are not invested in real estate, the proceeds may be invested in
permitted temporary investments such as U.S. government securities, certificates
of deposit, or commercial paper. The rate of return on those investments has
fluctuated in recent years and may be less than the return obtainable from real
property.
THE ACTUAL AMOUNT OF PROCEEDS AVAILABLE FOR INVESTMENT IN PROPERTIES IS
UNCERTAIN.
Although we estimate in this prospectus the net amount of offering proceeds
that will be available for investment in properties, the actual amount available
for investment may be less. For example, we might deem it necessary to establish
a larger than expected working capital or contingency reserve to cover
unexpected environmental liabilities from unexpected lawsuits or governmental
regulatory judgments or fines. Any liabilities of this sort, or other
unanticipated expenses or debts, would reduce the amount we have available for
investment in properties.
THE PER-SHARE OFFERING PRICES HAVE BEEN ESTABLISHED ARBITRARILY BY US AND MAY
NOT REFLECT THE TRUE VALUE OF THE COMMON SHARES.
If we were to list the common shares on a national securities exchange, the
common share price might drop below our shareholder's original investment.
Neither prospective investors nor shareholders should assume that the per-share
prices reflect the intrinsic or realizable value of the common shares or
otherwise reflect our value, earnings or other objective measures of worth. The
increase in the per-share offering price from $9 to $10 once the minimum
offering is achieved is also not based upon or reflective of any meaningful
measure of our share value.
WE MAY BE UNABLE TO MAKE DISTRIBUTIONS.
If our properties do not generate sufficient revenue to meet operating
expenses, our cash flow and our ability to make distributions to shareholders
may be adversely affected. Our properties are subject to all operating risks
common to hotel properties. These risks might adversely affect occupancy or room
rates. Increases in operating costs due to inflation and other factors may not
necessarily be offset by increased room rates. The local markets may limit the
extent to which room rates may be increased to meet increased operating expenses
without decreasing occupancy rates. In addition, a percentage of our rents will
be based on the gross income of Apple Suites Management from food and beverage,
telephone and other revenue of each property. If the gross income from these
sources decreases, our rental income will also decrease.
WE WILL FACE COMPETITION IN THE HOTEL INDUSTRY.
The extended-stay hotel industry is highly competitive. This competition
could reduce occupancy levels and rental revenues at our properties, which would
adversely affect our operations. We expect to face competition from many
sources. We will face competition from other hotels both in the immediate
vicinity and the geographic market where our hotels will be located.
Over-building in the hotel industry will increase the number of rooms available
and may decrease occupancy and room rates. In addition, increases in operating
costs due to inflation may not be offset by increased room rates. We will also
face competition from nationally recognized hotel brands with which we will not
be associated.
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We will also face competition for investment opportunities. these
competitors may be other real estate investment trusts, national hotel chains
and other entities that may have substantially greater financial resources than
we do. We will also face competition for investors from other hotel real estate
investment trusts and real estate entities.
INVESTORS MAY WAIT UP TO ONE YEAR BEFORE RECEIVING THEIR COMMON SHARES OR A
REFUND OF THEIR MONEY IF THE MINIMUM OFFERING IS NOT ACHIEVED.
Until the minimum offering of 1,666,666.67 common shares is achieved,
investors will not receive their common shares. If at least 1,666,666.67 common
shares have not been sold within one year after the date of this prospectus, we
will terminate this offering of common shares. If the minimum offering is sold
within one year, investors will receive their common shares plus interest on
their subscription monies at the time of closing. If the offering is terminated,
investor will have their money promptly refunded with interest.
THERE WOULD BE SIGNIFICANT ADVERSE CONSEQUENCES OF OUR FAILURE TO QUALIFY AS A
REIT.
Qualification as a real estate investment trust, or REIT, involves the
application of highly technical and complex Internal Revenue Code provisions for
which there are limited judicial or administrative interpretations. If we were
to fail to qualify as a REIT for any taxable year, we would be subject to
federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to our
shareholders because of the additional tax liability. In addition, distributions
to our shareholders would no longer qualify for the dividends paid deduction and
we would no longer be required to make distributions. To the extent we would
have made distributions in anticipation of qualifying as a REIT, we might be
required to borrow funds or liquidate investments in order to pay the applicable
tax.
OUR REAL ESTATE INVESTMENTS WILL BE RELATIVELY ILLIQUID.
Real estate investments are, in general, relatively difficult to sell. Our
illiquidity will tend to limit our ability to promptly vary our portfolio in
response to changes in economic or other conditions. In addition, provisions of
the Internal Revenue Code relating to REITs limit our ability to sell properties
held for fewer than four years. This limitation may affect our ability to sell
properties without adversely affecting returns to our shareholders.
OUR BOARD MAY IN ITS SOLE DISCRETION DETERMINE THE AMOUNT OF OUR AGGREGATE DEBT.
Subject to the limitations in our bylaws on the permitted maximum amount of
debt, there is no limitation on the number of mortgages or deeds of trust that
may be placed against any particular property. Our bylaws will prohibit us from
incurring debt if the debt would result in our total debt exceeding 100% of the
value of our assets at cost. The bylaws also will prohibit us from allowing
total borrowings to exceed 50% of the fair market value of our assets. However,
our bylaws allow us to incur debt in excess of these limitations when the excess
borrowing is approved by a majority of the independent directors and disclosed
to the shareholders. In addition, the bylaws will provide that our borrowings
must be reasonable in relation to our net assets and must be reviewed quarterly
by the directors.
WE HAVE NO RESTRICTION ON CHANGES IN OUR INVESTMENT AND FINANCING POLICIES.
Our board of directors approves our investment and financing policies,
including our policies with respect to growth, debt, capitalization and payment
of distributions. Although the board of directors has no present intention to
amend or waive its current policies, it could do so at any time, or from time to
time, at its discretion without a vote of our shareholders. For example, our
board could determine without shareholder's approval that it is in the best
interests of the shareholders to cease all investments in extended-stay hotel
properties, to make investments in other types of assets or to dissolve the
business.
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THERE WILL BE DILUTION OF SHAREHOLDER'S INTERESTS UPON CONVERSION OF THE CLASS B
SHARES.
Glade M. Knight, who is our director, chairman of the board and president,
and others will hold Class B convertible shares which are convertible into
common shares, as described under "principal and management shareholders." The
number of common shares into which the Class B convertible shares are
convertible depends on the gross proceeds of the offering. The conversion ratio
is one-to-one for gross proceeds of $50 million (5,166,666 common shares). The
conversion ratio increases to eight-to-one for gross proceeds of $300 million.
The conversion of Class B convertible shares into common shares will result in
dilution of the shareholders' interests.
o Assuming 5,166,666 common shares offered by this prospectus were sold, and
all of the Class B convertible shares were converted into common shares,
the holders of the Class B convertible shares would own approximately
240,000 common shares or 4.44% of the total number of common shares then
outstanding in exchange for an aggregate payment of 24,000.
o If half of the offering is sold, this would represent the sale of
15,166,666 common shares. Assuming 15,166,666 common shares were sold, and
all of the Class B convertible shares were converted into common shares,
the holders of the Class B convertible shares would own approximately
840,000 common shares or 5.25% of the total number of common shares then
outstanding in exchange for an aggregate payment of $24,000.
o Assuming all common shares offered by this prospectus were sold, and all
of the authorized Class B convertible shares were converted into common
shares, the holders of the Class B convertible shares would own
approximately 1,920,000 common shares or 5.98% of the total number of
common shares outstanding in exchange for an aggregate payment of $24,000.
OUR SHAREHOLDERS' INTERESTS MAY BE DILUTED IN VARIOUS WAYS.
The board of directors is authorized, without shareholder approval, to
cause us to issue additional common shares or to raise capital through the
issuance of preferred shares, options, warrants and other rights, on terms and
for consideration as the board of directors in its sole discretion may
determine. Any such issuance could result in dilution of the equity of the
shareholders. The board of directors may, in its sole discretion, authorize us
to issue common shares or other equity or debt securities, (1) to persons from
whom we purchase property, as part or all of the purchase price of the property,
or (2) to Apple Suites Advisors or Apple Suites Realty in lieu of cash payments
required under the Advisory Agreement or other contract or obligation. The board
of directors, in its sole discretion, may determine the value of any common
shares or other equity or debt securities issued in consideration of property or
services provided, or to be provided, to us, except that while common shares are
offered by us to the public, the public offering price of the shares shall be
deemed their value.
We have agreed to sell to David Lerner Associates, Inc. warrants to
purchase 10% of the shares sold, up to 3,000,000 common shares, at an exercise
price of $16.50 per share. To the extent that the warrants are exercised,
dilution will occur if the warrant exercise price is less than the value of the
common shares at the time of exercise.
We have adopted two stock incentive plans for the benefit of our directors
and a limited number of our employees and employees of Apple Suites Advisors and
Apple Suites Realty. The effect of the exercise of those options could be to
dilute the value of the shareholders' investments to the extent of any
difference between the exercise price of an option and the value of the shares
purchased at the time of the exercise of the option.
In addition, we expressly reserve the right to implement a dividend
reinvestment plan involving the issuance of additional shares by us, at an issue
price determined by the board of directors.
SEVEN PARTNERSHIPS PREVIOUSLY ORGANIZED BY GLADE M. KNIGHT FILED FOR BANKRUPTCY.
Several private partnerships previously organized by Glade M. Knight
experienced operating difficulties and adverse business developments. A
prospective investor may deem this relevant in evaluating the risk that we will
experience operating difficulties and adverse business developments.
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Seven private partnerships previously organized by Mr. Knight filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. These
partnerships ceased all cash distributions to their investors. In addition, the
properties owned by other partnerships organized by Mr. Knight were lost through
foreclosure.
OUR ARTICLES AND BYLAWS CONTAIN ANTITAKEOVER PROVISIONS AND OWNERSHIP LIMITS.
Ownership Limits. Our bylaws contain restrictions on stock ownership which
may discourage third parties from making acquisition proposals. These same
antitakeover provisions may also impede our shareholders' ability to change our
management.
In order to maintain our qualification as a REIT, no more than 50% in value
of our outstanding shares of capital stock may be owned, directly or indirectly,
by five or fewer individuals or entities. As a result, our bylaws prohibit
ownership, either directly or indirectly, of more than 9.8% of the common shares
by any shareholder. Our board may waive this ownership limitation on a
case-by-case basis. As a result, without our board's approval, no person may
acquire more than 9.8% of our outstanding common shares, limiting a
third-party's ability to acquire control of us.
Preferred Shares. Our articles of incorporation authorize the board to
issue up to 15,000,000 preferred shares and to establish the preference and
rights of those shares. Thus, our board could create a new class of preferred
shares with voting or other rights senior to any existing class of stock. These
rights could delay or prevent a change in control even if a change were in our
shareholders' best interest.
WE MAY BECOME SUBJECT TO ENVIRONMENTAL LIABILITIES.
Although we will subject our properties to an environmental assessment
prior to acquisition, we may not be made aware of all the environmental
liabilities associated with a property prior to its purchase. There may be
hidden environmental hazards that may not be discovered prior to acquisition.
The costs of investigation, remediation or removal of hazardous substances may
be substantial. In addition, the presence of hazardous substances on one of our
properties, or the failure to remediate properly a contaminated property, could
adversely affect our ability to sell or rent the property or to borrow using the
property as collateral.
Various federal, state and local environmental laws impose responsibilities
on an owner or operator of real estate and subject those persons to potential
joint and several liabilities. Typical provisions of those laws include:
-- Responsibility and liability for the costs of removal or remediation of
hazardous substances released on or in real property, generally without
regard to knowledge of or responsibility for the presence of the
contaminants.
-- Liability for the costs of removal or remediation of hazardous substances
at disposal facilities for persons who arrange for the disposal or
treatment of those substances.
-- Potential liability under common law claims by third parties based on
damages and costs of environmental contaminants.
WE MAY INCUR SIGNIFICANT COSTS COMPLYING WITH THE AMERICANS WITH DISABILITIES
ACT AND SIMILAR LAWS.
Our properties will be required to meet federal requirements related to
access and use by disabled persons as a result of the Americans with
Disabilities Act of 1990. In addition, a number of additional federal, state and
local laws may require modifications to any properties we purchase, or may
restrict further renovations thereof, with respect to access by disabled
persons. Noncompliance with these laws or regulations could result in the
imposition of fines or an award of damages to private litigants. Additional
legislation could impose additional financial obligations or restrictions with
respect to access by disabled persons. If required changes involve greater
expenditures than we currently anticipate, or if the changes must be made on a
more accelerated basis, our ability to make expected distributions could be
adversely affected.
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OUR COMPUTER SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT, WHICH WOULD LEAD TO
OPERATIONAL DIFFICULTIES AND INCREASED COSTS.
Many of the world's computer systems currently record years in a two-digit
format. Those computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to disruptions in our operations commonly
referred to as the "Year 2000" issue. We and Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management do not have any computer systems and are in
the process of developing initiatives to address the Year 2000 issue. We cannot
guarantee that our systems and those of Apple Suites Advisors, Apple Suites
Realty or Apple Suites Management will be Year 2000 compliant or that other
companies on which we may rely will be timely converted. As a result, our
operations could be adversely affected.
WE MAKE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS WHICH MAY PROVE TO BE
INACCURATE.
This prospectus contains forward-looking statements within the meaning of
the federal securities laws which are intended to be covered by the safe harbors
created by those laws. These statements include our plans and objectives for
future operations, including plans and objectives relating to future growth and
availability of funds. These forward-looking statements are based on current
expectations that involve numerous risks and uncertainties. Assumptions relating
to these statements involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to accurately predict and
many of which are beyond our control. Although we believe the assumptions
underlying the forward-looking statements, and the forward looking statements
themselves, are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that these forward-looking statements will
prove to be accurate. In light of the significant uncertainties inherent in
these forward-looking statements, the inclusion of this information should not
be regarded as a representation by us or any other person that our objectives
and plans, which we consider to be reasonable, will be achieved.
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USE OF PROCEEDS
We intend to invest the net proceeds of this offering in equity ownership
interests in extended-stay hotel properties located in selected metropolitan
areas of the United States. Pending investment in real estate, the proceeds may
be invested in temporary investments consistent with our bylaws and the Internal
Revenue Code. These temporary investments include U.S. government securities,
certificates of deposit, or commercial paper. All proceeds of this offering
received by us must be invested in properties or allocated to working capital
reserves within the later of two years after commencement of the offering or one
year after termination of the offering. Any proceeds not invested in properties
or allocated to working capital reserves by the end of this time period will be
returned to investors within 30 days after the expiration of the period. We may
elect to return the proceeds earlier if required by applicable law, including to
the extent necessary to avoid characterization as an "investment company". The
proceeds of this offering will be received and held in trust for the benefit of
investors in compliance with applicable securities laws, to be used only for the
purposes set forth in this prospectus.
Our bylaws prohibit our total organizational and offering expenses from
exceeding 15% of the amount raised in this offering. Organizational and offering
expenses are all expenses incurred in organizing us and offering and selling the
common shares, including: selling commissions and fees, legal fees and
accounting fees, and federal, state and other regulatory filing fees. The bylaws
also prohibit the total of all acquisition fees and acquisition expenses paid in
connection with an acquisition of a property from exceeding 6% of the contract
price for the property unless these excess fees or expenses are approved by the
board of directors. Acquisition fees are all fees and commissions paid by any
party in connection with our purchase of real property. Acquisition expenses are
all expenses related to the selection or acquisition of properties by us. Any
organizational and offering expenses or acquisition fees and acquisition
expenses incurred by us in excess of the permitted limits will be payable by
Apple Suites Advisors to us immediately upon our demand.
On April 20, 1999, we obtained a line of credit in a principal amount of up
to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all accrued interest are due in
full on October 20, 1999. Glade M. Knight, our president and chairman of the
board, has guaranteed repayment of the loan. We expect to repay this debt with
proceeds from the sale of common shares.
As indicated below, we expect, that once the minimum offering of
1,666,666.67 common shares is completed, that 84.5% of the gross offering
proceeds will be available for investment in properties and 0.5% will be
allocated to our working capital reserve. However, the percentage of gross
offering proceeds available for investment could be less if the offering
expenses are greater than the amounts indicated or if we feel it prudent to
establish a larger working capital reserve. For example, we might feel it
prudent to establish a larger working capital reserve to cover possible
unanticipated costs or liabilities. If we only receive the proceeds from the
minimum offering, we will invest in fewer properties than if we were to receive
the proceeds from the maximum offering of 30,166,666.67 common shares.
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The following table reflects the intended application of the proceeds from
the sale of the common shares.
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
----------------------------- ------------------------------
% OF % OF
GROSS GROSS
AMOUNT PROCEEDS AMOUNT PROCEEDS
-------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Gross Proceeds (1) ........................ $15,000,000 100.00% $300,000,000 100.00%
Less
Offering Expenses (2) .................... 450,000 3.00% 1,500,000 0.50%
Selling Commissions (3) .................. 1,125,000 7.50% 22,500,000 7.50%
Marketing Expense Allowance (3) .......... 375,000 2.50% 7,500,000 2.50%
----------- ------ ------------ ------
Net Proceeds after Offering Costs ......... $13,050,000 87.00% $268,500,000 89.50%
Less Acquisition Fees and Expenses (4). 300,000 2.00% 6,000,000 2.00%
----------- ------ ------------ ------
Proceeds Available for Investment and
Working Capital .......................... $12,750,000 85.00% $262,500,000 87.50%
Less Working Capital Reserve (5) .......... 75,000 0.50% 1,500,000 0.50%
----------- ------ ------------ ------
Net Amount Available for Investment in
Properties (6) ........................... $12,675,000 84.50% $261,000,000 87.00%
----------- ------ ------------ ------
</TABLE>
- ----------
(1) The Shares are being offered on a "best-efforts" basis.
(2) These amounts reflect our estimate of offering expenses, exclusive of the
selling commissions and the marketing expense allowance payable to David
Lerner Associates, Inc. If the offering expenses are greater than the
amounts indicated, the amount of proceeds available for investment will
decrease, and if these expenses are less, the amount available for
investment will increase.
(3) Payable to David Lerner Associates, Inc.
(4) These amounts include a real estate commission payable to Apple Suites
Realty in an amount equal to 2% of the proceeds of the offering used to pay
the purchase price of each property acquired not including amounts budgeted
for repairs and improvements plus our estimates of other expenses and fees
which will be incurred in connection with property acquisitions.
(5) Until used, amounts in our working capital reserve, together with any other
proceeds not invested in properties or used for other company purposes, will
be invested in permitted temporary investments such as U.S. Government
securities or similar liquid instruments.
(6) We expect the investment properties to be extended-stay hotel properties
located in selected metropolitan areas of the United States.
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<PAGE>
COMPENSATION
The table below describes all the compensation , fees, reimbursement and
other benefits which we will pay to Apple Suites Advisors and Apple Suites
Realty. Mr. Knight is the sole shareholder of Apple Suites Advisors and Apple
Suites Realty. Mr. Knight is also our sole executive officer. He will receive
no compensation from us. He will, however, receive dividend income from Apple
Suites Advisors and Apple Suites Realty.
We will pay David Lerner Associates, Inc. selling commissions equal to 7.5%
of the purchase price of the common shares and a marketing expense allowance
equal to 2.5% of the purchase price of the common shares. If the minimum
offering of $15,000,000 is sold, the selling commissions would be $1,125,000 and
the marketing expense allowance would be $375,000. If the maximum offering of
$300,000,000 is sold, the selling commissions would be $22,500,000 and the
marketing expense allowance would be $7,500,000. David Lerner Associates, Inc.
is not related to nor an affiliate of either Apple Suites Advisors or Apple
Suites Realty.
<TABLE>
<CAPTION>
PERSON RECEIVING
COMPENSATION (1) TYPE OF COMPENSATION AMOUNT OF COMPENSATION (2)
- --------------------------------- ---------------------------------------- ------------------------------------------
<S> <C> <C>
ACQUISITION PHASE
Apple Suites Realty Group, Inc. Real estate commission for 2% of the proceeds of the offering
acquiring our properties used 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 upon our ratio
day-to-day operations of based a funds from operations to the
amount raised in this offering ranging from
0.1% to 0.25% of the amount raised in this
offering -- a maximum of $37,500 per year if
the minimum offering is sold; a maximum of
$750,000 per year if the maximum offering is
sold. (4)
Apple Suites Advisors, Inc. and Reimbursement for costs and expenses Amount is indeterminate (6)
Apple Suites Realty incurred on our behalf, as described in
Group, Inc. 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. (7)
ALL PHASES
Apple Suites Advisors, Inc. and Payment for services and property (8) Amount is indeterminate (9)
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
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<PAGE>
property purchased by us not including amounts budgeted for repairs and
improvements. If the person from whom we purchase or to whom we sell a
property pays any fee to Apple Suites Realty that amount will decrease the
amount of our obligation to Apple Suites Realty.
(4) Under an Advisory Agreement with Apple Suites Advisors we are obligated to
pay an asset management fee which is a percentage of the gross offering
proceeds which have been received from time to time from the sale of the
common shares. The percentage used to calculate the asset management fee is
based on the "return ratio." The return ratio is the ratio of funds from
operations to the amount raised in this offering for the preceding calendar
quarter. The per annum asset management fee is equal to the following with
respect to each calendar quarter: 0.1% of the amount raised in this offering
if the return ratio for the preceding calendar quarter is 6% or less; 0.15%
of the amount raised in this offering if the return ratio for the preceding
calendar quarter is more than 6% but not more than 8%; and 0.25% of the
amount raised in this offering if the return ratio for the preceding
calendar quarter is above 8%. Assuming the minimum offering of $15,000,000
is sold, the annual asset management fee would be between $15,000 and
$37,500. Assuming the maximum offering of $300,000,000 is sold, the annual
asset management fee would be between $300,000 and $750,000.
(5) Apple Suites Advisors and Apple Suites Realty will be reimbursed for all
direct costs of acquiring and operating our properties and of goods and
materials used for or by us and obtained from entities that are not
affiliated with Apple Suites Advisors. These costs and expenses include, but
are not limited to, legal fees and expenses, travel and communication
expenses, expenses relating to shareholder communications, costs of
appraisals, non-refundable option payments on property not acquired,
accounting fees and expenses, title insurance, and all other fees, costs and
expenses directly attributable to the acquisition and ownership of our
properties. Operating expenses reimbursable to Apple Suites Advisors and
Apple Suites Realty are subject to the overall limitation on operating
expenses discussed under "Apple Suites Advisors and Affiliates -- The
Advisory Agreement," but the amount of reimbursement is not otherwise
limited.
(6) While we cannot determine with any certainty the future reimbursements for
costs and expenses that will be incurred on our behalf by Apple Suites
Advisors and Apple Suites Realty, we estimate based on the experience of
management in the organization and management of two other real estate
investment trusts that if that if the maximum offering is achieved the total
amount of reimbursements will equal $500,000 over the next three calendar
years. This amount is our best estimate of what those future costs and
expenses may be. We have no way of knowing at this time whether this
estimate will be accurate.
(7) Under the Property Acquisition/Disposition Agreement described in note (3),
Apple Suites Realty also will be entitled to a fee from us in connection
with our sale of each property equal to 2% of the gross sales price of the
property if, and only if, the sales price exceeds the sum of (1) our cost
basis in the property (consisting of the original purchase price plus any
and all capitalized costs and expenditures connected with the property) plus
(2) 10% of the cost basis. For purposes of this calculation, our cost basis
will not be reduced by depreciation.
The compensation to Apple Suites Realty for dispositions of properties is
subject to multiple factors, including (a) whether any properties are ever
sold, (b) the price at which those future sales, if any, occur, (c) whether
the purchaser is an affiliate and (d) whether the purchaser paid a fee to
Apple Suites Realty. While we cannot determine with an certainty the future
compensation to Apple Suites Realty for disposition services, we can
estimate the fees on the assumptions that after three years all our
properties are sold to non-affiliates, at prices equal to our cost basis
plus 10% and the purchaser does not pay a fee to Apple Suites Realty. Based
on those assumptions, if (1) the minimum offering were achieved and
$12,675,000 were invested in properties, the fee payable to Apple Suites
Realty would be $278,850 and (2) if the maximum offering were achieved and
$261,000,000 were invested in properties, the fee payable to Apple Suites
Realty would be $5,742,000. We currently have no plan or intention to sell
any properties we may purchase.
(8) Apple Suites Advisors and Apple Suites Realty may provide other services or
property to us, and will be entitled under certain conditions to
compensation or payment for those services or property. Those conditions,
which are summarized under "Conflicts of Interest -- Transactions with
Affiliates and Related Parties," include the requirement that each
transaction be approved by the affirmative vote of a majority of the
independent directors. Currently, there are no arrangements or proposed
arrangements between us, on the one hand, and these two entities, on the
other hand, for the provision of other services or property to us or the
payment of compensation or reimbursement. If any other arrangements arise in
the future, the terms of the arrangements, including the compensation or
reimbursement payable, will be subject to the restrictions in our bylaws.
The compensation, reimbursement or payment could take the form of cash or
property, including common shares.
(9) We currently have no, and do not anticipate entering into any, arrangements
or proposed arrangements to pay compensation or reimbursements for other
services or properties.
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<PAGE>
CONFLICTS OF INTERESTS
GENERAL
We may be subject to various conflicts of interest arising from our
relationship with Apple Suites Advisors, Apple Suites Realty, Apple Suites
Management and Glade M. Knight, our chairman of the board. Mr. Knight is the
sole shareholder of Apple Suites Advisors, Apple Suites Realty and Apple Suites
Management.
Apple Suites Advisors, Apple Suites Realty, Apple Suites Management and Mr.
Knight are not restricted from engaging for their own account in business
activities of the type conducted by us. Occasions may arise when our interests
conflict with those of one or more of Mr. Knight, Apple Suites Advisors, Apple
Suites Realty and Apple Suites Management. Apple Suites Advisors, Apple Suites
Realty, Apple Suites Management and Mr. Knight are accountable to us and our
shareholders as fiduciaries, and consequently must exercise good faith and
integrity in handling our affairs.
Apple Suites Advisors, Apple Suites Realty and Apple Suites Management will
assist us in acquisition, organization, servicing, management and disposition of
investments. At this time, Apple Suites Advisors, Apple Suites Realty and Apple
Suites Management will provide services exclusively to us, but THEY may perform
similar services for other parties, both affiliated and unaffiliated, in the
future.
CONFLICTS WITH RESPECT TO FEES PAID BY US TO APPLE SUITES ADVISORS AND APPLE
SUITES REALTY
The receipt of various fees from us by Apple Suites Advisors and Apple
Suites Realty may result in potential conflicts of interest for persons,
particularly Mr. Knight who participate in decision making on behalf of both us
and these other entities.
CONFLICTS WITH RESPECT TO COMMISSIONS. Apple Suites Realty will receive a
2% commission upon each purchase by us of a property, and a commission of 2%
upon each sale by us of a property. Therefore, its compensation will increase in
proportion to the number of properties purchased and sold by us and the
properties' purchase and sale prices. Apple Suites Realty has an incentive to
see that multiple properties are purchased and sold by us.
CONFLICTS WITH RESPECT TO ASSET MANAGEMENT FEES. Apple Suites Advisors
asset management fee is a percentage of total proceeds received from time to
time by us from the sales of our common shares. Accordingly, it has an incentive
to see that sales of common shares are closed as quickly as possible by us.
Apple Suites Advisors and Apple Suites Realty do not intend to take any
action or make any decision on our behalf which is based, wholly or in part,
upon a consideration of the compensation payable to them as a consequence of the
action or decision. In addition, the presence on our board of directors of
independent directors is intended to ameliorate the potential impact of
conflicts of interest for persons such as Mr. Knight who participate in decision
making on behalf of both us and Apple Suites Advisors or Apple Suites Realty.
POLICIES TO ADDRESS CONFLICTS
The board of directors, Apple Suites Advisors, Apple Suites Realty and
Apple Suites Management will also be subject to the various conflicts of
interest described below. Policies and procedures will be implemented to
ameliorate the effect of potential conflicts of interest. By way of
illustration, the bylaws place limitations on the terms of contracts between us
and Apple Suites Advisors, Apple Suites Realty or Apple Suites Management
designed to ensure that these contracts are not less favorable to us than would
be available from an unaffiliated party. However, some potential conflicts of
interest are not easily susceptible to resolution.
18
<PAGE>
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. Our
bylaws define an independent director as a director who is not affiliated,
directly or indirectly, with apple suites advisors, Apple Suites Realty, and
Apple Suites Management or an affiliate of any of these entities. An affiliate
of a company generally means a person who controls the company, who owns 10% or
more of the voting stock of the company, or who is an officer or director of the
company. Generally, our independent directors may perform no other services for
us, except as directors. However, any director who performs legal services for
us or Apple Suites Advisors, Apple Suites Realty or an affiliate may qualify as
an independent director. At all times on and after initial closing, a majority
of the board of directors must be independent directors. Under our bylaws, any
transaction between us, on the one hand, and Apple Suites Advisors, Apple Suites
Realty or Apple Suites Management on the other hand is permitted only if the
transaction has been approved by a majority of all of the independent directors.
However, the previous sentence does not apply to the entering into, and the
initial term under, the Advisory Agreement and the Property
Acquisition/Disposition Agreement, each of which is described in this
prospectus. In addition, under the bylaws, transactions between us and Apple
Suites Advisors, Apple Suites Realty, or Apple Suites Management must be in all
respects fair and reasonable to our shareholders. If any proposed transaction
involves the purchase of property, the purchase must be on terms not less
favorable to us than those prevailing for arm's-length transactions concerning
comparable property, and at a price to us no greater than the cost of the asset
to the seller unless a majority of the independent directors determines that
substantial justification for the excess exists. Examples of substantial
justification might include, without limitation, an extended holding period or
capital improvements by the seller which would support a higher purchase price.
Apple Suites Advisors and Apple Suites Realty will receive compensation
from us for providing many different services. The fees payable and expenses
reimbursable are subject to the general limitation on operation expenses. The
board of directors will have oversight responsibility with respect to our
relationships with Apple Suites Advisors or Apple Suites Realty and will attempt
to ensure that they are structured to be no less favorable to us than our
relationships with unrelated persons or entities and are consistent with our
objectives and policies.
COMPETITION BETWEEN US AND MR. KNIGHT
We have obtained a $1 million loan to cover our start-up costs. This loan
is guaranteed by Glade M. Knight, our president and chairman of the board. We
expect to repay this loan with proceeds of this offering. Because Mr. Knight is
personally liable for repayment of this loan, he has an incentive to see that at
least the minimum offering is raised. This could present a conflict of interest
for Mr. Knight since his personal interests would be adversely affected if the
offering is not successful for any reason.
Mr. Knight or other companies organized by him, may form additional REITs,
limited partnerships and other entities to engage in activities similar to
ours. Mr. Knight has no present intention of organizing any additional REITs.
However, until the time as more than 95% of the
19
<PAGE>
proceeds of this offering are invested, Mr. Knight and Apple Suites Advisors,
Apple Suites Realty and Apple Suites Management shall present to us any suitable
investment opportunity before offering it to any other affiliated entity.
The competing activities of Apple Suites Advisors, Apple Suites Realty,
Apple Suites Management and Mr. Knight may involve conflicts of interest. For
example, Mr. Knight is interested in the continuing success of previously formed
ventures because he has fiduciary responsibilities to investors in those
ventures, he may be personally liable on obligations of those ventures and he
has equity and incentive interests in those ventures. Conflicts of interest
would also exist if properties acquired by us compete with properties owned or
managed by Mr. Knight or affiliates of Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management. Conflicts of interest may also arise in the
future if we sell, finance or refinance properties at the same time as ventures
developed by Mr. Knight or affiliates of Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management.
COMPETITION FOR MANAGEMENT SERVICES
Mr. Knight is and in the future will be an officer or director of one or
more entities, which engage in the brokerage, sale, operation, or management of
real estate. Accordingly, Mr. Knight may have conflicts of interest in
allocating management time and services between us and other entities.
20
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following is a discussion of our current policies with respect to
investments, financing and other activities. These policies have been
established by our management. These policies may be amended or waived from time
to time at the discretion of our board of directors without a vote of our
shareholders. No assurance can be given that our investment objectives will be
attained.
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE.
Our primary business objective is to maximize shareholder value by
achieving long-term growth in cash distributions to our shareholders. We intend
to pursue this objective by acquiring extended-stay hotel properties for
long-term ownership. We intend to acquire fee ownership of our hotel properties.
We intend to lease these properties to hotel operating companies for their
management. We seek to maximize current and long-term net income and the value
of our assets. Our policy is to acquire assets where we believe opportunities
exist for acceptable investment returns.
We expect to pursue our objectives primarily through the direct ownership
of extended-stay hotel properties located in selected metropolitan areas.
However, future investment activities will not be limited to any geographic area
or product type or to a specified percentage of our assets.
Although we are not currently doing so, we may also participate with other
entities in property ownership, through joint ventures or other types of common
ownership. Equity investments may be subject to existing mortgage financing and
other indebtedness which have priority over our equity interests.
We reserve the right to dispose of any property if we determine the
disposition of a property is in our best interests and the best interests of our
shareholders.
BORROWING POLICIES
To maximize our potential cash flow and minimize our risk, we intend to
purchase our properties on an "all-cash" basis. However, we may initially use
limited interim borrowings in order to purchase properties. We will endeavor to
repay any interim borrowings with proceeds from the sale of common shares and
thereafter to hold our properties on an unleveraged basis. However, for the
purpose of flexibility in operations, we will have the right, subject to the
approval of the board of directors, to borrow.
One purpose of borrowing could be to permit our acquisition of additional
properties through the "leveraging" of shareholders' equity contributions.
Alternatively, we might find it necessary to borrow to permit the payment of
operating deficits at properties we already own. Furthermore, although not
anticipated, properties may be financed or refinanced if the board of directors
deems it in the best interests of shareholders because, for example,
indebtedness can be incurred on favorable terms and the incurring of
indebtedness is expected to improve the shareholders' after-tax cash return on
invested capital.
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.
21
<PAGE>
After the initial closing of $15,000,000, our bylaws will prohibit us from
incurring debt if the debt would result in aggregate debt exceeding 100% of "Net
Assets," defined generally to mean assets at cost, before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
independent directors and disclosed to the shareholders as required by the
bylaws. The bylaws also will prohibit us from allowing aggregate borrowings to
exceed 50% of our "Adjusted Net Asset Value," defined generally to mean assets
at fair market value, before subtracting liabilities, subject to the same
exception described in the previous sentence. In addition, the bylaws will
provide that the aggregate borrowings must be reasonable in relation to our net
assets and must be reviewed quarterly by the directors. Subject to the
limitations on the permitted maximum amount of debt, there is no limitation on
the number of mortgages or deeds of trust which may be placed against any
particular property.
Assuming the independent directors approve, we may initially borrow in
excess of the debt limitations described in the previous paragraph in order to
acquire a portfolio of extended-stay hotel properties. If attainable, the
acquisition of a portfolio of properties early in our existence would, in the
opinion of our management, provide us with greater ability to acquire
extended-stay hotel properties in the future as proceeds from the sale of common
shares are received and provide us with economies of scale from the outset. We
would endeavor to use only interim borrowing for these acquisitions in order to
maintain our long-term policy of purchasing our properties on an all cash basis.
We would repay any interim borrowings with proceeds from the sale of common
shares.
RESERVES
A portion of the proceeds of this offering will be reserved to meet working
capital needs and contingencies associated with our operations. We will
initially allocate to our working capital reserve not less than 0.5% of the
proceeds of the offering. As long as we own any properties, we will retain as
working capital reserves an amount equal to at least 0.5% of the proceeds of the
offering, subject to review and re-evaluation by the board of directors. If
reserves and any other available income become insufficient to cover our
operating expenses and liabilities, it may be necessary to obtain additional
funds by borrowing, refinancing properties or liquidating our properties on an
all cash basis. We would repay any interim borrowings with investment in one or
more properties.
SALE POLICIES
We are under no obligation to sell our investment properties, and currently
anticipate that we will hold our investment properties for an indefinite length
of time. However, a sale of one or more properties may occur at any time if
Apple Suites Advisors deems it advisable for us based upon current economic
considerations, and the board of directors concurs with the decision. In
deciding whether to sell a property, Apple Suites Advisors will also take into
consideration factors such as: the amount of appreciation in value, if any, to
be realized; federal, state and local tax consequences; the possible risks of
continued ownership; and the anticipated advantages to be gained for the
shareholders from sale of a property versus continuing to hold property.
Currently, we expect that within approximately three years from the initial
closing, we will either:
(1) cause the common shares to be listed on a national securities
exchange or quoted on the NASDAQ National Market System or
(2) with shareholder approval, dispose of all of our properties in a
manner which will permit distributions to our shareholders of cash.
The taking of either type of action would be conditioned on the board of
directors determining the action to be prudent and in the best interests of the
shareholders, and would be intended to provide shareholders with liquidity
either by initiating the development of a market for the common shares or by
disposing of properties and distributing to shareholders cash. Virginia law and
our articles of incorporation state that a majority of the common shares then
outstanding and entitled to vote is required to approve the sale of all or
substantially all our assets. However, we are under no obligation to take any of
these actions, and these actions, if taken, might be taken after the three-year
period.
22
<PAGE>
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:
o correct any ambiguity in the bylaws or resolve inconsistencies between
the bylaws and the Articles;
o make changes that are not materially adverse to the rights of
shareholders; or
o allow us to take any action or fulfill any obligation which we are legally
obligated or permitted to take.
Within the express restrictions and prohibitions of the bylaws, the
articles of incorporation and applicable law, however, the board of directors
has significant discretion to modify our investment objectives and policies, as
stated in this prospectus. We have no present intention to modify any of our
investment objectives and policies, and it is anticipated that any modification
would occur only if business and economic factors affecting us made our stated
investment objectives and policies unworkable or imprudent. By way of
illustration only, the board of directors could elect to acquire residential
apartment communities, or to acquire one or more commercial properties in
addition to extended-stay hotel properties.
Thus, while this prospectus accurately and fully discloses our current
investment objectives and policies, prospective shareholders must be aware that
the board of directors, acting consistently with our organizational documents,
applicable law and their fiduciary obligations, may elect to modify or expand
our objectives and policies from time to time. Any action by the board of
directors would be based upon the perceived best interests of our company and
the shareholders.
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<PAGE>
DISTRIBUTIONS POLICY
Distributions will be at the discretion of our board of directors and will
depend upon factors including:
-- the gross revenues we receive from our properties,
-- our operating expenses,
-- our interest expense incurred in borrowing,
-- capital expenditures, and
-- our need for cash reserves.
While we intend to make quarterly distributions, there can be no assurance
that we will be able to make distributions at any particular rate, or at all.
In accordance with applicable real estate investment trust requirements, we
will make distributions in compliance with the Internal Revenue Code.
We anticipate distributions will exceed net income determined in accordance
with generally accepted accounting principles due to non-cash expenses,
primarily depreciation and amortization.
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<PAGE>
BUSINESS
GENERAL
We are a Richmond, Virginia-based company. We plan to elect to be treated
as a real estate investment trust for federal income tax purposes beginning with
our taxable year ending December 31, 1999. We plan to purchase and own
extended-stay hotel properties located in selected metropolitan areas. However,
we currently own no properties.
BUSINESS STRATEGIES
Our primary business objective is to maximize shareholder value by
maintaining long-term growth in cash distributions to our shareholders. To
achieve this objective, we will focus on maximizing the internal growth of our
portfolio by selecting properties that have strong cash flow growth potential.
We intend to pursue this objective by acquiring extended-stay hotel properties
for long-term ownership by purchasing properties in fee simple. Because we are
prohibited under the federal tax laws pertaining to qualifying as a real estate
investment trust from operating our extended stay hotel properties, we will
lease each of our hotel properties to Apple Suites Management or another lessee
for their management. We anticipate that substantially all of our hotel
properties will be leased to Apple Suites Management, a Virginia corporation,
the sole shareholder and chief executive officer of which is Glade M. Knight.
We will seek associations with distinctive brands in the extended-stay
hotel market. We are currently negotiating a license agreement and management
agreement with Promus Hotels, Inc. with respect to extended-stay hotel
properties we may purchase from Promus Hotels, Inc. These agreements would
permit us to have our properties identified as Homewood Suites(Reg. TM)
properties.
HOMEWOOD SUITES(Reg. TM)
Consistent with our strategy to invest in extended-stay hotel properties,
we are in the process of negotiating an agreement to purchase a number of
Homewood Suites(Reg. TM) properties from Promus Hotels, Inc. No agreement
presently exists. If we are successful in negotiating an agreement with Promus
Hotels, Inc., any such agreement would have a number of conditions to each
party's obligations thereunder, including our achieving the minimum offering of
1,666,666.67 common shares. Accordingly, there can be no assurance we will
purchase any Homewood Suites(Reg. TM) properties.
If we are successful in negotiating an agreement with Promus Hotels, Inc.
and are able to sell the minimum offering of 1,666,666.67 common shares, we
expect that we would purchase five Homewood Suites(Reg. TM) properties for
approximately $50,000,000. Since the net proceeds of the minimum offering would
be approximately $12,675,000, our ability to purchase five Homewood Suites(Reg.
TM) properties would depend on our ability to arrange financing for the balance
of the purchase price either from Promus Hotels, Inc. or a bank.
We have no commitments from either Promus Hotels, Inc. or a bank to provide
such financing and there can be no assurance that financing on acceptable terms
will be available. Furthermore, such financing, if available, would require the
approval of a majority of the independent directors if it would exceed the limit
on debt allowed in the bylaws in the absence of such approval.
There are currently more than 70 Homewood Suites(Reg. TM) properties in the
United States. Homewood Suites(Reg. TM) offers upscale, all-suites,
high-quality, residential-style lodging with a comprehensive package of guest
services and amenities, for extended-stay business and leisure travelers.
Homewood Suites(Reg. TM) properties are designed to meet the needs of the
business and leisure traveler whose stay is typically five nights or more.
Homewood Suites(Reg. TM) was designed for people working on field assignments,
relocating to a new community, attending seminars and conventions, participating
in corporate training programs, taking an extended vacation or attending a
family event.
Homewood Suites(Reg. TM) properties consist of suites built around a
central hospitality center or lodge. Homewood Suites(Reg. TM) provides spacious
residential-style quarters with separate living and sleeping areas large enough
for work, study, entertaining or relaxation. Each suite features a fully
equipped
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kitchen and worksite with two telephones featuring data ports and voice mail.
Each lodge or hospitality center features a complete executive center with fax
machine and photocopier in addition to an exercise center, swimming pool and
other recreational facilities.
Homewood Suites(Reg. TM) is a service mark owned by Promus Hotels, Inc.
Promus Hotels, Inc., its subsidiaries or affiliates also own the following
trademarks and service marks: Doubletree(Reg. TM), Doubletree Guests Suites(Reg.
TM), Club Hotel by Doubletree(Reg. TM) Hampton Inn(Reg. TM), Hampton Inn &
Suites(Reg. TM), Embassy Vacation RESORTs(Reg. TM) and Hampton Vacation Resorts.
SM Promus Hotels, Inc., its subsidiaries OR affiliates serve guests in more than
1,275 hotels and more than 186,000 rooms and suites. We are not affiliated with
Promus Hotels, Inc. or any of its affiliates.
DESCRIPTION OF LEASES
We expect to lease our properties to an operator under long-term leases. We
anticipate that substantially all of our properties will be leased to and
operated by Apple Suites Management on the following anticipated terms and
conditions.
TERM. We anticipate that each lease will provide for an initial term of
five years commencing on the date on which the property is acquired. Each lease
will provides the lessee with renewal options, provided that (a) the lessee will
not have the right to a renewal if there shall have occurred a change in the tax
law that would permit us to operate the hotel properties directly and (b) the
rent for each renewal term will be adjusted to reflect the then fair market
rental value of the property. If we are unable to agree upon the then fair
market rental value of a property, the lease will terminate upon the expiration
of the then current term and Apple Suites Management will have a right of first
refusal to lease the property from us on terms as we may have agreed upon with a
third-party lessee.
BASE RENT; PARTICIPATING RENT. Our rents will be based on a base amount and
a percentage of gross income. We anticipate that each lease will require the
lessee to pay (1) fixed monthly base rent, (2) on a monthly basis, the excess of
"participating rent" over base rent, with participating rent based on
percentages of room revenue, food and beverage revenue and telephone and other
revenue at each property, and (3) other amounts, including interest accrued on
any late payments or charges. Base rent may increase annually by a percentage
equal to the percentage increase in the consumer price index compared to the
prior year. Base rent will be payable monthly in advance. Participating rent may
be payable in arrears based on a monthly schedule adjusted to reflect the
seasonal variations in the property's revenue.
In addition to rent, the leases may require the lessee to pay many of the
following items: liability insurance; real estate and personal property taxes
and assessments; casualty insurance, including loss of income insurance; and all
costs and expenses and all utility and other charges incurred in the operation
of the properties. The leases may also provide for rent reductions and
abatements in the event of damage or destruction or a partial condemnation of
any property.
OTHER REAL ESTATE INVESTMENTS.
Although we anticipate that our focus will be on extended-stay hotel
properties our bylaws and articles of incorporation do not preclude us from
acquiring other residential properties. Although we currently own no properties
we may acquire other real estate assets including, but not limited to,
multi-family residential properties and other income producing properties in
addition to extended-stay hotel properties. The purchase of any property will be
based upon our perceived best interests and those of our shareholders.
Regardless of the mix of properties we may own, our primary business objective
is to maximize shareholder value by acquiring properties that have strong cash
flow growth potential.
LEGAL PROCEEDINGS
We are not presently subject to any material litigation. To our knowledge,
there is no material litigation threatened against us. We may become subject in
the future to litigation, including routine litigation arising in the ordinary
course of business.
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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 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.
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These assessments generally will not include soil sampling or subsurface
investigations.
Nevertheless, it is possible that these assessments will not reveal all
environmental liabilities or that there are unknown material environmental
liabilities. Moreover, we cannot guarantee that
-- future laws, ordinances or regulations will not require any material
expenditures by or impose any material liabilities in connection with
environmental conditions by or on us or our properties,
-- the environmental condition of a property we purchase will not be
adversely affected by residents and occupants of the property, by the
condition of properties in the vicinity, such as the presence of
underground storage tanks, or by unrelated third parties, or
-- prior owners of any property we purchase will not have created unknown
environmental problems.
We will endeavor to ensure our properties will be in compliance in all
material respects with all Federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products.
INSURANCE
We will carry comprehensive liability, fire, extended coverage and rental
loss insurance with respect to any property we acquire, with policy
specifications, insured limits and deductibles customarily carried for similar
properties. There are, however, certain types of losses, such as losses arising
from earthquakes or wars, that are not generally insured because they are either
uninsurable or not economically insurable. Should an uninsured loss or a loss in
excess of insured limits occur, we could lose our capital invested in the
affected property, as well as the anticipated future revenues from the property
and would continue to be obligated on any mortgage indebtedness or other
obligations related to the property. We could be adversely affected by any such
loss.
AVAILABLE INFORMATION
We have filed a registration statement, of which this prospectus is a part,
on Form S-11 with the Securities and Exchange Commission (the "Commission")
relating to this offering of common shares. This prospectus does not contain all
of the information in the registration statement and the exhibits and financial
statements included with the registration statement. If we describe the contents
of any contract or other document in this prospectus, the description may not
necessarily be a complete description. You should refer to the copy of the
document filed as an exhibit to the registration statement or incorporated by
reference for a complete description.
You can obtain copies of the registration statement and the exhibits for a
fee from the Commission at its principal office in Washington, D.C.
We will also file periodic reports, proxy statements and other information
with the Commission. You can review and copy these documents at the offices of
the Commission in Washington, D.C. and at the Commission's regional offices in
Chicago, Illinois and New York, New York. The Commission also maintains an
Internet web site that contains these documents and other information regarding
registrants that file electronically. The Internet address of the Commission's
web site is: http://www.sec.gov.
We will furnish our shareholders with annual reports containing financial
statements audited by our independent auditors.
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MANAGEMENT
We are managed by our board of directors, elected by our shareholders. The
directors are responsible for appointing our executive officers and for
determining our strategic direction. The executive officers serve at the
discretion of the board and are chosen annually by the board at its first
meeting following the annual meeting of shareholders. Currently, Glade M. Knight
is our sole director and executive officer. The following table sets forth the
names and ages of Mr. Knight and those additional persons who will be elected as
directors at the time of initial closing of the minimum 1,666,666.67 common
shares. All of the directors set forth in the following table, other than Mr.
Knight, will be independent directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ----- ---------------------------------------------
<S> <C> <C>
Glade M. Knight ............ 55 Chairman, Chief Executive Officer, President
and Secretary
Lisa B. Kern ............... 38 Director*
Bruce H. Matson ............ 41 Director*
Michael S. Waters .......... 44 Director*
Robert M. Wily ............. 49 Director*
</TABLE>
- ----------
* To be elected at initial closing.
GLADE M. KNIGHT. Mr. Knight is our chairman of the board, chief executive
officer and President. He is also the chief executive officer and sole
shareholder of Apple Suites Advisors, Apple Suites Realty and Apple Suites
Management.
Mr. Knight founded and serves as chairman of the board and president of
Apple Residential Income Trust, Inc. and Cornerstone Realty Income Trust, Inc.,
which are real estate investment trusts. Cornerstone Realty Income Trust, Inc.,
a publicly traded company, which began operations in 1993, acquires, owns and
operates apartment complexes in the mid-Atlantic and southeastern regions of the
United States. Apple Residential Income Trust, Inc., which began operations in
1996, acquires, owns and operates apartment complexes in Texas.
Mr. Knight is chairman of the board of trustees of Southern Virginia
College in Buena Vista, Virginia. Mr. Knight is also a member of the advisory
board to the Graduate School of Real Estate and Urban Land Development at
Virginia Commonwealth University. He has served on a National Advisory Council
for Brigham Young University and is a founding member of and active lecturer for
the university's Entrepreneurial Department of the Graduate School of Business
Management.
LISA B. KERN. Ms. Kern is a portfolio manager and vice president of
Davenport & Co., LLC, an investment banking firm, in Richmond, Virginia.
Previously, Ms. Kern was a Vice president with Crestar Bank's Trust and
Investment Management Group from 1989 to 1996. Ms. Kern 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.
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.
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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 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.
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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 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
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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.
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 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.
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The Directors' Plan provides for the following automatic option awards:
(1) As of the initial closing of the common shares, each eligible
director will receive an option to purchase 5,500 shares plus 0.0125% of the
number of shares in excess of the minimum offering sold by the initial
closing.
(2) As of each June 1 during the years 2000 through 2004 (inclusive),
each eligible director shall automatically receive an option to purchase
0.02% of the number of common shares issued and outstanding on that date.
(3) As of the election as a director of any new person who qualifies as
an eligible director, the eligible director will automatically receive an
option to purchase 5,000 Shares.
The purpose of the Directors' Plan is to enhance the identification of the
participating directors' interests with those of the shareholders.
The exercise price for each option granted under the Directors' Plan will
be 100% of the fair market value on the date of grant; no consideration will be
paid to us for the granting of the option. Options granted under the Directors'
Plan will have a term of 10 years and will be fully exercisable six months after
the date of grant. If an optionee ceases to serve as a director prior to the
expiration of the six-month period following the date of grant, the option will
terminate on the date of termination of service as a director. If an optionee
ceases to serve as a director after the expiration of the six-month period
following the date of grant, the option will terminate three years after the
date of termination of service, or on expiration of the option, whichever is
earlier.
Options granted under the Directors' Plan are non-transferable other than
by will or the laws of descent and distribution upon the death of the optionee
and, during the lifetime of the optionee, are exercisable only by him. Payment
upon exercise of an option under the Directors' Plan may be made in cash or with
our common shares of equivalent value.
The board of directors may suspend or discontinue the Directors' Plan or
revise or amend the Plan in any respect; provided, however, that without
approval of the shareholders no revision or amendment may increase the number of
common shares subject to the Plan or materially increase the benefits accruing
under the Plan. In addition, the Directors' Plan may not be amended more than
once every six months other than to comply with changes in the Internal Revenue
Code or ERISA.
STOCK OPTION GRANTS
As of the date of this prospectus, there have been no grants under the
Incentive Plan or the Directors' Plan.
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APPLE SUITES ADVISORS, INC. AND AFFILIATES
GENERAL
On or before the initial closing of the minimum offering of $15,000,000, we
will enter into an advisory agreement with Apple Suites Advisors, who will,
among other things, seek to obtain, investigate, evaluate and recommend property
investment opportunities for us, serve as property investment advisor and
consultant in connection with investment policy decisions made by the board of
directors and, subject to its direction, supervise our day-to-day operations.
Apple Suites Advisors is a Virginia corporation all of the common shares of
which are owned by Glade M. Knight. Glade M. Knight is the sole director of
Apple Suites Advisors and also its sole officer.
The term "affiliate" as used in this document refers generally to a person
or entity which is related to another specific person or entity through common
control, through significant (10% or more) equity ownership, or by serving as an
officer or director with the specified entity. Affiliates of Apple Suites
Advisors include Apple Suites Realty and Glade M. Knight.
THE ADVISORY AGREEMENT
The advisory agreement will have a five-year term and will be renewable for
additional two-year terms thereafter by the board of directors. The advisory
agreement provides that it may be terminated at any time by a majority of the
independent directors or Apple Suites Advisors upon 60 days' written notice.
Under the advisory agreement, Apple Suites Advisors undertakes to use its best
efforts (1) to supervise and arrange for the day-to-day management of our
operations and (2) to assist us in maintaining a continuing and suitable
property investment program consistent with our investment policies and
objectives. Under the advisory agreement, generally, Apple Suites Advisors is
not required to, and will not, advise us on investments in securities, i.e., the
temporary investment of offering proceeds pending investment of those proceeds
in real property. It is expected that we will generally make our own decisions
with respect to temporary investments.
Pursuant to the advisory agreement, Apple Suites Advisors will be entitled
to an annual asset management fee. The asset management fee is payable quarterly
in arrears. The amount of the asset management fee is a percentage of the amount
raised in this offering. The applicable percentage used to calculate the asset
management fee is based on the ratio of funds from operations to the amount
raised in this offering for the preceding calendar quarter. This ratio is
referred to as the "return ratio." The per annum asset management fee is
initially equal to the following with respect to each calendar quarter:
o 0.1% if the return ratio for the preceding calendar quarter is 6% or
less;
o 0.15% if the return ratio for the preceding calendar quarter is more than
6% but not more than 8%; and
o 0.25% if the return ratio for the preceding calendar quarter is above 8%.
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
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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.
Unless the independent directors conclude that a higher level of expenses
is justified based upon unusual and nonrecurring factors which they deem
sufficient, Apple Suites Advisors must reimburse us for the amount of any excess
operating expenses. It must make reimbursement within 120 days from the end of
our fiscal year. Apple Suites Advisors will be entitled to be repaid
reimbursements in succeeding fiscal years to the extent actual operating
expenses are less than the permitted levels. In determining that unusual and
nonrecurring factors are present, the independent directors will be entitled to
consider all relevant factors pertaining to our business and operations, and
will be required to explain their conclusion in written disclosure to the
shareholders. Apple Suites Advisors generally would expect to pay any required
reimbursement out of compensation received from us in the current or prior
years. However, there can be no assurance that it would have the financial
ability to fulfill its reimbursement obligations.
Our bylaws further prohibit the total organizational and offering expenses,
including selling commissions from exceeding 15% of the amount raised in this
offering. Furthermore, the total of all acquisition fees and acquisition
expenses paid by us in connection with the purchase of a property by us shall be
reasonable and shall in no event exceed an amount equal to 6% of the contract
price for the property, unless a majority of the board of directors, including a
majority of the independent directors, not otherwise interested in the
transaction approves the transaction as being commercially competitive, fair and
reasonable to us. For purposes of this limitation, the "contract price for the
property" means the amount actually paid or allocated to the purchase,
development, construction or improvement of the property, exclusive of
acquisition fees and acquisition expenses. Any organizational and offering
expenses or acquisition fees and acquisition expenses incurred by us in excess
of the permitted limits shall be payable by Apple Suites Advisors immediately
upon our demand.
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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 property does not equal the
required amount, no real estate commission is payable, but Apple Suites Realty
is still entitled to payment from us of its "direct costs" incurred in marketing
the property. "Direct costs" refers to a reasonable allocation of all costs,
including salaries of personnel, overhead and utilities, allocable to services
in marketing a property. If the person from whom we purchase or to whom we sell
a property pays any fee to Apple Suites Realty that amount will decrease the
amount of our obligation to Apple Suites Realty. The agreement will have an
initial term of five years and will renew automatically for successive terms of
five years unless either party to the agreement elects not to renew by notice
sent to the other party within 60 days before the end of any term.
This discussion is only a summary of the Property Acquisition/Disposition
Agreement. A copy of the form of Property Acquisition/Disposition Agreement has
been filed as an exhibit to the registration statement of which this prospectus
is a part. Please refer to the agreement for a complete description of its
provisions.
Subject to the conditions applicable generally to transactions between us
and affiliates of Apple Suites Advisors, Apple Suites Realty or an affiliate may
render services to us in connection with our financings or refinancings, and
would be entitled to compensation for those services. As of the date of this
prospectus, there are no specific agreements for any of these services.
PRIOR PERFORMANCE OF PROGRAMS SPONSORED BY GLADE M. KNIGHT
The following paragraphs contain information on prior programs sponsored by
Glade M. Knight to invest in real estate. This discussion is a narrative summary
of Mr. Knight's experience with all other programs sponsored by him, both public
and nonpublic, that have invested in real estate regardless of the investment
objectives of the program. The information set forth is current as of June 15,
1999. This information should not be considered to be indicative of our
capitalization or operations. Purchasers of our common shares will not have any
interest in the entities referred to in this section or in any of the properties
owned by those entities.
PRIOR REITS - CORNERSTONE AND APPLE RESIDENTIAL
Mr. Knight was responsible for the organization of Cornerstone Realty
Income Trust, Inc. ("Cornerstone"), a real estate investment trust organized to
acquire, own and operate apartment complexes in the mid-Atlantic and
southeastern regions of the country. Mr. Knight is the chairman, chief
executive officer and president of Cornerstone. Between December 1992 and
October 1996,
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Cornerstone sold approximately $300 million in common shares in a continuous
best-efforts offering to approximately 12,000 investors. Since that initial
offering, Cornerstone has completed additional firm-commitment offerings.
Cornerstone currently has approximately 20,000 investors and its common shares
are traded on the New York Stock Exchange under the symbol "TCR." The net
proceeds of the Cornerstone best-efforts public offering and subsequent
offerings were used to acquire apartment communities in Virginia, North and
South Carolina, and Georgia. Cornerstone currently owns 58 apartment
communities. We will, upon request of any investor or prospective investor,
provide at no cost a copy of the most recent Report on Form 10-K filed by
Cornerstone with the Securities and Exchange Commission. For a reasonable
charge, We will also provide copies of the exhibits to the Report on Form 10-K.
In addition, Mr. Knight was responsible for the organization of Apple
Residential Income Trust, Inc. ("Apple Residential"), a real estate investment
trust organized to acquire, own and operate apartment complexes in the
southwestern region of the country. Mr. Knight is the chairman, chief executive
officer and president of Apple Residential. Between January 1997 and February
1999, Apple Residential sold approximately $300 million in common shares in a
continuous best-effort offering to approximately 11,000 investors. The net
proceeds of the Apple Residential public offering were used to acquire 28
apartment communities in Texas. We will, upon request of any investor or
prospective investor, provide at no cost a copy of the most recent Report on
Form 10-K filed by Apple Residential with the Securities and Exchange
Commission. For a reasonable charge, We will also provide copies of the exhibits
to the Report on Form 10-K.
Proposed merger of Cornerstone and Apple Residential. On March 30, 1999,
Cornerstone and Apple Residential announced that they had entered into a
definitive merger agreement. Under this agreement, Apple Residential would merge
into a subsidiary of Cornerstone. Cornerstone would survive as a corporation and
Apple Residential would cease to exist. The merger is subject to the approval of
Cornerstone's and Apple's shareholders, as well as other customary closing
conditions.
ADDITIONAL INFORMATION ON CORNERSTONE AND APPLE RESIDENTIAL ACQUISITIONS
Part II of our registration statement (which is not a part of this
prospectus) contains a more detailed summary of the 58 property acquisitions by
Cornerstone and 25 property acquisitions by Apple Residential which occurred on
or before December 31, 1998. Neither Cornerstone nor Apple Residential has sold
any properties. We will provide a copy of the summary without charge upon
request of any investor or prospective investor.
PRIOR PARTNERSHIPS
Mr. Knight, between 1981 and 1987, organized 40 partnerships for the
purpose of investing in real estate. Interests in 38 of these partnerships, in
which Mr. Knight served as a general partner and all but one of which were
limited partnerships, were sold to investors in privately-offered transactions.
Two of the partnerships were publicly-offered.
PUBLICLY-OFFERED PARTNERSHIPS
Two partnerships sponsored by Mr. Knight were issuers in public offerings
of assignee units of limited partnership interest. One publicly-offered
partnership, Southeastern Income Properties Limited Partnership ("Southeastern
I"), was organized in 1987 and raised $25,000,000 from 2,714 investors.
Southeastern I acquired four apartment complexes comprising 833 apartment units.
The other publicly-offered partnership, Southeastern Income Properties II
Limited Partnership ("Southeastern II"), was also organized in 1987 and raised
$17,883,780 from 1,710 investors. Southeastern II acquired four apartment
complexes comprising 794 apartment units. The aggregate cost of the eight
properties purchased by Southeastern I and Southeastern II, including capital
improvements thereto, was approximately $41,178,606. The affiliates of Mr.
Knight which originally served as the general partners for these two
partnerships transferred management control over these partnerships to a third
party in February 1992 by converting to limited partner status. Thus, affiliates
of Mr. Knight ceased to serve as the general partners.
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PRIVATELY-OFFERED PARTNERSHIPS
The 38 privately-offered partnerships were all organized in the 1980's, and
a majority of them were organized before 1985. The privately-offered
partnerships collectively owned and operated 40 apartment complexes with a total
of 5,972 apartment units and one motel with 144 rooms. A total of 733 investors
in these partnerships contributed an aggregate of approximately $47,788,965 to
the capital of the partnerships. The aggregate cost of the 41 properties
purchased by these 38 privately-offered partnerships was approximately
$129,088,000. All of the privately-offered partnerships were formed before and
had investment objectives dissimilar to those of Apple Suites, Inc. The
dissimilar nature of the investment objectives is described below in this
section.
The privately-offered partnerships used borrowing which varied from
substantial to 100% of required funds in the acquisition of their properties. In
addition, a significant objective of the privately-offered partnerships was the
realization of tax losses which could be used to offset some or all of
investors' other sources of income. The investment objectives of these
partnerships were dissimilar to our investment objectives in that we do not seek
to generate tax losses based in part on high levels of borrowing. Rather, we
seek to realize increasing cash distribution to shareholders with no or low
levels of debt.
Certain Bankruptcy Reorganizations. Seven of these partnerships with
investment objectives dissimilar to ours filed for reorganization under Chapter
11 of the United States Bankruptcy Code. Five of these seven partnerships
subsequently reached agreements with their lenders to allow foreclosure on their
properties on terms which were more favorable to the partnerships than were
available before the filing of the petition for reorganization. The other two of
the seven partnerships emerged from their chapter 11 reorganizations with
restructured debt. In addition, two other partnerships in which Mr. Knight
formerly served as a general partner filed for reorganization under Chapter 11
of the United States Bankruptcy Code within two years after Mr. Knight ceased to
serve as general partner.
Certain Foreclosures. Six of the dissimilar partnerships acquiesced to
negotiated foreclosures on their properties upon terms which were more favorable
to the partners than would have been available in the absence of negotiation.
Causes and Effects of Bankruptcies and Foreclosures. Each of the
partnerships described in the preceding two paragraphs owned a single property,
and the adverse business development affecting the partnership therefore
resulted in the partnership ceasing all cash distributions to investors. Mr.
Knight believes the bankruptcy filings and foreclosures described above were
attributable to a combination of high borrowing, a downturn in economic
conditions generally and the real estate industry in particular, a fundamental
change in tax laws, which decreased the perceived value of real estate to
potential buyers and lenders, and the unavailability of favorable financing. As
a result of these factors, each of the partnership was unable to meet debt
obligations or dispose of its property on terms that would allow repayment of
its debt obligations.
Mr. Knight does not expect that the combination of factors applicable to
the privately-offered partnerships will be applicable to our operations. The
privately-offered partnerships that experienced adverse business developments
were "tax-shelter" investments, a principal objective of which was to generate
tax losses for investors. A large portion of the tax losses resulted from
interest deductions on mortgage debt on the properties. Since more mortgage debt
resulted in higher tax losses to investors, there was an incentive to place a
large amount of debt on the properties. We do not have as an objective, and as a
real estate investment trust we cannot generate tax losses for shareholders. Our
policy is to own properties on an all-cash basis, or use limited interim
borrowing to be repaid with proceeds from this offering.
The properties owned by the privately-offered partnerships were purchased
by those partnerships when federal income tax laws permitted partnership
investors to use partnership losses to offset their income from other sources.
When this law was changed in 1986 to, in effect, prohibit the use of such
losses, the value of such real estate decreased, making sale or refinancing of
the properties at an amount sufficient to pay off the high mortgage debt
difficult or impossible. Again, since our objectives do not include the
generation of tax losses to shareholders, we do not expect this to be a risk for
us.
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In the private partnerships, the generation of tax losses was in general a
much more important investment objective than the making of cash distributions
to partners, either from operations or property dispositions. Our principal
business objective is to maximize shareholder value by achieving long-term
growth in cash distributions to our shareholders, and we do not plan to generate
tax losses for investors. The fact that our investment objectives are radically
different from those of the privately-offered partnerships means that we expect
key operating policies (such as the amount of debt) to be substantially
different and that the basic causes of the operating difficulties of the
privately-offered partnerships should not be present in our operations.
Finally, the privately-offered partnerships, which incurred much debt, had
little equity investment (some had no equity investment while the equity
investment in others was less than $1 million). The privately-offered
partnerships had no property diversification and small, if any, reserves to fund
operational difficulties. Even if only our minimum offering is raised, we expect
to have some property diversification and a reasonable reserve fund. To the
extent more than our minimum offering is raised, property diversification and
reserve amounts will increase.
As of June 15, 1999, Mr. Knight had ceased to hold an interest in all but
one of the 40 partnerships sponsored by him. That one partnership is Liberty
West Apartments Limited Partnership, which owns a single residential apartment
complex. Mr. Knight has entered into a contract for the sale of his interest in
that partnership.
ADDITIONAL INFORMATION ON PRIOR PROGRAMS
Prospective investors should also refer to the tabular information on prior
programs sponsored by Mr. Knight appearing under the heading "Experience of
Prior Programs" in this prospectus.
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PRINCIPAL AND MANAGEMENT SHAREHOLDERS
Beneficial ownership of our common shares, and options to purchase our
common shares, held by our directors and officers as of the date of this
prospectus, are indicated in the table below. Each person named in the table has
sole voting and investment powers as to the shares or shares those powers with
his spouse and minor children, if any.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF AGGREGATE
NAME BENEFICIALLY OWNED OUTSTANDING SHARES OWNED
- ----------------------------- -------------------- -------------------------
<S> <C> <C>
Apple Suites Advisors, Inc. 10 100%
</TABLE>
Mr. Knight is the sole shareholder of Apple Suites Advisors In addition to
the foregoing, Glade M. Knight, who is our director, chairman of the board and
president, will own 202,500 Class B convertible shares. In addition, Mr. Stanley
J. Olander, Jr. and Ms. Debra A. Jones, business associates of Mr. Knight, will
each own 18,750 Class B convertible shares. The Class B convertible shares are
convertible into common shares pursuant to the formula and on the terms and
conditions set forth below. We plan to issue the Class B convertible shares to
Mr. Knight and others on or before the initial closing of the minimum offering
of $15,000,000, in exchange for the payment by them of $0.10 per Class B
convertible share, or an aggregate of $24,000.
There are no dividends payable on the Class B convertible shares. Upon our
liquidation, the holder of the Class B convertible shares is entitled to a
liquidation payment of $0.10 per Class B convertible share before any
distribution of liquidation proceeds to the holders of the common shares.
Holders of more than two-thirds of the Class B convertible shares must approve
any proposed amendment to the Articles of incorporation that would adversely
affect the Class B convertible shares. The Class B convertible shares are
convertible into common shares upon and for 180 days following the occurrence of
either of the following events: (1) substantially all of our assets, stock or
business is sold or otherwise transferred, whether through sale, exchange,
merger, consolidation, lease, share exchange or otherwise, or (2) the Advisory
Agreement with Apple Suites Advisors is terminated or not renewed. Upon the
occurrence of either triggering event, each Class B convertible share is
convertible into a number of common shares based upon the gross proceeds raised
through the date of conversion in the offering made by this prospectus according
to the following formula:
<TABLE>
<CAPTION>
GROSS PROCEEDS RAISED FROM NUMBER OF COMMON SHARES
SALES OF COMMON SHARES THROUGH THROUGH CONVERSION OF ONE
DATE OF CONVERSION CLASS B CONVERTIBLE SHARE
- --------------------------------- --------------------------
<S> <C>
$50 million ................... 1.0
$100 million .................. 2.0
$150 million .................. 3.5
$200 million .................. 5.3
$250 million. ................. 6.7
$300 million .................. 8.0
</TABLE>
No additional consideration is due upon the conversion of the Class B
convertible shares. The conversion into common shares of the Class B convertible
shares will result in dilution of the shareholders' interests.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of material federal income tax considerations that
may be relevant to a holder of common shares is based on current law and is not
intended as tax advice. The statements of law and legal conclusions set forth in
this summary represents the opinion of McGuire, Woods, Battle & Boothe LLP,
special tax counsel to Apple Suites, Inc. The following discussion, which is not
exhaustive of all possible tax considerations, does not include a detailed
discussion of any state, local or foreign tax considerations. Nor does it
discuss all of the aspects of federal income taxation that
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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 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.
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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
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
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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 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.
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
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interests in real property, shares in other REITs and certain options, but
excluding mineral, oil or gas royalty interests. The temporary investment of new
capital in debt instruments also qualifies under this 75% asset test, but only
for the one-year period beginning on the date we receive the new capital.
Second, although the balance of our assets generally may be invested
without restriction, we will not be permitted to own (1) securities of any one
non-governmental issuer that represent more than 5% of the value of our total
assets or (2) more than 10% of the outstanding voting securities of any single
issuer. A REIT, however, may own 100% of the stock of a qualified REIT
subsidiary, in which case the assets, liabilities and items of income, deduction
and credit of the subsidiary are treated as those of the REIT. In evaluating a
REIT's assets, if the REIT invests in a partnership, it is deemed to own its
proportionate share of the assets of the partnership. We expect to satisfy these
asset tests.
ANNUAL DISTRIBUTIONS TO SHAREHOLDERS To maintain REIT status, we generally
must distribute to our shareholders in each taxable year at least 95% of our net
ordinary income. More precisely, we must distribute an amount equal to (1) 95%
of the sum of (a) our REIT taxable income before deduction of dividends paid and
excluding any net capital gain and (b) any net income from foreclosure property
less the tax on the income, minus (2) limited categories of excess noncash
income (including, cancellation of indebtedness and original issue discount
income).
REIT taxable income is defined to be the taxable income of the REIT,
computed as if it were an ordinary corporation, with modifications. For example,
the deduction for dividends paid is allowed, but neither net income from
foreclosure property, nor net income from prohibited transactions, is included.
In addition, the REIT may carry over, but not carry back, a net operating loss
for 20 years following the year in which it was incurred.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with dividends paid after the end of the taxable year if the
dividends fall within one of the following categories:
-- Dividends paid in January that were declared during the last calendar
quarter of the prior year and were payable to shareholders of record on a
date during the last calendar quarter of that prior year are treated as
paid in the prior year for ourselves and our shareholders.
-- Dividends declared before the due date of our tax return for the taxable
year (including extensions) also will be treated as paid in the prior
year for ourselves if they are paid (1) within 12 months of the end of
the taxable year and (2) no later than our next regular distribution
payment.
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.
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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;
-- 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:
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-- Dividends declared during the last quarter of a calendar year and
actually paid during January of the immediately following calendar year
are generally treated as if received by the shareholders on December 31
of the calendar year during which they were declared.
-- Distributions paid to shareholders will not constitute passive activity
income, and as a result generally cannot be offset by losses from passive
activities of a shareholder who is subject to the passive activity rules.
-- Distributions we designate as capital gains dividends generally will be
taxed as long term capital gains to shareholders to the extent that the
distributions do not exceed our actual net capital gain for the taxable
year. Corporate shareholders may be required to treat up to 20% of any
capital gains dividends as ordinary income.
-- If we elect to retain and pay income tax on any net long-term capital
gain, our shareholders would include in their income as long-term capital
gain their proportionate share of net long-term capital gain. Our
shareholders would receive a credit for the shareholder's proportionate
share of the tax paid by us on retained capital gains and an increase in
basis in their shares in an amount equal to the difference between the
undistributed long-term capital gains and the amount of tax we paid.
-- Any distributions we make, whether characterized as ordinary income or as
capital gains, are not eligible for the dividends received deduction for
corporations.
-- Shareholders are not permitted to deduct our losses or loss
carry-forwards.
We may generate cash in excess of our net earnings. If we distribute cash
to our shareholders in excess of our current and accumulated earnings and
profits, other than as a capital gain dividend, the excess cash will be deemed
to be a return of capital to each shareholder to the extent of the adjusted tax
basis of the shareholder's shares. Distributions in excess of the adjusted tax
basis will be treated as gain from the sale or exchange of the shares. A
shareholder who has received a distribution in excess of our current and
accumulated earnings and profits may, upon the sale of the shares, realize a
higher taxable gain or a smaller loss because the basis of the shares as reduced
will be used for purposes of computing the amount of the gain or loss.
Generally, gain or loss realized by a shareholder upon the sale of common
shares will be reportable as capital gain or loss. If a shareholder receives a
long-term capital gain dividend and has held the shares for six months or less,
any loss incurred on the sale or exchange of the shares is treated as a
long-term capital loss to the extent of the corresponding long-term capital gain
dividend received.
In any year in which we fail to qualify as a REIT, our shareholders
generally will continue to be treated in the same fashion described above,
except that none of our dividends will be eligible for treatment as capital
gains dividends, corporate shareholders will qualify for the dividends received
deduction and the shareholders will not be required to report any share of our
tax preference items.
BACKUP WITHHOLDING
We will report to our shareholders and the IRS the amount of dividends paid
during each calendar year and the amount of tax withheld, if any. If a
shareholder is subject to backup withholding, we will be required to deduct and
withhold from any dividends payable to that shareholder a tax of 31%. These
rules may apply in the following circumstances:
-- 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.
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A shareholder that does not provide a correct taxpayer identification
number may also be subject to penalties imposed by the IRS. Any amount withheld
as backup withholding may be credited against the shareholder's federal income
tax liability. We also may be required to withhold a portion of capital gain
distributions made to shareholders who fail to certify their non-foreign status.
The United States Treasury has recently issued final regulations regarding
the withholding and information reporting rules discussed above. In general, the
final regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and clarify
reliance standards. The final regulations are generally effective for payments
made on or after January 1, 2001, subject to transition rules. Prospective
investors should consult their own tax advisors concerning the adoption of the
final regulations and the potential effect on their ownership of common shares.
TAXATION OF TAX EXEMPT ENTITIES
In general, a tax exempt entity that is a shareholder will not be subject
to tax on distributions with respect to our shares or gain realized on the sale
of our shares. In Revenue Ruling 66-106, the IRS confirmed that a REIT's
distributions to a tax exempt employees' pension trust did not constitute
unrelated business taxable income ("UBTI"). A tax exempt entity may be subject
to UBTI, however, to the extent that it has financed the acquisition of its
shares with acquisition indebtedness within the meaning of the Code. The Revenue
Reconciliation Act of 1993 has modified the rules for tax exempt employees'
pension and profit sharing trusts which qualify under section 401(a) of the Code
and are exempt from tax under section 501(a) of the Code for tax years beginning
after December 31, 1993. In determining the number of shareholders a REIT has
for purposes of the "50% test" described above, any stock held by a qualified
trust will be treated as held directly by its beneficiaries in proportion to
their actuarial interests in the trust and will not be treated as held by the
trust.
A qualified trust owning more than 10% of a REIT may be required to treat a
percentage of dividends from the REIT as UBTI. The percentage is determined by
dividing the REIT's gross income, less direct expenses related thereto, derived
from an unrelated trade or business for the year (determined as if the REIT were
a qualified trust) by the gross income of the REIT for the year in which the
dividends are paid. However, if this percentage is less than 5%, dividends are
not treated as UBTI. These UBTI rules apply only if the REIT qualifies as a REIT
because of the change in the 50% test discussed above and if the trust is
predominantly held by qualified trusts. A REIT is predominantly held by
qualified trusts if at least one pension trust owns more than 25% of the value
of the REIT or a group of pension trusts each owning more than 10% of the value
of the REIT collectively own more than 50% of the value of the REIT.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code, respectively, income from an investment our securities will constitute
UBTI unless the organization is able to deduct an amount properly set aside or
placed in reserve for certain purposes so as to offset the unrelated business
taxable income generated by the investment our securities. These prospective
investors should consult their own tax advisors concerning the set aside and
reserve requirements.
TAXATION OF FOREIGN INVESTORS
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders are complex. Prospective Non-U.S. Shareholders should consult with
their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in common shares, including any
reporting requirements, as well as the tax treatment of an investment under the
laws of their home country.
STATE AND LOCAL TAXES
We may be subject to state or local taxation in various state or local
jurisdictions, including those in which we transact business. In addition, our
shareholders may also be subject to state or local taxation. Consequently,
prospective shareholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in our securities.
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ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement employee benefit plan,
individual retirement account ("IRA"), or Keogh Plan (each, a "Plan") subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
should consider the fiduciary standards under ERISA in the context of the Plan's
particular circumstances before authorizing an investment of a portion of a
Plan's assets in common shares. In particular, the fiduciary should consider:
-- whether the investment satisfies the diversification requirements of
Section 404(a)(1)(c) of ERISA,
-- whether the investment is in accordance with the documents and
instruments governing the Plan as required by Section 404(a)(1)(D) of
ERISA,
-- whether the investment is for the exclusive purpose of providing benefits
to participants in the Plan and their beneficiaries, or defraying
reasonable administrative expenses of the Plan, and
-- whether the investment is prudent under ERISA.
In addition to the general fiduciary standards of investment prudence and
diversification, specific provisions of ERISA and the Internal Revenue Code of
1986 (the "Code") prohibit a wide range of transactions involving the assets of
a Plan and transactions with persons who have specified relationships to the
Plan. These persons are referred to as "parties in interest" in ERISA and as
"disqualified persons" in the Code. Thus, a fiduciary of a Plan considering an
investment in common shares should also consider whether acquiring or continuing
to hold common shares, either directly or indirectly, might constitute a
prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the
"Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under these Regulations, if a Plan acquires an equity interest that is
neither a "publicly offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, as amended, then
for purposes of fiduciary and prohibited transaction provisions under ERISA and
the Code, the assets of the Plan would include both the equity interest and an
undivided interest in each of the entity's underlying assets, unless an
exemption applies.
The Regulations define a publicly-offered security as a security that is:
-- "widely held"
-- "freely transferable," and
-- either part of a class of securities registered under the Exchange Act,
or sold pursuant to an effective registration statement under the
Securities Act, provided the securities are registered under the Exchange
Act within 120 days after the end of the fiscal year of the issuer during
which the offering occurred.
The Regulations provide that a security is "widely held" only if it is part
of a class of securities that is owned by 100 or more investors independent of
the issuer and of one another. However, a security will not fail to be "widely
held" if the 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
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restrictions that apply to the common shares held by us, or which may be derived
from contractual arrangements requested by David Lerner Associates in connection
with common shares are unlikely to result in the failure of the common shares to
be "freely transferable." Nonetheless, no assurance can be given that the DOL
and/or the U.S. Treasury Department could not reach a contrary conclusion.
Finally, the common shares offered are securities that will be registered under
the Securities Act and are or will be registered under the Exchange Act.
Assuming that the common shares satisfy the definition of publicly-offered
securities, described above, the underlying assets will not be deemed to be
"plan assets" of any Plan that invests in the securities offered in this
prospectus.
Notwithstanding the above, the Regulations provide that even if a security
offered hereunder were not a publicly-traded security, investment by a Plan
would not include the underlying assets if equity participation by benefit plan
investors will not be significant. Under the Regulations, equity participation
is significant if 25 percent or more in the security is held by benefit plan
investors. The term "benefit plan investors" generally includes the plans
described above.
CAPITALIZATION
Our capitalization as of March 31, 1999, and as adjusted to reflect the
issuance and sale of the common shares offered assuming the minimum offering and
maximum offering and after deducting anticipated offering expenses, selling
commissions and the marketing expense allowance is as follows:
<TABLE>
<CAPTION>
AS ADJUSTED
-------------------------------------------
MINIMUM MAXIMUM
ACTUAL OFFERING OFFERING
-------- -------------- ---------------
<S> <C> <C> <C>
Common Shares; no par value; 10 shares
issued, 1,666,666.67 and 30,166,666.67 shares
issued as adjusted, respectively ............ $100 $13,050,100 $268,500,100
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were organized on March 5, 1999 and have no significant operations to
date. In addition, we currently own no properties. We intend to qualify as a
REIT under the Internal Revenue Code.
The proceeds of this offering and the cash flow generated from properties
we will acquire and any short term investments will be our principal source of
liquidity. In addition, we may borrow funds, subject to the approval of our
board of directors.
On April 20, 1999, we obtained a line of credit in a principal amount of up
to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all accrued interest are due in
full on October 20, 1999. Glade M. Knight, our president and Chairman of the
Board, has guaranteed repayment of the loan. We expect to repay this debt with
proceeds from the sale of common shares.
We anticipate that our cash flow will be adequate to cover our operating
expenses and to permit us to meet our anticipated liquidity requirements,
including distribution requirements. Inflation may increase our operating costs,
including our costs on bank borrowings, if any.
We intend to establish a working capital reserve of at least 0.5% of the
proceeds from this offering. This reserve, in combination with income from our
properties and short term investments, is anticipated to satisfy our liquidity
requirements.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. We will evaluate
systems we may employ to determine if any of the computer programs or hardware
that may be purchased have date-sensitive software or embedded chips that
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
We will undertake several initiatives to address the Year 2000 issue after
we commence operations. As part of our hotel acquisition due diligence process,
we will perform assessments of the information technology ("IT") and non-IT
systems of potential acquisitions for Year 2000 compliance. We will perform
similar assessments for any IT and non-IT systems that will be acquired for
internal use. In situations where these assessments indicate non-compliance with
Year 2000 issues a program of remediation, testing and implementation will be
developed and performed. We will request assurances from Apple Suites Advisors,
Apple Suites Realty and Apple Suites Management that, as they implement IT and
non-IT systems. They also implement appropriate steps to ensure that they
address the Year 2000 issue.
We will also assess the Year 2000 compliance of vendors and other external
relationships to determine the extent to which we may be vulnerable to these
parties' failure to resolve their own Year 2000 issues. We cannot ensure timely
compliance of third parties and; therefore, could be adversely affected by
failure of a significant third party to become Year 2000 compliant. We cannot
estimate the effect, if any, on us from the failure of third parties to be Year
2000 compliant.
These initiatives may not detect all Year 2000 issues. We will along with
Apple Suites Advisors, Apples Suites Realty and Apple Suites Management, Inc.
develop contingency plans intended to mitigate the possible disruption in
business operations that may result from the Year 2000 issue. We believe a worst
case scenario may be a lack of readiness by electrical and water utilities,
financial institutions, governmental agencies or other providers of general
infrastructure which could pose significant impediments to our ability to carry
on our normal operations. We have not incurred any cost to date implementing the
Year 2000 initiatives and do not believe the cost of implementation will be
material.
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PLAN OF DISTRIBUTION
We are offering to sell the common shares using the service of David Lerner
Associates, Inc. as the managing dealer, and other broker-dealers selected by
the managing dealer. The common shares are being offered on a "best efforts"
basis, meaning that the managing dealer and other broker-dealers are not
obligated to purchase any common shares. No common shares will be sold unless at
least a minimum of 1,666,666.67 shares has been sold no later than one year
after the date of this prospectus. Our officers and directors and those of Apple
Suites Advisors, Apple Suites Realty and Apple Suites Management will not be
permitted to purchase common shares in order to reach the minimum offering of
1,666,666.67 common shares. If the minimum offering of shares is not sold by
that date, the offering will terminate and all funds deposited by investors into
the interest-bearing escrow account will be promptly refunded in full, with
interest. First Union National Bank will act as escrow agent for the escrow
account until the minimum offering of shares is sold.
The common shares are offered at $9 per share until the minimum offering of
$15,000,000 in shares is achieved and the minimum 1,666,666.67 common shares
have been sold. Thereafter, the common shares will be offered at $10 per share.
The offering of common shares is expected to terminate when all shares
offered by this prospectus have been sold or one year from the date hereof,
unless extended by us for up to an additional year in order to achieve the
maximum offering of 30,166,666.67 common shares. In some states, extension of
the offering may not be allowed, or may be allowed only upon the filing of a new
application with the appropriate state administrator.
Purchasers will be sold common shares at one or more closings. Following
the sale of the minimum offering, additional closings will be held monthly
during the offering period as orders are received. The final closing will be
held shortly after the termination of the offering period or, if earlier, upon
the sale of all the common shares. It is expected that after the INITIAL closing
of the sale of the minimum offering, purchasers will be sold common shares no
later than the last day of the calendar month following the month in which their
orders are received. Funds received during the offering but after the initial
disbursement of funds will be held in escrow for the benefit of purchasers until
the next closing, and then disbursed to us.
In no event are we required to accept the subscription of any prospective
investor, and no subscription shall become binding on us until a properly
completed subscription agreement prepared and executed by the prospective
investor has been accepted by our duly authorized representative. We will either
accept or reject each subscription within four business days from the receipt of
the subscription by David Lerner Associates, Inc. OR other broker-dealer.
We intend to hold investors' funds in escrow in an interest-bearing account
with First Union National Bank until the minimum offering of 1,666,666.67 common
shares is achieved and the initial closing has occurred. The account will pay
interest to investors from the date the investor's funds are received until the
date of the initial closing. First Union National Bank will remit the aggregate
interest on escrowed funds to David Lerner Associates, Inc., and David Lerner
Associates, Inc. will pay the individual investors their interest. After the
initial closing, investors' funds will be held in an interest-bearing account
with David Lerner Associates, Inc. or other broker-dealers pending each
applicable closing. That account will provide the investor with interest based
on a then current money market fund rate. We and David Lerner Associates, Inc.
reserve the right to formulate and adopt reasonable simplifying conventions in
determining each investor's share of interest earned pending each closing. For
example, we and David Lerner Associates, Inc. may average interest rates on
escrowed funds over a given period of time or treat all investors subscribing
during a given period of time (such as during a particular month or other
period) as having subscribed on the same day during such period. These
simplifying conventions would be designed to avoid costs necessary to compute
interest amounts precisely where the costs are not commensurate with the amount
of interest involved. Investors' subscriptions will be revocable by written
notice delivered to the escrow agent at least five days before the initial
closing. An investor's subscription funds may remain in escrow for an indefinite
period of time.
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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 (higher in certain
states) and gross income of $50,000, or a net worth (with the same exclusions)
of at least $100,000 (higher in certain states).
You further represent that your investment in common shares is 10% or less
of your net worth (with the indicated exclusions). This representation helps us
determine that your proposed investment is suitable for you based on your
financial condition.
(e) If you are acting on behalf on an entity, you represent that you have
authority to bind the entity.
(f) You represent that the taxpayer identification number (social security
number in the case of an individual) provided is correct and that you are not
subject to backup withholding. This representation allows us to make
distributions to you without any requirement to withhold for income tax
purposes.
(g) You understand that we have the right, in our sole discretion, to
accept or reject your subscription for common shares.
(h) You agree to settle by arbitration any controversy between you and your
broker concerning the Subscription Agreement and the investment represented by
the Subscription Agreement.
It is expected that shareholders will be able to elect to reinvest any
distributions from us in additional common shares available in this offering,
for as long as this offering continues. This option is referred to as the
"Additional Share Option." Any purchase by reinvestment of distributions would
be at the same price per share and on the same terms applicable generally to
subscriptions in this offering effective at the time of reinvestment. We reserve
the right to establish rules governing reinvestment, as well as the right to
modify or terminate the Additional Share Option at any time. We estimate that
approximately 500,000 common shares offered through this prospectus will be
purchased through shareholders' reinvestment of distributions in common shares
pursuant to the Additional Share Option, but the number of shares which will be
purchased cannot be determined at this time.
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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.
The following table reflects the compensation payable to David Lerner
Associates, Inc.
<TABLE>
<CAPTION>
MARKETING EXPENSE
PRICE TO PUBLIC COMMISSIONS ALLOWANCE
----------------- --------------- ------------------
<S> <C> <C> <C>
Per Share Minimum
Offering ......... $ 9.00 $ 0.675 $ 0.225
Per Share Maximum
Offering ......... $ 10.00 $ 0.75 $ 0.25
Total Minimum
Offering ......... $ 15,000,000 $ 1,125,000 $ 375,000
Total Maximum
Offering ......... $300,000,000 $22,500,000 $7,500,000
</TABLE>
Prospective investors are advised that David Lerner Associates, Inc.,
reserves the right to purchase common shares, on the same terms applicable
generally to sales pursuant to this prospectus, for its own account, at any time
and in any amounts, to the extent not prohibited by relevant law. However, it is
not expected that the managing dealer or other broker-dealers will purchase
common shares.
The Agency Agreement between us and David Lerner Associates, Inc. permits
David Lerner Associates, Inc. to use the services of other broker-dealers in
offering and selling the common shares, subject to our approval. David Lerner
Associates, Inc. will pay the compensation owing to the broker-dealers out of
the selling commissions or marketing expense allowance payable to it. Sales by
the broker-dealers will be carried on in accordance with customary securities
distribution procedures. David Lerner Associates, Inc. may be deemed to be an
"underwriter" for purposes of the Securities
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Act of 1933 in connection with this offering. Until the minimum offering is
achieved, investors must provide their subscription payment either by
authorizing the liquidation of funds in their money market account with the
managing dealer or by providing a check made payable to "First Union National
Bank, Escrow Agent." Following the initial closing, investors will provide their
subscription payment as directed by the managing dealer.
Purchasers are required to purchase a minimum of $5,000 in common shares or
$2,000 in common shares for plans. After the minimum offering is achieved, Apple
Suites Advisors and Apple Suites Realty may purchase in this offering up to 2.5%
of the total number of shares sold in the offering, on the same terms and
conditions as the public. If Apple Suites Advisors and Apple Suites Realty
purchase any common shares, they will be permitted to vote on any matters
submitted to a vote of holders of the common shares. Any purchase of shares in
this offering by Apple Suites Advisors and Apple Suites Realty must be for
investment, and not for resale or distribution. The shares described in this
paragraph are exclusive of the shares which may be issued under our stock
incentive plans.
There has been no previous market for any of our common shares. The initial
offering price for the common shares is arbitrary and was determined on the
basis of our proposed capitalization, market conditions and other relevant
factors.
We have agreed to indemnify David Lerner Associates, Inc. and other
broker-dealers against a limited number of liabilities under the Securities Act.
These liabilities include liabilities arising out of untrue statements of a
material fact contained in this registration statement or arising out of the
omission of a material fact required to be stated in this registration
statement. We will also indemnify David Lerner Associates, Inc. for losses from
a breach of any warranties made by us in the agency agreement.
As part of the compensation negotiated between us and the managing dealer
we have agreed to sell to David Lerner Associates, Inc. for an aggregate of
$100, warrants to purchase 10% of the shares sold up to 3,000,000 common shares
at an exercise price of $16.50 per common share or 165% of the public offering
price per common share. The warrants may not be sold, transferred, assigned or
hypothecated for one year from the date of their issuance, except to the
officers of David Lerner Associates, Inc. and are exercisable at any time and
from time to time, in whole or in part, during the five-year period commencing
on the date of the final closing after the termination of this offering (the
"Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the
warrants are given, at nominal cost, the opportunity to profit from a rise in
the market price of the common shares. To the extent that the warrants are
exercised, dilution to the interests of the shareholders will occur if the
warrant exercise price is less than the value of the common shares at the time
of exercise. Further, the terms upon which we may be able to obtain additional
equity capital may be adversely affected since the holders of the warrants can
be expected to exercise them at a time when we would, in all likelihood, be able
to obtain any needed capital on terms more favorable to us than those provided
in the warrants. Any profit realized by David Lerner Associates on the sale of
the warrants may be deemed additional underwriting compensation. We have agreed,
at the request of the holders of a majority of the warrants, at our expense, to
register the warrants under the Securities Act of 1933 on one occasion during
the Warrant Exercise Term and to include the warrants in any appropriate
registration statement which is filed by us during the seven years following the
date of this prospectus.
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DESCRIPTION OF CAPITAL STOCK
The information set forth below is only a summary of our terms of our
common shares. You should refer to our articles of incorporation, and bylaws for
a complete description of the common shares.
Our authorized capital stock consists of 200,000,000 common shares, no par
value, 240,000 Class B convertible shares, no par value and 15,000,000 preferred
shares. Each common share will be fully paid and nonassessable upon issuance and
payment therefor. As of the date of this prospectus, there were 10 common shares
issued and outstanding. All 240,000 authorized Class B convertible shares will
initially be held by Glade M. Knight, Stanley J.
Olander, Jr., and Debra A. Jones.
COMMON SHARES
DIVIDEND AND DISTRIBUTION RIGHTS
Our common shares have equal rights in connection with:
-- dividends
-- distributions, and
-- liquidations.
If our board of directors determines, in its sole discretion, to declare a
dividend, the right to a dividend is subject to the following restrictions:
-- the dividend rights of the common shares may be subordinate to any other
of our shares ranking senior to the common shares, and
-- the amount of the dividend may be limited by law.
If we liquidate our assets or dissolve entirely, the holders of the common
shares will share, on a pro rata basis, in the assets we are legally allowed to
distribute. We must pay all of our known debts and liabilities or have made
adequate provision for payment of these debts and liabilities before holders of
common shares can share in our assets.
Holders of common shares do not have the right to convert or redeem their
shares. In addition, they do not have rights to a sinking fund or to subscribe
for any of our securities.
VOTING RIGHTS
Each outstanding common share entitles the holder to one vote on all
matters submitted to a vote of shareholders. The holders of common shares have
exclusive voting power with respect to the election of directors, except as
otherwise required by law or except as provided with respect to any other class
or series of stock. There is no cumulative voting in the election of directors.
Therefore the holders of a majority of the outstanding common shares can elect
all of the directors then standing for election and the holders of the remaining
shares will not be able to elect any directors.
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.
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CLASS B CONVERTIBLE SHARES
Our authorized capital stock includes 240,000 Class B convertible shares.
There are no dividends payable on the Class B convertible shares. Upon our
liquidation, the holder of the Class B convertible shares is entitled to a
liquidation payment of $0.10 per Class B convertible share before any
distribution of liquidation proceeds to the holders of the common shares.
Holders of more than two-thirds of the Class B convertible shares must approve
any proposed amendment to the Articles of incorporation that would adversely
affect the Class B convertible shares.
The Class B convertible shares are convertible into common shares upon and
for 180 days following the occurrence of either of the following events:
(1) substantially all of our assets, stock or business is sold or
otherwise transferred, whether through sale, exchange, merger, consolidation,
lease, share exchange or otherwise, or
(2) the Advisory Agreement with Apple Suites Advisors is terminated or
not renewed.
Upon the occurrence of either triggering event, each Class B convertible
share is convertible into a number of common shares based upon the gross
proceeds raised through the date of conversion in the offering made by this
prospectus according to the following formula:
<TABLE>
<CAPTION>
GROSS PROCEEDS RAISED FROM SALES NUMBER OF COMMON SHARES
OF COMMON SHARES THROUGH DATE OF THROUGH CONVERSION OF ONE
CONVERSION CLASS B CONVERTIBLE SHARE
- ---------------------------------- --------------------------
<S> <C>
$50 million.................... 1.0
$100 million................... 2.0
$150 million................... 3.5
$200 million................... 5.3
$250 million................... 6.7
$300 million................... 8.0
</TABLE>
No additional consideration is due upon the conversion of the Class B
convertible shares. The conversion into common shares of the Class B convertible
shares will result in dilution of the shareholders' interests.
PREFERRED SHARES
Our articles of incorporation authorize our issuance of up to 15 million
preferred shares. No preferred shares have been issued.
We believe that the authorization to issue preferred shares benefit us and
our shareholders by permitting flexibility in financing additional growth,
giving us additional financing options in our corporate planning and in
responding to developments in our business, including financing of additional
acquisitions and other general corporate purposes. Having authorized preferred
shares available for issuance in the future gives us the ability to respond to
future developments and allow preferred shares to be issued without the expense
and delay of a special shareholders' meeting.
At present, we have no specific financing or acquisition plans involving
the issuance of preferred shares and we do not propose to fix the
characteristics of any series of preferred shares in anticipation of issuing
preferred shares. We cannot now predict whether or to what extent, if any,
preferred shares will be used or if so used what the characteristics of a
particular series may be.
The voting rights and rights to distributions of the holders of common
shares will be subject to the prior rights of the holders of any
subsequently-issued preferred shares. Unless otherwise required by applicable
law or regulation, the preferred shares would be issuable without further
authorization by holders of the common shares and on such terms and for such
consideration as may be determined by the board of directors. The preferred
shares could be issued in one or more series having varying voting rights,
redemption and conversion features, distribution (including liquidating
distribution) rights and preferences, and other rights, including rights of
approval of specified
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<PAGE>
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.
Fair market value means the average daily closing price of a share if
listed on a national securities exchange. If the shares are quoted on the NASD
National Market System, fair market value will be the average of closing bid
prices and closing asked prices. If there have been no sales or published bid
and asked quotations with respect to the shares, the fair market value will be
as determined in good faith by our board.
In addition, each shareholder shall, upon demand, be required to disclose
in writing all information regarding the direct and indirect beneficial
ownership of shares of capital stock as our board deems reasonably necessary to
comply with the provisions of the Internal Revenue Code applicable to a REIT, to
comply with the requirements of any taxing authority or governmental agency or
to determine any compliance with those provisions or requirements.
These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of shares
of capital stock might receive a premium for their shares over the
then-prevailing market price or which these holders might believe to be
otherwise in their best interest.
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FACILITIES FOR TRANSFERRING COMMON SHARES
David Lerner Associates may, but is not obligated to, assist shareholders
who desire to transfer their common shares. In the event David Lerner Associates
provides assistance, it will be entitled to receive compensation as specified by
it. Any assistance offered by David Lerner Associates may be terminated or
modified at any time without notice, and any fee charged for transfer assistance
may be modified or terminated at any time and without notice. David Lerner
Associates currently has no plans for rendering the type of assistance referred
to in this paragraph. This assistance, if offered, would likely consist of
informally matching isolated potential buyers and sellers, and would not
represent the creation of any "market" for the common shares.
No public market for the common shares currently exists. We do not plan to
cause the common shares to be listed on any securities exchange or quoted on any
system or in any established market either immediately or at any definite time
in the future. While we may cause the common shares to be listed or quoted if
our board of directors determines that action to be prudent, there can be no
assurance that this event will ever occur. Prospective shareholders should view
the common shares as illiquid and must be prepared to hold their investment for
an indefinite length of time.
WARRANTS
We have agreed to sell to David Lerner Associates, Inc. for an aggregate of
$100, warrants to purchase 10% of the shares sold in this offering, up to
3,000,000 common shares at an exercise price of $16.50 per common share or 165%
of the public offering price per common share. The warrants may not be sold,
transferred, assigned or hypothecated for one year from the date of this
prospectus, except to the officers of David Lerner Associates, Inc. and are
exercisable at any time and from time to time, in whole or in part, during the
Warrant Exercise Term. During the Warrant Exercise Term, the holders of the
warrants are given, at nominal cost, the opportunity to profit from a rise in
the market price of the common shares. To the extent that the warrants are
exercised, dilution to the interests of the shareholders will occur if the
warrant exercise price is less than the value of the common shares at the time
of exercise. We have agreed, at the request of the holders of a majority of the
Warrants, at our expense, to register the Warrants under the Securities Act of
1933 on one occasion during the Warrant Exercise Term and to include the
Warrants in any appropriate registration statement which is filed by us during
the seven years following the date of this prospectus.
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SUMMARY OF ORGANIZATIONAL DOCUMENTS
The following is a summary of the principal provisions of our articles of
incorporation and bylaws, some of which may be described or referred to
elsewhere in this prospectus. Neither this summary nor the descriptions
appearing elsewhere in this prospectus purport to be, or should be considered, a
complete statement of the terms and conditions of the articles of incorporation
or bylaws or any specific provision thereof, and this summary and all the
descriptions are qualified in their entirety by reference to, and the provisions
of, the articles of incorporation and bylaws, which have been filed as exhibits
to the registration statement of which this prospectus is a part. Our articles
of incorporation have been reviewed and approved unanimously by the board of
directors.
BOARD OF DIRECTORS
The board of directors, subject to specific limitations in the articles of
incorporation and those imposed by law, has full, exclusive, and absolute power,
control and authority over our property and business. The board of directors,
without approval of the shareholders, may alter our investment policies in view
of changes in economic circumstances and other relevant factors, subject to the
investment restrictions set forth in the bylaws.
A director may be removed if the director is declared of unsound mind by an
order of court or if the director has pled guilty to or been convicted of a
felony involving moral turpitude. In addition, a director may be removed (1) for
cause by the vote or written consent of all directors other than the director
whose removal is being considered, or (2) with or without cause at a special
meeting of the shareholders by vote of a majority of the outstanding common
shares. "For cause" is defined as willful violations of the articles of
incorporation or bylaws, or gross negligence in the performance of a director's
duties. Any vacancies in the office of director may be filled by a majority of
the directors continuing in office or at a special meeting of shareholders by
vote of a majority of the common shares present at a meeting at which there is a
quorum. Any director so elected shall hold office for the remainder of his
predecessor's term. The number of directors shall not be less than three nor
more than 15. At the time of initial closing, there will be five directors, a
majority of whom are independent directors. The holders of the common shares are
entitled to vote on the election or removal of the board of directors, with each
common share entitled to one vote.
The board of directors is empowered to fix the compensation of all officers
and the board of directors. Under the bylaws, directors may receive reasonable
compensation for their services as directors and officers and reimbursement of
their expenses, and we may pay a director such compensation for special
services, including legal and accounting services, as the board of directors
deems reasonable. The board of directors may delegate some of its powers to one
or more committees, each comprised of at least three directors, the majority of
whom are independent directors. At all times a majority of the directors and a
majority of the members of any board committee shall be independent directors,
except that upon the death, removal, or resignation of an independent director
this requirement shall not be applicable for 60 days.
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
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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 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
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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.
SHAREHOLDER LIABILITY
The holders of our shares shall not be liable personally on account of any
of our obligations.
SALES LITERATURE
We may use sales or marketing literature in connection with the offering of
the common shares. Sales or marketing materials which may be used include sales
brochures highlighting our company, our properties or other aspects of our
business. The literature may also include a brochure describing Apple Suites
Advisors, Apple Suites Realty or affiliates and a "tombstone" advertisement,
mailer and introductory letter. We may, from time to time, also utilize
brochures describing completed or proposed property acquisitions, summaries of
our company or of the offering of the common shares, and discussions of REIT
investments generally.
The offering is, however, made only by means of this prospectus. Except as
described, we have not authorized the use of other supplemental literature in
connection with the offering other than marketing bulletins to be used
internally by broker-dealers. Although the information contained in the
literature does not conflict with any of the information contained in this
prospectus, the material does not purport to be complete, and should not be
considered as a part of this prospectus or the registration statement of which
this prospectus is a part, as incorporated in this prospectus or the
registration statement by reference, or as forming the basis of the offering of
the common shares.
REPORTS TO SHAREHOLDERS
Financial information contained in all reports to shareholders will be
prepared in accordance with generally accepted accounting principles. The annual
report, which will contain financial statements audited by a nationally
recognized accounting firm, will be furnished within 120 days following the
close of each fiscal year. The annual report will contain a complete statement
of compensation and fees paid or accrued by us to Apple Suites Advisors and
Apple Suites Realty together with a description of any new agreements. Under the
bylaws, we are also obligated to send to our shareholders quarterly reports
after the end of the first three calendar quarters of each year. Quarterly
reports will include unaudited financial statements prepared in accordance with
generally accepted accounting principles, a statement of fees paid 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.
61
<PAGE>
We will file a report meeting the requirements of Form 8-K under the
Securities Exchange Act of 1934 if, after the termination of the offering, a
commitment is made involving the use of 10 percent or more of the net proceeds
of the offering and will provide the information contained in the report to the
shareholders at least once each quarter after the termination of this offering.
LEGAL MATTERS
Certain legal matters in connection with the common shares will be passed
upon for us by McGuire, Woods, Battle & Boothe LLP, Richmond, Virginia.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our balance sheet at
March 26, 1999, as set forth in their report. We've included our balance sheet
in the prospectus and in the registration statement in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
62
<PAGE>
EXPERIENCE OF PRIOR PROGRAMS
The tables following this introduction set forth information with respect
to prior real estate programs sponsored by Glade M. Knight, who is sometimes
referred to as the "prior program sponsor." These tables provide information for
use in evaluating the programs, the results of the operations of the programs,
and compensation paid by the programs. Information in the tables is current as
of December 30, 1998. The tables are furnished solely to provide prospective
investors with information concerning the past performance of entities formed by
Glade M. Knight. Regulatory filings and annual reports of Cornerstone Realty
Income Trust, Inc. ("Cornerstone") and Apple Residential Income Trust, Inc.
("Apple Residential") will be provided upon request for no cost (except for
exhibits, for which there is a minimal charge). In addition, Part II of our
Registration Statement contains detailed information on the property
acquisitions of Cornerstone and Apple Residential and is available without
charge upon request of any investor or prospective investor. Please send all
requests to Cornerstone Realty Income Trust, Inc., 306 East Main Street,
Richmond, VA 23219; telephone: 804-643-1761.
In the five years ending December 30, 1998, Glade M. Knight sponsored only
Cornerstone and Apple Residential, which have investment objectives similar to
ours. Cornerstone and Apple Residential were formed to invest in existing
residential properties on a substantially debt-free basis for the purpose of
providing regular quarterly distributions to shareholders and the possibility of
long-term appreciation in the value of properties and shares.
The information in the following tables should not be considered as
indicative of our capitalization or operations. Purchasers of shares offered by
our offering will not have any interest in the entities referred to in the
following tables or in any of the properties owned by those entities as a result
of the acquisition of shares in us.
See "Apple Suites Advisors, Inc., and Affiliates -- Prior Performance of
Programs Sponsored by Glade M. Knight" in the prospectus for additional
information on certain prior real estate programs sponsored by Mr. Knight,
including a description of the investment objectives which are deemed by Mr.
Knight to be similar and dissimilar to those of the Company.
The following tables use certain financial terms. The following paragraphs
briefly describe the meanings of these terms.
o "Acquisition Costs" means fees related to the purchase of property, cash
down payments, acquisition fees, and legal and other costs related to
property acquisitions.
o "Cash Generated From Operations" means the excess (or the deficiency in the
case of a negative number) of operating cash receipts, including interest
on investments, over operating cash expenditures, including debt service
payments.
o "GAAP" refers to "Generally Accepted Accounting Principles."
o "Recapture" means the portion of taxable income from property sales or
other dispositions that is taxed as ordinary income.
o "Reserves" refers to offering proceeds designated for repairs and
renovations to properties and offering proceeds not committed for
expenditure and held for potential unforeseen cash requirements.
o "Return of Capital" refers to distributions to investors in excess of net
income.
63
<PAGE>
TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds by
Cornerstone and Apple Residential, whose investment objectives are similar to
those of Apple Suites and whose offerings closed within three years ending
December 31, 1998.
<TABLE>
<CAPTION>
CORNERSTONE APPLE
----------------- ---------------------
<S> <C> <C>
Dollar Amount Offered ..................................... $409,409,897 $300,000,000
Dollar Amount Raised ...................................... $409,409,897 $281,228,183
LESS OFFERING EXPENSES:
Selling Commissions and Discounts ........................ 6.79% 10.00%
Organizational Expenses .................................. 2.82% 1.00%
Other .................................................... 0.00% 0.00%
Reserves .................................................. 3.00% 0.50%
Percent Available from Investment ......................... 87.39% 88.50%
ACQUISITION COSTS:
Prepaid items and fees to purchase property .............. 86.27% 86.50%
Cash down payment ........................................ 0.00% 0.00%
Acquisition fees ......................................... 1.12% 2.00%
Other .................................................... 0.00% 0.00%
Total Acquisition Costs ................................... 87.39% 88.50%
Date offering began ....................................... May 1993 January 1997
Length of offering (in months) ............................ 54 24
Months to invest amount available for investment .......... 54 24
</TABLE>
64
<PAGE>
TABLE II: COMPENSATION TO SPONSOR AND ITS AFFILIATES
Table II summarizes the compensation paid to the prior program sponsor and its
affiliates (i) by programs organized by it and closed within three years ended
December 31, 1998, and (ii) by all other programs during the three years ended
December 31, 1998.
<TABLE>
<CAPTION>
OTHER
CORNERSTONE APPLE PROGRAMS
---------------- --------------- -------------
<S> <C> <C> <C>
Date offering commenced ....................... May 1993 January 1997 Various
Dollar amount raised .......................... $ 409,409,897 $281,228,183 $9,868,220
AMOUNTS PAID TO PRIOR PROGRAM SPONSOR FROM
PROCEEDS OF OFFERING:
Acquisition fees
Real estate commission ..................... $ 4,075,337 $ 4,320,548 $ --
Advisory fees .............................. $ 515,689 $ 718,248 $ --
Other ...................................... $ -- $ -- $ --
Cash generated from operations before deducting
payments to prior program sponsor ............ $ 111,550,382 $ 21,265,581 $5,293,228
AGGREGATE COMPENSATION TO PRIOR PROGRAM SPONSOR
Management and accounting fees ............... $ 3,088,348 $ 2,388,954 $2,828,330
Reimbursements ............................... $ 2,717,655 $ -- $ --
Leasing fees ................................. $ -- $ -- $ --
Other fees ................................... $ -- $ -- $ --
</TABLE>
There have been no fees from property sales or refinancings
65
<PAGE>
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for Cornerstone and
Apple Residential, the offerings closed in the five years ending December 31,
1998. Table III is shown on both an income tax basis as well as in accordance
with generally accepted accounting principles, the only significant difference
being the methods of calculating depreciation.
<TABLE>
<CAPTION>
1998 1997
CORNERSTONE APPLE CORNERSTONE
----------------- --------------- ---------------
<S> <C> <C> <C>
Capital contributions by year ................... $ 38,905,636 $142,800,094 $ 63,485,868
Gross revenue ................................... $ 93,637,948 $ 30,764,904 $ 71,970,624
Operating expenses .............................. $ 33,797,439 $ 14,958,699 $ 27,339,955
Interest income (expense) ....................... $ (12,175,940) $ 900,669 $ (7,230,205)
Depreciation .................................... $ 20,741,130 $ 5,788,476 $ 15,163,593
Net income (loss) GAAP basis .................... $ 23,210,642 $ 10,079,908 $ 19,225,553
Taxable income .................................. $ -- $ -- $ --
Cash generated from operations .................. $ 45,027,655 $ 17,122,276 $ 34,973,533
Less cash distributions to investors ............ $ 38,317,602 $ 13,040,936 $ 31,324,870
Cash generated after cash distribution .......... $ 6,710,053 $ 4,081,340 $ 3,648,663
Special items ...................................
Capital contributions, net ..................... $ 38,905,636 $142,800,094 $ 63,485,868
Fixed asset additions .......................... $ 97,863,162 $125,017,627 $157,859,343
Line of credit ................................. $ 50,323,852 $ -- $ 96,166,147
Cash generated .................................. $ (1,923,622) $ 15,910,626 $ 1,331,335
End of period cash .............................. $ 2,590,364 $ 40,073,198 $ 4,513,986
Tax and distribution data per $1,000 invested
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
Source (on Cash basis) .........................
Sales ......................................... $ -- $ -- $ --
Refinancings .................................. $ -- $ --
Operations .................................... $ 103 $ 82 $ 100
Other ......................................... $ -- $ -- $ --
<CAPTION>
1996 1995 1994
APPLE CORNERSTONE CORNERSTONE CORNERSTONE
--------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Capital contributions by year ................... $109,090,359 $ 144,798,035 $71,771,027 $23,496,784
Gross revenue ................................... $ 12,005,968 $ 40,261,674 $16,266,610 $ 8,177,576
Operating expenses .............................. $ 5,993,492 $ 17,198,882 $ 7,457,574 $ 3,894,657
Interest income (expense) ....................... $ (235,708) $ (1,140,667) $ (68,061) $ 110,486
Depreciation .................................... $ 1,898,003 $ 8,068,063 $ 2,788,818 $ 1,210,818
Net income (loss) GAAP basis .................... $ 3,499,194 $ (4,169,849) $ 5,229,715 $ 2,386,303
Taxable income .................................. $ -- $ -- $ -- $ --
Cash generated from operations .................. $ 7,075,025 $ 20,162,776 $ 9,618,956 $ 3,718,086
Less cash distributions to investors ............ $ 3,249,098 $ 15,934,901 $ 6,316,185 $ 2,977,136
Cash generated after cash distribution .......... $ 3,825,927 $ 4,227,875 $ 3,302,771 $ 740,950
Special items ...................................
Capital contributions, net ..................... $109,090,359 $ 144,798,035 $71,771,027 $23,496,784
Fixed asset additions .......................... $ 88,753,814 $ 194,519,406 $75,589,089 $28,557,568
Line of credit ................................. $ -- $ 41,603,000 $ 3,300,000 $ 5,000,000
Cash generated .................................. $ 24,162,472 $ (3,890,496) $ 2,784,709 $ 680,166
End of period cash .............................. $ 24,162,572 $ 3,182,651 $ 7,073,147 $ 4,288,438
Tax and distribution data per $1,000 invested
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 ............................. $ 60 $ 14 $ 16 $ 19
Source (on Cash basis) .........................
Sales ......................................... $ -- $ -- $ -- $ --
Refinancings .................................. $ -- $ -- $ -- $ --
Operations .................................... $ 60 $ 99 $ 96 $ 89
Other ......................................... $ -- $ -- $ -- $ --
</TABLE>
66
<PAGE>
TABLE IV: RESULTS OF COMPLETED PROGRAMS
Table IV shows the results of programs sponsored by Mr. Knight which completed
operations in the five years ending December 31, 1998. All of these programs had
investment objectives dissimilar to those of Apple Suites.
<TABLE>
<CAPTION>
MOUNTAIN TEAL
PROGRAM NAME VIEW WESTFIELD SUNSTONE POINT
- -------------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Dollar amount raised ................................... $2,605,800 $1,825,600 $1,890,000 $3,310,620
Number of properties ................................... 1 1 1 1
Date of closing of offering ............................ OCT 1984 NOV 1984 JULY 1984 DEC 1989
Date of sale of property ............................... AUG 1995 APR 1996 NOV 1995 DEC 1997
Tax and Distribution data per $1,000 investment through-
Federal income tax results:
Ordinary income
From operations ..................................... $ 68 $ 80 $ 122 $ (4)
From recapture ...................................... $ 1,200 $ 1,302 $ 526 $ --
Capital gain .......................................... $ -- $ -- $ -- $ 2,126
Deferred gain .........................................
Capital ............................................. $ -- $ -- $ -- $ --
Ordinary ............................................ $ -- $ -- $ -- $ --
Cash distributions to investors
Source(On GAAP basis)
Investment income ................................... $ 68 $ 80 $ 122 $ (4)
Return of capital ................................... $ 38 $ 233 $ -- $ --
Source (On cash basis)
Sales ............................................... $ 38 $ 233 $ 122 $ 2,126
Refinancing ......................................... $ -- $ -- $ -- $ --
Operations .......................................... $ 68 $ 80 $ -- $ (4)
Other ............................................... $ -- $ -- $ -- $ --
Receivable on net purchase money financing ............. $ -- $ -- $ -- $ --
</TABLE>
67
<PAGE>
TABLE V: SALES OR DISPOSALS OF PROPERTIES
Table V is not applicable. Cornerstone and Apple Residential (the sole prior
programs with investment objectives similar to our investment objectives) have
not sold or disposed of any properties as required for inclusion in the Table
(sale or disposals of properties by programs with similar investment objectives
within the most recent three years).
68
<PAGE>
APPLE SUITES, INC.
INDEX TO BALANCE SHEET
MARCH 26, 1999
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors ........... F-2
Balance Sheet at March 26, 1999 .......... F-3
Notes to Balance Sheet ................... F-4
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder of
Apple Suites, Inc.
We have audited the accompanying balance sheet of Apple Suites, Inc. as of
March 26, 1999. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Apple Suites, Inc. at March 26,
1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Richmond, Virginia
April 21, 1999
F-2
<PAGE>
APPLE SUITES, INC.
BALANCE SHEET
MARCH 26, 1999
<TABLE>
<S> <C>
ASSETS
Cash ...................................................................... $100
====
STOCKHOLDER'S EQUITY
Preferred stock, authorized 15,000,000 shares; none issued and outstanding. --
Class B convertible stock, no par value, authorized 240,000 shares; none
issued and outstanding ................................................... --
Common stock, no par value authorized 200,000,000 shares; issued and
outstanding 10 shares .................................................... $100
----
$100
====
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Apple Suites, Inc. (the "Company") is a Virginia corporation that intends
to qualify as a real estate investment trust ("REIT") for federal income tax
purposes. The Company, which has no operating history, was formed to invest
primarily in extended stay hotels in the southeastern and southwestern United
States. Initial capitalization occurred on March 5, 1999, when 10 shares of
common stock were purchased by Apple Suites Advisors, Inc. (see Note 3).
SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The Company intends to make an election to be treated, and expects to
qualify, as a REIT under the Internal Revenue Code of 1986, as amended. As a
REIT, the Company will be allowed a deduction for the amount of dividends paid
to its shareholders, thereby subjecting the distributed net income of the
Company to taxation only at the shareholder level. The Company's continued
qualification as a REIT will depend on its compliance with numerous
requirements, including requirements as to the nature of its income and
distribution of dividends.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Start Up Costs
Start up costs incurred other than offering costs will be expensed upon the
successful completion of the minimum offering (see Note 3).
2. OFFERING OF SHARES
The Company intends to raise capital through a "best-efforts" offering of
shares by David Lerner Associates, Inc. (the "Managing Dealer"), which will
receive selling commissions and a marketing expense allowance based on proceeds
of the shares sold.
A minimum offering of 1,666,666 shares ($15,000,000) must be sold within
one year from the beginning of this offering or the offering will terminate and
investors' subscription payments, with interest, will be refunded to investors.
Pending sale of such minimum offering amount, investors' subscription payments
will be placed in an escrow account.
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.
F-5
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET - (CONTINUED)
5. CLASS B CONVERTIBLE STOCK - (CONTINUED)
Upon the occurrence of either conversion event, each Class B Convertible
Share may be converted into a number of Common Shares based upon the gross
proceeds raised through the date of conversion in the public offering or
offerings of the Company's Common Shares made by the Company's prospectus
according to the following formula:
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES
GROSS PROCEEDS RAISED FROM THROUGH CONVERSION OF ONE
SALES OF COMMON SHARES THROUGH CLASS B CONVERTIBLE SHARE
DATE OF CONVERSION (THE INITIAL "CONVERSION RATIO")
- -------------------------------- ---------------------------------
<S> <C>
$ 50 million................. 1.0
$100 million................. 2.0
$150 million................. 3.5
$200 million................. 5.3
$250 million................. 6.7
$300 million................. 8.0
</TABLE>
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>
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, ANY OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH AN OFFER MAY
NOT LEGALLY BE MADE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION CONTAINED IN THIS PROSPECTUS HAS NOT CHANGED AS OF ANY TIME
AFTER ITS DATE.
-----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Summary ............................... 1
Risk Factors .......................... 6
Use of Proceeds ....................... 13
Compensation .......................... 15
Conflicts of Interests ................ 17
Investment Objectives and
Policies ........................... 20
Distribution Policy ................... 23
Business .............................. 24
Management ............................ 28
Apple Suites Advisors, Inc. and
Affiliates ......................... 33
Principal and Management
Shareholders ....................... 38
Federal Income Tax
Considerations ..................... 38
ERISA Considerations .................. 46
Capitalization ........................ 48
Management's Discussion and
Analysis of Financial Condition
and Results of Operations .......... 49
Plan of Distribution .................. 50
Description of Capital Stock .......... 54
Summary of Organizational
Documents .......................... 58
Sales Literature ...................... 60
Reports to Shareholders ............... 60
Legal Matters ......................... 61
Experts ............................... 61
Experience of Prior Programs .......... 62
Index to Balance Sheet ................ F-1
Subscription Agreement ................ Exhibit A
</TABLE>
================================================================================
================================================================================
APPLE SUITES, INC.
-----------------------------------
PROSPECTUS
-----------------------------------
DAVID LERNER ASSOCIATES, INC.
AS MANAGING DEALER
JULY 26, 1999
================================================================================
<PAGE>
EXHIBIT A
SUBSCRIPTION AGREEMENT
To: Apple Suites, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Suites, Inc. ("REIT")
at a purchase price of and 00/100 Dollars ($ ) per Share. By executing or having
executed on my (our) behalf this Subscription Agreement and submitting payment,
I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Suites, Inc.,
of which this Subscription Agreement is a part, and understand that the shares
being acquired will be governed by the terms of such Prospectus and any
amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home,
home furnishings and automobiles) of at least $50,000 ($125,000 in the case of
New Hampshire purchasers) and estimate that (without regard to investment in the
REIT) I (we) will have gross income during the current year of $50,000, or (ii)
a net worth (excluding home, home furnishings and automobiles) of at least
$100,000 ($150,000 in the case of Kentucky and North Carolina purchasers, and
$250,000 in the case of New Hampshire purchasers); and, in either event, further
represent that the purchase amount is 10% or less of my (our) net worth as
defined above;
(e) represent (if purchasing in a fiduciary or other representative
capacity) that I (we) have due authority to execute the Subscription Agreement
and to thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer
identification number shown on the signature page of this Subscription Agreement
is true, correct and complete (or I am (we are) waiting for a number to be
issued to me (us)), and (ii) that I am (we are) not subject to backup
withholding either because (a) I am (we are) exempt from backup withholding, or
(b) I (we) have not been notified by the Internal Revenue Service that I am (we
are) subject to backup withholding as a result of a failure to report all
interest or distributions, or (c) the Internal Revenue Service has notified me
(us) that I am (we are) no longer subject to backup withholding; and
(g) it is understood that the REIT shall have the right to accept or reject
this subscription in whole or in part in its sole and absolute discretion. The
REIT will either accept or reject this subscription within four business days
from the receipt of the subscription by the Managing Dealer or Selected Dealer.
To the extent permitted by applicable law, the REIT intends to assert the
foregoing representations as a defense to any claim based on factual assertions
contrary to those set forth above.
(H) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE
THE FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR
RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION,
OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS OPTED OUT OF THE
CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS
ACTION UNTIL: (1) THE CLASS CERTIFICATION IS DENIED; OR (II) THE CLASS
IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM THE CLASS BY THE
COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL NOT
CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN
HIM/HER AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR
ACCOUNT TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH
BROKER WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH
ARBITRATION WILL BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER
SELF-REGULATORY ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR
THE CUSTOMER MAY INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE
CUSTOMER DOES NOT DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND
IN WRITING WITHIN 5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES
BROKER TO DESIGNATE THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER
SUBMITS HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF SUCH
COURT.
<PAGE>
APPLE SUITES, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s) ---------------------------------------------------
Tax ID Number(s)-------------------------------------------------------------
Account # (If applicable)
2. Name(s) in which shares are to be registered:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community
Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
[ ] As Custodian for --------------------------------------------------------
[ ] For Estate of ----------------------------------------------------------
[ ] Other -------------------------------------------------------------------
4. Address for correspondence -------------------------------------------------
----------------------------------------------------------------------------
5. Are you a non-resident alien individual (other than a non-resident alien who
has elected to be taxed as a resident), a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, or otherwise not qualified
as a United States person? If so, transaction will not be executed without a
completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $--------------- for ------------------- Shares
(Investment must be for a minimum of $5,000 in Shares or $2,000 in Shares
for qualified plans). Make check payable to: First Union National Bank,
Escrow Agent (or as otherwise instructed). [ ] Liquidate funds from money
market [ ] Check enclosed
7. Instructions for cash distributions [ ] Deposit to money market [ ] Reinvest
in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (H).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE INVESTOR IS NOT WAIVING ANY RIGHTS
UNDER THE FEDERAL SECURITIES LAWS.
x -----------------------------------------------------------------------------
Signature Date
x -----------------------------------------------------------------------------
Signature Date
10. Broker/Dealer Information:
x ---------------------------------------------- ------------------------------
Registered Representative's Name Second Registered
Representative's Name
x --------------------------------------------- ------------------------------
Broker/Dealer Firm Registered Representative's
Office Address
x ---------------------------------------------- ------------------------------
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative
hereby certifies: I have reasonable grounds to believe, based on information
obtained from the investor(s) concerning investment objectives, other
investments, financial situation and needs and any other information known
by me, that investment in the REIT is suitable for such investor(s) in light
of financial position, net worth and other suitability characteristics.
- --------------------------------------------------------------------------------
Registered Representative Date
- --------------------------------------------------------------------------------
General Securities Principal Date
- --------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Signature page Agreed and accepted by:
will not be an effective agreement until it is Apple Suites, Inc.
signed by a duly authorized agent of Apple By__________________________
Suites, Inc. Date________________________
<PAGE>
SUBSCRIPTION AGREEMENT
To: Apple Suites, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Suites, Inc. ("REIT")
at a purchase price of and 00/100 Dollars ($ ) per Share. By executing or having
executed on my (our) behalf this Subscription Agreement and submitting payment,
I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Suites, Inc.,
of which this Subscription Agreement is a part, and understand that the shares
being acquired will be governed by the terms of such Prospectus and any
amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home,
home furnishings and automobiles) of at least $50,000 ($125,000 in the case of
New Hampshire purchasers) and estimate that (without regard to investment in the
REIT) I (we) will have gross income during the current year of $50,000, or (ii)
a net worth (excluding home, home furnishings and automobiles) of at least
$100,000 ($150,000 in the case of Kentucky and North Carolina purchasers, and
$250,000 in the case of New Hampshire purchasers); and, in either event, further
represent that the purchase amount is 10% or less of my (our) net worth as
defined above;
(e) represent (if purchasing in a fiduciary or other representative
capacity) that I (we) have due authority to execute the Subscription Agreement
and to thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer
identification number shown on the signature page of this Subscription Agreement
is true, correct and complete (or I am (we are) waiting for a number to be
issued to me (us)), and (ii) that I am (we are) not subject to backup
withholding either because (a) I am (we are) exempt from backup withholding, or
(b) I (we) have not been notified by the Internal Revenue Service that I am (we
are) subject to backup withholding as a result of a failure to report all
interest or distributions, or (c) the Internal Revenue Service has notified me
(us) that I am (we are) no longer subject to backup withholding; and
(g) it is understood that the REIT shall have the right to accept or reject
this subscription in whole or in part in its sole and absolute discretion. The
REIT will either accept or reject this subscription within four business days
from the receipt of the subscription by the Managing Dealer or Selected Dealer.
To the extent permitted by applicable law, the REIT intends to assert the
foregoing representations as a defense to any claim based on factual assertions
contrary to those set forth above.
(H) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE
THE FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR
RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION,
OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS OPTED OUT OF THE
CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS
ACTION UNTIL: (1) THE CLASS CERTIFICATION IS DENIED; OR (II) THE CLASS
IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM THE CLASS BY THE
COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL NOT
CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN
HIM/HER AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR
ACCOUNT TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH
BROKER WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH
ARBITRATION WILL BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER
SELF-REGULATORY ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR
THE CUSTOMER MAY INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE
CUSTOMER DOES NOT DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND
IN WRITING WITHIN 5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES
BROKER TO DESIGNATE THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER
SUBMITS HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF SUCH
COURT.
<PAGE>
APPLE SUITES, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s) ---------------------------------------------------
Tax ID Number(s)-------------------------------------------------------------
Account # (If applicable)
2. Name(s) in which shares are to be registered:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community
Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
[ ] As Custodian for --------------------------------------------------------
[ ] For Estate of ----------------------------------------------------------
[ ] Other -------------------------------------------------------------------
4. Address for correspondence -------------------------------------------------
----------------------------------------------------------------------------
5. Are you a non-resident alien individual (other than a non-resident alien who
has elected to be taxed as a resident), a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, or otherwise not qualified
as a United States person? If so, transaction will not be executed without a
completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $--------------- for ------------------- Shares
(Investment must be for a minimum of $5,000 in Shares or $2,000 in Shares
for qualified plans). Make check payable to: First Union National Bank,
Escrow Agent (or as otherwise instructed). [ ] Liquidate funds from money
market [ ] Check enclosed
7. Instructions for cash distributions [ ] Deposit to money market [ ] Reinvest
in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (H).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE INVESTOR IS NOT WAIVING ANY RIGHTS
UNDER THE FEDERAL SECURITIES LAWS.
x -----------------------------------------------------------------------------
Signature Date
x -----------------------------------------------------------------------------
Signature Date
10. Broker/Dealer Information:
x ---------------------------------------------- ------------------------------
Registered Representative's Name Second Registered
Representative's Name
x --------------------------------------------- ------------------------------
Broker/Dealer Firm Registered Representative's
Office Address
x ---------------------------------------------- ------------------------------
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative
hereby certifies: I have reasonable grounds to believe, based on information
obtained from the investor(s) concerning investment objectives, other
investments, financial situation and needs and any other information known
by me, that investment in the REIT is suitable for such investor(s) in light
of financial position, net worth and other suitability characteristics.
- --------------------------------------------------------------------------------
Registered Representative Date
- --------------------------------------------------------------------------------
General Securities Principal Date
- --------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Signature page Agreed and accepted by:
will not be an effective agreement until it is Apple Suites, Inc.
signed by a duly authorized agent of Apple By__________________________
Suites, Inc. Date________________________
<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:
<TABLE>
<S> <C>
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
==========
</TABLE>
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
II-1
<PAGE>
liabilities under the Securities Act of 1933. The 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>
1.1 Agency Agreement between the Registrant and David Lerner Associates, Inc. with
form of Selected Dealer Agreement attached as Exhibit A thereto. FILED HEREWITH.
1.2 Escrow Agreement. FILED HEREWITH.
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3 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 Opinion of McGuire, Woods, Battle & Boothe LLP as to the legality of
the securities being registered.
8 Opinion of McGuire, Woods, Battle & Boothe LLP as to certain tax matters. FILED HEREWITH.
10.1 Advisory Agreement between the Registrant and Apple Suites Advisors, Inc.
10.2 Property Acquisition/Disposition Agreement between the Registrant and Apple Suites Realty
Group, Inc.
10.3 Apple Suites, Inc. 1999 Incentive Plan.
10.4 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.
23.3 Consent of Lisa B. Kern, Prospective Director. FILED HEREWITH.
23.4 Consent of Bruce H. Matson, Prospective Director. FILED HEREWITH.
23.5 Consent of Michael S. Waters, Prospective Director. FILED HEREWITH.
23.6 Consent of Robert M. Wily, Prospective Director. 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(b)(3) 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 RESIDENTIAL
The following is a summary of rental property owned by Cornerstone Realty
Income Trust, Inc. at December 31, 1998. All properties are residential
communities and are owned on a mortgage-free basis. Cornerstone Realty Income
Trust, Inc. has not disposed of any properties since inception. Purchasers of
our shares will not have any interest in these properties.
<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
</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>
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
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 Residential
Income Trust, Inc. at December 31, 1998. All properties are residential
communities. Except as indicated, all properties are located in the Dallas/Fort
Worth, Texas market. Apple Residential Income Trust, Inc. has not disposed of
any properties since inception. Purchasers of our shares will not have any
interest in these properties.
<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. 3 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
July 26, 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. 3
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 July 26, 1999
- ------------------------- President, the Registrant's Principal
Glade M. Knight Executive Officer, Principal
Financial Officer and Principal
Accounting Officer
</TABLE>
EXHIBIT 1.1
30,166,666.67 Shares
APPLE SUITES, INC.
Common Stock
Agency Agreement
July 23, 1999
David Lerner Associates, Inc.
477 Jericho Turnpike
Syosset, New York 11791
Dear Sirs:
Apple Suites, Inc., a Virginia corporation (the "Company"), is a
corporation that will elect to qualify as a real estate investment trust
pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended ( the "Code"). Subject to the terms and conditions stated herein, the
Company proposes to engage David Lerner Associates, Inc. as its managing dealer
(the "Agent") to solicit offers to buy and obtain purchasers for shares of
common stock, no par value, of the Company as offered by the Prospectus which is
part of the Form S-11 Registration Statement under the Securities Act of 1933
(File No. 333-77055) as filed with the Securities and Exchange Commission on
April 26, 1999. The term "Shares" refers to the shares of common stock, no par
value, of the Company registered pursuant to the Registration Statement referred
to in the preceding sentence. This will confirm our agreement respecting your
engagement as the exclusive agent to solicit offers to buy and obtain purchasers
for the Shares on a "best efforts" basis.
1. Representations and Warranties. The Company represents and warrants
to, and agrees with, the Agent that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-11 (File No.
333-77055), and as a part thereof a preliminary prospectus, both as amended by
such amendments thereto as may have been required to the date hereof, with
respect to the registration of the Shares under the Securities Act of 1933, as
amended (the "Act"); any preliminary prospectus included in such registration
statement or filed with the Commission pursuant to Rule 424 of the Commission
under the Act is hereinafter called a "Preliminary Prospectus"; the registration
statement, as amended at the time it becomes effective under the Act, and the
prospectus filed as a part thereof or mailed for filing pursuant to Rule 424(b)
of the Act are hereinafter called the "Registration Statement" and "Prospectus,"
respectively; except that (A) if the Company files a post-effective amendment to
the registration statement, then the term "Registration Statement" shall refer
to the registration statement as amended by such post-effective amendment
thereto and the term "Prospectus" shall refer to the amended prospectus then on
file with the Commission, and (B) if the prospectus, including any sticker
supplement thereto not theretofore consolidated into a post-effective amendment,
filed by the Company pursuant to either Rule 424(b) or (c) of the rules and
regulations of the Commission under the Act (the "Regulations"), shall differ
from the prospectus on file at the time the Registration Statement or any
post-effective amendment thereto shall have become effective, the term
"Prospectus" shall refer to the prospectus, including any such sticker
supplement, filed pursuant to either Rule 424(b) or (c), as the case may be,
from and after the date on which it shall have been filed. The Company will not
at any time after the Registration Statement initially becomes effective file
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus to which you shall object in writing or which shall be
disapproved by your counsel;
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
1
<PAGE>
requirements of the Act and the Regulations, and did not contain any untrue
statement of a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished to the Company by
you, and relating to you, expressly for use therein;
(c) The Registration Statement and the Prospectus, when effective
or filed with the Commission, as the case may be, conformed or will conform, in
all material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder and did not and will not as of the
applicable effective date as to the Registration Statement and any amendment
thereto and as of the applicable filing date as to the Prospectus and any
amendment or supplement thereto contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished to the Company by
you, and relating to you, expressly for use therein;
(d) There are no contracts or other documents that are required to
be filed as exhibits to the Registration Statement which have not been so filed;
(e) The Company and each of its subsidiaries has been duly
incorporated or organized, is validly existing, and if a corporation is in good
standing, under the laws of Virginia, with power and authority (corporate or
other) to own its properties and conduct its business as described in the
Prospectus, and has been duly qualified as a foreign entity for the transaction
of business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership of property or the
conduct of business, except such jurisdictions, if any, in which the failure to
be so qualified will not have a material adverse effect on the respective
company;
(f) The Company and each of its subsidiaries possesses all
material licenses, permits, authorizations, consents and orders required for the
contemplated method of operation of its business as described in the Prospectus;
(g) The Company has an authorized capitalization as set forth in
the Prospectus; all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and nonassessable
and conform to the description of the capital stock of the Company contained in
the Prospectus; there are no preemptive or other rights to subscribe for or to
purchase any shares of capital stock of the Company; except as described in the
Prospectus, there are no warrants or options to purchase any shares of capital
stock of the Company; and neither the filing of the Registration Statement nor
the offering or sale of the Shares as contemplated by this Agreement gives rise
to any rights for or relating to the registration of any shares of the capital
stock of the Company;
(h) The Shares to be issued and sold by the Company pursuant to
this Agreement have been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein, will be duly and validly
issued and fully paid and nonassessable and will conform to the description of
the Shares contained in the Prospectus;
(i) The Company has the corporate power to enter into this
Agreement, and the issue and sale of the Shares by the Company and the
performance of such Agreement and the consummation by the Company of the
transactions herein contemplated will not result in a breach or violation of any
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which the
Company, is subject, nor will such action result in any violation of the
provisions of the Articles of Incorporation or Bylaws of the Company, or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its properties; and no
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the issue and
sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except such consents, approvals, authorizations,
registrations or qualifications as may be required under the Act and under state
securities or Blue Sky laws in connection with the distribution of the Shares by
the Agent;
(j) This Agreement has been duly authorized executed and delivered
by the Company, and constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent that
enforceability may be limited by bankruptcy, insolvency or other laws affecting
the enforcement of creditors' rights
2
<PAGE>
generally or by general principles of equity, and except to the extent that the
enforceability of the indemnity and contribution provisions contained in this
Agreement may be limited under applicable laws;
(k) The Advisory Agreement has been duly authorized and when
executed and delivered by the parties thereto will constitute a valid and
binding agreement of the parties thereto enforceable in accordance with its
terms, except to the extent that enforceability may be limited by bankruptcy,
insolvency or other laws affecting the enforcement of creditors' rights
generally or by general principles of equity;
(l) Ernst & Young LLP, which has certified the financial
statements of the Company, constitutes an independent public accountant as
required by the Act and the rules and regulations of the Commission thereunder;
(m) The financial statements of the Company, together with related
notes, as set forth in the Registration Statement and the Prospectus, presently
fairly the financial position of the Company at the indicated date;
(n) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, neither the Company nor any of
its subsidiaries has experienced any material adverse change or any development
involving a prospective material adverse change in the general affairs,
management, financial position, properties or results of operations of the
Company, or any of its subsidiaries, otherwise than as set forth in the
Prospectus; and neither the Company nor any of its subsidiaries have entered
into any material transactions other than as described in the Prospectus; and
the capitalization, indebtedness, properties, material liabilities and business
of the Company and its subsidiaries conform to the descriptions thereof
contained in the Prospectus;
(o) There are no legal or governmental proceedings pending to
which the Company or any of its subsidiaries is a party or of which any property
of the Company or any of its subsidiaries is the subject, other than as set
forth or contemplated in the Prospectus, which, individually or in the
aggregate, would have a material adverse effect on the financial position,
stockholders? equity or results of operations of the Company or any of its
subsidiaries and, to the best of their knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened or
contemplated by others;
(p) The Company is not and will not be an "investment company," or
under the control of an investment company as defined in the Investment Company
Act of 1940, as amended; and
(q) The Company is organized in conformity with the requirements
for qualification as a real estate investment trust under Sections 856 through
860 of the Code and the rules and regulations thereunder. The contemplated
method of operation of the Company's business as described in the Prospectus
will allow the Company to satisfy the operational requirements for qualification
as a real estate investment trust under such Sections and such rules and
regulations.
2. Offering and Sale of Shares -- Closing Dates
(a) On the basis of the representations, warranties and covenants
herein contained, but subject to the terms and conditions herein set forth, the
Agent is hereby appointed the selling agent of the Company during the term
herein specified (the "Offering Period") for the purpose of finding subscribers
for the Shares for the account and risk of the Company through a public
offering. Your agency hereunder, which is subject to the conditions of Section 6
hereof, shall continue as long as Shares are being offered through the
Commission filing 333-77055 and any amendments thereto. However, your agency may
be terminated by the Company if you cease to be a member in good standing of the
NASD or if you become subject to an order or other action of or by the
Securities and Exchange Commission or other securities authority substantially
restricting or impairing your ability to offer and sell the Shares under this
Agreement, or if there is a material default by you under this Agreement which
is not promptly cured. Subject to the performance by the Company of all of its
obligations to be performed hereunder, and to the completeness and accuracy of
all the representations and warranties contained herein, the Agent hereby
accepts such agency and agrees on the terms and conditions herein set forth to
use its best efforts during the Offering Period to find subscribers for the
Shares at the current public offering price (each subscriber being required to
invest at least $5,000, or $2,000 in the case of a Qualified Plan, as defined in
the Prospectus). The time for each issuance of and payment for Shares is herein
referred to as a "Closing Date."
3
<PAGE>
(b) If less than all the Shares shall have been subscribed and
paid for at the initial Closing Date (the "Initial Closing Date"), then, at
periodic intervals to be mutually agreed upon by you and the Company during the
Offering Period, there shall be subsequent closings for the payment to the
Company of the purchase price of additional Shares sold by you ("Subsequent
Closing Date(s)") as described in Section 2(c).
(c) Subsequent closing(s) will take place at such time(s), date(s)
and place(s) as determined by the Company, with the concurrence of the Agent.
Shares will be issued to subscribers and compensation will be paid to the Agent
at each Closing Date.
(d) As compensation for your services under this Agreement, you
will be paid, on each Closing Date, a commission equal to 7.5% of the public
offering price for each Share subscribed and paid for at each Closing Date which
was sold by you or a Selected Dealer engaged by you. In addition, you will be
paid, on each Closing Date, a non-accountable Marketing Expense Allowance equal
to 2.5% of the public offering price for each Share subscribed and paid for on
the applicable Closing Date which was sold by you or a Selected Dealer engaged
by you.
(e) Subscriptions for Shares may be solicited by certain dealers
selected by you (the "Selected Dealers") and sales by Selected Dealers shall be
made under a Selected Dealer Agreement in substantially the form attached as
Exhibit A, which sets forth the terms and conditions, including compensation, of
the other dealers participating. Each such Selected Dealer shall be a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD").
Subscribers' checks are to be made payable to the Agent. Selected Dealers must
transmit all such checks directly to the Agent by noon of the next business day
after receipt.
(f) Neither you, the Company, the Agent, nor any Selected Dealer
participating in the offering of the Shares shall, directly or indirectly, pay
or award any finder's fees, commissions or other compensation to any person
engaged by a potential investor for investment advice as an inducement to such
adviser to advise the purchase of Shares; provided, however, that normal sales
commissions payable to a registered broker-dealer or other properly licensed
person for selling Shares shall not be prohibited hereby.
(g) The Company agrees to sell to you for an aggregate of $100,
warrants to purchase 10% of the Shares sold hereunder up to 3,000,000 Common
Shares at an exercise price of $16.50 per Share or 165% of the public offering
price per Share. The warrants may not be sold, transferred, assigned or
hypothecated for one year from the date of their issuance, except to your
officers and shall be 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 Period (the "Warrant Exercise Term"). The
Company agrees, at the request of the holders of a majority of the warrants, at
the Company's 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 the Company during the
seven years following the date of the initial form of the Prospectus. The
Company and you agree if requested by either party to enter into an agreement
describing more fully any of the terms pertaining to matters described in this
paragraph.
3. Covenants of the Company
The Company agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective and will notify you immediately and
confirm in writing (i) when the Registration Statement and any amendments
thereto shall have become effective, or any supplement to the Prospectus or any
amended Prospectus shall have been filed, (ii) of any request by the Commission
for any amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information, (iii) of the happening of any
event which makes untrue any statement of a material fact made in the
Registration Statement or the Prospectus, or which requires the making of a
change in the Registration Statement or the Prospectus, in order to make any
material statement therein not misleading; and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of the initiation of any proceedings for that purpose, or of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution of any proceedings for such purpose; and the
Company will make every
4
<PAGE>
reasonable effort to prevent the issuance by the Commission or any governmental
agency pursuant to the securities laws of any jurisdiction of any stop order
and, if such stop order shall at any time be issued, to obtain the lifting
thereof at the earliest possible moment;
(b) It will, promptly from time to time take such actions as you
may reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales of Shares therein in such
jurisdictions for so long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith neither the Company, the
Advisor nor the Broker shall be required to qualify as a foreign corporation or
to file a general consent to service of process in any jurisdiction;
(c) The Company will deliver to you, as soon as available, a copy
of the Registration Statement as originally filed and each amendment thereto
(including exhibits);
(d) The Company will deliver promptly to you, as soon as the
Registration Statement becomes effective and thereafter from time to time during
the period when the Prospectus is required to be delivered under the Act, such
number of copies of the Prospectus (as amended or supplemented), as you may
reasonably request; and the Company consents to the use of the Prospectus and
any amendments or supplements thereto by you and by any Selected Dealers for the
purposes contemplated by the Act and this Agreement;
(e) During the period when the Prospectus is required to be
delivered under the Act, the Company will comply, so far as it is able and at
the Company's expense, with all requirements imposed upon it by the Act, as now
and as hereafter amended, so far as necessary to permit the continuation of
sales of the Shares during such period in accordance with the provisions of this
Agreement and of the Prospectus;
(f) If any event relating to or affecting the Company shall occur
as a result of which it is necessary, in the opinion of your counsel, to amend
or supplement the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
subscriber, the Company will forthwith prepare and furnish to you, without
expense to you, a reasonable number of copies of an amendment or amendments of,
or a supplement or supplements to, the Prospectus (in form and substance
reasonably satisfactory to your counsel) which will amend or supplement the
Prospectus so that, as amended or supplemented, it will not contain an untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances existing at
the time the Prospectus is delivered to a subscriber, not misleading. For the
purposes of this subsection, the Company will furnish such information with
respect to the Company and any Company properties as you may from time to time
reasonably request;
(g) The Company will furnish to its Shareholders as soon as
practicable after the end of each fiscal year an annual report (including a
balance sheet and statements of income and cash flows of the Company certified
by independent public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement), summary
financial information of the Company for such quarter in reasonable detail;
(h) During a period of five years from the effective date of the
Registration Statement, the Company will furnish to you copies of all reports or
other communications (financial or other) furnished to securityholders, and
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Company is listed;
and (ii) such additional information concerning the business and financial
condition of the Company as you may from time to time reasonably request;
(i) The Company, will not, at any time before or after the
Registration Statement becomes effective, file any amendment to the Registration
Statement or any amendment or supplement to the Prospectus to which you shall
reasonably object in writing or which shall be reasonably disapproved by your
counsel promptly after notice thereof; will deliver to you, from time to time,
all supplemental sales materials (whether designated solely for broker-dealer
use or otherwise) proposed to be used or delivered by the Company in connection
with the offering of Shares, prior to the use
5
<PAGE>
or delivery to third parties of such material, and it will not use or deliver
any such material to which you shall object or which shall be disapproved by
your counsel; and
(j) Subsequent to the date of this Agreement and through each
Closing Date, except as described, contemplated or permitted in the Registration
Statement, the Company will not take any action (or refrain from taking any
action) that will result in the Company incurring any material liability or
obligation, direct or contingent, or enter into any material transaction not in
the ordinary course of business, and there will not be any material change in
the capital stock, long-term debt, notes payable or short-term borrowings of the
Company or any issuance of options, warrants or rights to purchase capital stock
of the Company, or any declaration or payment or commitment to pay or
anticipated payment of any dividend or other distribution on the capital stock
of the Company, except as contemplated in the Prospectus, which has resulted in
or reasonably could be expected to result in a material adverse change in the
business or financial position of the Company, taken as a whole.
4. Expenses. The Company covenants and agrees with you that, except as
otherwise agreed by you and the Company, the Company will pay the following: (i)
the fees, disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to you and the Selected
Dealers; (ii) the cost of printing or producing this Agreement, any Blue Sky
Surveys, all sales material and any other documents in connection with the
offering, purchase, sale and delivery of the Shares; (iii) the cost of preparing
stock certificates, if any; (iv) the costs or expenses of any depositary, escrow
agent, transfer agent or registrar; (v) all travel, lodging and other expenses
incurred by the Company for advertising, publicity and selling materials used in
connection therewith; and (vi) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section. It is understood, however, that you will pay all
of your own costs and expenses, including the fees of your counsel and any
advertising expenses incurred by you in making offers and sales of the Shares.
5. Covenants of Agent. Insofar as the distribution of the offering is
within your control and not the Company's, you agree that the distribution of
the offering will comply with the terms of the Prospectus, the Act, the
Securities Exchange Act of 1934 and the securities laws (including applicable
suitability standards, if any) of all jurisdictions in which you offer the
Shares or whose laws are applicable to your offering of the Shares, and all
rules promulgated under such Acts and laws, and all applicable rules of the
NASD. You agree to provide, from time to time as requested by the Company,
written certificates of compliance by you with the terms of this Agreement.
6. Conditions to Closing. Your obligations hereunder shall be subject,
in your discretion, to the condition that all representations and warranties and
other statements of the Company herein are, at and as of the date hereof, and
each Closing Date, true and correct, and the condition that the Company shall
have performed all of its obligations hereunder theretofore to be performed, and
the following additional conditions:
(a) If required by law, the Prospectus shall have been filed with
the Commission pursuant to Rule 424(b) under the Act within the applicable time
period prescribed for such filing by the rules and regulations under the Act and
in accordance with Section 1(a) of this Agreement; no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction;
(b) (i) The Company shall not have sustained since the date of the
latest audited financial statement included in the Prospectus, any loss or
interference with its business, fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus there shall not have been any change in
the capital stock or long-term debt of the Company as a whole or any change, or
any development involving a prospective change, in or affecting the general
affairs, management, financial position, shareholders' equity or results of
operation of the Company otherwise than as set forth or contemplated in the
6
<PAGE>
Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is in your reasonable judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being issued at such Closing Date on the terms and in the manner
contemplated by the Prospectus;
(c) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange; (ii) a general moratorium on commercial banking activities in New York
declared by either Federal or New York State Authorities; (iii) the engagement
by the United States in hostilities which have resulted in the declaration of a
national emergency or war if the effect of any such event specified in this
clause in your reasonable judgment makes it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares being issued at
such Closing Date on the terms and in the manner contemplated in the Prospectus;
or (iv) such a material adverse change in general economic, political, financial
or international conditions affecting financial markets in the United States
having a material adverse impact on trading prices of securities in general, as,
in your reasonable judgment makes it inadvisable to proceed with the sale of the
Shares through you; and
(d) If requested by you, the Company shall have furnished or
caused to be furnished to you at such Closing Date certificates of officers of
the Company satisfactory to you as to the accuracy of the representations and
warranties of the Company, herein at and as of such Closing Date and as to the
performance by the Company of all of its obligations hereunder to be performed
at or prior to such Closing Date.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless you and each Selected Dealer against any losses, claims, damages
or liabilities, joint or several, to which you and such Selected Dealer may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, any Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto (including any sales
literature furnished to you by any of them), or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
arise out of or are based upon any misrepresentation or breach of warranty or
any alleged misrepresentation or breach of warranty set forth in Section 1 of
this Agreement, or arise out of or are based upon the failure of the Company to
comply with Sections 1 or 3 of this Agreement; and will reimburse you and each
Selected Dealer for any legal or other expenses reasonably incurred by you and
such Selected Dealer in connection with investigating or defending any such
action or claim; provided, however, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement or Prospectus or
any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by you or any Selected Dealer, relating to
you or such Selected Dealer, expressly for use therein; and provided further
that as to any Preliminary Prospectus, this agreement to indemnify and hold
harmless shall not inure to the benefit of you or any Selected Dealer if such
person failed to give or send a copy of the Prospectus, as the same may be
amended or supplemented, to an investor within the time required by the Act and
Regulations, and the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact in such
Preliminary Prospectus was corrected in the Prospectus or any supplement or
amendment thereto.
(b) You and each Selected Dealer will indemnify and hold harmless
the Company (which term shall be deemed to include its subsidiaries) against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of a failure by you or a
Selected Dealer to comply with any covenants contained in Section 5 of or
elsewhere in this Agreement or a Selected Dealer Agreement, or arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with information furnished to the Company by you or such Selected
Dealer relating to you or such Selected Dealer expressly for use therein; and
will reimburse the Company for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such action or claim.
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<PAGE>
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof,
other than reasonable costs of investigation.
(d) If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and you or a Selected
Dealer on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of Company, on the one hand and you or a Selected Dealer on the other in
connection with the statements or omissions which resulted in such losses,
claims, and damages or liabilities (or actions in respect thereof), as well as
any other relevant equitable considerations. The relative benefits received by
the Company, on the one hand and you or a Selected Dealer on the other shall be
deemed to be in the same proportion as the total proceeds from the offering
received by the Company bear to the total compensation received by you or such
Selected Dealer. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, on the one hand or you or a Selected Dealer
on the other, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and you agree that it would not be just and equitable if contributions pursuant
to this subsection (d) were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. No person guilty of fraudulent misrepresentation (within the meaning
of Section ll(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(e) The obligations of the Company under this Section 7 shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
you and any Selected Dealer within the meaning of the Act; and the obligations
of you or any Selected Dealer under this Section 7 shall be in addition to any
liability which you and the respective Selected Dealers may otherwise have and
shall extend, upon the same terms and conditions, to each officer and director
of the Company, the Advisor and the Broker (including any person who, with his
consent, is named in the Registration Statement as proposed to become a director
of the Company) and to each person, if any, who controls the Company within the
meaning of the Act.
8. Survival. The respective indemnities, agreements, representations,
warranties and other statements of the Company and you, as set forth in this
Agreement or made by you or on your behalf pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation (or any
statement as to the results thereof) made by you or on behalf of you or any
controlling person of you or the Company, or any officer or director or
controlling person of the Company, and shall survive each Closing Date.
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9. Effective Date of This Agreement. This Agreement shall become
effective (the "Effective Date") upon the date of your acceptance hereof, as set
forth below.
10. Notices. All statements, requests, notices and agreements hereunder
shall be in writing, and if to you shall be sufficient in all respects if
delivered by hand or sent by registered or certified mail, or by reputable
overnight courier service, to you in care of David Lerner Associates, Inc., at
477 Jericho Turnpike, Syosset, New York 11791, Attention: Daniel E. Chafetz, and
if to the Company shall be sufficient in all respects if delivered by hand or
sent by registered or certified mail, or by reputable overnight courier service,
to the address of the Company as set forth in the Registration Statement,
Attention: Glade M. Knight.
11. Binding Effect. This Agreement shall be binding upon, and inure
solely to the benefit of you and the Company (including its subsidiaries) and to
the extent provided in Sections 7 and 8 hereof, the officers and directors of
the Company (including its subsidiaries) and each person who controls the
Company (including its subsidiaries) or you, and their respective heirs,
executors, administrators, and successors under or by virtue of this agreement.
12. Governing Law. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Virginia.
13. Counterparts. This Agreement may be executed by any one or more of
the parties in any number of counterparts, each of which shall be deemed to be
an original, but all such counterparts shall together constitute one and the
same instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us four counterparts hereof, and upon the acceptance hereof by
you, this letter and such acceptance hereof shall constitute a binding agreement
among you and the Company.
Very truly yours,
APPLE SUITES, INC
By: /s/ S. J. Olander, Jr.
------------------------------------
Stanley J. Olander, Jr.
Vice President
Accepted as of the 26th day of July, 1999.
DAVID LERNER ASSOCIATES, INC., AS
MANAGING DEALER
By: Constance Ferreira
-----------------------------------
Title: Sr. V. President
Chief Operating Officer
-----------------------------------
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Exhibit A
APPLE SUITES, INC.
Common Shares
SELECTED DEALER AGREEMENT
, 199
--------------- --
Gentlemen:
We have agreed to use our best efforts to sell up to 30,166,666.67
common shares (the "Shares") in Apple Suites, Inc., a Virginia corporation (the
"Company"), as described in the enclosed prospectus (the "Prospectus"). The
Shares are being offered by David Lerner Associates, Inc., as Sales Agent for
the Company ("DLA"), pursuant to an agency agreement (the "Agency Agreement")
among us and the Company. We have been advised by the Company that the
registration statement relating to the Shares (and including the Prospectus)
(the "Registration Statement") filed by the Company under the Securities Act of
1933, as amended (the "Act"), has become effective with the Securities and
Exchange Commission.
We are hereby inviting you, subject to the other terms and conditions
set forth below and in the Prospectus, to solicit subscriptions for the Shares.
You confirm that you are a member in good standing of the National Association
of Securities Dealers, Inc. (the "NASD") and that you are currently registered
as a dealer under the Securities Exchange Act of 1934, as amended (the "1934
Act"). You hereby agree to comply with the provisions of Rule 2810 of the Rules
of Fair Practice of the NASD. In addition, you hereby agree to comply with the
provisions of Rules 2420, 2730, 2740 and 2750 of the Rules of Fair Practice of
the NASD to the extent such sections are applicable to your activities in
connection with this offering.
1. You agree to offer the Shares at a purchase price of $10.00 per
Share. Upon the admission of subscribers to the Company, you shall be paid a
commission equal to $___ (____%) per Share for each Share purchased by an
Investor provided by you. Commissions will be payable to you only with respect
to transactions that are lawful in the jurisdiction wherein they occur.
2. Subscriptions may be taken by you from your customers in accordance
with the procedures described in the Prospectus. Each subscription solicited by
you shall be promptly forwarded by you, in accordance with the requirements of
SEC Rule 15c2-4, together with a check payable to "___________________________,"
for the full purchase price of the Shares subscribed for, to: David Lerner
Associates, Inc., 477 Jericho Turnpike, Syosset, New York 11791. Such forwarding
shall take place by noon of the next business day after receipt by you from your
customer of such subscription and payment. Notwithstanding the foregoing, any
subscribers' checks not properly completed as described above shall be promptly
returned to such subscribers not later than the next business day following
receipt by you of such checks. With respect to each subscription solicited by
you, you shall obtain and furnish to the Company in the case of United States
residents, (i) the subscriber's name, address, taxpayer identification number,
the number of Shares to be acquired by each subscriber, (ii) the certification
as to non-foreign status as required by Temp. Treas. Reg. Section 1.1445-2T(b),
and (iii) Form W-9.
<PAGE>
All acceptable subscriptions solicited by you will be strictly subject
to acceptance thereof by the Company, which has reserved the right to refuse to
accept in whole or in part any subscription and related payment and to refuse to
accept as a purchaser any person for any reason whatsoever. Subscriptions
delivered to the Company will be accepted or rejected within 30 days of their
receipt; provided, however that the Company may at any time reject in whole or
in part any subscription in its sole and absolute discretion if the total
offering for the Company is oversubscribed, or if the Company would be
prohibited from accepting such subscription by any Blue Sky or other applicable
securities law or regulation. If the Company rejects a subscription in whole or
in part, it will arrange for the Sales Agent to return to such subscriber within
____ days after rejection of the subscription by the Company, any payment made
by him applicable to the portion of the subscription which has been rejected.
3. Neither you nor any other person is authorized to give any
information or make any representations in connection with the sale of any of
the Shares other than those contained in the Prospectus or in the supplemental
sales material authorized for use in connection with this offering, as described
below. No dealer is authorized to act as agent for us when offering any of the
Shares to the public or otherwise, it being understood that you and each other
Selected Dealer are independent contractors with us. Nothing herein contained
shall constitute you or any other Selected Dealer an association or partner with
us.
4. We understand that the Company will provide you with such number of
copies of the enclosed Prospectus and such number of copies of amendments and
supplements thereto as you may reasonably request. We also understand that the
Company may provide you with certain supplemental sales literature for Shares in
the Company. You agree that such material shall not be used in connection with
the solicitation of subscribers for Shares unless accompanied or preceded by the
Prospectus as then currently in effect and as it may be amended or supplemented
in the future. You agree that neither you nor any person under your control will
deliver or show to any prospective subscriber for Shares any supplementary sales
material other than the Prospectus (including, inter alia, transmittal letters,
underwriting memoranda, summary descriptions, graphics, supplemental exhibits,
media advertising, charts, pictures, written scripts or outlines), except as
supplied by the Company and described under the caption "SALES LITERATURE" in
the Prospectus, or otherwise specifically described in written advice from the
Company authorizing the type and manner of use. The delivery or showing of any
such other supplementary sales materials to prospective subscribers is expressly
prohibited except to the extent specified in such written advice.
5. You agree that neither you nor any person under your control shall
directly or indirectly pay or award any finder's fees, commissions or other
compensation to any person engaged by a potential investor for investment advice
as an inducement to such advisor to advise the purchase of Shares; provided,
however, that this provision shall not prohibit the normal sales commission
payable to any registered broker-dealer or other properly licensed person for
selling Shares. In addition, you agree not to receive any rebates or give-ups or
participate in any reciprocal business arrangements which would violate any
restriction on the Company contained in the Prospectus.
6. You represent that neither you nor any of your directors, officers,
partners or "persons associated with" you (as defined in the By-laws of the
NASD), nor, to your knowledge, any related person (as defined by the NASD in its
Interpretation with respect to Review of Corporate Financing) have participated
or intend to participate in any transaction or dealing as to which documents or
information are required to be filed with the NASD pursuant to such
Interpretation.
7. This Agreement shall terminate simultaneously with the termination
of the Agency Agreement, but may be terminated by us prior thereto at any time
by written or telegraphic notice. Upon termination, rights and obligations
hereunder shall cease, except rights and obligations accrued or unsatisfied at
the date of termination.
8. You agree that in selling Shares of the Company you will comply with
the applicable provisions of the Act, the 1934 Act, the applicable rules and
regulations of the Securities and Exchange Commission thereunder, the laws of
the jurisdictions in which the Shares are offered and sold and the applicable
rules and regulations of the NASD. We shall have full authority to take such
action as we may deem advisable in respect to all matters pertaining to the
offering. We shall be under no liability to you except for lack of good faith
and for obligations expressly assumed by us in this Agreement. Nothing contained
in this paragraph is intended to operate as, and the provisions of this
paragraph shall not constitute, a waiver by you of compliance with any provision
of the Act, the 1934 Act, or the rules and regulations thereunder.
2
<PAGE>
9. Upon application to us, we will inform you as to the states and
other jurisdictions of the United States in which we believe the Shares have
been qualified for the sale under, or are exempt from the requirements of, the
respective securities laws of such jurisdictions, but we assume no
responsibility or obligation as to your right to sell the Shares in any
jurisdiction. You covenant and agree that you will not effect sales in any
jurisdiction where the Shares are not qualified or exempt from qualification.
You further agree to provide us, promptly upon our request, with geographic
distribution information, setting forth (a) the number of Shares sold, (b) the
number of transactions done, (c) the jurisdictions where sold, and (d) the types
of purchasers.
10. You confirm that you are familiar with Securities Act Release No.
4968 and Rule 15c2-8 under the 1934 Act, relating to the distribution of
preliminary and final prospectuses, and that you have complied and will continue
to comply therewith.
11. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless DLA and each Selected
Dealer against any losses, claims, damages or liabilities, joint or several, to
which they may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, any Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto (including
any sales literature furnished to you by the Company), or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or arise out of or are based upon any misrepresentation or breach of
warranty or any alleged misrepresentation or breach of warranty set forth in
Section 1 of the Agency Agreement, or arise out of or are based upon the failure
of the Company to comply with Sections 1 or 3 of the Agency Agreement; and will
reimburse DLA and each Selected Dealer for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such action or claim; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement or Prospectus
or any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by DLA or any Selected Dealer, relating to
them, expressly for use therein; and provided further that as to any Preliminary
Prospectus, this agreement to indemnify and hold harmless shall not inure to the
benefit of DLA or any Selected Dealer if such person failed to give or send a
copy of the Prospectus, as the same may be amended or supplemented, to an
investor within the time required by the Act and Regulations, and the untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact in such Preliminary Prospectus was corrected
in the Prospectus or any supplement or amendment thereto.
(b) DLA and each Selected Dealer will indemnify and hold harmless the
Company (which term shall be deemed to include its subsidiaries) against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of a failure by DLA or a
Selected Dealer to comply with any covenants contained in Section 8 of or
elsewhere in this Agreement, or arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by you or such Selected Dealer relating to
you or such Selected Dealer expressly for use therein; and will reimburse the
Company for any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such action or claim.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled
3
<PAGE>
to participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation.
(d) If the indemnification provided for in this Section is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and DLA or a Selected Dealer on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c) above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of Company on the one hand
and DLA or a Selected Dealer on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and DLA or a Selected Dealer on the other shall be deemed to be in the same
proportion as the total proceeds from the offering received by the Company bear
to the total compensation received by DLA or such Selected Dealer. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or DLA or a Selected Dealer on the other, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and we agree that it would not
be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section ll(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls DLA and
any Selected Dealer within the meaning of the Act; and the obligations of DLA or
any Selected Dealer under this Section shall be in addition to any liability
which DLA and the respective Selected Dealers may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of the
Company, the Advisor and the Broker (including any person who, with his consent,
is named in the Registration Statement as about to become a director of the
Company) and to each person, if any, who controls the Company (including its
subsidiaries) within the meaning of the Act.
12. This Agreement shall be subject to and interpreted consistently with
the Agency Agreement. All representations, warranties, and covenants and
agreements made by you herein shall inure to the benefit of David Lerner
Associates, Inc. and the Company (including its subsidiaries).
Any notice from us to you shall be deemed to have been duly given if
mailed or telegraphed to you at your address as specified below.
Please confirm your agreement hereby by signing and returning to us at
477 Jericho Turnpike Syosset, New York 11791, Attn: Daniel E. Chafetz, an
original of this letter.
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Upon receipt thereof, this letter and such signed copy will evidence the
agreement among us.
Very truly yours,
DAVID LERNER ASSOCIATES, INC.
By:
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Title:
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READ AND AGREED TO:
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By:
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Title:
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Address:
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5
EXHIBIT 1.2
ESCROW AGREEMENT
(APPLE SUITES, INC.)
THIS ESCROW AGREEMENT, dated as of July 23, 1999 ("Escrow Agreement"),
is by and among DAVID LERNER ASSOCIATES, INC., a New York corporation ("Agent");
APPLE SUITES, INC., a Virginia corporation ("Company"); and FIRST UNION NATIONAL
BANK, a national banking association, as Escrow Agent hereunder ("Escrow
Agent").
BACKGROUND
A Company has engaged Agent to sell up to 30,166,666.67 Common Shares,
no par value (the "Shares"), with a minimum required investment of $5,000 in
Shares ($2,000 in Shares in the case of Qualified Plans) at a price of $9.00 per
Share until the Minimum Offering of 1,666,666.67 Shares ($15,000,000) is
achieved and thereafter $10.00 per Share on a "best efforts" basis, pursuant to
Registration Statement No. 333-77055 filed with the Securities and Exchange
Commission (the "SEC") which includes a Prospectus, as supplemented and amended
from time to time (the "Offering Document").
B In accordance with the Offering Document, subscribers to the Shares
(the "Subscribers" and individually, a "Subscriber") will be required to submit
full payment for their respective investments in the manner set forth in their
subscription agreements.
C In accordance with the Offering Document, all payments received by
Agent on or before sale of the Minimum Offering amount (as defined in the
Offering Document) in connection with subscriptions for Shares shall be promptly
forwarded to Escrow Agent, and Escrow Agent has agreed to accept, hold, and
disburse such funds deposited with it and the earnings thereon in accordance
with the terms of this Escrow Agreement.
D In order to establish the escrow of funds and to effect the
provisions of the Offering Document, the parties hereto have entered into this
Escrow Agreement.
STATEMENT OF AGREEMENT
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
for themselves, their successors and assigns, hereby agree as follows:
1. Definitions. The following terms shall have the following meanings
when used herein:
"Agent" shall mean David Lerner Associates, Inc., and/or any
selected dealer participating at a later date.
<PAGE>
"Cash Investment" shall mean the number of Shares to be
purchased by any Subscriber multiplied by the offering price per share of $9.00
until the Minimum Offering is achieved and thereafter $10.00 as set forth in the
Offering Document. Cash Investments shall not include any interest or other
earnings thereon.
"Cash Investment Instrument" shall mean a check, money order
or similar instrument, made payable to "First Union National Bank, Escrow
Agent," or funds wired to Escrow Agent directed in the manner described in
Section 3 and referencing the Agent's account number in full payment for the
Shares to be purchased by any Subscriber or Subscribers.
"Escrow Funds" shall mean the funds deposited with Escrow
Agent pursuant to this Agreement, consisting of (1) the Cash Investments, and
(2) any interest and other earnings thereon.
"Minimum Offering" shall mean the sale of $15,000,000 in
Shares at $9.00 per Share (1,666,666.67 Shares) by the Company in the offering
made by the Offering Document.
"Shares" shall have the meaning set forth in the section of
this Escrow Agreement titled "Background."
"Subscriber" or "Subscribers" shall have the meaning set forth
in the section of this Escrow Agreement titled "Background."
"Subscription Accounting" shall mean an accounting of all
subscriptions for Shares received by Agent as of the date of such accounting,
indicating for each subscription the Subscriber's name, social security number
and address, the number and total purchase price of subscribed Shares, the date
of receipt by Agent of the Cash Investment Instrument for the Subscriber, and
notations of any nonpayment of the Cash Investment Instrument submitted with
such subscription, any withdrawal of such subscription by the Subscriber, any
rejection of such subscriber by Company, or other termination, for whatever
reason, of such subscription.
2. Appointment of and Acceptance by Escrow Agent. Company and Agent
hereby appoint Escrow Agent to serve as escrow agent hereunder, and Escrow Agent
hereby accepts such appointment in accordance with the terms of this Escrow
Agreement.
3. Deposits into Escrow
a. Procedures for Deposits. Upon receipt by Agent of any Cash
Investment Instrument for the purchase of Shares, Agent shall forward to Escrow
Agent the Cash Investment Instrument for deposit into the following escrow
account, or shall wire to Escrow Agent funds aggregating the Cash Investments of
one or more Subscribers for deposit in the following escrow account:
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First Union National Bank, Escrow Agent
Charlotte, North Carolina
ABA # 053000219
Account # 5000000016439
ATTN: Karen Atkinson
for Apple Suites, Inc. Escrow Account
Notify (704) 374-2670
Each such deposit shall be accompanied by a Subscription
Accounting.
The Escrow Agent is under no obligation to accept deposits from anyone
other than the Agent. If a deposit is received by 12:00 P.M. on a given business
day, it will be accepted that business day; otherwise it will be accepted on or
as of the next business day, except that a wire of funds will be deemed to be
received on the actual day of receipt.
ALL FUNDS SO DEPOSITED SHALL REMAIN THE PROPERTY OF THE
SUBSCRIBERS ACCORDING TO THEIR RESPECTIVE INTERESTS AND SHALL NOT BE SUBJECT TO
ANY LIEN OR CHARGE BY ESCROW AGENT OR BY JUDGMENT OR CREDITORS' CLAIMS AGAINST
COMPANY UNTIL RELEASED TO COMPANY IN ACCORDANCE WITH SECTION 4(A) HEREOF.
b. Deposits Subject to Collection. Agent and Company
understand and agree that all checks and similar instruments received by Escrow
Agent hereunder are subject to collection requirements of presentment and final
payment, and that the funds represented thereby cannot be drawn upon or
disbursed until such time as final payment has been made and is no longer
subject to dishonor. Upon receipt, Escrow Agent shall, as appropriate, process
each Cash Investment Instrument for collection, and the proceeds thereof shall
be held as part of the Escrow Funds until disbursed in accordance with Section 4
hereof. If, upon presentment for payment, any Cash Investment Instrument is
dishonored, Escrow Agent's sole obligation shall be to notify Agent of such
dishonor and to return such Cash Investment Instrument to Agent to take whatever
action it deems necessary. Notwithstanding the foregoing, if for any reason any
Cash Investment Instrument is uncollectible after payment of the funds
represented thereby has been made by Escrow Agent, the party receiving such
funds shall immediately reimburse Escrow Agent upon receipt from Escrow Agent of
written notice thereof.
Upon receipt of any Cash Investment Instrument that represents
payment of less than or greater than the Cash Investment, Escrow Agent's sole
obligation shall be to notify Company and Agent of such fact and to return such
Cash Investment Instrument to Agent.
c. Form of Instruments. All Cash Investment Instruments shall
be made payable to the order of, or endorsed to the order of, "First Union
National Bank, Escrow Agent" and Escrow Agent shall not be obligated to accept,
or present for payment, any Cash Investment Instrument that is not payable or
endorsed in that manner, but this paragraph shall not apply in the case of a
direct wire of funds into the escrow account as described in Section 3.
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4. Disbursements of Escrow Funds.
a. Generally. Subject to the provisions of Section 10 hereof,
Escrow Agent shall pay to Company the liquidated value of the Cash Investments
(excluding, however, any interest or other earnings on Cash Investments), by
certified or bank check or by wire transfer, no later than three (3) days
following receipt of the following documents:
(1) A request in writing from the Company for
disbursement, including a statement that the
conditions, if any, to disbursement
described in the Offering Document have been
satisfied; and
(2) Such other certificates and notices as
Escrow Agent shall reasonably require.
b. Interest. At such time or times as amounts comprising the
Cash Investment portion of the Escrow Funds are paid to Company pursuant to
Section 4(a) of this Escrow Agreement, Escrow Agent shall simultaneously pay to
Agent the portion of the Escrow Funds comprising interest and other earnings on
the Cash Investments. At the time of such payments, Escrow Agent shall also
deliver to Agent a notice (the "Earnings Notice") showing in reasonable detail
the rate or rates at which interest or other earnings were earned on Cash
Investments during the period such Cash Investments were held by Escrow Agent
and the period or periods during which such rate or rates applied. Such interest
and other earnings shall thereafter promptly be paid by Agent to Subscribers in
a manner determined by Agent to be consistent with the Offering Document.
c. Rejection of Any Subscription or Termination of the
Offering. No later than five (5) business days after receipt by Escrow Agent of
written notice (1) from Company or Agent that Company intends to reject a
Subscriber's subscription, or (2) that a subscriber has revoked his
subscription, or (3) from the SEC or any other federal or state regulatory
authority that a stop order has been issued with respect to the Offering
Document and has remained in effect for at least twenty (20) days, Escrow Agent
will, upon written instructions given by the Company, transmit to Agent that
portion of the Escrow Funds attributable to such subscriber or subscribers
affected by such event, or equal to the amount of the reduction in a
subscription, as the case may be, with interest, and Agent shall promptly
deposit such funds directly to the account of the Subscriber or Subscribers
entitled thereto, together with an Earnings Notice of the type described in
Section 4(b).
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<PAGE>
5. Suspension of Performance or Disbursement Into Court. If, at any
time, there shall exist any dispute between Agent, Company, Escrow Agent, any
Subscriber or any other person with respect to the holding or disposition of any
portion of the Escrow Funds or any other obligations of Escrow Agent hereunder,
or if at any time Escrow Agent is unable to determine, to Escrow Agent's sole
satisfaction, the proper disposition of any portion of the Escrow Funds or
Escrow Agent's proper actions with respect to its obligations hereunder, or if
Agent and Company have not within 30 days of the furnishing by Escrow Agent of a
notice of resignation pursuant to Section 7 hereof appointed a successor Escrow
Agent to act hereunder, then Escrow Agent may, in its sole discretion, take
either or both of the following actions:
a. Suspension of Performance. Suspend the performance of any
of its obligations under this Escrow Agreement until such dispute or uncertainty
shall be resolved to the sole satisfaction of Escrow Agent or until a successor
Escrow Agent shall have been appointed (as the case may be); provided however,
that Escrow Agent shall continue to invest the Escrow Funds in accordance with
Section 6 hereof; and/or
b. Court Proceeding. Petition (by means of an interpleader
action or any other appropriate method) any court of competent jurisdiction in
Charlotte, North Carolina, for instructions with respect to such dispute or
uncertainty, and pay into such court all funds held by it as Escrow Funds for
holding and disposition in accordance with the instructions of such court.
Escrow Agent shall have no liability to Agent, Company, any Subscriber
or any other person with respect to any such suspension of performance or
disbursement into court, specifically including any liability or claimed
liability that may arise, or be alleged to have arisen, out of or as a result of
any delay in the disbursement of funds held as Escrow Funds or any delay in or
with respect to any other action required or requested of Escrow Agent.
6. Investment of Funds. Escrow Agent shall invest and reinvest the
Escrow Funds as Company shall direct (subject to applicable minimum investment
requirements) in writing; provided, however, that no investment or reinvestment
may be made except in the following:
a. Short-term direct obligations of the United States of
America or obligations the principal of and the interest on which are
unconditionally guaranteed by the United States of America; or
b. Short-term certificates of deposit issued by any bank (as
defined in Section 3(a)(6) of the Securities Exchange Act of 1934) (including
Escrow Agent and its affiliates) located in the United States and having a net
worth of at least $50,000,000; or
c. 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 net worth of at least $50,000,000; or
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<PAGE>
d. Any money market fund substantially all of which is
invested in the foregoing investment categories, including any money market fund
managed by Escrow Agent and any of its affiliates.
If Escrow Agent has not received written instructions from Company at
any time that an investment decision must be made, Escrow Agent shall invest the
Escrow Funds, or such portion thereof as to which no written instructions have
been received, in investments described in clause (d) above. Each of the
foregoing investments shall be made in the name of Escrow Agent in its stated
capacity as escrow agent. No investment shall be made in any instrument or
security that has a maturity of greater than three (3) months. Notwithstanding
anything to the contrary contained herein, Escrow Agent may, without notice to
Company or Agent, sell or liquidate any of the foregoing investments at any time
if the proceeds thereof are required for any release of funds permitted or
required hereunder, and Escrow Agent shall not be liable or responsible for any
loss, cost or penalty resulting from any such sale or liquidation. With respect
to any funds received by Escrow Agent for deposit into the Escrow Funds or any
written investment instruction of Company received by Escrow Agent after ten
o'clock, a.m., Charlotte, North Carolina, time, Escrow Agent shall not be
required to invest such funds or to effect such investment instruction until the
next day upon which banks in Charlotte, North Carolina, are open for business.
Escrow Agent shall deliver to Company, upon request by Company, an
accounting of all funds held in escrow pursuant to this Agreement, to the extent
such funds have not been previously paid over by Escrow Agent.
7. Resignation and Removal of Escrow Agent.
a. Generally. Escrow Agent may resign from the performance of
its duties hereunder at any time by giving at least five (5) days' prior written
notice to Agent and Company or may be removed, with or without cause, by Agent
and Company, acting jointly in writing, at any time by the giving of at least
five (5) days' prior written notice to Escrow Agent. Such resignation or removal
shall take effect upon the appointment of a successor Escrow Agent as provided
herein below. Upon any such notice of resignation or removal, Agent and Company
jointly shall appoint a successor Escrow Agent hereunder, which shall be a bank
(as defined in Section 3(a)(6) of the Securities Exchange Act of 1934). Upon the
acceptance in writing of any appointment as Escrow Agent hereunder by a
successor Escrow Agent, such successor Escrow Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Escrow Agent, and the retiring Escrow Agent shall be discharged from
its duties and obligations under this Escrow Agreement, but shall not be
discharged from any liability for actions taken as escrow agent hereunder prior
to such succession. After any retiring Escrow Agent's resignation or removal,
the provisions of this Escrow Agreement shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Escrow Agent under this
Escrow Agreement.
b. Following Sale of Minimum Offering. Notwithstanding
anything to the contrary in this Escrow Agreement, at any time after Shares
representing the Minimum Offering have been sold (and the corresponding Escrow
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<PAGE>
Funds disbursed in accordance with this Escrow Agreement), Company and Agent, by
two (2) days' prior written notice to Escrow Agent, may terminate this Escrow
Agreement. Any Escrow Funds remaining at the time of termination of this Escrow
Agreement shall be disbursed in accordance with Section 4 hereof.
8. Liability of Escrow Agent. Escrow Agent shall have no liability or
obligation with respect to the Escrow Funds except for Escrow Agent's willful
misconduct or gross negligence. Escrow Agent's sole responsibility shall be for
the safekeeping, investment, and disbursement of the Escrow Funds in accordance
with the terms of this Escrow Agreement. Escrow Agent shall have no implied
duties or obligations and shall not be charged with knowledge or notice of any
fact or circumstance not specifically set forth herein or in a written notice
provided hereunder. Escrow Agent may rely upon any instrument, not only as to
its due execution, validity and effectiveness, but also as to the truth and
accuracy of any information contained therein which Escrow Agent shall in good
faith believe to be genuine, to have been signed or presented by the person or
parties purporting to sign the same and to conform to the provisions of this
Escrow Agreement. In no event shall Escrow Agent be liable for incidental,
indirect, special, consequential or punitive damages. Escrow Agent shall not be
obligated to take any legal action or commence any proceeding in connection with
the Escrow Funds or any account in which Escrow Funds are deposited or this
Escrow Agreement, or to appear in, prosecute or defend any such legal action or
proceeding. Without limiting the generality of the foregoing, Escrow Agent shall
not be responsible for or required to enforce any of the terms or conditions of
any subscription agreement with any Subscriber or any other agreement between
Company, Agent and/or any Subscriber. Escrow Agent shall not be responsible or
liable in any manner for the performance by Company or any Subscriber of their
respective obligations under any subscription agreement nor shall Escrow Agent
be responsible or liable in any manner for the failure of Company, Agent or any
third party (including any Subscriber) to honor any of the provisions of this
Escrow Agreement. Escrow Agent may consult legal counsel selected by it in the
event of any dispute or question as to the construction of any of the provisions
hereof or of any other agreement or of its duties hereunder, and shall incur no
liability and shall be fully protected from any liability whatsoever in acting
in good faith in accordance with the opinion or instruction of such counsel.
Company shall promptly pay, upon demand, the reasonable fees and expenses of any
such counsel.
9. Indemnification of Escrow Agent. From and at all times after the
date of this Escrow Agreement, Company shall, to the fullest extent permitted by
law, indemnify and hold harmless the Escrow Agent and each director, officer,
employee, attorney, agent and affiliate of Escrow Agent (collectively, the
"Indemnified Parties") against any and all actions, claims (whether or not
valid), losses, damages, liabilities, costs and expenses of any kind or nature
whatsoever (including without limitation reasonable attorneys' fees, costs and
expenses) incurred by or asserted against any of the Indemnified Parties from
and after the date hereof, whether direct, indirect or consequential, as a
result of or arising from or in any way relating to any claim, demand, suit,
action or proceeding (including any inquiry or investigation) by any person,
whether threatened or initiated, asserting a claim for any legal or equitable
remedy against any person under any statute or regulation, including, but not
limited to, any federal or state securities laws, or under any common law or
equitable cause or otherwise, arising from or in connection with the
negotiation, preparation, execution, performance or failure of performance of
this Escrow Agreement or any transactions contemplated herein, whether or not
any such
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<PAGE>
Indemnified Party is a party to any such action, proceeding, suit or
the target of any such inquiry or investigation; provided, however, that no
Indemnified Party shall have the right to be indemnified hereunder for any
liability finally determined by a court of competent jurisdiction, subject to no
further appeal, to have resulted solely from the gross negligence or willful
misconduct of such Indemnified Party. If any such action or claim shall be
brought or asserted against any Indemnified Party, such Indemnified Party shall
promptly notify Company in writing, and Company shall assume the defense
thereof, including the employment of counsel and the payment of all expenses.
Such Indemnified Party shall, in its sole discretion, have the right to employ
separate counsel in any such action and to participate in the defense thereof,
and the fees and expenses of such counsel shall be paid by such Indemnified
Party unless (a) Company agrees to pay such fees and expenses, or (b) Company
shall fail to assume the defense of such action or proceeding or shall fail, in
the reasonable discretion of such Indemnified Party, to employ counsel
satisfactory to the Indemnified Party in any such action or proceeding, or (c)
the named parties to any such action or proceeding (including any impleaded
parties) include both Indemnified Party and Company, and Indemnified Party shall
have been advised by counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to
Company. All such fees and expenses payable by Company pursuant to the foregoing
sentence shall be paid from time to time as incurred, both in advance of and
after the final disposition of such action or claim. The obligations of Company
under this Section 9 shall survive any termination of this Escrow Agreement and
the resignation or removal of Escrow Agent.
10. Compensation to Escrow Agent.
a. Fees and Expenses. Company shall compensate Escrow Agent
for its services hereunder in accordance with Exhibit A attached hereto and, in
addition, shall reimburse Escrow Agent for all of its reasonable and necessary
out-of-pocket expenses, including attorneys' fees, travel expenses, telephone
and facsimile transmission costs, postage (including express mail and overnight
delivery charges), copying charges and the like. All of the foregoing
compensation and reimbursement obligations shall be payable by Company upon
demand by Escrow Agent. The obligations of Company under this Section 10 shall
survive any termination of this Escrow Agreement and the resignation or removal
of Escrow Agent.
b. Disbursements from Escrow Funds to Pay Escrow Agent. Escrow
Agent is authorized to and may disburse from time to time, to itself or to any
Indemnified Party from the Escrow Funds (but only to the extent of Company's
rights thereto), the amount of any compensation and reimbursement of
out-of-pocket expenses due and payable hereunder (including any amount to which
Escrow Agent or any Indemnified Party is entitled to seek indemnification
pursuant to Section 9 hereof). Escrow Agent shall, prior to disbursement, notify
Company of any disbursement from the Escrow Funds to itself or to any
Indemnified Party in respect of any compensation or reimbursement hereunder and
shall furnish to Company copies of all related invoices and other statements.
c. Security and Offset. Company hereby grants to Escrow Agent
and the Indemnified Parties a security interest in and lien upon the Escrow
Funds (but only to the extent of Company's rights thereto) to secure all
obligations hereunder, and Escrow Agent and the
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<PAGE>
Indemnified Parties shall have the right to offset the amount of any
compensation or reimbursement due any of them hereunder (including any claim for
indemnification pursuant to Section 9 hereof) against the Escrow Funds (but only
to the extent of Company's rights thereto.) If for any reason the Escrow Funds
available to Escrow Agent and the Indemnified Parties pursuant to such security
interest or right of offset are insufficient to cover such compensation and
reimbursement, Company shall promptly pay such amounts to Escrow Agent and the
Indemnified Parties upon receipt of an itemized invoice.
11. Representations and Warranties
a. Company. Company makes the following representations and
warranties to Escrow Agent:
(1) Company is a corporation duly organized, validly
existing, and in good standing under the laws of the Commonwealth of Virginia,
and has full power and authority to execute and deliver this Escrow Agreement
and to perform its obligations hereunder;
(2) This Escrow Agreement has been duly approved by
all necessary corporate action of Company, has been executed by duly authorized
officers of Company, and constitutes a valid and binding agreement of Company,
enforceable in accordance with its terms.
(3) The execution, delivery, and performance by
Company of this Escrow Agreement will not violate, conflict with, or cause a
default under the articles of incorporation or bylaws of Company, any applicable
law or regulation applicable to the Company, any court order or administrative
ruling or decree to which Company is a party or any of its property is subject,
or any agreement, contract, indenture, or other binding arrangement to which
Company is a party or any of its property is subject. The execution, delivery
and performance of this Escrow Agreement is consistent with and accurately
described in the Offering Document, and the allocation of interest and other
earnings to Subscribers, as set forth in Section 4 hereof, has been properly
described therein.
(4) No party other than the parties hereto and the
prospective Subscribers have, or shall have, any lien, claim or security
interest in the Escrow Funds or any part thereof. No financing statement under
the Uniform Commercial Code is on file in any jurisdiction claiming a security
interest in or describing (whether specifically or generally) the Escrow Funds
or any part thereof.
(5) Company hereby acknowledges that the status of
Escrow Agent is that of agent only for the limited purposes set forth herein,
and hereby represents and covenants that no representation or implication has
been or shall be made that Escrow Agent has investigated the desirability or
advisability of investment in the Shares or has approved, endorsed or passed
upon the merits of the investment therein and that the name of the Escrow Agent
has not and shall not be used in any manner in connection with the offer or sale
of the Shares other than to state that the Escrow Agent has agreed to serve as
escrow agent for the limited purposes set forth herein.
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(6) All of the representations and warranties of
Company contained herein are true and complete as of the date hereof and will be
true and complete at the time of any deposit to or disbursement from the Escrow
Funds.
b. Agent. Agent makes the following representations and
warranties to Escrow Agent:
(1) Agent is a corporation duly organized, validly
existing, and in good standing under the laws of the State of New York, and has
full power and authority to execute and deliver this Escrow Agreement and to
perform its obligations hereunder;
(2) This Escrow Agreement has been duly approved by
all necessary corporate action of Agent, has been executed by duly authorized
officers of Agent, and constitutes a valid and binding agreement of Agent,
enforceable in accordance with its terms.
(3) The execution, delivery, and performance by Agent
of this Escrow Agreement will not violate, conflict with, or cause a default
under the articles of incorporation or bylaws of Agent, any applicable law,
regulation or license applicable to Agent, any court order or administrative
ruling or decree to which Agent is a party or any of its property is subject, or
any agreement, contract, indenture, or other binding arrangement to which Agent
is a party or any of its property is subject. The execution, delivery and
performance of this Agreement is consistent with and accurately described in the
Offering Document, and the allocation of interest and other earnings to
Subscribers, as set forth in Section 4 hereof, has been properly described
therein.
(4) The deposit with Escrow Agent by Agent of Cash
Investment Instruments pursuant to Section 3 hereof shall be deemed a
representation and warranty by Agent that such Cash Investment Instrument
represents a bona fide sale to the Subscriber or Subscribers described therein
of the amount of Shares set forth therein, subject to and in accordance with the
terms of the Offering Document.
(5) Agent hereby acknowledges that the status of
Escrow Agent is that of agent only for the limited purposes set forth herein,
and hereby represents and covenants that no representation or implication has
been or shall be made that Escrow Agent has investigated the desirability or
advisability of investment in the Shares or has approved, endorsed or passed
upon the merits of the investment therein and that the name of the Escrow Agent
has not and shall not be used in any manner in connection with the offer or sale
of the Shares other than to state that the Escrow Agent has agreed to serve as
escrow agent for the limited purposes set forth herein.
(6) All of the representations and warranties of
Agent contained herein are true and complete as of the date hereof and will be
true and complete at the time of any deposit to or disbursement from the Escrow
Funds.
12. Consent to Jurisdiction and Venue. In the event that any party
hereto commences a lawsuit or other proceeding relating to or arising from this
Escrow Agreement, the parties
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hereto agree that the United States District Court for the Western District of
North Carolina shall have the sole and exclusive jurisdiction over any such
proceeding. If all such courts lack federal subject matter jurisdiction, the
parties agree that the Superior Court Division of the General Court of Justice
of Mecklenburg County, North Carolina shall have sole and exclusive
jurisdiction. Any of these courts shall be proper venue for any such lawsuit or
judicial proceeding and the parties hereto waive any objection to such venue.
The parties hereto consent to and agree to submit to the jurisdiction of any of
the courts specified herein and agree to accept service or process to vest
personal jurisdiction over them in any of these courts.
13. Notice. All notices and other communications hereunder shall be in
writing and shall be deemed to have been validly served, given or delivered five
(5) days after deposit in the United States mails, by certified mail with return
receipt requested and postage prepaid, when delivered personally, one (1) day
after delivery to any overnight courier, or when transmitted by facsimile
transmission facilities (with a copy mailed or otherwise delivered as provided
in this section 13), and addressed to the party to be notified as follows:
If to Agent at:
David Lerner Associates, Inc.
477 Jericho Turnpike
Syosset, New York 11791
Attention: Daniel E. Chafetz
Facsimile Number: (516) 364-1637
If to Company at:
Apple Suites, Inc.
306 East Main Street
Richmond, Va. 23219
Attention: Glade M. Knight, President
Facsimile Number: (804) 782-9302
If to the Escrow
Agent at:
First Union National Bank, as Escrow Agent
Corporate Trust Department
230 South Tryon Street, 9th Floor
Charlotte, North Carolina 28288-1179
Attention: Karen Atkinson
Facsimile Number: (___) ___-____
or to such other address as each party may designate for itself by like notice.
-11-
<PAGE>
14. Amendment or Waiver. This Escrow Agreement may be changed, waived,
discharged or terminated only by a writing signed by Agent, Company and Escrow
Agent. No delay or omission by any party in exercising any right with respect
hereto shall operate as a waiver. A waiver on any one occasion shall not be
construed as a bar to, or waiver of, any right or remedy on any future occasion.
15. Severability. To the extent any provision of this Escrow Agreement
is prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Escrow Agreement.
16. Governing Law. This Escrow Agreement shall be construed and
interpreted in accordance with the internal laws of the Commonwealth of Virginia
without giving effect to the conflict of laws principles thereof.
17. Entire Agreement. This Escrow Agreement constitutes the entire
agreement between the parties relating to the acceptance, collection, holding,
investment and disbursement of the Escrow Funds and sets forth in their entirety
the obligations and duties of the Escrow Agent with respect to the Escrow Funds.
18. Binding Effect. All of the terms of this Escrow Agreement, as
amended from time to time, shall be binding upon, inure to the benefit of and be
enforceable by the respective successors and assigns of Agent, Company and
Escrow Agent.
19. Execution in Counterparts. This Escrow Agreement may be executed in
two or more counterparts, which when so executed shall constitute one and the
same agreement.
20. Termination. Upon the first to occur of notice of termination by
Company or deposit of all amounts of the Escrow Funds into court pursuant to
Section 5 hereof, this Escrow Agreement shall terminate and Escrow Agent shall
have no further obligation or liability whatsoever with respect to this Escrow
Agreement or the Escrow Funds.
21. Acts of the Escrow Agent. The Escrow Agent and any stockholder,
director, officer or employee of the Escrow Agent may buy, sell, and deal in any
of the securities of the Company and become pecuniarily interested in any
transaction in which the Company may be interested, and contract and lend money
to the Company and otherwise act as fully and freely as though it were not
Escrow Agent under this Agreement. Nothing herein shall preclude the Escrow
Agent from acting in any other capacity for or with respect to the Company or
for any other entity.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be executed under seal as of the date first above written.
APPLE SUITES, INC.
By: /s/ Glade M. Knight
-------------------------------------------
Title: President
-----------------------------------------
DAVID LERNER ASSOCIATES, INC.
By: /s/ David Lerner
-------------------------------------------
Title: President
-----------------------------------------
FIRST UNION NATIONAL BANK, AS ESCROW AGENT
By: /s/ Karen E. Atkinson
-------------------------------------------
Title: Assistant Vice President
-----------------------------------------
-13-
<PAGE>
EXHIBIT A
FEES PAYABLE TO ESCROW AGENT
<TABLE>
<S> <C>
I. ACCEPTANCE FEE $500 One-time, Upfront
Initial fee for reviewing documents, setting up accounts and
administration of records.
Escrow Agent's Counsel Fees if needed for review of escrow agreement. Billed at cost
II. ADMINISTRATION FEE $2,500 Annually in Advance
Day-to-day administration of governing documents, maintenance of
investments, communications and providing statements, and other duties
defined in the Agreement.
III. OUT-OF-POCKET EXPENSES
Advance or out-of-pocket expenses including but not limited to postage,
telephone, freight, legal, courier, and express mail will be billed in
addition to the fees quoted herein.
IV. ACTIVITY CHARGES
Wire Transfers $25 per Transfer
Check Disbursements $25 Per Disbursement
Securities Transactions - Buy/Sell/Maturity $25 Per Transaction
Automatic Cash Investment Management 30 Basis Points Annualized
(AAA rated U.S. Treasury daily money market fund) Net of Income
Counsel fees, if ever retained as a result of default or other Billed at Cost
extraordinary occurrence on behalf of Escrow Agent.
</TABLE>
EXHIBIT 8
July 26, 1999
Board of Directors
Apple Suites, Inc.
9 North Third Street
Richmond, VA 23219
Dear Sirs:
We have acted as counsel to Apple Suites, Inc. (the "Company"), a
Virginia corporation, in connection with the preparation of the registration
statement on Form S-11 to which this opinion is attached as an exhibit (the
"Registration Statement"). The Company is filing the Registration Statement with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"), to register under the Act 30,166,666.67 Common Shares of
the Company. Terms not otherwise defined herein shall have the meanings assigned
to them in the Registration Statement.
We have reviewed originals or copies of (i) the Articles of
Incorporation, Bylaws and other corporate documents of the Company, (ii) certain
resolutions of the Board of Directors of the Company, (iii) the Registration
Statement and the prospectus included therein (the "Prospectus"), and (iv) the
form of Advisory Agreement between the Company and Apple Suites, Inc., a
Virginia corporation (the "Advisor"), included in the Registration Statement as
an exhibit. In addition, we have reviewed such other documents and have made
such legal and factual inquiries as we have deemed necessary or advisable for
purposes of rendering the opinions set forth below.
We understand and assume that the Company will duly elect to be treated
as a real estate investment trust ("REIT") for federal income tax purposes
commencing with its taxable year ended December 31, 1999. The Company's initial
and continuing qualification as a REIT depends upon the satisfaction of various
requirements under the Internal Revenue Code of 1986, as amended (the "Code").
The satisfaction of those requirements generally will be within the control of
the Company's Board of Directors and the Advisor, which has been engaged to
conduct the affairs of the Company under the supervision of the Board of
Directors. The Advisor and appropriate officers of the Company have made the
following representations to us with respect to the operation of the Company:
<PAGE>
Board of Directors
July 26, 1999
Page 2
1. The Company will operate in compliance with the Articles of
Incorporation and the Bylaws;
2. The Company will not operate so that it becomes either (i) a
financial institution referred to in Section 582(c)(5) of the Code, or (ii) an
insurance company to which subchapter L of the Code applies;
3. The Company will have at least 100 Shareholders for at least 335
days of each full taxable year, or proportionate part of any shorter taxable
year, after its first taxable year and will not be closely held as defined in
Section 856(h) of the Code;
4. The Company will use a calendar year for federal income tax
purposes;
5. The Company will elect to be treated as a REIT under the Code, and
will not elect to be treated as an S Corporation, a real estate mortgage
investment conduit, a regulated investment company, or any entity other than a
REIT for federal income tax purposes;
6. The Company will not revoke its election to be treated as a REIT and
will satisfy all relevant filing and other administrative requirements
established by the Internal Revenue Service that must be met to elect and to
maintain REIT status;
7. The Company will not have, as of the close of any taxable year, any
earnings and profits accumulated in any year during which the Company was not
treated as a REIT under the Code;
8. The Company will conduct its operations as described in the
Registration Statement (including the Prospectus), will operate in a manner so
as to qualify for taxation as a REIT under the Code, and intends to continue to
operate in such a manner;
9. The Company will invest in assets that, when acquired by the
Company, will cause the Company to satisfy (i) the asset test described in the
Prospectus, and (ii) the sources of income tests described in the Prospectus;
10. The Company will not hold any assets for sale to customers in the
ordinary course of a trade or business and will attempt to comply with the terms
of safe-harbor provisions in the Code prescribing when asset sales by a REIT
will not be characterized as prohibited transactions;
11. The Company expects that substantially all of the operating gross
income from the properties of the Company will be considered "rents from real
property" within the meaning of Section 856(d) of the Code;
12. The Company will comply with the distribution requirements of the
Code applicable to REITs;
<PAGE>
Board of Directors
July 26, 1999
Page 3
13. The Company will comply for each taxable year with the Treasury
regulations prescribed for the purpose of ascertaining the actual ownership of
outstanding Shares of the Company; and
14. The Company anticipates that it will be a "domestically controlled
REIT," within the meaning of Section 897(h) of the Code.
Based on the foregoing documents, representations, and assumptions
being, and continuing to be, accurate, we are of the opinion that:
1. The Company's proposed method of operation will enable it to meet
the requirements for qualification as a REIT under the Code;
2. Provided that a Shareholder which is an Exempt Organization does
not incur any "acquisition indebtedness" as defined in Section 514(c) of the
Code in connection with its acquisition of Shares, dividends paid by the Company
to such Shareholder will not constitute unrelated business taxable income under
Section 512 of the Code even if the Company owns "debt-financed property" as
that term is defined in Section 514(b) of the Code; and
3. The statements and legal conclusions contained in the Registration
Statement under the caption "Federal Income Tax Considerations" describe the
material federal income tax aspects of the offering made by the Registration
Statement applicable to the Company and the Shareholders, are correct in all
material respects, and the discussion thereunder does not omit any material
provision with respect to the matters covered.
With respect to our opinion contained in paragraph 1 above, you should
note that qualification of the Company as a REIT will depend, in part, upon the
Company's ability, through its actual operations, to meet the qualification
tests as described in the Prospectus.
The foregoing opinions are based solely on the provisions of the Code,
the Treasury regulations promulgated thereunder and the judicial and
administrative rulings, pronouncements and decisions now in effect, all of which
are subject to change, which change may be retroactively applied, or possible
differing interpretations that may affect the conclusions stated herein. To the
extent this opinion relies upon recent tax legislation, and recently promulgated
Treasury regulations, no assurance can be given as to the interpretations of
such recent legislation that will be reflected in applicable Internal Revenue
Service rulings and future Treasury regulations, which could be applied
retroactively. Further, this opinion does not purport to deal with any aspects
of state law that may affect particular investors nor with certain types of
investors subject to special treatment under the federal income tax laws.
<PAGE>
Board of Directors
July 26, 1999
Page 4
We hereby consent to the reference to our firm under the captions
"Federal Income Tax Considerations" and "Legal Matters" in the Registration
Statement and to the filing of this opinion as an exhibit to the Registration
Statement. In giving this consent, we do not admit that we are in the category
of persons whose consent is required by Section 7 of the Act or the rules and
regulations promulgated thereunder by the Securities and Exchange Commission.
Very truly yours,
/s/ McGuire, Woods, Battle & Boothe LLP
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. 3 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.
/s/ Ernst & Young LLP
Richmond, Virginia
July 26, 1999
EXHIBIT 23.3
CONSENT OF LISA B. KERN, PROSPECTIVE DIRECTOR
The undersigned, a prospective director of Apple Suites, Inc., a
Virginia corporation (the "Company"), hereby (i) consents to being nominated for
the position of director of the Company and to serve as such if elected, and
(ii) consents to being named as a prospective director in the Company's
Registration Statement on Form S-11 relating to the Company's initial public
offering of its common shares, and in the Prospectus contained therein proposed
to be circulated with such offering, and all amendments thereto.
Executed this 12th day of July, 1999.
/s/ Lisa B. Kern
------------------------
Lisa B. Kern
EXHIBIT 23.4
CONSENT OF BRUCE H. MATSON, PROSPECTIVE DIRECTOR
The undersigned, a prospective director of Apple Suites, Inc., a
Virginia corporation (the "Company"), hereby (i) consents to being nominated for
the position of director of the Company and to serve as such if elected, and
(ii) consents to being named as a prospective director in the Company's
Registration Statement on Form S-11 relating to the Company's initial public
offering of its common shares, and in the Prospectus contained therein proposed
to be circulated with such offering, and all amendments thereto.
Executed this 19th day of July, 1999.
/s/ Bruce H. Matson
------------------------
Bruce H. Matson
EXHIBIT 23.5
CONSENT OF MICHAEL S. WATERS, PROSPECTIVE DIRECTOR
The undersigned, a prospective director of Apple Suites, Inc., a
Virginia corporation (the "Company"), hereby (i) consents to being nominated for
the position of director of the Company and to serve as such if elected, and
(ii) consents to being named as a prospective director in the Company's
Registration Statement on Form S-11 relating to the Company's initial public
offering of its common shares, and in the Prospectus contained therein proposed
to be circulated with such offering, and all amendments thereto.
Executed this 13th day of July, 1999.
/s/ Michael S. Waters
------------------------
Michael S. Waters
EXHIBIT 23.6
CONSENT OF ROBERT M. WILY, PROSPECTIVE DIRECTOR
The undersigned, a prospective director of Apple Suites, Inc., a
Virginia corporation (the "Company"), hereby (i) consents to being nominated for
the position of director of the Company and to serve as such if elected, and
(ii) consents to being named as a prospective director in the Company's
Registration Statement on Form S-11 relating to the Company's initial public
offering of its common shares, and in the Prospectus contained therein proposed
to be circulated with such offering, and all amendments thereto.
Executed this 14th day of July, 1999.
/s/ Robert M. Wily
------------------------
Robert M. Wily
