AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 2000
FILE NO. 333-77055
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
APPLE SUITES, INC.
(Exact name of registrant as specified in governing instruments)
9 North Third Street
Richmond, Virginia 23219
(Address of principal executive offices)
Glade M. Knight
9 North Third Street
Richmond, Virginia 23219
(Name and address of agent for service)
Copy to:
Martin B. Richards, 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 the public: From time to
time after 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, 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. [ ]
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. [ ]
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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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APPLE SUITES, INC.
CROSS REFERENCE SHEET TO
PART I (INFORMATION REQUIRED IN PROSPECTUS)
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ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
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1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus ........ Forepart of Registration Statement and Outside
Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus ........................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges ............ Summary; Risk Factors; Summary of
Organizational Documents -- Shareholder
Liability
4. Determination of Offering Price ............... Risk Factors -- The Per-Share Offering Prices
Have Been Established Arbitrarily
5. Dilution ...................................... Risk Factors -- Our Shareholders' Interests May
Be Diluted; Summary of Organizational
Documents -- Issuance of Securities
6. Selling Security Holders ...................... Not Applicable
7. Plan of Distribution .......................... Plan of Distribution
8. Use of Proceeds ............................... Use of Proceeds
9. Selected Financial Data ....................... Supplement No. 5; Supplement No. 7
10. Management's Discussion and Analysis
of Financial Condition and Results of
Operations .................................... Management's Discussion and Analysis of
Financial Condition; Supplement No. 5;
Supplement No. 6
11. General Information as to Registrant .......... Summary; Business; Management
12. Policy with Respect to Certain Activities...... Summary; Investment Objectives and Policies;
Summary of Organizational Documents; Reports
to Shareholders
13. Investment Policies of Registrant ............. Summary; Investment Objectives and Policies
14. Description of Real Estate .................... Business; Supplement No. 5; Supplement No. 6;
Supplement No. 7
15. Operating Data ................................ Business
16. Tax Treatment of Registrant and its
Security Holders .............................. Summary; Federal Income Tax Considerations
17. Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters ................... Distribution Policy
18. Description of Registrant's Securities ........ Summary; Description of Capital Stock
19. Legal Proceedings ............................. Business -- Legal Proceedings
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ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
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20. Security Ownership of Certain Beneficial
Owners and Management ...................... Principal and Management Shareholders;
Supplement No. 5
21. Directors and Executive Officers ........... Management
22. Executive Compensation ..................... Compensation; Management
23. Certain Relationships and Related
Transactions ............................... Summary; Compensation; Conflicts of Interests;
Management; Apple Suites Advisors, Inc. and
Affiliates
24. Selection, Management and Custody of
Registrant's Investments ................... Summary; Compensation; Conflicts of Interests;
Investment Objectives and Policies; Management;
Apple Suites Advisors, Inc. and Affiliates
25. Policies with Respect to Certain
Transactions ............................... Investment Objectives and Policies; Conflicts of
Interests
26. Limitation of Liability .................... Risk Factors; Summary of Organizational
Documents
27. Financial Statements and Information ....... Index to Balance Sheet; Supplement No. 5;
Supplement No. 6; Supplement No. 7
28. Interests of Named Experts and Counsel...... Legal Matters
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities ................................ Risk Factors; Summary of Organizational
Documents
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STICKER SUPPLEMENT TO SUPPLEMENT NO. 5 DATED MARCH 21, 2000,
SUPPLEMENT NO. 6 DATED MAY 31, 2000 AND
SUPPLEMENT NO. 7 DATED JUNE 20, 2000
SUPPLEMENT NO. 5 TO BE USED WITH SUPPLEMENT NO. 6, SUPPLEMENT NO. 7 AND
PROSPECTUS DATED AUGUST 3, 1999
SUMMARY OF SUPPLEMENTS TO PROSPECTUS
(SEE THE SUPPLEMENTS FOR ADDITIONAL INFORMATION)
Supplement No. 5 dated March 21, 2000 (incorporating and replacing all prior
Supplements in use, No. 1 though 4):
(1) Reports on our purchase, either directly or through a subsidiary, of
eleven extended-stay hotels for an aggregate purchase price of
$91,426,000
(2) Reports on the short-term financing of 75% of the aggregate purchase
price, or $68,569,500, secured by the properties and having maturity
dates of October 1, 2000, December 1, 2000 and January 1, 2001
(3) Reports on the manner in which the hotels are being leased, operated
and managed, including a summary of the material contracts affecting
these matters
(4) Provides certain other information about us and the hotels we have
purchased
Supplement No. 6 dated May 31, 2000:
(1) Reports on our purchase, through a subsidiary, of a long-term
leasehold interest in an extended-stay hotel for a purchase price of
$15,489,000
(2) Reports on the short-term financing of 75% of the purchase price, or
$11,616,750, secured by the property and having a maturity date of
April 28, 2001
(3) Reports on the manner in which the hotel is being leased, operated and
managed, including a summary of the material contracts affecting these
matters
(4) Provides certain other information about us and the hotel
Supplement No. 7 dated June 20, 2000:
(1) Reports on the potential refinancing of our short-term debt
(2) Reports on the possible purchase of an additional extended-stay hotel
(3) Provides certain updated information about our hotels
As of August 23, 1999, we had closed on the sale of 1,666,666.67 of our
common shares at a price of $9 per share, representing completion of the minimum
offering. As of June 19, 2000, we had closed on the sale of 3,278,875 of our
common shares at a price of $10 per share. These sales, when combined, represent
gross proceeds of $47,788,750 and proceeds net of selling commissions and
marketing expenses of $43,009,875. We are continuing the offering at $10 per
share in accordance with the prospectus.
We have paid a total real estate commission of $2,138,300, representing 2%
of the aggregate purchase price for all of our hotels, to Apple Suites Realty
Group, Inc., which is our real estate broker and is owned by our Chairman and
Chief Executive Officer.
<PAGE>
PROSPECTUS
[APPLE SUITES LOGO]
1,666,666.67 COMMON SHARES
We plan to own extended-stay hotel properties and qualify as a real estate
investment trust. We are offering up to 30,166,666.67 of our common shares.
Purchasers must purchase a minimum of $5,000 in common shares. If a minimum of
1,666,666.67 common shares are not sold within one year after the date of this
prospectus, we will terminate this offering and all money received will be
promptly refunded to investors with interest. The common shares are being
offered on a best efforts, minimum offering basis through David Lerner
Associates, Inc. Until the minimum offering is achieved, all funds received
from investors will be deposited into an interest-bearing escrow account.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
THIS OFFERING INVOLVES MATERIAL RISKS AND INVESTMENT CONSIDERATIONS INCLUDING:
o There is no public trading market for the common shares.
o We will pay substantial compensation for advisory, acquisition,
disposition and other services which will reduce our return.
o There are conflicts of interest between us and our chairman and
president because he is the sole shareholder of companies with which
we will enter into contracts for services.
o We own no properties at this time.
o We may be unable to generate sufficient cash for distributions.
o Shareholders' interests will be diluted upon conversion of the Class B
Convertible shares.
o Seven partnerships previously organized by Glade M. Knight filed for
bankruptcy.
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PROCEEDS TO
PRICE TO COMMISSIONS & APPLE SUITES,
PUBLIC MARKETING EXPENSES INC.
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Per Share(1) ................... $ 9.00 $ .90 $ 8.10
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 AUGUST 3, 1999.
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EXCEPT FOR THE STATES SPECIFICALLY DESCRIBED BELOW, EACH PURCHASER OF
COMMON SHARES MUST CERTIFY THAT HE HAS EITHER (1) A MAXIMUM ANNUAL GROSS INCOME
OF $50,000 AND A NET WORTH (EXCLUSIVE OF EQUITY IN A HOME, HOME FURNISHINGS AND
PERSONAL AUTOMOBILES) OF AT LEAST $50,000, OR (2) A NET WORTH (SIMILARY
DEFINED) OF AT LEAST $100,000.
EACH NEW HAMPSHIRE PURCHASER MUST CERTIFY THAT HE HAS EITHER (1) A MINIMUM
ANNUAL GROSS INCOME OF $50,000 AND A NET WORTH (SIMILARLY DEFINED) OF AT LEAST
$125,000, OR (2) A NET WORTH (SIMILARLY DEFINED) OF AT LEAST $250,000.
EACH KENTUCKY OR NORTH CAROLINA PURCHASER MUST CERTIFY THAT HE HAS EITHER
(1) A MINIMUM ANNUAL GROSS INCOME OF $50,000 AND A NET WORTH (SIMILARLY
DEFINED) OF AT LEAST $50,000, OR (2) A NET WORTH (SIMILARLY DEFINED) OF AT
LEAST $150,000.
EACH MAINE PURCHASER MUST CERTIFY THAT HE HAS EITHER (1) A MINIMUM ANNUAL
GROSS INCOME OF $50,000 AND A NET WORTH (SIMILARLY DEFINED) OF AT LEAST
$125,000, OR (2) A NET WORTH (SIMILARLY DEFINED) OF AT LEAST $200,000.
NO PURCHASER OF COMMON SHARES MAY PURCHASE COMMON SHARES COSTING MORE THAN
10% OF THE PURCHASER'S NET WORTH (SIMILARLY DEFINED).
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND IF
GIVEN OR MADE, ANY OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON, THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH AN
OFFER MAY NOT LEGALLY BE MADE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT INFORMATION CONTAINED IN THIS PROSPECTUS HAS NOT CHANGED AS OF
ANY TIME AFTER ITS DATE.
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TABLE OF CONTENTS
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SUMMARY ............................................................................ 1
Apple Suites, Inc. ............................................................... 1
Apple Suites Advisors, Inc. and Affiliates ....................................... 1
Risk Factors ..................................................................... 2
The Offering ..................................................................... 2
Use of Proceeds .................................................................. 3
Liquidity ........................................................................ 3
Borrowing Policy ................................................................. 4
Investment Policy ................................................................ 5
Distributions Policy ............................................................. 5
Capital Stock .................................................................... 5
Compensation ..................................................................... 5
RISK FACTORS ....................................................................... 7
There is no public market for our common shares, so investors may be unable
to dispose of their investment .................................................. 7
The board of directors may decide in its sole discretion to list our common
shares or dissolve us ........................................................... 7
The compensation to Apple Suites Advisors and Apple Suites Realty is
payable before distributions and will reduce investors'return ................... 7
There were no arms-length negotiations for our agreements with Apple
Suites Advisors, Apple Suites Realty and Apple Suites Management ................ 7
Commissions, acquisition, advisory and other fees and expenses will limit our
ability to make distributions to investors ...................................... 8
The Compensation to Apple Suites Realty and Apple Suites Advisors is
indeterminable and cannot be stated with certainty .............................. 8
There are conflicts of interest with our president and chairman of the board...... 8
There are conflicts of interest with our advisor and broker ...................... 8
There are conflicts of interest with our lessee .................................. 9
Our management will spend time on other activities ............................... 9
We own no properties at this time ................................................ 9
We are not diversified and are dependent on our investment in a single
industry ........................................................................ 9
We will be dependent upon Apple Suites Management for our revenues ............... 9
There may be operational limitations associated with franchise agreements
affecting our properties ........................................................ 10
We have no operating history and we have no assurance of success ................. 10
There is a possible lack of diversification and lower return due to the
minimum size of our offering .................................................... 10
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iii
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There may be delays in investment in real property, and this delay may
decrease the return to shareholders ............................................. 11
The actual amount of proceeds available for investment in properties is
uncertain ....................................................................... 11
The per-share offering prices have been established arbitrarily by us and may
not reflect the true value of the common shares ................................. 11
We may be unable to make distributions ........................................... 11
We will face competition in the hotel industry ................................... 11
Investors may wait up to one year before receiving their common shares or
a refund of their money if the minimum offering is not achieved ................. 12
There would be significant adverse consequences of our failure to qualify as
a REIT .......................................................................... 12
Our real estate investments will be relatively illiquid .......................... 12
Our board may in its sole discretion determine the amount of our aggregate
debt ............................................................................ 12
We have no restriction on changes in our investment and financing policies........ 13
There will be dilution of shareholder's interests upon conversion of the Class
B Shares ........................................................................ 13
Our shareholders'interests may be diluted in various ways ........................ 14
Seven partnerships previously organized by Glade M. Knight filed for
bankruptcy ...................................................................... 14
Our articles and bylaws contain antitakeover provisions and ownership limits...... 14
We may become subject to environmental liabilities ............................... 15
We may incur significant costs complying with the Americans with
Disabilities Act and similar laws ............................................... 15
Our computer systems may not be Year 2000 compliant, which would lead to
operational difficulties and increased costs .................................... 16
We make forward-looking statements in this prospectus which may prove
to be inaccurate ................................................................ 16
USE OF PROCEEDS .................................................................... 17
COMPENSATION ....................................................................... 19
Acquisition Phase ................................................................ 19
Operational Phase ................................................................ 19
Disposition Phase ................................................................ 20
All Phases ....................................................................... 20
CONFLICTS OF INTERESTS ............................................................. 21
General .......................................................................... 21
Conflicts with respect to fees paid by us to Apple Suites Advisors
and Apple Suites Realty ......................................................... 21
Conflicts with Respect to Commissions ............................................ 22
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iv
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Conflicts with Respect to Asset Management Fees ................ 22
Policies to Address Conflicts .................................. 22
Transactions with Affiliates and Related Parties ............... 22
Competition Between Us and Mr. Knight .......................... 23
Competition for Management Services ............................ 24
INVESTMENT OBJECTIVES AND POLICIES ............................... 25
Investments in Real Estate or Interests in Real Estate ......... 25
Borrowing Policies ............................................. 25
Reserves ....................................................... 26
Sale Policies .................................................. 27
Changes in Objectives and Policies ............................. 27
DISTRIBUTIONS POLICY ............................................. 29
BUSINESS ......................................................... 30
General ........................................................ 30
Business Strategies ............................................ 30
Homewood Suites(Reg. TM) ....................................... 30
Description of Leases .......................................... 31
Term .......................................................... 31
Base Rent; Participating Rent ................................. 31
Other Real Estate Investments .................................. 32
Legal Proceedings .............................................. 32
Regulation ..................................................... 32
General ....................................................... 32
Americans With Disabilities Act ............................... 32
Environmental Matters .......................................... 32
Insurance ...................................................... 34
Available Information .......................................... 34
MANAGEMENT ....................................................... 35
Classification of the Board .................................... 36
Committees of the Board ........................................ 36
Director Compensation .......................................... 36
Indemnification and Insurance .................................. 37
Officer Compensation ........................................... 37
Stock Incentive Plans .......................................... 37
The Incentive Plan ............................................. 37
Directors' Plan ................................................ 39
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v
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Stock Option Grants ........................................................ 40
APPLE SUITES ADVISORS, INC. AND AFFILIATES ................................. 41
General .................................................................. 41
The Advisory Agreement ................................................... 41
Apple Suites Realty Group, Inc ........................................... 43
Prior Performance of Programs Sponsored by Glade M. Knight ............... 44
Prior REITS - Cornerstone and Apple Residential .......................... 44
Additional Information on Cornerstone and Apple Residential Acquisitions.. 45
Prior Partnerships ....................................................... 45
Publicly-Offered Partnerships ............................................ 45
Privately-Offered Partnerships ........................................... 46
Additional Information on Prior Programs ................................. 48
PRINCIPAL AND MANAGEMENT SHAREHOLDERS ...................................... 49
FEDERAL INCOME TAX CONSIDERATIONS .......................................... 50
General .................................................................. 50
REIT Qualification ....................................................... 51
Sources of Gross Income ................................................. 51
75% Gross Income Test ................................................... 52
95% Gross Income Test ................................................... 53
Failing the 75% or 95% Tests; Reasonable Cause .......................... 53
Character of Assets Owned ............................................... 53
Annual Distributions to Shareholders .................................... 54
Taxation as a REIT ....................................................... 55
Failure to Qualify as a REIT ............................................. 56
Taxation of Shareholders ................................................. 56
Backup Withholding ....................................................... 57
Taxation of Tax Exempt Entities .......................................... 58
Taxation of Foreign Investors ............................................ 58
State and Local Taxes .................................................... 59
ERISA CONSIDERATIONS ....................................................... 60
CAPITALIZATION ............................................................. 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................................... 62
Overview ................................................................. 62
Year 2000 Compliance ..................................................... 62
PLAN OF DISTRIBUTION ....................................................... 64
DESCRIPTION OF CAPITAL STOCK ............................................... 68
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vi
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Common Shares ............................................................. 69
Dividend and Distribution Rights ......................................... 69
Voting Rights ............................................................ 69
Class B Convertible Shares ................................................ 70
Preferred Shares .......................................................... 70
Restrictions on Transfer .................................................. 71
Facilities for Transferring Common Shares ................................. 72
Warrants .................................................................. 73
SUMMARY OF ORGANIZATIONAL DOCUMENTS ......................................... 74
Board of Directors ........................................................ 74
Responsibility of Board of Directors, Apple Suites Advisors, Inc., Officers
and Employees ............................................................ 75
Issuance of Securities .................................................... 76
Redemption and Restrictions on Transfer ................................... 76
Amendment ................................................................. 76
Shareholder Liability ..................................................... 77
SALES LITERATURE ............................................................ 77
REPORTS TO SHAREHOLDERS ..................................................... 77
LEGAL MATTERS ............................................................... 78
EXPERTS ..................................................................... 78
EXPERIENCE OF PRIOR PROGRAMS ................................................ 79
INDEX TO BALANCE SHEET ...................................................... F-1
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vii
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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.
1
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[GRAPHIC OMITTED]
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* Wholly-owned by Glade M. Knight, chairman and president of Apple Suites, Inc.
RISK FACTORS
We urge you to consider carefully the matters discussed under "Risk
Factors" beginning on page 7 before you decide to purchase our common shares.
An investment in our securities involves a number of risks including:
o There will be no public trading market for the common shares for an
indefinite period of time, if ever.
o We will pay substantial compensation established without the benefit
of arm's length negotiation for advisory, property acquisition,
disposition and other services.
o There are conflicts of interest between us and our chairman and
president because he is the sole shareholder of companies with which
we will enter into contracts for services.
o We own no properties at this time.
o We may be unable to generate sufficient cash for distributions.
o Shareholders' interests will be diluted upon conversion of the Class B
convertible shares.
o Seven partnerships previously organized by Glade M. Knight, our
president and chairman, filed for bankruptcy.
o We will primarily acquire extended-stay hotel properties and,
therefore, are subject to the risks inherent in investing in a single
industry.
o Due to federal income tax restrictions, we cannot operate our
properties directly.
o We do not have an operating history and, therefore, there is no
assurance that we will be successful in our operations.
THE OFFERING
We are offering common shares at $9 per common share until a minimum of
1,666,666.67 common shares have been sold. Thereafter, the common shares will
be offered at $10 per common share until a maximum of 30,166,666.67 common
shares
2
<PAGE>
have been sold. Purchasers must purchase a minimum of $5,000 in common shares
except that certain benefit plans may purchase a minimum of $2,000 in common
shares. The common shares are being offered through David Lerner Associates,
Inc.
If at least 1,666,666.67 common shares have not been sold within one year
after the date of this prospectus, we will terminate this offering of common
shares and all moneys received will be promptly refunded to investors with
interest. Our officers and directors and those of apple suites advisors, apple
suites realty and apple suites management will not be permitted to purchase
common shares in order to reach the minimum offering of 1,666,666.67 common
shares.
This offering of common shares will continue until all the common shares
offered under this prospectus have been sold or until one year from the date of
this prospectus, unless we extend the offering for up to an additional year in
order to achieve the maximum offering of 30,166,666.67 common shares. In some
states, extension of the offering may not be allowed or may be allowed only
upon the filing of a new application with the appropriate state administrator.
This is a best efforts offering. Purchasers will be sold common shares at
one or more closings. An initial closing will occur after the minimum offering
of 1,666,666.67 common shares is achieved. Thereafter, additional closings are
expected to occur on a monthly basis as shares are sold during the offering
period.
USE OF PROCEEDS
The proceeds of the offering will be used
o to pay expenses and fees of selling the common shares;
o to invest in properties;
o to pay expenses and fees associated with acquiring properties; and
o to establish a working capital reserve.
On April 20, 1999, we obtained a line of credit in a principal amount of
up to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all accrued interest are due in
full on October 20, 1999. Glade M. Knight, our president and chairman of the
board, has guaranteed repayment of the loan. We expect to repay this debt with
proceeds from the sale of common shares.
LIQUIDITY
Before this offering there has been no public market for the common shares
and initially we do not expect a market to develop. Prospective shareholders
should view the common shares as illiquid and must be prepared to hold their
investment for an indefinite length of time.
3
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We do not plan to cause the common shares to be listed on any securities
exchange or quoted on any system or in any established market either
immediately or at any definite time in the future. We may cause the common
shares to be listed or quoted if the board of directors determines this action
to be prudent. However, there can be no assurance that this event will ever
occur. In order to provide liquidity to our shareholders, we expect that within
approximately three years from the initial closing, we intend either:
(1) to cause the common shares to be listed on a national securities
exchange or quoted on the NASDAQ National Market System or
(2) with shareholder approval, to dispose of all of our properties in a
manner which will permit distributions to shareholders of cash.
However, we are under no obligation to take any of these actions, and
these actions, if taken, might be taken after three years from the initial
closing.
BORROWING POLICY
We intend to purchase our properties either on an all-cash basis or using
interim borrowings. Any interim borrowings may come from Apple Suites Advisors
or its affiliates or from third-party, non-affiliated lenders. We will endeavor
to repay any interim borrowing with proceeds from the sale of common shares and
to hold our properties on an unleveraged basis. However, for the purpose of
flexibility in operations, we may, subject to the approval of the board of
directors, borrow.
After the initial closing of common shares, our bylaws will prohibit us
from incurring debt if the debt would result in our total debt exceeding 100%
of the value of our assets at cost. The value of our assets at cost means the
cost of the asset before deducting depreciation less liabilities. However, our
bylaws allow us to incur debt in excess of this limitation when the excess
borrowing is approved by a majority of the independent directors and disclosed
to the shareholders. The bylaws also will prohibit us from allowing total
borrowings to exceed 50% of the fair market value of our assets, before
subtracting liabilities, subject to the same exception Described in the
previous sentence. The two limitations on debt described in this paragraph are
applied separately and independently. For example, it is possible that
incurring debt may require approval by a majority of the independent directors
under one limitation even though the other limitation on debt does not apply.
In addition, the bylaws will provide that our borrowings must be reasonable in
relation to our net assets and must be reviewed quarterly by the directors.
Subject to these limitations on the permitted maximum amount of debt, there is
no limitation on the number of mortgages or deeds of trust which may be placed
against any particular property.
Assuming the independent directors approve, we may initially borrow in
excess of the debt limitations described in the previous paragraph in order to
acquire a portfolio of extended-stay hotel properties. If attainable, the
acquisition of a portfolio of properties early in our existence would, in the
opinion of our management, provide us
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with greater ability to acquire extended-stay hotel properties in the future as
proceeds from the sale of common shares are received and provide us with
economies of scale from the outset. We would endeavor to use only interim
borrowing for these acquisitions in order to maintain our long-term policy of
purchasing our properties on an all cash basis. We would repay any interim
borrowings with proceeds from the sale of common shares.
INVESTMENT POLICY
The investment return to shareholders from ownership of our common shares
will likely be less than could be obtained by a shareholder's direct
acquisition and ownership of the same properties because:
(1) we will pay to David Lerner Associates, Inc. substantial fees to
sell the common shares which will reduce the net proceeds available for
investment in properties;
(2) we will pay to Apple Suites Realty substantial fees to acquire
properties which will reduce the net proceeds available for investment in
properties; and
(3) we will pay to Apple Suites Advisors substantial advisory and
related compensation which will reduce funds available for distribution to
shareholders.
DISTRIBUTIONS POLICY
We intend to make distributions in accordance with federal income tax
rules applicable to real estate investment trusts. We intend to pay regular
quarterly distributions to our shareholders.
CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 common shares, no par
value, 240,000 Class B convertible shares, no par value, and 15,000,000
preferred shares, no par value. As of the date of this prospectus, there were
10 common shares of our company issued and outstanding.
COMPENSATION
We do not pay our officers salaries. Mr. Knight is currently our sole
executive officer. In addition, he is the sole shareholder of Apple Suites
Advisors and Apple Suites Realty which are entitled to receive fees for
services rendered by them to us. Mr. Knight will not receive a salary from
those entities but will receive dividend income due to his ownership of those
entities. The compensation and reimbursements payable to Apple Suites Advisors
and Apple Suites Realty are listed below. Except as indicated, we cannot
determine the maximum dollar amount of this compensation and reimbursement.
Apple Suites Advisors is entitled to receive an annual asset management
fee of between 0.1% and 0.25% of the amount raised in this offering. The
percentage used to calculate the asset management fee is based on the ratio of
funds from
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operations to the amount raised in this offering. This ratio is referred to as
the "return ratio." Funds from operations is defined as net income excluding
gains or losses from debt restructuring and sales of property, plus
depreciation of real property, after adjustments for significant non-recurring
items and unconsolidated partnerships and joint ventures, if any.
The percentage used to determine the asset management fee will be:
o 0.1% if the return ratio for the preceding calendar quarter is 6% or
less,
o 0.15% if the return ratio for the preceding calendar quarter is more
than 6% but not more than 8%, or
o 0.25% if the return ratio for the preceding calendar quarter is more
than 8%.
Assuming the minimum offering amount of $15,000,000 in common shares is
sold, the annual asset management fee would be:
o $15,000 if the return ratio is 6% or less,
o $22,500 if the return ratio is more than 6% but no more than 8%, or
o $37,500 if the return ratio is more than 8%.
Assuming the maximum offering amount of $300,000,000 in common shares is
sold, the annual asset management fee would be:
o $300,000 if the return ratio is 6% or less,
o $450,000 if the return ratio is more than 6% but no more than 8%, or
o $750,000 if the return ratio is more than 8%.
Apple Suites Realty will serve as the real estate advisor in connection
with our purchases and sales of properties, and will receive fees from us of up
to 2% of the gross purchase price , up to a maximum of $5,400,000, and up to 2%
of the gross sale price of each property.
If the person from whom we purchase or to whom we sell a property pays any
fee to Apple Suites Realty that amount will decrease the amount of our
obligation to Apple Suites Realty. Apple Suites Realty will not be entitled to
any disposition fee in connection with a sale of a property by us to any
affiliate of Apple Suites Realty, but will be reimbursed for its costs in
marketing the property.
We may request that Apple Suites Advisors and Apple Suites Realty provide
other services or property to us in exchange for fees. In order to do so, our
bylaws require that the transaction be approved by a majority of the directors
who are not affiliated with either Apple Suites Advisors or Apple Suites
Realty. We currently have no plans to request services or property of the type
described in this paragraph and, therefore, do not expect to incur any
additional fees.
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RISK FACTORS
An investment in our common shares involves various risks. You should
carefully consider the following information before making a decision to
purchase our common shares.
THERE IS NO PUBLIC MARKET FOR OUR COMMON SHARES, SO INVESTORS MAY BE UNABLE TO
DISPOSE OF THEIR INVESTMENT.
Prospective shareholders should view the common shares as illiquid and
must be prepared to hold their shares for an indefinite length of time. Before
this offering, there has been no public market for our common shares, and
initially we do not expect a market to develop. We do not plan to cause our
common shares to be listed on any securities exchange or quoted on any system
or in any established market either immediately or at any definite time in the
future. While we, acting through our board of directors, may cause the common
shares to be listed or quoted if the board of directors determines this action
to be prudent, there can be no assurance that this event will ever occur.
Shareholders may be unable to resell their common shares at all, or may be able
to resell them only later at a substantial discount from the purchase price.
Thus, the common shares should be considered a long-term investment.
THE BOARD OF DIRECTORS MAY DECIDE IN ITS SOLE DISCRETION TO LIST OUR COMMON
SHARES OR DISSOLVE US.
Currently, we expect that within approximately three years from the
initial closing of the minimum offering of 1,666,666.67 common shares we intend
either:
(1) to cause our common shares to be listed on a national securities
exchange or quoted on the NASDAQ National Market System or
(2) with shareholder approval, to dispose of all of our properties in a
manner which will permit distributions to our shareholders of cash.
Either type of action will be conditioned on the board of directors determining
the action to be prudent and in the best interests of our shareholders.
However, we are under no obligation to take any of these actions, and any
action, if taken, might be taken after the three-year period mentioned above.
THE COMPENSATION TO APPLE SUITES ADVISORS AND APPLE SUITES REALTY IS PAYABLE
BEFORE DISTRIBUTIONS AND WILL REDUCE INVESTORS' RETURN.
The payment of compensation to Apple Suites Advisors and Apple Suites
Realty from proceeds of the offering and property revenues will reduce the
amount of proceeds available for investment in properties, or the cash
available for distribution, and will therefore tend to reduce the return on our
shareholders' investments. In addition, this compensation is payable regardless
of our profitability, and is payable prior to, and without regard to whether we
have sufficient cash for distributions.
THERE WERE NO ARMS-LENGTH NEGOTIATIONS FOR OUR AGREEMENTS WITH APPLE SUITES
ADVISORS, APPLE SUITES REALTY AND APPLE SUITES MANAGEMENT.
Apple Suites Advisors and Apple Suites Realty will receive substantial
compensation from us in exchange for various services they have agreed to
render to us. This compensation has been established without the benefits of
arms-length
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negotiation. Apple Suites Management will enter into leases for our properties
and has agreed to pay us rent. This rent WILL BE established without the
benefit of arms-length negotiation.
COMMISSIONS, ACQUISITION, ADVISORY AND OTHER FEES AND EXPENSES WILL LIMIT OUR
ABILITY TO MAKE DISTRIBUTIONS TO INVESTORS.
The investment return to our shareholders likely will be less than could
be obtained by a shareholder's direct acquisition and ownership of the same
properties. We will pay to David Lerner Associates, Inc. substantial fees to
sell our common shares which will reduce the net proceeds available for
investment in properties. We will pay to Apple Suites Realty substantial
acquisition fees to acquire properties which will reduce the net proceeds
available for investment in properties. In addition, we will pay, principally
to Apple Suites Advisors, substantial advisory and related compensation, which
will reduce cash available for distribution to shareholders. Thus, for example,
if only 87% of the gross proceeds of the offering are available for investment
in properties, revenues may be reduced by 13% compared to revenues in the
absence of these fees.
THE COMPENSATION TO APPLE SUITES REALTY AND APPLE SUITES ADVISORS IS
INDETERMINABLE AND CANNOT BE STATED WITH CERTAINTY.
Apple Suites Realty and Apple Suites Advisors will receive compensation
for services rendered by them to us that cannot be determined with certainty.
Apple Suites Advisors will receive an asset management fee that may range from
$15,000 to $750,000 per year. The asset management fee will be based upon the
ratio of funds from operations to the amount raised in this offering. Apple
Suites Realty will receive a commission for each property purchased based upon
the purchase price of the properties we purchase. The total compensation to
Apple Suites Realty is therefore dependent upon (1) the number of properties we
purchase and (2) the cost of each property purchased. In addition, Apple Suites
Advisors and Apple Suites Realty will be reimbursed for their costs incurred on
our behalf and are entitled to compensation for other services and property we
may request that they provide to us. The dollar amount of the cost and the
compensation cannot now be determined.
THERE ARE CONFLICTS OF INTEREST WITH OUR PRESIDENT AND CHAIRMAN OF THE BOARD.
Generally, conflicts of interest between us and Glade M. Knight arise
because he is the sole shareholder of Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management. These companies will enter into contracts
with us to lease our properties or provide us with asset management and
property acquisition and disposition services. In addition, Glade M. Knight is
and will be a principal in other real estate investment transactions or
programs which may compete with us.
THERE ARE CONFLICTS OF INTEREST WITH OUR ADVISOR AND BROKER.
We will pay Apple Suites Realty an acquisition fee in connection with each
acquisition of a property, and a disposition fee in connection with property
dispositions. As a consequence, Apple Suites Realty may have an incentive to
recommend the purchase or disposition of a property in order to receive a fee.
Apple Suites Advisors
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will receive a fee which is a percentage of the total consideration we receive
from sale of common shares and, therefore, it could have an incentive to close
the sales of shares as rapidly as possible.
THERE ARE CONFLICTS OF INTEREST WITH OUR LESSEE.
We will lease our extended-stay hotel properties to Apple Suites
Management. We may be less willing to enforce provisions of the lease contract
against Apple Suites Management than against a third-party non-affiliated
lessee. Our lessee may not be able to make its lease payments under the lease.
Although failure on the part of Apple Suites Management to materially comply
with the terms of a lease including failure to pay rent when due will give us
the right to terminate the lease, repossess the property and enforce the
payment obligations under the lease, we would then be required to find another
lessee to lease the property since we cannot operate extended-stay hotel
properties directly. In addition, it is possible that we would be unable to
enforce the payment obligations under the leases following any termination.
There can be no assurance that we would be able to find another lessee or that
we would be able to enter into a new lease on terms as favorable to us if
another lessee were found.
OUR MANAGEMENT WILL SPEND TIME ON OTHER ACTIVITIES.
The officers and directors of Apple Suites Advisors, Apple Suites Realty
and Apple Suites Management also serve as officers and directors of entities
which engage in the brokerage, sale, operation or management of real estate.
The officers and directors of Apple Suites Advisors, Apple Suites Realty and
Apple Suites Management may disproportionately allocate their time and
resources between us and these other entities.
WE OWN NO PROPERTIES AT THIS TIME.
We have not committed to purchasing any specific properties with the
proceeds of this offering as of the date of this prospectus. However, when at
any time during the offering period we believe that there is a reasonable
probability that any specific property will be acquired, this prospectus will
be supplemented to provide a description of the property and the anticipated
terms of its purchase, financing and management. A prospective shareholder will
only be able to evaluate information as to properties which are disclosed in a
prospectus supplement issued before the prospective shareholder makes its
investment.
WE ARE NOT DIVERSIFIED AND ARE DEPENDENT ON OUR INVESTMENT IN A SINGLE
INDUSTRY.
Our current strategy is to acquire interests primarily in extended-stay
hotel properties. As a result, we are subject to the risks inherent in
investing in a single industry. A downturn in the extended-stay hotel industry
may have more pronounced effects on the amount of cash available to us for
distribution or on the value of our assets than if we had diversified our
investments. We will also be subject to any downturns in the business,
commercial and tourism travel industry as a whole.
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
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distributions to our shareholders will depend solely upon the ability of Apple
Suites Management to make rent payments under its leases. Apple Suites
Management has no significant assets. Any failure by Apple Suites Management to
make rent payments would adversely affect our ability to make distributions to
our shareholders.
THERE MAY BE OPERATIONAL LIMITATIONS ASSOCIATED WITH FRANCHISE AGREEMENTS
AFFECTING OUR PROPERTIES.
Apple Suites Management will operate a substantial number of our
properties pursuant to franchise or license agreements with nationally
recognized hotel brands. These franchise agreements may contain specific
standards for, and restrictions and limitations on, the operation and
maintenance of our properties in order to maintain uniformity within the
franchisor system. We do not know whether those limitations may conflict with
our ability to create specific business plans tailored to each property and to
each market.
The standards are subject to change over time, in some cases at the
direction of the franchisor, and may restrict Apple Suites Management's
ability, as franchisee, to make improvements or modifications to a property
without the consent of the franchisor. In addition, compliance with the
standards could require us or Apple Suites Management, as franchisees, to incur
significant expenses or capital expenditures. Action or inaction on our part or
by Apple Suites Management could result in a breach of those standards or other
terms and conditions of the franchise agreements and could result in the loss
or cancellation of a franchise license.
In connection with terminating or changing the franchise affiliation of a
property, we may be required to incur significant expenses or capital
expenditures. Moreover, the loss of a franchise license could have a material
adverse effect upon the operations or the underlying value of the property
covered by the franchise because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor.
WE HAVE NO OPERATING HISTORY AND WE HAVE NO ASSURANCE OF SUCCESS.
We do not have an operating history. There is no assurance that we will
operate successfully or achieve our objectives.
THERE IS A POSSIBLE LACK OF DIVERSIFICATION AND LOWER RETURN DUE TO THE MINIMUM
SIZE OF OUR OFFERING.
We initially will be funded with contributions of not less than
$15,000,000. Our profitability could be affected if we do not sell more than
the minimum offering. In the event we receive only the minimum offering of
1,666,666.67 common shares, we will invest in fewer properties. The fewer
properties purchased, the greater the 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.
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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
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where our hotels will be located. Over-building in the hotel industry will
increase the number of rooms available and may decrease occupancy and room
rates. In addition, increases in operating costs due to inflation may not be
offset by increased room rates. We will also face competition from nationally
recognized hotel brands with which we will not be associated.
We will also face competition for investment opportunities. these
competitors may be other real estate investment trusts, national hotel chains
and other entities that may have substantially greater financial resources than
we do. We will also face competition for investors from other hotel real estate
investment trusts and real estate entities.
INVESTORS MAY WAIT UP TO ONE YEAR BEFORE RECEIVING THEIR COMMON SHARES OR A
REFUND OF THEIR MONEY IF THE MINIMUM OFFERING IS NOT ACHIEVED.
Until the minimum offering of 1,666,666.67 common shares is achieved,
investors will not receive their common shares. If at least 1,666,666.67 common
shares have not been sold within one year after the date of this prospectus, we
will terminate this offering of common shares. If the minimum offering is sold
within one year, investors will receive their common shares plus interest on
their subscription monies at the time of closing. If the offering is
terminated, investor will have their money promptly refunded with interest.
THERE WOULD BE SIGNIFICANT ADVERSE CONSEQUENCES OF OUR FAILURE TO QUALIFY AS A
REIT.
Qualification as a real estate investment trust, or REIT, involves the
application of highly technical and complex Internal Revenue Code provisions
for which there are limited judicial or administrative interpretations. If we
were to fail to qualify as a REIT for any taxable year, we would be subject to
federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status
would reduce our net earnings available for investment or distribution to our
shareholders because of the additional tax liability. In addition,
distributions to our shareholders would no longer qualify for the dividends
paid deduction and we would no longer be required to make distributions. To the
extent we would have made distributions in anticipation of qualifying as a
REIT, we might be required to borrow funds or liquidate investments in order to
pay the applicable tax.
OUR REAL ESTATE INVESTMENTS WILL BE RELATIVELY ILLIQUID.
Real estate investments are, in general, relatively difficult to sell. Our
illiquidity will tend to limit our ability to promptly vary our portfolio in
response to changes in economic or other conditions. In addition, provisions of
the Internal Revenue Code 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
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debt would result in our total debt exceeding 100% of the value of our assets
at cost. The bylaws also will prohibit us from allowing total borrowings to
exceed 50% of the fair market value of our assets. However, our bylaws allow us
to incur debt in excess of these limitations when the excess borrowing is
approved by a majority of the independent directors and disclosed to the
shareholders. In addition, the bylaws will provide that our borrowings must be
reasonable in relation to our net assets and must be reviewed quarterly by the
directors.
WE HAVE NO RESTRICTION ON CHANGES IN OUR INVESTMENT AND FINANCING POLICIES.
Our board of directors approves our investment and financing policies,
including our policies with respect to growth, debt, capitalization and payment
of distributions. Although the board of directors has no present intention to
amend or waive its current policies, it could do so at any time, or from time
to time, at its discretion without a vote of our shareholders. For example, our
board could determine without shareholder's approval that it is in the best
interests of the shareholders to cease all investments in extended-stay hotel
properties, to make investments in other types of assets or to dissolve the
business.
THERE WILL BE DILUTION OF SHAREHOLDER'S INTERESTS UPON CONVERSION OF THE CLASS
B SHARES.
Glade M. Knight, who is our director, chairman of the board and president,
and others will hold Class B convertible shares which are convertible into
common shares, as described under "principal and management shareholders." The
number of common shares into which the Class B convertible shares are
convertible depends on the gross proceeds of the offering. The conversion ratio
is one-to-one for gross proceeds of $50 million (5,166,666 common shares). The
conversion ratio increases to eight-to-one for gross proceeds of $300 million.
The conversion of Class B convertible shares into common shares will result in
dilution of the shareholders' interests.
o Assuming 5,166,666 common shares offered by this prospectus were sold,
and all of the Class B convertible shares were converted into common
shares, the holders of the Class B convertible shares would own
approximately 240,000 common shares or 4.44% of the total number of
common shares then outstanding in exchange for an aggregate payment of
24,000.
o If half of the offering is sold, this would represent the sale of
15,166,666 common shares. Assuming 15,166,666 common shares were sold,
and all of the Class B convertible shares were converted into common
shares, the 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.
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OUR SHAREHOLDERS' INTERESTS MAY BE DILUTED IN VARIOUS WAYS.
The board of directors is authorized, without shareholder approval, to
cause us to issue additional common shares or to raise capital through the
issuance of preferred shares, options, warrants and other rights, on terms and
for consideration as the board of directors in its sole discretion may
determine. Any such issuance could result in dilution of the equity of the
shareholders. The board of directors may, in its sole discretion, authorize us
to issue common shares or other equity or debt securities, (1) to persons from
whom we purchase property, as part or all of the purchase price of the
property, or (2) to Apple Suites Advisors or Apple Suites Realty in lieu of
cash payments required under the Advisory Agreement or other contract or
obligation. The board of directors, in its sole discretion, may determine the
value of any common shares or other equity or debt securities issued in
consideration of property or services provided, or to be provided, to us,
except that while common shares are offered by us to the public, the public
offering price of the shares shall be deemed their value.
We have agreed to sell to David Lerner Associates, Inc. warrants to
purchase 10% of the shares sold, up to 3,000,000 common shares, at an exercise
price of $16.50 per share. To the extent that the warrants are exercised,
dilution will occur if the warrant exercise price is less than the value of the
common shares at the time of exercise.
We have adopted two stock incentive plans for the benefit of our directors
and a limited number of our employees and employees of Apple Suites Advisors
and Apple Suites Realty. The effect of the exercise of those options could be
to dilute the value of the shareholders' investments to the extent of any
difference between the exercise price of an option and the value of the shares
purchased at the time of the exercise of the option.
In addition, we expressly reserve the right to implement a dividend
reinvestment plan involving the issuance of additional shares by us, at an
issue price determined by the board of directors.
SEVEN PARTNERSHIPS PREVIOUSLY ORGANIZED BY GLADE M. KNIGHT FILED FOR
BANKRUPTCY.
Several private partnerships previously organized by Glade M. Knight
experienced operating difficulties and adverse business developments. A
prospective investor may deem this relevant in evaluating the risk that we will
experience operating difficulties and adverse business developments. Seven
private partnerships previously organized by Mr. Knight filed for
reorganization under Chapter 11 of the 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
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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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<PAGE>
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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<PAGE>
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 Real estate commission 2% of the proceeds of the
Group, Inc. for acquiring our offering used to pay the
properties purchase prices of the
properties purchased by us for
a maximum of $5,400,000. (3)
OPERATIONAL PHASE
Apple Suites Asset management fee for Annual fee payable quarterly
Advisors, Inc managing a day-to-day based upon our ratio of funds
operations from operations to the
amount raised in this offering
ranging from 0.1% to 0.25%
of the amount raised in this
offering -- a maximum of
$37,500 per year if the
minimum offering is sold; a
maximum of $750,000 per
year if the maximum offering
is sold. (4)
Apple Suites Reimbursement for costs Amount is indeterminate (6)
Advisors, Inc. and and expenses incurred on
Apple Suites Realty our behalf, as described in
Group, Inc. Note (5)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
DISPOSITION PHASE
<S> <C> <C>
Apple Suites Realty Real estate commission for Up to 2% of the gross sales
Group, Inc. selling our properties prices of the properties sold by
us. (7)
ALL PHASES
Apple Suites Payment for services and Amount is indeterminate (9)
Advisors, Inc. and property (8)
Apple Suites Realty
Group, Inc.
</TABLE>
----------
(1) Apple Suites Advisors and Apple Suites Realty will receive different types
of compensation for services rendered in connection with the acquisition
and disposition of our properties, as well as the management of our
day-to-day operations. As discussed under "Conflicts of Interest," the
receipt of these fees could result in potential conflicts of interest for
persons who participate in decision making on behalf of both our company
and these other entities.
(2) Except as otherwise indicated in this table, the specific amounts of
compensation or reimbursement payable to Apple Suites Advisors and Apple
Suites Realty are not now known and generally will depend upon factors
determinable only at the time of payment. Compensation payable to these
entities may be shared or reallocated among them or their affiliates in
their sole discretion as they may agree. However, compensation and
reimbursements which would exceed specified limits or ceilings cannot be
recovered by them or their affiliates through reclassification into a
different category.
(3) Under a Property Acquisition/Disposition Agreement with us, Apple Suites
Realty has agreed to serve as the real estate advisor in connection with
both our purchases and sales of properties. In exchange for these services,
Apple Suites Realty will be entitled to a fee from us of 2% of the gross
purchase price of each property purchased by us not including amounts
budgeted for repairs and improvements. If the person from whom we purchase
or to whom we sell a property pays any fee to Apple Suites Realty that
amount will decrease the amount of our obligation to Apple Suites Realty.
(4) Under an Advisory Agreement with Apple Suites Advisors we are obligated to
pay an asset management fee which is a percentage of the gross offering
proceeds which have been received from time to time from the sale of the
common shares. The percentage used to calculate the asset management fee is
based on the "return ratio." The return ratio is the ratio of funds from
operations to the amount raised in this offering for the preceding calendar
quarter. The per annum asset management fee is equal to the following with
respect to each calendar quarter: 0.1% of the amount raised in this
offering if the return ratio for the preceding calendar quarter is 6% or
less; 0.15% of the amount raised in this offering if the return ratio for
the preceding calendar quarter is more than 6% but not more than 8%; and
0.25% of the amount raised in this offering if the return ratio for the
preceding calendar quarter is above 8%. Assuming the minimum offering of
$15,000,000 is sold, the annual asset management fee would be between
$15,000 and $37,500. Assuming the maximum offering of $300,000,000 is sold,
the annual asset management fee would be between $300,000 and $750,000.
(5) Apple Suites Advisors and Apple Suites Realty will be reimbursed for all
direct costs of acquiring and operating our properties and of goods and
materials used for or by us and obtained from entities that are not
affiliated with Apple Suites Advisors. These costs and expenses include,
but are not limited to, legal fees and expenses, travel and communication
expenses, expenses relating to shareholder communications, costs of
appraisals, non-refundable option payments on property not acquired,
accounting fees and expenses, title insurance, and all other fees, costs
and expenses directly attributable to the acquisition and ownership of our
properties. Operating expenses reimbursable to Apple Suites Advisors and
Apple Suites Realty are subject to the overall limitation on operating
expenses discussed under "Apple Suites Advisors and Affiliates -- The
Advisory Agreement," but the amount of reimbursement is not otherwise
limited.
(6) While we cannot determine with any certainty the future reimbursements for
costs and expenses that will be incurred on our behalf by Apple Suites
Advisors and Apple Suites Realty, we estimate based on the experience of
management in the organization and management of two other real estate
investment trusts that if that if the maximum offering is achieved the
total amount of reimbursements will equal $500,000 over the next three
calendar years. This amount is our best estimate of what those future costs
and expenses may be. We have no way of knowing at this time whether this
estimate will be accurate.
(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
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<PAGE>
(consisting of the original purchase price plus any and all capitalized
costs and expenditures connected with the property) plus (2) 10% of the
cost basis. For purposes of this calculation, our cost basis will not be
reduced by depreciation.
The compensation to Apple Suites Realty for dispositions of properties is
subject to multiple factors, including (a) whether any properties are ever
sold, (b) the price at which those future sales, if any, occur, (c) whether
the purchaser is an affiliate and (d) whether the purchaser paid a fee to
Apple Suites Realty. While we cannot determine with an certainty the future
compensation to Apple Suites Realty for disposition services, we can
estimate the fees on the assumptions that after three years all our
properties are sold to non-affiliates, at prices equal to our cost basis
plus 10% and the purchaser does not pay a fee to Apple Suites Realty. Based
on those assumptions, if (1) the minimum offering were achieved and
$12,675,000 were invested in properties, the fee payable to Apple Suites
Realty would be $278,850 and (2) if the maximum offering were achieved and
$261,000,000 were invested in properties, the fee payable to Apple Suites
Realty would be $5,742,000. We currently have no plan or intention to sell
any properties we may purchase.
(8) Apple Suites Advisors and Apple Suites Realty may provide other services or
property to us, and will be entitled under certain conditions to
compensation or payment for those services or property. Those conditions,
which are summarized under "Conflicts of Interest -- Transactions with
Affiliates and Related Parties," include the requirement that each
transaction be approved by the affirmative vote of a majority of the
independent directors. Currently, there are no arrangements or proposed
arrangements between us, on the one hand, and these two entities, on the
other hand, for the provision of other services or property to us or the
payment of compensation or reimbursement. If any other arrangements arise
in the future, the terms of the arrangements, including the compensation or
reimbursement payable, will be subject to the restrictions in our bylaws.
The compensation, reimbursement or payment could take the form of cash or
property, including common shares.
(9) We currently have no, and do not anticipate entering into any, arrangements
or proposed arrangements to pay compensation or reimbursements for other
services or properties.
CONFLICTS OF INTERESTS
GENERAL
We may be subject to various conflicts of interest arising from our
relationship with Apple Suites Advisors, Apple Suites Realty, Apple Suites
Management and Glade M. Knight, our chairman of the board. Mr. Knight is the
sole shareholder of Apple Suites Advisors, Apple Suites Realty and Apple Suites
Management.
Apple Suites Advisors, Apple Suites Realty, Apple Suites Management and
Mr. Knight are not restricted from engaging for their own account in business
activities of the type conducted by us. Occasions may arise when our interests
conflict with those of one or more of Mr. Knight, Apple Suites Advisors, Apple
Suites Realty and Apple Suites Management. Apple Suites Advisors, Apple Suites
Realty, Apple Suites Management and Mr. Knight are accountable to us and our
shareholders as fiduciaries, and consequently must exercise good faith and
integrity in handling our affairs.
Apple Suites Advisors, Apple Suites Realty and Apple Suites Management
will assist us in acquisition, organization, servicing, management and
disposition of investments. At this time, Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management will provide services exclusively to us, but
THEY may perform similar services for other parties, both affiliated and
unaffiliated, in the future.
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.
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<PAGE>
CONFLICTS WITH RESPECT TO COMMISSIONS. Apple Suites Realty will receive a
2% commission upon each purchase by us of a property, and a commission of 2%
upon each sale by us of a property. Therefore, its compensation will increase
in proportion to the number of properties purchased and sold by us and the
properties' purchase and sale prices. Apple Suites Realty has an incentive to
see that multiple properties are purchased and sold by us.
CONFLICTS WITH RESPECT TO ASSET MANAGEMENT FEES. Apple Suites Advisors
asset management fee is a percentage of total proceeds received from time to
time by us from the sales of our common shares. Accordingly, it has an
incentive to see that sales of common shares are closed as quickly as possible
by us.
Apple Suites Advisors and Apple Suites Realty do not intend to take any
action or make any decision on our behalf which is based, wholly or in part,
upon a consideration of the compensation payable to them as a consequence of
the action or decision. In addition, the presence on our board of directors of
independent directors is intended to ameliorate the potential impact of
conflicts of interest for persons such as Mr. Knight who participate in
decision making on behalf of both us and Apple Suites Advisors or Apple Suites
Realty.
POLICIES TO ADDRESS CONFLICTS
The board of directors, Apple Suites Advisors, Apple Suites Realty and
Apple Suites Management will also be subject to the various conflicts of
interest described below. Policies and procedures will be implemented to
ameliorate the effect of potential conflicts of interest. By way of
illustration, the bylaws place limitations on the terms of contracts between us
and Apple Suites Advisors, Apple Suites Realty or Apple Suites Management
designed to ensure that these contracts are not less favorable to us than would
be available from an unaffiliated party. However, some potential conflicts of
interest are not easily susceptible to resolution.
Prospective shareholders are entitled to rely on the general fiduciary
duties of the directors, Apple Suites Advisors, Apple Suites Realty and Apple
Suites Management as well as the specific policies and procedures designed to
ameliorate potential conflicts of interest. Apple Suites Advisors, Apple Suites
Realty and Apple Suites Management believe that general legal principles
dealing with fiduciary and similar duties of corporate officers and directors,
combined with specific contractual provisions in the agreements between us, on
the one hand, and Apple Suites Advisors, Apple Suites Realty and Apple Suites
Management on the other hand, will provide substantial protection for the
interests of the shareholders. We do not believe that the potential conflicts
of interests described above will have a material adverse effect upon our
ability to realize our investment objectives.
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
22
<PAGE>
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 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
23
<PAGE>
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.
24
<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.
25
<PAGE>
Loans we obtain may be evidenced by promissory notes secured by mortgages
on our properties. As a general policy, we would seek to obtain mortgages
securing indebtedness which encumber only the particular property to which the
indebtedness relates, but recourse on these loans may include all of our
assets. If recourse on any loan incurred by us to acquire or refinance any
particular property includes all of our assets, the equity in other properties
could be reduced or eliminated through foreclosure on that loan.
Subject to the approval of the board of directors, we may borrow from
Apple Suites Advisors or Apple Suites Realty or establish a line of credit with
a bank or other lender. Those entities are under no obligation to make any
loans, however. After the initial closing of $15,000,000, any loans made by
them must be approved by a majority of the independent directors as being fair,
competitive and commercially reasonable and no less favorable to us than loans
between unaffiliated lenders and borrowers under the same circumstances.
After the initial closing of $15,000,000, our bylaws will prohibit us from
incurring debt if the debt would result in aggregate debt exceeding 100% of
"Net Assets," defined generally to mean assets at cost, before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
independent directors and disclosed to the shareholders as required by the
bylaws. The bylaws also will prohibit us from allowing aggregate borrowings to
exceed 50% of our "Adjusted Net Asset Value," defined generally to mean assets
at fair market value, before subtracting liabilities, subject to the same
exception described in the previous sentence. In addition, the bylaws will
provide that the aggregate borrowings must be reasonable in relation to our net
assets and must be reviewed quarterly by the directors. Subject to the
limitations on the permitted maximum amount of debt, there is no limitation on
the number of mortgages or deeds of trust which may be placed against any
particular property.
Assuming the independent directors approve, we may initially borrow in
excess of the debt limitations described in the previous paragraph in order to
acquire a portfolio of extended-stay hotel properties. If attainable, the
acquisition of a portfolio of properties early in our existence would, in the
opinion of our management, provide us with greater ability to acquire
extended-stay hotel properties in the future as proceeds from the sale of
common shares are received and provide us with economies of scale from the
outset. We would endeavor to use only interim borrowing for these acquisitions
in order to maintain our long-term policy of purchasing our properties on an
all cash basis. We would repay any interim borrowings with proceeds from the
sale of common shares.
RESERVES
A portion of the proceeds of this offering will be reserved to meet
working capital needs and contingencies associated with our operations. We will
initially allocate to our working capital reserve not less than 0.5% of the
proceeds of the offering. As long as we own any properties, we will retain as
working capital reserves an amount equal to at least 0.5% of the proceeds of
the offering, subject to review and re-evaluation by the board of directors. If
reserves and any other available income become insufficient to
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cover our operating expenses and liabilities, it may be necessary to obtain
additional funds by borrowing, refinancing properties or liquidating our
properties on an all cash basis. We would repay any interim borrowings with
investment in one or more properties.
SALE POLICIES
We are under no obligation to sell our investment properties, and
currently anticipate that we will hold our investment properties for an
indefinite length of time. However, a sale of one or more properties may occur
at any time if Apple Suites Advisors deems it advisable for us based upon
current economic considerations, and the board of directors concurs with the
decision. In deciding whether to sell a property, Apple Suites Advisors will
also take into consideration factors such as: the amount of appreciation in
value, if any, to be realized; federal, state and local tax consequences; the
possible risks of continued ownership; and the anticipated advantages to be
gained for the shareholders from sale of a property versus continuing to hold
property.
Currently, we expect that within approximately three years from the
initial closing, we will either:
(1) cause the common shares to be listed on a national securities
exchange or quoted on the NASDAQ National Market System or
(2) with shareholder approval, dispose of all of our properties in a
manner which will permit distributions to our shareholders of cash.
The taking of either type of action would be conditioned on the board of
directors determining the action to be prudent and in the best interests of the
shareholders, and would be intended to provide shareholders with liquidity
either by initiating the development of a market for the common shares or by
disposing of properties and distributing to shareholders cash. Virginia law and
our articles of incorporation state that a majority of the common shares then
outstanding and entitled to vote is required to approve the sale of all or
substantially all our assets. However, we are under no obligation to take any
of these actions, and these actions, if taken, might be taken after the
three-year period.
CHANGES IN OBJECTIVES AND POLICIES
Subject to the limitations in the articles of incorporation, the bylaws
and the Virginia Stock Corporation Act, the powers of our company will be
exercised by or under the authority of, and the business and affairs of our
company will be controlled by, the board of directors. The board of directors
also has the right and power to establish policies concerning investments and
the right, power and obligation to monitor the procedures, investment
operations and performance of our company.
In general, the articles of incorporation and the bylaws can be amended
only with the affirmative vote of a majority of the outstanding common shares,
except that the bylaws may be amended by the board of directors if necessary to
comply 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:
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o correct any ambiguity in the bylaws or resolve inconsistencies between
the bylaws and the Articles;
o make changes that are not materially adverse to the rights of
shareholders; or
o allow us to take any action or fulfill any obligation which we are
legally obligated or permitted to take.
Within the express restrictions and prohibitions of the bylaws, the
articles of incorporation and applicable law, however, the board of directors
has significant discretion to modify our investment objectives and policies, as
stated in this prospectus. We have no present intention to modify any of our
investment objectives and policies, and it is anticipated that any modification
would occur only if business and economic factors affecting us made our stated
investment objectives and policies unworkable or imprudent. By way of
illustration only, the board of directors could elect to acquire residential
apartment communities, or to acquire one or more commercial properties in
addition to extended-stay hotel properties.
Thus, while this prospectus accurately and fully discloses our current
investment objectives and policies, prospective shareholders must be aware that
the board of directors, acting consistently with our organizational documents,
applicable law and their fiduciary obligations, may elect to modify or expand
our objectives and policies from time to time. Any action by the board of
directors would be based upon the perceived best interests of our company and
the shareholders.
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DISTRIBUTIONS POLICY
Distributions will be at the discretion of our board of directors and will
depend upon factors including:
-- the gross revenues we receive from our properties,
-- our operating expenses,
-- our interest expense incurred in borrowing,
-- capital expenditures, and
-- our need for cash reserves.
While we intend to make quarterly distributions, there can be no assurance
that we will be able to make distributions at any particular rate, or at all.
In accordance with applicable real estate investment trust requirements,
we will make distributions in compliance with the Internal Revenue Code.
We anticipate distributions will exceed net income determined in
accordance with generally accepted accounting principles due to non-cash
expenses, primarily depreciation and amortization.
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BUSINESS
GENERAL
We are a Richmond, Virginia-based company. We plan to elect to be treated
as a real estate investment trust for federal income tax purposes beginning
with our taxable year ending December 31, 1999. We plan to purchase and own
extended-stay hotel properties located in selected metropolitan areas. However,
we currently own no properties.
BUSINESS STRATEGIES
Our primary business objective is to maximize shareholder value by
maintaining long-term growth in cash distributions to our shareholders. To
achieve this objective, we will focus on maximizing the internal growth of our
portfolio by selecting properties that have strong cash flow growth potential.
We intend to pursue this objective by acquiring extended-stay hotel properties
for long-term ownership by purchasing properties in fee simple. Because we are
prohibited under the federal tax laws pertaining to qualifying as a real estate
investment trust from operating our extended stay hotel properties, we will
lease each of our hotel properties to Apple Suites Management or another lessee
for their management. We anticipate that substantially all of our hotel
properties will be leased to Apple Suites Management, a Virginia corporation,
the sole shareholder and chief executive officer of which is Glade M. Knight.
We will seek associations with distinctive brands in the extended-stay
hotel market. We are currently negotiating a license agreement and management
agreement with Promus Hotels, Inc. with respect to extended-stay hotel
properties we may purchase from Promus Hotels, Inc. These agreements would
permit us to have our properties identified as Homewood Suites(Reg. TM)
properties.
HOMEWOOD SUITES(Reg. TM)
Consistent with our strategy to invest in extended-stay hotel properties,
we are in the process of negotiating an agreement to purchase a number of
Homewood Suites(Reg. TM) properties from Promus Hotels, Inc. No agreement
presently exists. If we are successful in negotiating an agreement with Promus
Hotels, Inc., any such agreement would have a number of conditions to each
party's obligations thereunder, including our achieving the minimum offering of
1,666,666.67 common shares. Accordingly, there can be no assurance we will
purchase any Homewood Suites(Reg. TM) properties.
If we are successful in negotiating an agreement with Promus Hotels, Inc.
and are able to sell the minimum offering of 1,666,666.67 common shares, we
expect that we would purchase five Homewood Suites(Reg. TM) properties for
approximately $50,000,000. Since the net proceeds of the minimum offering would
be approximately $12,675,000, our ability to purchase five Homewood Suites(Reg.
TM) properties would depend on our ability to arrange financing for the balance
of the purchase price either from Promus Hotels, Inc. or a bank.
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We have no commitments from either Promus Hotels, Inc. or a bank to
provide such financing and there can be no assurance that financing on
acceptable terms will be available. Furthermore, such financing, if available,
would require the approval of a majority of the independent directors if it
would exceed the limit on debt allowed in the bylaws in the absence of such
approval.
There are currently more than 70 Homewood Suites(Reg. TM) properties in
the United States. Homewood Suites(Reg. TM) offers upscale, all-suites,
high-quality, residential-style lodging with a comprehensive package of guest
services and amenities, for extended-stay business and leisure travelers.
Homewood Suites(Reg. TM) properties are designed to meet the needs of the
business and leisure traveler whose stay is typically five nights or more.
Homewood Suites(Reg. TM) was designed for people working on field assignments,
relocating to a new community, attending seminars and conventions,
participating in corporate training programs, taking an extended vacation or
attending a family event.
Homewood Suites(Reg. TM) properties consist of suites built around a
central hospitality center or lodge. Homewood Suites(Reg. TM) provides spacious
residential-style quarters with separate living and sleeping areas large enough
for work, study, entertaining or relaxation. Each suite features a fully
equipped kitchen and worksite with two telephones featuring data ports and
voice mail. Each lodge or hospitality center features a complete executive
center with fax machine and photocopier in addition to an exercise center,
swimming pool and other recreational facilities.
Homewood Suites(Reg. TM) is a service mark owned by Promus Hotels, Inc.
Promus Hotels, Inc., its subsidiaries or affiliates also own the following
trademarks and service marks: Doubletree(Reg. TM), Doubletree Guests Suites(Reg.
TM), Club Hotel by Doubletree(Reg. TM) Hampton Inn(Reg. TM), Hampton Inn &
Suites(Reg. TM), Embassy Vacation Resorts(Reg. TM) and Hampton Vacation
Resorts.(SM) Promus Hotels, Inc., its subsidiaries or affiliates serve guests in
more than 1,275 hotels and more than 186,000 rooms and suites. We are not
affiliated with Promus Hotels, Inc. or any of its affiliates.
DESCRIPTION OF LEASES
We expect to lease our properties to an operator under long-term leases.
We anticipate that substantially all of our properties will be leased to and
operated by Apple Suites Management on the following anticipated terms and
conditions.
TERM. We anticipate that each lease will provide for an initial term of
five years commencing on the date on which the property is acquired. Each lease
will provides the lessee with renewal options, provided that (a) the lessee
will not have the right to a renewal if there shall have occurred a change in
the tax law that would permit us to operate the hotel properties directly and
(b) the rent for each renewal term will be adjusted to reflect the then fair
market rental value of the property. If we are unable to agree upon the then
fair market rental value of a property, the lease will terminate upon the
expiration of the then current term and Apple Suites Management will have a
right of first refusal to lease the property from us on terms as we may have
agreed upon with a third-party lessee.
BASE RENT; PARTICIPATING RENT. Our rents will be based on a base amount
and a percentage of gross income. We anticipate that each lease will require
the lessee to pay
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(1) fixed monthly base rent, (2) on a monthly basis, the excess of
"participating rent" over base rent, with participating rent based on
percentages of room revenue, food and beverage revenue and telephone and other
revenue at each property, and (3) other amounts, including interest accrued on
any late payments or charges. Base rent may increase annually by a percentage
equal to the percentage increase in the consumer price index compared to the
prior year. Base rent will be payable monthly in advance. Participating rent
may be payable in arrears based on a monthly schedule adjusted to reflect the
seasonal variations in the property's revenue.
In addition to rent, the leases may require the lessee to pay many of the
following items: liability insurance; real estate and personal property taxes
and assessments; casualty insurance, including loss of income insurance; and
all costs and expenses and all utility and other charges incurred in the
operation of the properties. The leases may also provide for rent reductions
and abatements in the event of damage or destruction or a partial condemnation
of any property.
OTHER REAL ESTATE INVESTMENTS.
Although we anticipate that our focus will be on extended-stay hotel
properties our bylaws and articles of incorporation do not preclude us from
acquiring other residential properties. Although we currently own no properties
we may acquire other real estate assets including, but not limited to,
multi-family residential properties and other income producing properties in
addition to extended-stay hotel properties. The purchase of any property will
be based upon our perceived best interests and those of our shareholders.
Regardless of the mix of properties we may own, our primary business objective
is to maximize shareholder value by acquiring properties that have strong cash
flow growth potential.
LEGAL PROCEEDINGS
We are not presently subject to any material litigation. To our knowledge,
there is no material litigation threatened against us. We may become subject in
the future to litigation, including routine litigation arising in the ordinary
course of business.
REGULATION
GENERAL. Our properties may be subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities such as
swimming pools, activity centers and other common areas. We intend to acquire
the necessary permits and approvals under present laws, ordinances and
regulations to operate our business.
AMERICANS WITH DISABILITIES ACT. Our properties will need to comply with
Title III of the Americans with Disabilities Act of 1990 (the "ADA") to the
extent they are "public accommodations" and/or "commercial facilities" under
the ADA. Compliance with ADA requirements could require removal of structural
barriers to handicapped access in public areas of the properties where removal
is readily achievable.
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
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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.
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
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-- 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 was also a director of
Apple Residential Income Trust, Inc.
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BRUCE H. MATSON. Mr. Matson is a vice president and director of the law
firm of LeClair Ryan, a Professional Corporation, in Richmond, Virginia. He has
been with LeClair Ryan since 1994. Mr. Matson has practiced law since 1983. He
was also a director of Apple Residential Income Trust, Inc.
MICHAEL S. WATERS. Mr. Waters is president and co-founder of Partnership
Marketing, Inc. From 1995 through 1998, Mr. Waters served as a vice president
and general manager of GT Foods, a division of GoodTimes Home Video. From 1987
to 1995, he served as a vice president and general manager for two U.S.
subsidiaries (Instant Products of America and Chocolate Products) of George
Weston Ltd. (Canada), a fully-integrated food retailer and manufacturer.
ROBERT M. WILY. Mr. Wily is the Deputy Chief, Article III Judges Division,
of the Administrative Office of the U.S. Courts. He has served as the Clerk of
Court for both the United States Bankruptcy Court for the Eastern District of
Virginia from 1986 to 1999 and the District of Utah from 1981 to 1986. Prior to
those positions, Mr. Wily was in the private practice of law.
CLASSIFICATION OF THE BOARD
The board is divided into three classes. The terms of the first, second
and third classes expire in 2000, 2001, and 2002, respectively. Directors of
each class are elected for three year terms upon the expiration of the current
class' term. The staggered terms for directors may affect our shareholders'
ability to effect a change in control even if a change in control were in our
shareholders' best interest. Mr. Knight's term expires in 2002; Mr. Water and
Ms Kern's terms will expire in 2001 and Mr. Matson and Mr. Wily's terms will
expire in 2000.
COMMITTEES OF THE BOARD
The board has an Executive Committee, an Audit Committee and a
Compensation Committee.
The Executive Committee has all powers of the board except for those which
require action by all directors under our Articles or Bylaws or under
applicable law. The Executive Committee will consist of Messrs. Knight, Matson
and Wily.
The Audit Committee's function is to make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the plans and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of our internal accounting
controls. The Audit Committee will consist of Ms. Kern and Mr. Waters.
The Compensation Committee will administer our stock incentive plans. The
Compensation Committee will consist of Messrs. Matson and Wily.
DIRECTOR COMPENSATION
We will pay to each director who is not an affiliate of Apple Suites
Advisors an annual fee of $5,000 plus $500 for each meeting of the full board
of directors attended by each director in person ($100 if any are attended by
telephonic means). There will
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be no additional compensation for serving on a committee or attending a
committee meeting. We will, however, reimburse all directors for their travel
and other out-of-pocket expenses incurred in connection with attending any
meeting of the board of directors or any committee, and for carrying on the
business of our company, including reimbursement for expenses for any on-site
review of properties presented for acquisition or of new markets. Directors who
are affiliates of Apple Suites Advisors receive no compensation from us for
their service as directors. These directors, however, are remunerated
indirectly by their relationship to Apple Suites Advisors and its affiliated
companies and are reimbursed by us for their expenses in attending meetings of
the board of directors or a committee and in carrying on our business.
INDEMNIFICATION AND INSURANCE
We intend to obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (1) the directors and officers from
any claim arising out of an alleged wrongful act by the directors and officers
in their respective capacities as directors and officers of our company, and
(2) us to the extent that we have indemnified the directors and officers for
loss.
OFFICER COMPENSATION
Our officers are not paid salaries by us. Mr. Knight is currently our sole
executive officer. In addition, he is the sole shareholder of Apple Suites
Advisors and Apple Suites Realty which are entitled to fees for services
rendered by them to us. Mr. Knight will not receive any compensation from Apple
Suites Advisors and Apple Suites Realty but will receive dividend income due to
his ownership of those entities. See "Compensation" for a description of the
fees payable to Apple Suites Advisors and Apple Suites Realty.
STOCK INCENTIVE PLANS
We plan to adopt two stock incentive plans which are described below. For
purposes of the description below, the term "Offering" means the Initial
Offering plus all additional offerings and sales of common shares which may
occur during the five-year period beginning July 1, 1999 and ending June 30,
2004. The term "Initial Offering" means the offering of common shares made
pursuant to this prospectus.
The aggregate number of common shares reserved for issuance under the two
stock incentive plans is (1) 80,000 shares, plus (2) 6.425% of the number of
shares sold in the Initial Offering in excess of the minimum offering, plus (3)
6.2% of the number of shares sold in the Offering above the Initial Offering.
THE INCENTIVE PLAN
Under one plan (the "Incentive Plan"), incentive awards may be granted to
employees (including officers and directors who are employees) of us, or of
Apple Suites Advisors or Apple Suites Realty (the latter two companies being
sometimes referred to herein as "Apple Suites Companies"). Of the directors,
initially Mr. Knight will be a participant in the Incentive Plan. Incentive
awards may be in the form of stock options or restricted stock. Under the
Incentive Plan, the number of Shares reserved for
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issuance is equal to an aggregate of (1) 35,000 common shares, plus (2) 4.625%
of the number of Shares sold in the Initial Offering in excess of the minimum
offering, plus (3) 4.4% of the number of the shares sold in the Offering above
the Initial Offering. If an option is canceled, terminates or lapses
unexercised, any unissued common shares allocable to the option may be
subjected again to an incentive award. The purpose of the Incentive Plan is to
attract and retain the services of experienced and qualified employees who are
acting on behalf of us, either directly or through the Apple Suites Companies,
in a way that enhances the identification of the employees' interests with
those of the shareholders.
The Incentive Plan will be administered by a Compensation Committee of the
board of directors (the "Committee"). Notwithstanding anything to the contrary
in this prospectus, the Committee must have a minimum of two members who are
not eligible to participate in the Incentive Plan or any similar plan other
than the Directors' Plan (described below).
Subject to the provisions of the Incentive Plan, the Committee has
authority to determine (1) when to grant incentive awards, (2) which eligible
employees will receive incentive awards, and (3) whether the award will be an
option or restricted stock, and the number of common shares to be allocated to
each incentive award. The Committee may impose conditions on the exercise of
options and upon the transfer of restricted stock received under the Plan, and
may impose other restrictions and requirements as it may deem appropriate.
Stock Options
An option granted under the Incentive Plan will not be transferable by the
option holder except by will or under the intestacy laws, and will be
exercisable only at the times specified by the Committee. During the lifetime
of the option holder the option may be exercised only while the option holder
is in our employ or in the employ of one of the Apple Suites Companies, or
within 60 days after termination of employment. In the event the termination is
due to death or disability, the option will be exercisable for a 180-day period
thereafter.
The exercise price of the options will be not less than 100% of the fair
market value of the common shares as of the date of grant of the option. Unless
the common shares are listed, the fair market value will be determined by the
Committee using any reasonable method in good faith.
The Committee has discretion to take action as it deems appropriate with
respect to outstanding options in the event of a sale of substantially all of
our stock or assets, a merger of the Apple Suites Companies in which an option
holder is employed, or the occurrence of similar events. Adjustments will be
made in the terms of options and the number of common shares which may be
issued under the Incentive Plan in the event of a future stock dividend, stock
split or similar pro rata change in the number of outstanding shares or the
future creation or issuance to shareholders generally of rights, options or
warrants for the purchase of common shares.
Options granted under the Incentive Plan are non-qualified stock options.
Non-qualified stock options are options that are not intended to qualify for
favorable incentive stock option tax treatment under the Internal Revenue Code.
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Restricted Stock
Restricted stock issued pursuant to the Incentive Plan is subject to the
following general restrictions: (1) none of those shares may be sold,
transferred, pledged, or otherwise encumbered or disposed of until the
restrictions on those shares shall have lapsed or been removed under the
provisions of the Incentive Plan, and (2) if a holder of restricted stock
ceases to be employed by us or one of the Apple Suites Companies, he will
forfeit any shares of restricted stock on which the restrictions have not
lapsed or been otherwise removed.
The Committee will establish as to each share of restricted stock issued
under the Incentive Plan the terms and conditions upon which the restrictions
on those shares shall lapse. The terms and conditions may include, without
limitation, the lapsing of those restrictions at the end of a specified period
of time, or as a result of the disability, death or retirement of the
participant. In addition, the Committee may, at any time, in its sole
discretion, accelerate the time at which any or all restrictions will lapse or
remove any or all restrictions.
Amendment of the Incentive Plan and Incentive Awards
The board of directors may amend the Incentive Plan as it deems advisable;
provided that our shareholders must approve any amendment that would (1)
materially increase the benefits accruing to participants under the Incentive
Plan, (2) materially increase the number of common shares that may be issued
under the Incentive Plan, or (3) materially modify the requirements of
eligibility for participation in the Incentive Plan. Incentive awards granted
under the Incentive Plan may be amended with the consent of the recipient so
long as the amended award is consistent with the terms of the Plan.
DIRECTORS' PLAN
We also plan to adopt a stock option plan for members of our board of
directors who are not our employees or employees of the Apple Suites Companies
(the "Directors' Plan"). Under the Directors' Plan, the number of shares
reserved for issuance is equal to 45,000 shares plus 1.8% of the number of
Shares sold in the Offering in excess of the minimum offering of 1,666,666.67
common shares.
A director is eligible to receive an option under the Directors' Plan if
the director is not otherwise our employee or an employee of any of the Apple
Suites Companies or any subsidiary of ours and was not an employee of any of
these entities for a period of at least one year before the date of grant of an
option under the Plan. Four members of the board (all of the directors except
Mr. Knight) are expected initially to qualify to receive options under the
Directors' Plan.
The Directors' Plan will be administered by the board of directors. Grants
of stock options to eligible directors under the Plan will be automatic.
However, the board of directors has powers vested in it by the terms of the
Plan, including, without limitation, the authority to prescribe the form of the
agreement embodying awards of stock options under the Plan, to construe the
Plan, to determine all questions arising under the Plan, and to adopt and amend
rules and regulations for the administration of the Plan as it
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may deem desirable. Any decision of the board of directors in the
administration of the Directors' Plan will be final and conclusive. The board
of directors may act only by a majority of its members in office, except
members thereof may authorize any one or more of their number, or any officer,
to execute and deliver documents on behalf of the board of directors.
The Directors' Plan provides for the following automatic option awards:
(1) As of the initial closing of the common shares, each eligible
director will receive an option to purchase 5,500 shares plus 0.0125% of
the number of shares in excess of the minimum offering sold by the initial
closing.
(2) As of each June 1 during the years 2000 through 2004 (inclusive),
each eligible director shall automatically receive an option to purchase
0.02% of the number of common shares issued and outstanding on that date.
(3) As of the election as a director of any new person who qualifies as
an eligible director, the eligible director will automatically receive an
option to purchase 5,000 Shares.
The purpose of the Directors' Plan is to enhance the identification of the
participating directors' interests with those of the shareholders.
The exercise price for each option granted under the Directors' Plan will
be 100% of the fair market value on the date of grant; no consideration will be
paid to us for the granting of the option. Options granted under the Directors'
Plan will have a term of 10 years and will be fully exercisable six months
after the date of grant. If an optionee ceases to serve as a director prior to
the expiration of the six-month period following the date of grant, the option
will terminate on the date of termination of service as a director. If an
optionee ceases to serve as a director after the expiration of the six-month
period following the date of grant, the option will terminate three years after
the date of termination of service, or on expiration of the option, whichever
is earlier.
Options granted under the Directors' Plan are non-transferable other than
by will or the laws of descent and distribution upon the death of the optionee
and, during the lifetime of the optionee, are exercisable only by him. Payment
upon exercise of an option under the Directors' Plan may be made in cash or
with our common shares of equivalent value.
The board of directors may suspend or discontinue the Directors' Plan or
revise or amend the Plan in any respect; provided, however, that without
approval of the shareholders no revision or amendment may increase the number
of common shares subject to the Plan or materially increase the benefits
accruing under the Plan. In addition, the Directors' Plan may not be amended
more than once every six months other than to comply with changes in the
Internal Revenue Code or ERISA.
STOCK OPTION GRANTS
As of the date of this prospectus, there have been no grants under the
Incentive Plan or the Directors' Plan.
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APPLE SUITES ADVISORS, INC. AND AFFILIATES
GENERAL
On or before the initial closing of the minimum offering of $15,000,000,
we will enter into an advisory agreement with Apple Suites Advisors, who will,
among other things, seek to obtain, investigate, evaluate and recommend
property investment opportunities for us, serve as property investment advisor
and consultant in connection with investment policy decisions made by the board
of directors and, subject to its direction, supervise our day-to-day
operations. Apple Suites Advisors is a Virginia corporation all of the common
shares of which are owned by Glade M. Knight. Glade M. Knight is the sole
director of Apple Suites Advisors and also its sole officer.
The term "affiliate" as used in this document refers generally to a person
or entity which is related to another specific person or entity through common
control, through significant (10% or more) equity ownership, or by serving as
an officer or director with the specified entity. Affiliates of Apple Suites
Advisors include Apple Suites Realty and Glade M. Knight.
THE ADVISORY AGREEMENT
The advisory agreement will have a five-year term and will be renewable
for additional two-year terms thereafter by the board of directors. The
advisory agreement provides that it may be terminated at any time by a majority
of the independent directors or Apple Suites Advisors upon 60 days' written
notice. Under the advisory agreement, Apple Suites Advisors undertakes to use
its best efforts (1) to supervise and arrange for the day-to-day management of
our operations and (2) to assist us in maintaining a continuing and suitable
property investment program consistent with our investment policies and
objectives. Under the advisory agreement, generally, Apple Suites Advisors is
not required to, and will not, advise us on investments in securities, i.e.,
the temporary investment of offering proceeds pending investment of those
proceeds in real property. It is expected that we will generally make our own
decisions with respect to temporary investments.
Pursuant to the advisory agreement, Apple Suites Advisors will be entitled
to an annual asset management fee. The asset management fee is payable
quarterly in arrears. The amount of the asset management fee is a percentage of
the amount raised in this offering. The applicable percentage used to calculate
the asset management fee is based on the ratio of funds from operations to the
amount raised in this offering for the preceding calendar quarter. This ratio
is referred to as the "return ratio." The per annum asset management fee is
initially equal to the following with respect to each calendar quarter:
o 0.1% if the return ratio for the preceding calendar quarter is 6% or
less;
o 0.15% if the return ratio for the preceding calendar quarter is more
than 6% but not more than 8%; and
o 0.25% if the return ratio for the preceding calendar quarter is above
8%.
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Funds from operations is defined as net income excluding gains or losses
from debt restructuring and sales of property, plus depreciation of real
property, after adjustments for significant non-recurring items and
unconsolidated partnerships and joint ventures, if any. This definition
conforms to the recommendations set forth in a White Paper adopted by the
National Association of Real Estate Investment Trusts (NAREIT) in 1995.
Although we have adopted the NAREIT definition of funds from operations, we
caution that the calculation of funds from operations may vary from entity to
entity and as such the presentation of funds from operations by us may not be
comparable to other similarly titled measures of other reporting companies.
We believe that "funds from operations" is an appropriate measure to use
in determining the fees to be paid to Apple Suites Advisors because it ties
compensation to an important and widely accepted measure of operating
performance of REITs which provides a relevant basis for comparison to other
REITs. Funds from operations does not represent cash flow from operating,
investing or financing activities in accordance with GAAP and is not indicative
of cash available to fund all of our cash needs. Funds from operations should
not be considered as an alternative to net income or any other GAAP measure as
an indicator of performance and should not be considered as an alternative to
cash flow as a measure of liquidity or the ability to service debt or to pay
dividends.
The bylaws require our independent directors to monitor Apple Suites
Advisors' performance under the advisory agreement and to determine at least
annually that the amount of compensation we pay to Apple Suites Advisors is
reasonable, based on factors as they deem appropriate, including:
o the amount of the asset management fee in relation to the size,
composition and profitability of our investments;
o the success of Apple Suites Advisors in selecting opportunities that
meet our investment objectives;
o the rates charged by other investment advisors performing comparable
services;
o the amount of additional revenues realized by it for other services
performed for us;
o the quality and extent of service and advice furnished by it;
o the performance of our investments; and
o the quality of our investments in relation to any investments
generated by it for its own account.
Our bylaws generally prohibit our operating expenses from exceeding in any
year the greater of 2% of our total "Average Invested Assets" or 25% of our
"Net Income" for the year. Operating expense means, generally, all operating,
general and administrative expenses, but excluding depreciation and similar
non-cash items and expenses of raising capital, interest, taxes and costs
related to asset acquisition, operation and disposition. Average Invested
Assets means, generally, the monthly average of the aggregate book value of
assets invested in real estate, before deducting depreciation. Net Income
means, generally, the revenues for any period, less expenses other than
depreciation or similar non-cash items.
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Unless the independent directors conclude that a higher level of expenses
is justified based upon unusual and nonrecurring factors which they deem
sufficient, Apple Suites Advisors must reimburse us for the amount of any
excess operating expenses. It must make reimbursement within 120 days from the
end of our fiscal year. Apple Suites Advisors will be entitled to be repaid
reimbursements in succeeding fiscal years to the extent actual operating
expenses are less than the permitted levels. In determining that unusual and
nonrecurring factors are present, the independent directors will be entitled to
consider all relevant factors pertaining to our business and operations, and
will be required to explain their conclusion in written disclosure to the
shareholders. Apple Suites Advisors generally would expect to pay any required
reimbursement out of compensation received from us in the current or prior
years. However, there can be no assurance that it would have the financial
ability to fulfill its reimbursement obligations.
Our bylaws further prohibit the total organizational and offering
expenses, including selling commissions from exceeding 15% of the amount raised
in this offering. Furthermore, the total of all acquisition fees and
acquisition expenses paid by us in connection with the purchase of a property
by us shall be reasonable and shall in no event exceed an amount equal to 6% of
the contract price for the property, unless a majority of the board of
directors, including a majority of the independent directors, not otherwise
interested in the transaction approves the transaction as being commercially
competitive, fair and reasonable to us. For purposes of this limitation, the
"contract price for the property" means the amount actually paid or allocated
to the purchase, development, construction or improvement of the property,
exclusive of acquisition fees and acquisition expenses. Any organizational and
offering expenses or acquisition fees and acquisition expenses incurred by us
in excess of the permitted limits shall be payable by Apple Suites Advisors
immediately upon our demand.
This discussion is only a summary of the Advisory Agreement. A copy of the
form of agreement has been filed as an exhibit to the registration statement of
which this prospectus is a part. Please refer to the agreement for a complete
statement of its provisions.
APPLE SUITES REALTY GROUP, INC.
Apple Suites Realty is engaged in the business of management of real
property and the solution of financial and marketing problems related to
investments in real property. Glade M. Knight is the sole shareholder and
director of Apple Suites Realty as well as its sole officer.
We will enter into a Property Acquisition/Disposition Agreement with Apple
Suites Realty under which Apple Suites Realty has agreed to act as a real
estate broker in connection with our purchases and sales of properties. Under
the agreement, Apple Suites Realty is entitled to a real estate commission
equal to 2% 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
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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, 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
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and South Carolina, and Georgia. Cornerstone currently owns 58 apartment
communities. We will, upon request of any investor or prospective investor,
provide at no cost a copy of the most recent Report on Form 10-K filed by
Cornerstone with the Securities and Exchange Commission. For a reasonable
charge, We will also provide copies of the exhibits to the Report on Form 10-K.
In addition, Mr. Knight was responsible for the organization of Apple
Residential Income Trust, Inc. ("Apple Residential"), a real estate investment
trust organized to acquire, own and operate apartment complexes in the
southwestern region of the country. Mr. Knight is the chairman, chief executive
officer and president of Apple Residential. Between January 1997 and February
1999, Apple Residential sold approximately $300 million in common shares in a
continuous best-effort offering to approximately 11,000 investors. The net
proceeds of the Apple Residential public offering were used to acquire 28
apartment communities in Texas. We will, upon request of any investor or
prospective investor, provide at no cost a copy of the most recent Report on
Form 10-K filed by Apple Residential with the Securities and Exchange
Commission. For a reasonable charge, We will also provide copies of the
exhibits to the Report on Form 10-K.
Merger of Cornerstone and Apple Residential. On March 30, 1999,
Cornerstone and Apple Residential announced that they had entered into a
definitive merger agreement. Under this agreement, Apple Residential would
merge into a subsidiary of Cornerstone. Cornerstone would survive as a
corporation and Apple Residential would cease to exist. The merger was closed
on July 23, 1999.
ADDITIONAL INFORMATION ON CORNERSTONE AND APPLE RESIDENTIAL ACQUISITIONS
Part II of our registration statement (which is not a part of this
prospectus) contains a more detailed summary of the 58 property acquisitions by
Cornerstone and 25 property acquisitions by Apple Residential which occurred on
or before December 31, 1998. Neither Cornerstone nor Apple Residential has sold
any properties. We will provide a copy of the summary without charge upon
request of any investor or prospective investor.
PRIOR PARTNERSHIPS
Mr. Knight, between 1981 and 1987, organized 40 partnerships for the
purpose of investing in real estate. Interests in 38 of these partnerships, in
which Mr. Knight served as a general partner and all but one of which were
limited partnerships, were sold to investors in privately-offered transactions.
Two of the partnerships were publicly-offered.
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
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partnership, Southeastern Income Properties II Limited Partnership
("Southeastern II"), was also organized in 1987 and raised $17,883,780 from
1,710 investors. Southeastern II acquired four apartment complexes comprising
794 apartment units. The aggregate cost of the eight properties purchased by
Southeastern I and Southeastern II, including capital improvements thereto, was
approximately $41,178,606. The affiliates of Mr. Knight which originally served
as the general partners for these two partnerships transferred management
control over these partnerships to a third party in February 1992 by converting
to limited partner status. Thus, affiliates of Mr. Knight ceased to serve as
the general partners.
PRIVATELY-OFFERED PARTNERSHIPS
The 38 privately-offered partnerships were all organized in the 1980's,
and a majority of them were organized before 1985. The privately-offered
partnerships collectively owned and operated 40 apartment complexes with a
total of 5,972 apartment units and one motel with 144 rooms. A total of 733
investors in these partnerships contributed an aggregate of approximately
$47,788,965 to the capital of the partnerships. The aggregate cost of the 41
properties purchased by these 38 privately-offered partnerships was
approximately $129,088,000. All of the privately-offered partnerships were
formed before and had investment objectives dissimilar to those of Apple
Suites, Inc. The dissimilar nature of the investment objectives is described
below in this section.
The privately-offered partnerships used borrowing which varied from
substantial to 100% of required funds in the acquisition of their properties.
In addition, a significant objective of the privately-offered partnerships was
the realization of tax losses which could be used to offset some or all of
investors' other sources of income. The investment objectives of these
partnerships were dissimilar to our investment objectives in that we do not
seek to generate tax losses based in part on high levels of borrowing. Rather,
we seek to realize increasing cash distribution to shareholders with no or low
levels of debt.
Certain Bankruptcy Reorganizations. Seven of these partnerships with
investment objectives dissimilar to ours filed for reorganization under Chapter
11 of the United States Bankruptcy Code. Five of these seven partnerships
subsequently reached agreements with their lenders to allow foreclosure on
their properties on terms which were more favorable to the partnerships than
were available before the filing of the petition for reorganization. The other
two of the seven partnerships emerged from their chapter 11 reorganizations
with restructured debt. In addition, two other partnerships in which Mr. Knight
formerly served as a general partner filed for reorganization under Chapter 11
of the United States Bankruptcy Code within two years after Mr. Knight ceased
to serve as general partner.
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
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ceasing all cash distributions to investors. Mr. Knight believes the bankruptcy
filings and foreclosures described above were attributable to a combination of
high borrowing, a downturn in economic conditions generally and the real estate
industry in particular, a fundamental change in tax laws, which decreased the
perceived value of real estate to potential buyers and lenders, and the
unavailability of favorable financing. As a result of these factors, each of
the partnership was unable to meet debt obligations or dispose of its property
on terms that would allow repayment of its debt obligations.
Mr. Knight does not expect that the combination of factors applicable to
the privately-offered partnerships will be applicable to our operations. The
privately-offered partnerships that experienced adverse business developments
were "tax-shelter" investments, a principal objective of which was to generate
tax losses for investors. A large portion of the tax losses resulted from
interest deductions on mortgage debt on the properties. Since more mortgage
debt resulted in higher tax losses to investors, there was an incentive to
place a large amount of debt on the properties. We do not have as an objective
to, and as a real estate investment trust we cannot, generate tax losses for
shareholders. Our policy is to own properties on an all-cash basis, or use
limited interim borrowing to be repaid with proceeds from this offering.
The properties owned by the privately-offered partnerships were purchased
by those partnerships when federal income tax laws permitted partnership
investors to use partnership losses to offset their income from other sources.
When this law was changed in 1986 to, in effect, prohibit the use of such
losses, the value of such real estate decreased, making sale or refinancing of
the properties at an amount sufficient to pay off the high mortgage debt
difficult or impossible. Again, since our objectives do not include the
generation of tax losses to shareholders, we do not expect this to be a risk
for us.
In the private partnerships, the generation of tax losses was in general a
much more important investment objective than the making of cash distributions
to partners, either from operations or property dispositions. Our principal
business objective is to maximize shareholder value by achieving long-term
growth in cash distributions to our shareholders, and we do not plan to
generate tax losses for investors. The fact that our investment objectives are
radically different from those of the privately-offered partnerships means that
we expect key operating policies (such as the amount of debt) to be
substantially different and that the basic causes of the operating difficulties
of the privately-offered partnerships should not be present in our operations.
Finally, the privately-offered partnerships, which incurred much debt, had
little equity investment (some had no equity investment while the equity
investment in others was less than $1 million). The privately-offered
partnerships had no property 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.
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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.
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of material federal income tax considerations that
may be relevant to a holder of common shares is based on current law and is not
intended as tax advice. The statements of law and legal conclusions set forth
in this summary represents the opinion of McGuire, Woods, Battle & Boothe LLP,
special tax counsel to Apple Suites, Inc. The following discussion, which is
not exhaustive of all possible tax considerations, does not include a detailed
discussion of any state, local or foreign tax considerations. Nor does it
discuss all of the aspects of federal income taxation that may be relevant to a
prospective shareholder in light of his or her particular circumstances or to
certain types of shareholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) who are subject
to special treatment under the federal income tax laws.
The statements in this discussion are based on current provisions of the
Internal Revenue Code, existing, temporary and currently proposed Treasury
Regulations under the Code, the legislative history of the Code, existing
administrative rulings and practices of the IRS and judicial decisions. No
assurance can be given that legislative, judicial or administrative changes
will not affect the accuracy of any statements in this prospectus with respect
to transactions entered into or contemplated prior to the effective date of the
changes.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
EACH PROSPECTIVE PURCHASER OF COMMON SHARES IS ADVISED TO CONSULT WITH HIS OR
HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON SHARES IN AN ENTITY ELECTING
TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
We will elect to be treated as a REIT for federal income tax purposes
commencing with our taxable year ended December 31, 1999. Based on assumptions
and representations summarized below, McGuire, Woods, Battle & Boothe LLP, our
legal counsel, is of the opinion that beginning with our taxable year ended
December 31, 1999:
-- we are organized in conformity with the requirements for qualification
and taxation as a REIT under the Code, and
-- our proposed method of operations described in this prospectus will
enable us to satisfy the requirements for qualification as a REIT.
The rules governing REITs are highly technical and require ongoing
compliance with a variety of tests that depend, among other things, on future
operating results. McGuire, Woods, Battle & Boothe LLP will not monitor our
compliance with these requirements. While we expect to satisfy these tests, and
will use our best efforts to do so, we cannot
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ensure we will qualify as a REIT for any particular year, or that the
applicable law will not change and adversely affect us and our shareholders.
The following is a summary of the material federal income tax considerations
affecting us as a REIT and our shareholders:
REIT QUALIFICATION
In order to maintain our REIT qualification, we must meet the following
criteria:
-- We must be organized as an entity that would, if we did not maintain
our REIT status, be taxable as a regular corporation;
-- We must be managed by one or more directors;
-- Our taxable year must be the calendar year;
-- Our beneficial ownership must be evidenced by transferable shares;
-- Our capital stock must be held by at least 100 persons during at least
335 days of a taxable year of 12 months or during a proportionate part
of a taxable year of less than 12 months; and
-- Not more than 50% of the value of our shares of capital stock may be
held, directly or indirectly, applying constructive ownership rules,
by five or fewer individuals at any time during the last half of each
our taxable years.
To protect against violations of these requirements, our bylaws provide
restrictions on transfers of our common shares, as well as provisions that
automatically convert shares of stock into nonvoting, non-dividend paying
excess stock to the extent that the ownership otherwise might jeopardize our
REIT status.
To monitor our compliance with the share ownership requirements, we are
required to and will maintain records disclosing the actual ownership of common
shares. To do so, we will demand written statements each year from the record
holders of certain percentages of shares in which the record holders are to
disclose the actual owners of the shares. A list of those persons failing or
refusing to comply with this demand will be maintained as part of our records.
Shareholders who fail or refuse to comply with the demand must submit a
statement with their tax returns disclosing the actual ownership of the shares
and other information.
We expect to satisfy each of the requirements discussed above. We also
expect to satisfy the requirements that are separately described below
concerning the nature and amounts of our income and assets and the levels of
required annual distributions.
SOURCES OF GROSS INCOME. In order to qualify as a REIT for a particular
year, we also must meet two tests governing the sources of our income. These
tests are designed to ensure that a REIT derives its income principally from
passive real estate investments. In evaluating a REIT's income, the REIT will
be treated as receiving its 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.
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75% GROSS INCOME TEST. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to us
are:
-- rents from real property;
-- interest on loans secured by real property;
-- gain from the sale of real property or loans secured by real property
(excluding gain from the sale of property held primarily for sale to
customers in the ordinary course of a company's trade or business,
referred to below as "dealer property");
-- income from the operation and gain from the sale of property acquired
in connection with the foreclosure of a mortgage securing that
property ("foreclosure property");
-- distributions on, or gain from the sale of, shares of other qualifying
REITs;
-- abatements and refunds of real property taxes; and
-- "qualified temporary investment income" (described below).
In evaluating our compliance with the 75% gross income test, as well as
the 95% gross income test described below, gross income does not include gross
income from "prohibited transactions." In general, a prohibited transaction is
one involving a sale of dealer property, not including foreclosure property and
dealer property held by us for at least four years.
We expect that substantially all of our operating gross income will be
considered rent from real property. Rent from real property is qualifying
income for purposes of the gross income tests only if certain conditions are
satisfied. Rent from real property includes charges for services customarily
rendered to tenants, and rent attributable to personal property leased together
with the real property so long as the personal property rent is less than 15%
of the total rent. We do not expect to earn material amounts in these
categories. Rent from real property generally does not include rent based on
the income or profits derived from the property. We do not intend to lease
property and receive rentals based on the tenant's net income or profit.
However, rent based on a percentage of gross income is permitted as rent from
real property and we will have leases where rent is based on a percentage of
gross income.
Also excluded from "rents from real property" is rent received from a
person or corporation in which we (or any of its 10% or greater owners)
directly or indirectly through the constructive ownership rules contained in
section 318 of the Code, owns a 10% or greater 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
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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
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loans secured by mortgages on real property or by interests in real property,
shares in other REITs and certain options, but excluding mineral, oil or gas
royalty interests. The temporary investment of new capital in debt instruments
also qualifies under this 75% asset test, but only for the one-year period
beginning on the date we receive the new capital.
Second, although the balance of our assets generally may be invested
without restriction, we will not be permitted to own (1) securities of any one
non-governmental issuer that represent more than 5% of the value of our total
assets or (2) more than 10% of the outstanding voting securities of any single
issuer. A REIT, however, may own 100% of the stock of a qualified REIT
subsidiary, in which case the assets, liabilities and items of income,
deduction and credit of the subsidiary are treated as those of the REIT. In
evaluating a REIT's assets, if the REIT invests in a partnership, it is deemed
to own its proportionate share of the assets of the partnership. We expect to
satisfy these asset tests.
ANNUAL DISTRIBUTIONS TO SHAREHOLDERS To maintain REIT status, we generally
must distribute to our shareholders in each taxable year at least 95% of our net
ordinary income. More precisely, we must distribute an amount equal to (1) 95%
of the sum of (a) our REIT taxable income before deduction of dividends paid and
excluding any net capital gain and (b) any net income from foreclosure property
less the tax on the income, minus (2) limited categories of excess noncash
income (including, cancellation of indebtedness and original issue discount
income).
REIT taxable income is defined to be the taxable income of the REIT,
computed as if it were an ordinary corporation, with modifications. For
example, the deduction for dividends paid is allowed, but neither net income
from foreclosure property, nor net income from prohibited transactions, is
included. In addition, the REIT may carry over, but not carry back, a net
operating loss for 20 years following the year in which it was incurred.
A REIT may satisfy the 95% distribution test with dividends paid during
the taxable year and with dividends paid after the end of the taxable year if
the dividends fall within one of the following categories:
-- Dividends paid in January that were declared during the last calendar
quarter of the prior year and were payable to shareholders of record
on a date during the last calendar quarter of that prior year are
treated as paid in the prior year for ourselves and our shareholders.
-- Dividends declared before the due date of our tax return for the
taxable year (including extensions) also will be treated as paid in
the prior year for ourselves if they are paid (1) within 12 months of
the end of the taxable year and (2) no later than our next regular
distribution payment.
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.
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Dividends that are paid after the close of a taxable year that do not
qualify under the rule governing payments made in January described above will
be taxable to our shareholders in the year paid, even though we may be able to
take them into account for a prior year. We will incur a nondeductible excise
tax equal to 4% will for each calendar year to the extent that dividends
declared and distributed or deemed distributed before December 31 are less than
the sum of (a) 85% of our "ordinary income" plus (b) 95% of our capital gain
net income plus (c) any undistributed income from prior periods.
We will be taxed at regular corporate rates to the extent we retain any
portion of our taxable income. It is possible that we may not have sufficient
cash or other liquid assets to meet the distribution requirement. This could
arise because of competing demands for our funds, or because of timing
differences between tax reporting and cash receipts and disbursements. Although
we do not anticipate any difficulty in meeting this requirement, no assurance
can be given that necessary funds will be available. In the event this occurs,
we may arrange for short-term, or possibly long-term, borrowings to permit the
payment of required dividends and meet the 95% distribution requirement.
If we fail to meet the 95% distribution requirement because of an
adjustment to our taxable income by the IRS, we may be able to retroactively
cure the failure by paying a deficiency dividend, as well as applicable
interest and penalties, within a specified period.
TAXATION AS A REIT
As a REIT, we generally will not be subject to corporate income tax to the
extent we currently distribute our REIT taxable income to our shareholders.
This treatment effectively eliminates the double taxation imposed on
investments in most corporations. We generally will be taxed only on the
portion of our taxable income which we retain, including any undistributed net
capital gain, because we will be entitled to a deduction for dividends paid to
shareholders during the taxable year. A dividends paid deduction is not
available for dividends that are considered preferential within any given class
of shares or as between classes except to the extent a class is entitled to a
preference. We do not anticipate we will pay any preferential dividends.
Even as a REIT, we will be subject to tax in the following circumstances:
-- any income or gain from foreclosure property will be taxed at the
highest corporate rate;
-- 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;
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-- if we fail to distribute with respect to each calendar year at least
the sum of (1) 85% of our REIT ordinary income for the year, (2) 95%
of our REIT capital gain net income for the year, and (3) any
undistributed taxable income from prior years, we would be subject to
a 4% excise tax on the excess of the required distribution over the
amounts actually distributed; and
-- under regulations that are to be promulgated, we also may be taxed at
the highest regular corporate tax rate on any built-in gain
attributable to assets we acquire in tax-free corporate transactions,
to the extent the gain is recognized during the first ten years after
we acquire the assets.
FAILURE TO QUALIFY AS A REIT
If we fail to qualify as a REIT and are not successful in seeking relief,
we will be taxed at regular corporate rates on all of our taxable income.
Distributions to our shareholders would not be deductible in computing that
taxable income, and we would no longer be required to make distributions. Any
corporate level taxes generally would reduce the amount of cash available for
distribution to our shareholders and, because our shareholders would continue
to be taxed on any distributions they receive, the net after tax yield to our
shareholders likely would be substantially reduced.
As a result, our failure to qualify as a REIT during any taxable year
could have a material adverse effect upon us and our shareholders. If we lose
our REIT status, unless we are able to obtain relief, we will not be eligible
to elect REIT status again until the fifth taxable year which begins after the
taxable year during which our election was terminated.
TAXATION OF SHAREHOLDERS
In general, distributions will be taxable to shareholders as ordinary
income to the extent of our earnings and profits. Specifically, dividends and
distributions will be treated as follows:
-- Dividends declared during the last quarter of a calendar year and
actually paid during January of the immediately following calendar
year are generally treated as if received by the shareholders on
December 31 of the calendar year during which they were declared.
-- 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
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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.
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.
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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
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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
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independent investors falls below 100 subsequent to the initial public offering
as a result of events beyond the issuer's control. The Regulations further
provide that whether a security is "freely transferable" is a factual question
to be determined on the basis of all relevant facts and circumstances. The
Regulations also provide that when a security is part of an offering in which
the minimum investment is $10,000 or less, the existence of certain
restrictions ordinarily will not, alone or in combination, affect the finding
that the securities are freely transferable.
We believe that the restrictions imposed under our bylaws on the transfer
common shares are limited to the restrictions on transfer generally permitted
under the Regulations, and are not likely to result in the failure of the
common shares to be "freely transferable." We also believe that the
restrictions that apply to the common shares held by us, or which may be
derived from contractual arrangements requested by David Lerner Associates in
connection with common shares are unlikely to result in the failure of the
common shares to be "freely transferable." Nonetheless, no assurance can be
given that the DOL and/or the U.S. Treasury Department could not reach a
contrary conclusion. Finally, the common shares offered are securities that
will be registered under the Securities Act and are or will be registered under
the Exchange Act.
Assuming that the common shares satisfy the definition of publicly-offered
securities, described above, the underlying assets will not be deemed to be
"plan assets" of any Plan that invests in the securities offered in this
prospectus.
Notwithstanding the above, the Regulations provide that even if a security
offered hereunder were not a publicly-traded security, investment by a Plan
would not include the underlying assets if equity participation by benefit plan
investors will not be significant. Under the Regulations, equity participation
is significant if 25 percent or more in the security is held by benefit plan
investors. The term "benefit plan investors" generally includes the plans
described above.
CAPITALIZATION
Our capitalization as of March 31, 1999, and as adjusted to reflect the
issuance and sale of the common shares offered assuming the minimum offering
and maximum offering and after deducting anticipated offering expenses, selling
commissions and the marketing expense allowance is as follows:
<TABLE>
<CAPTION>
AS ADJUSTED
-------------------------------------------
MINIMUM MAXIMUM
ACTUAL OFFERING OFFERING
-------- -------------- ---------------
<S> <C> <C> <C>
Common Shares; no par value; 10
shares issued, 1,666,666.67 and
30,166,666.67 shares issued as
adjusted, respectively ......... $100 $13,050,100 $268,500,100
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were organized on March 5, 1999 and have no significant operations to
date. In addition, we currently own no properties. We intend to qualify as a
REIT under the Internal Revenue Code.
The proceeds of this offering and the cash flow generated from properties
we will acquire and any short term investments will be our principal source of
liquidity. In addition, we may borrow funds, subject to the approval of our
board of directors.
On April 20, 1999, we obtained a line of credit in a principal amount of
up to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all accrued interest are due in
full on October 20, 1999. Glade M. Knight, our president and Chairman of the
Board, has guaranteed repayment of the loan. We expect to repay this debt with
proceeds from the sale of common shares.
We anticipate that our cash flow will be adequate to cover our operating
expenses and to permit us to meet our anticipated liquidity requirements,
including distribution requirements. Inflation may increase our operating
costs, including our costs on bank borrowings, if any.
We intend to establish a working capital reserve of at least 0.5% of the
proceeds from this offering. This reserve, in combination with income from our
properties and short term investments, is anticipated to satisfy our liquidity
requirements.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. We will evaluate
systems we may employ to determine if any of the computer programs or hardware
that may be purchased have date-sensitive software or embedded chips that
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
We will undertake several initiatives to address the Year 2000 issue after
we commence operations. As part of our hotel acquisition due diligence process,
we will perform assessments of the information technology ("IT") and non-IT
systems of potential acquisitions for Year 2000 compliance. We will perform
similar assessments for any IT and non-IT systems that will be acquired for
internal use. In situations where these assessments indicate non-compliance
with Year 2000 issues a program of remediation, testing and implementation will
be developed and performed. We will request assurances from Apple Suites
Advisors, Apple Suites Realty and Apple Suites Management that, as they
implement IT and non-IT systems. They also implement appropriate steps to
ensure that they address the Year 2000 issue.
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We will also assess the Year 2000 compliance of vendors and other external
relationships to determine the extent to which we may be vulnerable to these
parties' failure to resolve their own Year 2000 issues. We cannot ensure timely
compliance of third parties and; therefore, could be adversely affected by
failure of a significant third party to become Year 2000 compliant. We cannot
estimate the effect, if any, on us from the failure of third parties to be Year
2000 compliant.
These initiatives may not detect all Year 2000 issues. We will along with
Apple Suites Advisors, Apples Suites Realty and Apple Suites Management, Inc.
develop contingency plans intended to mitigate the possible disruption in
business operations that may result from the Year 2000 issue. We believe a
worst case scenario may be a lack of readiness by electrical and water
utilities, financial institutions, governmental agencies or other providers of
general infrastructure which could pose significant impediments to our ability
to carry on our normal operations. We have not incurred any cost to date
implementing the Year 2000 initiatives and do not believe the cost of
implementation will be material.
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PLAN OF DISTRIBUTION
We are offering to sell the common shares using the service of David
Lerner Associates, Inc. as the managing dealer, and other broker-dealers
selected by the managing dealer. The common shares are being offered on a "best
efforts" basis, meaning that the managing dealer and other broker-dealers are
not obligated to purchase any common shares. No common shares will be sold
unless at least a minimum of 1,666,666.67 shares has been sold no later than
one year after the date of this prospectus. Our officers and directors and
those of Apple Suites Advisors, Apple Suites Realty and Apple Suites Management
will not be permitted to purchase common shares in order to reach the minimum
offering of 1,666,666.67 common shares. If the minimum offering of shares is
not sold by that date, the offering will terminate and all funds deposited by
investors into the interest-bearing escrow account will be promptly refunded in
full, with interest. First Union National Bank will act as escrow agent for the
escrow account until the minimum offering of shares is sold.
The common shares are offered at $9 per share until the minimum offering
of $15,000,000 in shares is achieved and the minimum 1,666,666.67 common shares
have been sold. Thereafter, the common shares will be offered at $10 per share.
The offering of common shares is expected to terminate when all shares
offered by this prospectus have been sold or one year from the date hereof,
unless extended by us for up to an additional year in order to achieve the
maximum offering of 30,166,666.67 common shares. In some states, extension of
the offering may not be allowed, or may be allowed only upon the filing of a
new application with the appropriate state administrator.
Purchasers will be sold common shares at one or more closings. Following
the sale of the minimum offering, additional closings will be held monthly
during the offering period as orders are received. The final closing will be
held shortly after the termination of the offering period or, if earlier, upon
the sale of all the common shares. It is expected that after the INITIAL
closing of the sale of the minimum offering, purchasers will be sold common
shares no later than the last day of the calendar month following the month in
which their orders are received. Funds received during the offering but after
the initial disbursement of funds will be held in escrow for the benefit of
purchasers until the next closing, and then disbursed to us.
In no event are we required to accept the subscription of any prospective
investor, and no subscription shall become binding on us until a properly
completed subscription agreement prepared and executed by the prospective
investor has been accepted by our duly authorized representative. We will
either accept or reject each subscription within four business days from the
receipt of the subscription by David Lerner Associates, Inc. OR other
broker-dealer.
We intend to hold investors' funds in escrow in an interest-bearing
account with First Union National Bank until the minimum offering of
1,666,666.67 common shares is achieved and the initial closing has occurred.
The account will pay interest to investors from the date the investor's funds
are received until the date of the initial closing. First Union National Bank
will remit the aggregate interest on escrowed funds to David Lerner Associates,
Inc., and David Lerner Associates, Inc. will pay the individual investors their
interest. After the initial closing, investors' funds will be held
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in an interest-bearing account with David Lerner Associates, Inc. or other
broker-dealers pending each applicable closing. That account will provide the
investor with interest based on a then current money market fund rate. We and
David Lerner Associates, Inc. reserve the right to formulate and adopt
reasonable simplifying conventions in determining each investor's share of
interest earned pending each closing. For example, we and David Lerner
Associates, Inc. may average interest rates on escrowed funds over a given
period of time or treat all investors subscribing during a given period of time
(such as during a particular month or other period) as having subscribed on the
same day during such period. These simplifying conventions would be designed to
avoid costs necessary to compute interest amounts precisely where the costs are
not commensurate with the amount of interest involved. Investors' subscriptions
will be revocable by written notice delivered to the escrow agent at least five
days before the initial closing. An investor's subscription funds may remain in
escrow for an indefinite period of time.
Each investor who desires to purchase common shares will be required to
complete and sign a Subscription Agreement in the form attached to this
prospectus as Exhibit A. In addition to requesting basic identifying
information concerning the investor, such as his or her name and address, the
number of common shares subscribed for, and the manner in which ownership will
be held, the Subscription Agreement requires the investor to make a series of
representations to us set forth in paragraphs designated "(a)" through "(h)."
We ask for these representations to help us determine whether you have
received the disclosure materials pertaining to the investment, meet certain
suitability requirements we have established, and understand what you are
investing in. Should a dispute later arise between you and us concerning
matters that are the subject of any representation, we would expect to rely
upon your making of that representation in the Subscription Agreement if you
later claim that that representation is not correct.
Set forth below is a brief summary of the nature of each representation in
the lettered paragraphs of the Subscription Agreement. You should, however,
carefully review the Subscription Agreement in its entirety.
(a) You acknowledge that you have received a copy of the prospectus and
that you understand that your investment will be governed by the terms of that
prospectus.
(b) You represent that you are of majority age and, therefore, can enter
into a binding contract to purchase the common shares.
(c) You represent that you have adequate financial resources, understand
the financial risks of an investment in common shares, and understand that
there is no ready ability to sell or otherwise dispose of your investment in
common shares.
(d) You specifically represent that you either have a net worth (excluding
home, furnishings and automobiles) of at least $50,000 (higher in certain
states) and gross income of $50,000, or a net worth (with the same exclusions)
of at least $100,000 (higher in certain states).
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.
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(e) If you are acting on behalf on an entity, you represent that you have
authority to bind the entity.
(f) You represent that the taxpayer identification number (social security
number in the case of an individual) provided is correct and that you are not
subject to backup withholding. This representation allows us to make
distributions to you without any requirement to withhold for income tax
purposes.
(g) You understand that we have the right, in our sole discretion, to
accept or reject your subscription for common shares.
(h) You agree to settle by arbitration any controversy between you and
your broker concerning the Subscription Agreement and the investment
represented by the Subscription Agreement.
It is expected that shareholders will be able to elect to reinvest any
distributions from us in additional common shares available in this offering,
for as long as this offering continues. This option is referred to as the
"Additional Share Option." Any purchase by reinvestment of distributions would
be at the same price per share and on the same terms applicable generally to
subscriptions in this offering effective at the time of reinvestment. We
reserve the right to establish rules governing reinvestment, as well as the
right to modify or terminate the Additional Share Option at any time. We
estimate that approximately 500,000 common shares offered through this
prospectus will be purchased through shareholders' reinvestment of
distributions in common shares pursuant to the Additional Share Option, but the
number of shares which will be purchased cannot be determined at this time.
Subject to the Additional Share Option being available through the
broker-dealer which initially sells a shareholder its common shares, a
shareholder will be able to elect the option by directing, on its subscription
agreement, that cash distributions be reinvested in additional shares.
Distributions attributable to any calendar quarter will then be used to purchase
common shares in this offering. As described under "Federal Income Tax
Consequences -- Federal Income Taxation of the Shareholders," a shareholder who
elects the Additional Share Option will be taxed as if it had received its
distributions which are used to purchase additional shares. A shareholder may
elect to terminate its participation in the Additional Share Option at any time
by written notice sent by it to the broker-dealer through which the shareholder
initially purchased shares. The notice will be effective with respect to
distributions attributable to any calendar quarter if it is sent at least 10
days before the end of that calendar quarter.
Funds not invested in real properties may only be invested by us in United
States government securities, certificates of deposit of banks located in the
United States having a net worth of at least $50,000,000, bank repurchase
agreements covering the securities of the United States Government or United
States governmental agencies issued by banks located in the United States
having a new 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
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also pay to David Lerner Associates, Inc. a marketing expense allowance equal
to 2.5% of the purchase price of the shares, as a non-accountable reimbursement
for expenses incurred by it in connection with the offer and sale of the common
shares. The marketing expense allowance will equal $0.225 per share purchased
at $9 per share and $0.25 per share purchased at $10 per share. The maximum
selling commission payable to David Lerner Associates, Inc. is $22,500,000. The
maximum marketing expense allowance payable to David Lerner Associates, Inc. is
$7,500,000. The selling commissions and marketing expense allowance are payable
to David Lerner Associates, Inc. at the times of the issuance of common shares
to purchasers.
The following table reflects the compensation payable to David Lerner
Associates, Inc.
<TABLE>
<CAPTION>
MARKETING EXPENSE
PRICE TO PUBLIC COMMISSIONS ALLOWANCE
----------------- --------------- ------------------
<S> <C> <C> <C>
Per Share Minimum
Offering ......... $ 9.00 $ 0.675 $ 0.225
Per Share Maximum
Offering ......... $ 10.00 $ 0.75 $ 0.25
Total Minimum
Offering ......... $ 15,000,000 $ 1,125,000 $ 375,000
Total Maximum
Offering ......... $300,000,000 $22,500,000 $7,500,000
</TABLE>
Prospective investors are advised that David Lerner Associates, Inc.,
reserves the right to purchase common shares, on the same terms applicable
generally to sales pursuant to this prospectus, for its own account, at any
time and in any amounts, to the extent not prohibited by relevant law. However,
it is not expected that the managing dealer or other broker-dealers will
purchase common shares.
The Agency Agreement between us and David Lerner Associates, Inc. permits
David Lerner Associates, Inc. to use the services of other broker-dealers in
offering and selling the common shares, subject to our approval. David Lerner
Associates, Inc. will pay the compensation owing to the broker-dealers out of
the selling commissions or marketing expense allowance payable to it. Sales by
the broker-dealers will be carried on in accordance with customary securities
distribution procedures. David Lerner Associates, Inc. may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 in connection with
this offering. Until the minimum offering is achieved, investors must provide
their subscription payment either by authorizing the liquidation of funds in
their money market account with the managing dealer or by providing a check
made payable to "First Union National 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,
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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.
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.
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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
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-- engage in a share exchange or similar transactions;
except for amendments to our articles of incorporation relating to the
classification of the board of directors. This matter requires the approval of
at least two-thirds of the shares entitled to vote.
The transfer agent and registrar for the common shares is First Union
National Bank.
CLASS B CONVERTIBLE SHARES
Our authorized capital stock includes 240,000 Class B convertible shares.
There are no dividends payable on the Class B convertible shares. Upon our
liquidation, the holder of the Class B convertible shares is entitled to a
liquidation payment of $0.10 per Class B convertible share before any
distribution of liquidation proceeds to the holders of the common shares.
Holders of more than two-thirds of the Class B convertible shares must approve
any proposed amendment to the Articles of incorporation that would adversely
affect the Class B convertible shares.
The Class B convertible shares are convertible into common shares upon and
for 180 days following the occurrence of either of the following events:
(1) substantially all of our assets, stock or business is sold or
otherwise transferred, whether through sale, exchange, merger,
consolidation, lease, share exchange or otherwise, or
(2) the Advisory Agreement with Apple Suites Advisors is terminated or
not renewed.
Upon the occurrence of either triggering event, each Class B convertible
share is convertible into a number of common shares based upon the gross
proceeds raised through the date of conversion in the offering made by this
prospectus according to the following formula:
<TABLE>
<CAPTION>
GROSS PROCEEDS RAISED FROM SALES NUMBER OF COMMON SHARES
OF COMMON SHARES THROUGH DATE OF THROUGH CONVERSION OF ONE
CONVERSION CLASS B CONVERTIBLE SHARE
---------------------------------- --------------------------
<S> <C>
$50 million.................... 1.0
$100 million................... 2.0
$150 million................... 3.5
$200 million................... 5.3
$250 million................... 6.7
$300 million................... 8.0
</TABLE>
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.
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We believe that the authorization to issue preferred shares benefit us and
our shareholders by permitting flexibility in financing additional growth,
giving us additional financing options in our corporate planning and in
responding to developments in our business, including financing of additional
acquisitions and other general corporate purposes. Having authorized preferred
shares available for issuance in the future gives us the ability to respond to
future developments and allow preferred shares to be issued without the expense
and delay of a special shareholders' meeting.
At present, we have no specific financing or acquisition plans involving
the issuance of preferred shares and we do not propose to fix the
characteristics of any series of preferred shares in anticipation of issuing
preferred shares. We cannot now predict whether or to what extent, if any,
preferred shares will be used or if so used what the characteristics of a
particular series may be.
The voting rights and rights to distributions of the holders of common
shares will be subject to the prior rights of the holders of any
subsequently-issued preferred shares. Unless otherwise required by applicable
law or regulation, the preferred shares would be issuable without further
authorization by holders of the common shares and on such terms and for such
consideration as may be determined by the board of directors. The preferred
shares could be issued in one or more series having varying voting rights,
redemption and conversion features, distribution (including liquidating
distribution) rights and preferences, and other rights, including rights of
approval of specified transactions. A series of preferred shares could be given
rights that are superior to rights of holders of common shares and a series
having preferential distribution rights could limit common share distributions
and reduce the amount holders of common shares would otherwise receive on
dissolution.
RESTRICTIONS ON TRANSFER
To qualify as a REIT under the Code, our common shares must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of twelve months or during a proportionate part of a shorter taxable year.
Further, not more than 50% of the value of our issued and outstanding common
shares may be owned, directly or indirectly, by five or fewer individuals or,
in limited circumstances, entities such as qualified private pension plans,
during the last half of a taxable year or during a proportionate part of a
shorter taxable year.
Since our board of directors believes it is essential that we maintain our
REIT status, our bylaws provide that no person may own or be deemed to own more
than 9.8% of the issued and outstanding shares of any class or series. The
board may 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.
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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.
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.
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No public market for the common shares currently exists. We do not plan to
cause the common shares to be listed on any securities exchange or quoted on
any system or in any established market either immediately or at any definite
time in the future. While we may cause the common shares to be listed or quoted
if our board of directors determines that action to be prudent, there can be no
assurance that this event will ever occur. Prospective shareholders should view
the common shares as illiquid and must be prepared to hold their investment for
an indefinite length of time.
WARRANTS
We have agreed to sell to David Lerner Associates, Inc. for an aggregate
of $100, warrants to purchase 10% of the shares sold in this offering, up to
3,000,000 common shares at an exercise price of $16.50 per common share or 165%
of the public offering price per common share. The warrants may not be sold,
transferred, assigned or hypothecated for one year from the date of this
prospectus, except to the officers of David Lerner Associates, Inc. and are
exercisable at any time and from time to time, in whole or in part, during the
Warrant Exercise Term. During the Warrant Exercise Term, the holders of the
warrants are given, at nominal cost, the opportunity to profit from a rise in
the market price of the common shares. To the extent that the warrants are
exercised, dilution to the interests of the shareholders will occur if the
warrant exercise price is less than the value of the common shares at the time
of exercise. We have agreed, at the request of the holders of a majority of the
Warrants, at our expense, to register the Warrants under the Securities Act of
1933 on one occasion during the Warrant Exercise Term and to include the
Warrants in any appropriate registration statement which is filed by us during
the seven years following the date of this prospectus.
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SUMMARY OF ORGANIZATIONAL DOCUMENTS
The following is a summary of the principal provisions of our articles of
incorporation and bylaws, some of which may be described or referred to
elsewhere in this prospectus. Neither this summary nor the descriptions
appearing elsewhere in this prospectus purport to be, or should be considered,
a complete statement of the terms and conditions of the articles of
incorporation or bylaws or any specific provision thereof, and this summary and
all the descriptions are qualified in their entirety by reference to, and the
provisions of, the articles of incorporation and bylaws, which have been filed
as exhibits to the registration statement of which this prospectus is a part.
Our articles of incorporation have been reviewed and approved unanimously by
the board of directors.
BOARD OF DIRECTORS
The board of directors, subject to specific limitations in the articles of
incorporation and those imposed by law, has full, exclusive, and absolute
power, control and authority over our property and business. The board of
directors, without approval of the shareholders, may alter our investment
policies in view of changes in economic circumstances and other relevant
factors, subject to the investment restrictions set forth in the bylaws.
A director may be removed if the director is declared of unsound mind by
an order of court or if the director has pled guilty to or been convicted of a
felony involving moral turpitude. In addition, a director may be removed (1)
for cause by the vote or written consent of all directors other than the
director whose removal is being considered, or (2) with or without cause at a
special meeting of the shareholders by vote of a majority of the outstanding
common shares. "For cause" is defined as willful violations of the articles of
incorporation or bylaws, or gross negligence in the performance of a director's
duties. Any vacancies in the office of director may be filled by a majority of
the directors continuing in office or at a special meeting of shareholders by
vote of a majority of the common shares present at a meeting at which there is
a quorum. Any director so elected shall hold office for the remainder of his
predecessor's term. The number of directors shall not be less than three nor
more than 15. At the time of initial closing, there will be five directors, a
majority of whom are independent directors. The holders of the common shares
are entitled to vote on the election or removal of the board of directors, with
each common share entitled to one vote.
The board of directors is empowered to fix the compensation of all
officers and the board of directors. Under the bylaws, directors may receive
reasonable compensation for their services as directors and officers and
reimbursement of their expenses, and we may pay a director such compensation
for special services, including legal and accounting services, as the board of
directors deems reasonable. The board of directors may delegate some of its
powers to one or more committees, each comprised of at least three directors,
the majority of whom are independent directors. At all times a majority of the
directors and a majority of the members of any board committee shall be
independent directors, except that upon the death, removal, or resignation of
an independent director this requirement shall not be applicable for 60 days.
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RESPONSIBILITY OF BOARD OF DIRECTORS, APPLE SUITES ADVISORS, INC., OFFICERS AND
EMPLOYEES
Our articles of incorporation provide that the directors and officers
shall have no liability to us or our shareholders in actions by or in the right
of the company unless the officer or director has engaged in willful misconduct
or a knowing violation of the criminal law or of any federal or state
securities laws. The advisory agreement provides that Apple Suites Advisors
shall have no liability to us or our shareholders unless it has engaged in
gross negligence or willful misconduct. Generally, claimants must look solely
to our property for satisfaction of claims arising in connection with our
affairs. The articles of incorporation and the advisory agreement,
respectively, provide that we shall indemnify any present or former director,
officer, employee or agent and Apple Suites Advisors against any expense or
liability in an action brought against the person if the directors, excluding
the indemnified party, determine in good faith that the director, officer,
employee or agent or Apple Suites Advisors was acting in good faith within what
he or it reasonably believed to be the scope of his or its employment or
authority and for a purpose which he or it reasonably believed to be in our
best interests or of our shareholders, and that the liability was not the
result of willful misconduct, bad faith, reckless disregard of duties or
violation of the criminal law. Indemnification is not allowed for any liability
imposed by judgment, and costs associated therewith, including attorneys' fees,
arising from or out of a violation of federal or state securities laws
associated with the public offering of the common shares unless (1) there has
been a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnity, or (2) the claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnity, or (3) a court of competent
jurisdiction approves a settlement of the claims against a particular
indemnity. To the extent that the indemnification provisions purport to include
indemnification for liabilities arising under the Securities Act of 1933, in
the opinion of the Securities and Exchange Commission, the indemnification is
contrary to public policy and therefore unenforceable.
The exculpation and indemnification provisions in the articles of
incorporation and the advisory agreement have been adopted to help induce the
beneficiaries of these provisions to agree to serve on our behalf or the behalf
of Apple Suites Advisors by providing a degree of protection from liability for
alleged mistakes in making decisions and taking actions. The exculpation and
indemnification provisions have been adopted, in part, in response to a
perceived increase generally in shareholders' litigation alleging director and
officer misconduct. The exculpation and indemnification provisions in the
articles of incorporation and the advisory agreement may result in a
shareholder or our company having a more limited right of action against a
director, Apple Suites Advisors or its affiliates than he or it would otherwise
have had in the absence of the provisions. Conversely, the presence of these
provisions may have the effect of conferring greater discretion upon the
directors, Apple Suites Advisors and its affiliates in making decisions and
taking actions with respect to us. Subject to the exculpation and
indemnification provisions in the articles of incorporation, the advisory
agreement, and as otherwise provided by law, Apple Suites Advisors and the
directors and officers are accountable to us and our shareholders as
fiduciaries and must exercise good faith and integrity in handling our affairs.
As noted above, however, the exculpation and
75
<PAGE>
indemnification provisions in the articles of incorporation and the advisory
agreement represent a material change from the accountability which would be
imposed upon the directors, officers, Apple Suites Advisors and its affiliates
in the absence of the contractual provisions. Thus, the fiduciary duties will
be materially different from the fiduciary duties as they would exist in the
absence of the provisions of the articles of incorporation and the advisory
agreement.
ISSUANCE OF SECURITIES
The board of directors may in its discretion issue additional common
shares or other equity or debt securities, including options, warrants, and
other rights, on such terms and for such consideration as it may deem
advisable. The board of directors may, in its sole discretion, issue shares of
stock or other equity or debt securities, (1) to persons from whom we purchases
property, as part or all of the purchase price of the property, or (2) to Apple
Suites Advisors and Apple Suites Realty in lieu of cash payments required under
the advisory agreement or other contract or obligation. The board of directors,
in its sole discretion, may determine the value of any shares or other equity
or debt securities issued in consideration of property or services provided, or
to be provided, to us, except that while shares are offered by us to the
public, the public offering price of the common shares shall be deemed their
value.
We have adopted two stock incentive plans for the benefit of our directors
and employees and for the benefit of employees of Apple Suites Advisors and
Apple Suites Realty.
REDEMPTION AND RESTRICTIONS ON TRANSFER
For us to qualify as a REIT under the Internal Revenue Code, not more than
50% of our outstanding shares may be owned directly or indirectly by five or
fewer individuals during the last half of any year other than the first year,
and after the first year all shares must be owned by 100 or more persons during
at least 335 days of a taxable year of 12 months or during a proportionate part
of a shorter taxable year. As a means of attempting to ensure compliance with
these requirements, the bylaws provide that we may prohibit any person from
directly or indirectly acquiring ownership, beneficial or otherwise, of more
than 9.8% of the issued and outstanding shares of any class or series.
AMENDMENT
The articles of incorporation and the bylaws may be amended or altered or
we may be dissolved by the affirmative vote of the holders of a majority of the
outstanding common shares, with each shareholder entitled to cast one vote per
common share held. Our articles and bylaws may not be amended unless approved
by the vote of the holders of a majority of the common shares except that the
directors may amend the bylaws if they determine the amendment to be necessary
to comply with the REIT provisions of the Internal Revenue Code or other
applicable 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
76
<PAGE>
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.
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<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.
78
<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.
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<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>
80
<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
81
<PAGE>
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for Cornerstone
and Apple Residential, the offerings closed in the five years ending December
31, 1998. Table III is shown on both an income tax basis as well as in
accordance with generally accepted accounting principles, the only significant
difference being the methods of calculating depreciation.
<TABLE>
<CAPTION>
1998 1997
CORNERSTONE APPLE CORNERSTONE
----------------- --------------- ---------------
<S> <C> <C> <C>
Capital contributions by year ........... $ 38,905,636 $142,800,094 $ 63,485,868
Gross revenue ........................... $ 93,637,948 $ 30,764,904 $ 71,970,624
Operating expenses ...................... $ 33,797,439 $ 14,958,699 $ 27,339,955
Interest income (expense) ............... $ (12,175,940) $ 900,669 $ (7,230,205)
Depreciation ............................ $ 20,741,130 $ 5,788,476 $ 15,163,593
Net income (loss) GAAP basis ............ $ 23,210,642 $ 10,079,908 $ 19,225,553
Taxable income .......................... $ -- $ -- $ --
Cash generated from operations .......... $ 45,027,655 $ 17,122,276 $ 34,973,533
Less cash distributions to investors..... $ 38,317,602 $ 13,040,936 $ 31,324,870
Cash generated after cash distribution... $ 6,710,053 $ 4,081,340 $ 3,648,663
Special items ...........................
Capital contributions, net ............. $ 38,905,636 $142,800,094 $ 63,485,868
Fixed asset additions .................. $ 97,863,162 $125,017,627 $157,859,343
Line of credit ......................... $ 50,323,852 $ -- $ 96,166,147
Cash generated .......................... $ (1,923,622) $ 15,910,626 $ 1,331,335
End of period cash ...................... $ 2,590,364 $ 40,073,198 $ 4,513,986
Tax and distribution data per $1,000
invested
<CAPTION>
1996 1995 1994
APPLE CORNERSTONE CORNERSTONE CORNERSTONE
--------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Capital contributions by year ........... $109,090,359 $ 144,798,035 $71,771,027 $23,496,784
Gross revenue ........................... $ 12,005,968 $ 40,261,674 $16,266,610 $ 8,177,576
Operating expenses ...................... $ 5,993,492 $ 17,198,882 $ 7,457,574 $ 3,894,657
Interest income (expense) ............... $ (235,708) $ (1,140,667) $ (68,061) $ 110,486
Depreciation ............................ $ 1,898,003 $ 8,068,063 $ 2,788,818 $ 1,210,818
Net income (loss) GAAP basis ............ $ 3,499,194 $ (4,169,849) $ 5,229,715 $ 2,386,303
Taxable income .......................... $ -- $ -- $ -- $ --
Cash generated from operations .......... $ 7,075,025 $ 20,162,776 $ 9,618,956 $ 3,718,086
Less cash distributions to investors..... $ 3,249,098 $ 15,934,901 $ 6,316,185 $ 2,977,136
Cash generated after cash distribution... $ 3,825,927 $ 4,227,875 $ 3,302,771 $ 740,950
Special items ...........................
Capital contributions, net ............. $109,090,359 $ 144,798,035 $71,771,027 $23,496,784
Fixed asset additions .................. $ 88,753,814 $ 194,519,406 $75,589,089 $28,557,568
Line of credit ......................... $ -- $ 41,603,000 $ 3,300,000 $ 5,000,000
Cash generated .......................... $ 24,162,472 $ (3,890,496) $ 2,784,709 $ 680,166
End of period cash ...................... $ 24,162,572 $ 3,182,651 $ 7,073,147 $ 4,288,438
Tax and distribution data per $1,000
invested
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
CORNERSTONE APPLE CORNERSTONE APPLE CORNERSTONE CORNERSTONE CORNERSTONE
------------- ------- ------------- ------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Federal income tax results
Cornerstone and Apple are REITs
and thus are not taxed at the
corporate level
Cash distributions to investors
Source (on GAAP basis)
Investment income ............. $ 82 $-- $ 77 $-- $85 $80 $70
Return of capital ............. $ 21 $82 $ 23 $60 $14 $16 $19
Source (on Cash basis) .........
Sales ......................... $ -- $-- $ -- $-- $-- $-- $--
Refinancings .................. $-- $ -- $-- $-- $-- $--
Operations .................... $103 $82 $100 $60 $99 $96 $89
Other ......................... $ -- $-- $ -- $-- $-- $-- $--
</TABLE>
83
<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>
84
<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).
85
<PAGE>
APPLE SUITES, INC.
INDEX TO BALANCE SHEET
MARCH 26, 1999
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors ........... F-2
Balance Sheet at March 26, 1999 .......... F-3
Notes to Balance Sheet ................... F-4
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder of
Apple Suites, Inc.
We have audited the accompanying balance sheet of Apple Suites, Inc. as of
March 26, 1999. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Apple Suites, Inc. at March
26, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Richmond, Virginia
April 21, 1999
F-2
<PAGE>
APPLE SUITES, INC.
BALANCE SHEET
MARCH 26, 1999
<TABLE>
<S> <C>
ASSETS
Cash ......................................................... $100
====
STOCKHOLDER'S EQUITY
Preferred stock, authorized 15,000,000 shares; none issued and
outstanding ................................................ --
Class B convertible stock, no par value, authorized 240,000
shares; none issued and outstanding ........................ --
Common stock, no par value authorized 200,000,000 shares;
issued and outstanding 10 shares ........................... $100
----
$100
====
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Apple Suites, Inc. (the "Company") is a Virginia corporation that intends
to qualify as a real estate investment trust ("REIT") for federal income tax
purposes. The Company, which has no operating history, was formed to invest
primarily in extended stay hotels in the southeastern and southwestern United
States. Initial capitalization occurred on March 5, 1999, when 10 shares of
common stock were purchased by Apple Suites Advisors, Inc. (see Note 3).
SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The Company intends to make an election to be treated, and expects to
qualify, as a REIT under the Internal Revenue Code of 1986, as amended. As a
REIT, the Company will be allowed a deduction for the amount of dividends paid
to its shareholders, thereby subjecting the distributed net income of the
Company to taxation only at the shareholder level. The Company's continued
qualification as a REIT will depend on its compliance with numerous
requirements, including requirements as to the nature of its income and
distribution of dividends.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Start Up Costs
Start up costs incurred other than offering costs will be expensed upon
the successful completion of the minimum offering (see Note 3).
2. OFFERING OF SHARES
The Company intends to raise capital through a "best-efforts" offering of
shares by David Lerner Associates, Inc. (the "Managing Dealer"), which will
receive selling commissions and a marketing expense allowance based on proceeds
of the shares sold.
A minimum offering of 1,666,666 shares ($15,000,000) must be sold within
one year from the beginning of this offering or the offering will terminate and
investors' subscription payments, with interest, will be refunded to investors.
Pending sale of such minimum offering amount, investors' subscription payments
will be placed in an escrow account.
F-4
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET - (CONTINUED)
3. RELATED PARTIES
The Company has negotiated, but not signed, a Property Acquisition and
Disposition Agreement with Apple Suites Realty Group, Inc. ("ASRG"), to acquire
and dispose of real estate assets for the Company. A fee of 2% of the purchase
price or sale price in addition to certain reimbursable expenses will be
payable for these services.
The Company has negotiated, but not signed, an Advisory Agreement with
Apple Suites Advisors, Inc. ("ASA") to provide management of the Company and
its assets. An annual fee ranging from .1% to .25% of total contributions
received by the Company in addition to certain reimbursable expenses will be
payable for these services.
ASRG and ASA are 100% owned by Glade M. Knight, Chairman and President of
the Company. ASRG and ASA may purchase in the "best efforts" offering up to
2.5% of the total number of shares sold in the offering.
Affiliates of the Company have incurred certain organization and offering
costs on behalf of the Company. Upon successful completion of the minimum
offering (see Note 2), the Company will reimburse the affiliates for these
organizational and offering costs. The Company is not responsible for these
costs in the event that the offering is not successfully completed.
On April 20, 1999, the Company obtained a line of credit in a principal
amount of up to $1 million to fund certain offering costs. The loan bears
interest at LIBOR plus 1.50%. Interest is payable monthly and the principal
balance and all accrued interest are due in full on October 20, 1999. Glade M.
Knight has guaranteed repayment of the loan.
4. STOCK INCENTIVE PLANS
The Company intends to adopt two stock incentive plans (the "Incentive
Plan" and "Directors' Plan") to provide incentives to attract and retain
directors, officers and key employees. The plans provide for the grant of
options to purchase a specified number of shares of common stock ("Options") or
grants of restricted shares of common stock ("Restricted Stock") to selected
employees and directors of the Company and certain affiliates. Following
consummation of the offering, a Compensation Committee ("Committee") will be
established to implement and administer the plans. The Committee will be
responsible for granting Options and shares of Restricted Stock and for
establishing the exercise price of Options and the terms and conditions of
Restricted Stock.
5. CLASS B CONVERTIBLE STOCK
The Company has authorized 240,000 shares of Class B Convertible Stock.
The Company will issue 202,500 Class B Convertible Shares to Glade M. Knight,
Chairman and President of the Company, and a combined 37,500 Class B
Convertible Shares to two other individuals. The Class B Convertible Shares
will be issued by the Company
F-5
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET - (CONTINUED)
5. CLASS B CONVERTIBLE STOCK - (CONTINUED)
on or before the initial closing of the minimum offering of $15,000,000, in
exchange for payment of $.10 per Class B Convertible Share, or an aggregate of
$24,000. There will be no dividends payable on the Class B Convertible Shares.
On liquidation of the Company, the holders of the Class B Convertible Shares
will be entitled to a liquidation payment of $.10 per share before any
distribution of liquidation proceeds to holders of the Common Shares. Holders of
more than two-thirds of the Class B Convertible Shares must approve any proposed
amendment to the Articles of Incorporation that would adversely affect the Class
B Convertible Shares or create a new class of stock senior to, or on a parity
with, the Class B Convertible Shares. The Class B Convertible Shares may not be
redeemed by the Company.
Each holder of outstanding Class B Convertible Shares shall have the right
to convert any of such shares into Common Shares of the Company upon and for
180 days following the occurrence of either of the following conversion events:
(1) the sale or transfer of substantially all of the Company's assets,
stock or business, whether through sale, exchange, merger,
consolidation, lease, share exchange or otherwise, or
(2) the termination or expiration without renewal of the Advisory
Agreement with ASA, and if the Company ceases to use ASRG to provide
substantially all of its property acquisition and disposition
services.
Upon the occurrence of either conversion event, each Class B Convertible
Share may be converted into a number of Common Shares based upon the gross
proceeds raised through the date of conversion in the public offering or
offerings of the Company's Common Shares made by the Company's prospectus
according to the following formula:
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES
GROSS PROCEEDS RAISED FROM THROUGH CONVERSION OF ONE
SALES OF COMMON SHARES THROUGH CLASS B CONVERTIBLE SHARE
DATE OF CONVERSION (THE INITIAL "CONVERSION RATIO")
-------------------------------- ---------------------------------
<S> <C>
$ 50 million................... 1.0
$100 million................... 2.0
$150 million................... 3.5
$200 million................... 5.3
$250 million................... 6.7
$300 million................... 8.0
</TABLE>
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.
F-6
<PAGE>
APPLE SUITES, INC.
NOTES TO BALANCE SHEET - (CONTINUED)
6. WARRANTS
The Company has agreed to sell to the Managing Dealer for an aggregate of
$100, warrants (the "Warrants") to purchase 10% of the shares sold in this
offering, up to 3,000,000 common shares at an exercise price of $16.50 per
common share (165% of the public offering price per common share). The Warrants
may not be sold, transferred, assigned or hypothecated for one year from the
date of the "best-efforts" offering prospectus, except to the officers and
employees of the Managing Dealer and are exercisable at any time and from time
to time, in whole or in part, during the five-year period commencing on the
date of the final closing after the termination of the offering (the "Warrant
Exercise Term"). At the Company's expense, the Company intends to register the
Warrants under the Securities Act on one occasion during the Warrant Exercise
Term and to include the Warrants in any appropriate registration statement
which is filed by the Company during the seven years following the date of the
"best efforts" offering prospectus.
F-7
<PAGE>
EXHIBIT A
SUBSCRIPTION AGREEMENT
To: Apple Suites, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Suites, Inc. ("REIT")
at a purchase price of and 00/100 Dollars ($ ) per Share. By executing or
having executed on my (our) behalf this Subscription Agreement and submitting
payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Suites, Inc.,
of which this Subscription Agreement is a part, and understand that the shares
being acquired will be governed by the terms of such Prospectus and any
amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home,
home furnishings and automobiles) of at least $50,000 ($125,000 in the case of
Maine and New Hampshire purchasers) and estimate that (without regard to
investment in the REIT) I (we) will have gross income during the current year
of $50,000, or (ii) a net worth (excluding home, home furnishings and
automobiles) of at least $100,000 ($150,000 in the case of Kentucky and North
Carolina purchasers, $200,000 in the case of Maine purchasers, and $250,000 in
the case of New Hampshire purchasers); and, in either event, further represent
that the purchase amount is 10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative
capacity) that I (we) have due authority to execute the Subscription Agreement
and to thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer
identification number shown on the signature page of this Subscription
Agreement is true, correct and complete (or I am (we are) waiting for a number
to be issued to me (us)), and (ii) that I am (we are) not subject to backup
withholding either because (a) I am (we are) exempt from backup withholding, or
(b) I (we) have not been notified by the Internal Revenue Service that I am (we
are) subject to backup withholding as a result of a failure to report all
interest or distributions, or (c) the Internal Revenue Service has notified me
(us) that I am (we are) no longer subject to backup withholding; and
(g) it is understood that the REIT shall have the right to accept or
reject this subscription in whole or in part in its sole and absolute
discretion. The REIT will either accept or reject this subscription within four
business days from the receipt of the subscription by the Managing Dealer or
Selected Dealer.
To the extent permitted by applicable law, the REIT intends to assert the
foregoing representations as a defense to any claim based on factual assertions
contrary to those set forth above.
(H) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE
THE FOLLOWING:
<PAGE>
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION
OR RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION,
OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS OPTED OUT OF THE
CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS
ACTION UNTIL: (1) THE CLASS CERTIFICATION IS DENIED; OR (II) THE CLASS
IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM THE CLASS BY
THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL
NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO
THE EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN
HIM/HER AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR
ACCOUNT TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH
BROKER WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH
ARBITRATION WILL BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER
SELF-REGULATORY ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR
THE CUSTOMER MAY INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE
CUSTOMER DOES NOT DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND
IN WRITING WITHIN 5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES
BROKER TO DESIGNATE THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER
SUBMITS HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF
SUCH COURT.
<PAGE>
APPLE SUITES, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)
--------------------------------------------------
Tax ID Number(s)
-----------------------------------------------------------
Account # (If applicable)
2. Name(s) in which shares are to be registered:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
<TABLE>
<S> <C> <C> <C>
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
</TABLE>
[ ] As Custodian for
-------------------------------------------------------
[ ] For Estate of
----------------------------------------------------------
[ ] Other
------------------------------------------------------------------
4. Address for correspondence
-------------------------------------------------
--------------------------------------------------------------------------------
5. Are you a non-resident alien individual (other than a non-resident alien
who has elected to be taxed as a resident), a foreign corporation, a
foreign partnership, a foreign trust, a foreign estate, or otherwise not
qualified as a United States person? If so, transaction will not be
executed without a completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $__________ for ____________ Shares (Investment must
be for a minimum of $5,000 in Shares or $2,000 in Shares for qualified
plans). Make check payable to: First Union National Bank, Escrow Agent (or
as otherwise instructed).
[ ] Liquidate funds from money market [ ] Check enclosed
7. Instructions for cash distributions
[ ] Deposit to money market [ ] Reinvest in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (H).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE INVESTOR IS NOT WAIVING ANY
RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
X
-----------------------------------------------------------------------------
Signature Date
X
-----------------------------------------------------------------------------
Signature Date
<PAGE>
10. Broker/Dealer Information:
X
-------------------------------- -----------------------------------------
Registered Representative's Name Second Registered Representative's Name
X
-------------------------------- -----------------------------------------
Broker/Dealer Firm Registered Representative's Office Address
X
-------------------------------- -----------------------------------------
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of
the NASD's Rules of Fair Practice, the undersigned Registered
Representative hereby certifies: I have reasonable grounds to believe,
based on information obtained from the investor(s) concerning investment
objectives, other investments, financial situation and needs and any other
information known by me, that investment in the REIT is suitable for such
investor(s) in light of financial position, net worth and other suitability
characteristics.
--------------------------------------------------------------------------------
Registered Representative Date
--------------------------------------------------------------------------------
General Securities Principal Date
--------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Signature page will not be an effective
agreement until it is signed by a duly authorized agent of Apple Suites, Inc.
Agreed and accepted by:
Apple Suites, Inc.
By
---------------------------------------------------------------------
Date
--------------------------------------------------------------------
<PAGE>
SUBSCRIPTION AGREEMENT
To: Apple Suites, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Suites, Inc. ("REIT")
at a purchase price of ___________ and 00/100 Dollars ($_______) per Share. By
executing or having executed on my (our) behalf this Subscription Agreement and
submitting payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Suites, Inc.,
of which this Subscription Agreement is a part, and understand that the shares
being acquired will be governed by the terms of such Prospectus and any
amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home,
home furnishings and automobiles) of at least $50,000 ($125,000 in the case of
Maine and New Hampshire purchasers) and estimate that (without regard to
investment in the REIT) I (we) will have gross income during the current year
of $50,000, or (ii) a net worth (excluding home, home furnishings and
automobiles) of at least $100,000 ($150,000 in the case of Kentucky and North
Carolina purchasers, $200,000 in the case of Maine purchasers, and $250,000 in
the case of New Hampshire purchasers); and, in either event, further represent
that the purchase amount is 10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative
capacity) that I (we) have due authority to execute the Subscription Agreement
and to thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer
identification number shown on the signature page of this Subscription
Agreement is true, correct and complete (or I am (we are) waiting for a number
to be issued to me (us)), and (ii) that I am (we are) not subject to backup
withholding either because (a) I am (we are) exempt from backup withholding, or
(b) I (we) have not been notified by the Internal Revenue Service that I am (we
are) subject to backup withholding as a result of a failure to report all
interest or distributions, or (c) the Internal Revenue Service has notified me
(us) that I am (we are) no longer subject to backup withholding; and
(g) it is understood that the REIT shall have the right to accept or
reject this subscription in whole or in part in its sole and absolute
discretion. The REIT will either accept or reject this subscription within four
business days from the receipt of the subscription by the Managing Dealer or
Selected Dealer.
To the extent permitted by applicable law, the REIT intends to assert the
foregoing representations as a defense to any claim based on factual assertions
contrary to those set forth above.
(H) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE
THE FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION
OR RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION,
OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS OPTED OUT OF THE
CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS
ACTION UNTIL: (1) THE CLASS CERTIFICATION IS DENIED; OR (II) THE CLASS
IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM THE CLASS BY
THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL
NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO
THE EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN
HIM/HER AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR
ACCOUNT TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH
BROKER WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH
ARBITRATION WILL BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER
SELF-REGULATORY ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR
THE CUSTOMER MAY INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE
CUSTOMER DOES NOT DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND
IN WRITING WITHIN 5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES
BROKER TO DESIGNATE THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER
SUBMITS HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF
SUCH COURT.
<PAGE>
APPLE SUITES, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)
--------------------------------------------------
Tax ID Number(s)
-----------------------------------------------------------
Account # (If applicable)
2. Name(s) in which shares are to be registered:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
<TABLE>
<S> <C> <C> <C>
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
</TABLE>
[ ] As Custodian for
-------------------------------------------------------
[ ] For Estate of
----------------------------------------------------------
[ ] Other
------------------------------------------------------------------
4. Address for correspondence
-------------------------------------------------
--------------------------------------------------------------------------------
5. Are you a non-resident alien individual (other than a non-resident alien
who has elected to be taxed as a resident), a foreign corporation, a
foreign partnership, a foreign trust, a foreign estate, or otherwise not
qualified as a United States person? If so, transaction will not be
executed without a completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $_______________ for ___________________ Shares
(Investment must be for a minimum of $5,000 in Shares or $2,000 in Shares
for qualified plans). Make check payable to: First Union National Bank,
Escrow Agent (or as otherwise instructed).
[ ] Liquidate funds from money market [ ] Check enclosed
7. Instructions for cash distributions
[ ] Deposit to money market [ ] Reinvest in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (H).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE INVESTOR IS NOT WAIVING ANY
RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
X
------------------------------------------------------------------------------
Signature Date
X
------------------------------------------------------------------------------
Signature Date
<PAGE>
10. Broker/Dealer Information:
X
------------------------------------------------------------------------------
Registered Representative's Name Second Registered Representative's Name
X
------------------------------------------------------------------------------
Broker/Dealer Firm Registered Representative's Office Address
X
------------------------------------------------------------------------------
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of
the NASD's Rules of Fair Practice, the undersigned Registered
Representative hereby certifies: I have reasonable grounds to believe,
based on information obtained from the investor(s) concerning investment
objectives, other investments, financial situation and needs and any other
information known by me, that investment in the REIT is suitable for such
investor(s) in light of financial position, net worth and other suitability
characteristics.
--------------------------------------------------------------------------------
Registered Representative Date
--------------------------------------------------------------------------------
General Securities Principal Date
--------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Signature page will not be an effective
agreement until it is signed by a duly authorized agent of Apple Suites, Inc.
Agreed and accepted by:
Apple Suites, Inc.
By
--------------------------------------------------------------------------
Date
------------------------------------------------------------------------
<PAGE>
SUPPLEMENT NO. 5 DATED MARCH 21, 2000
TO PROSPECTUS DATED AUGUST 3, 1999
APPLE SUITES, INC.
The following information supplements the prospectus of Apple Suites, Inc.
dated August 3, 1999 and is part of the prospectus. THIS SUPPLEMENT NO. 5
INCORPORATES AND THEREFORE REPLACES ALL SUPPLEMENTS PREVIOUSLY IN USE
(SUPPLEMENTS 1, 2, 3 AND 4). PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE
PROSPECTUS AND THIS SUPPLEMENT.
TABLE OF CONTENTS FOR SUPPLEMENT NO. 5
<TABLE>
<S> <C>
Status of the Offering ................................................ S-2
Recent Developments ................................................... S-2
Company Management .................................................... S-2
Our Properties ........................................................ S-4
Property Acquisitions ................................................. S-5
Overview ............................................................. S-5
Ownership and Leasing of Hotels ...................................... S-5
Hotel Supplies and Franchise Fees .................................... S-6
Description of Financing ............................................. S-7
Licensing And Management ............................................. S-8
Potential Economic Risk and Benefit Involving Apple Suites Management S-8
Summary of Material Contracts ......................................... S-10
Description of Properties ............................................. S-17
Management's Discussion and Analysis .................................. S-41
Selected Financial Data ............................................... S-46
Update Concerning Prior Programs ...................................... S-47
Experts ............................................................... S-52
Index to Financial Statements ......................................... F-1
</TABLE>
The prospectus and this supplement contain forward-looking statements
within the meaning of the federal securities laws which are intended to be
covered by the safe harbors created by those laws. These statements include our
plans and objectives for future operations, including plans and objectives
relating to future growth and availability of funds. These forward-looking
statements are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to these statements involve judgments with
respect to, among other things, the continuation of our offering of common
shares, future economic, competitive and market conditions and future business
decisions. All of these matters are difficult or impossible to predict
accurately and many of them are beyond our control. Although we believe the
assumptions underlying the forward-looking statements, and the forward-looking
statements themselves, are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that these forward-looking
statements will prove to be accurate. In light of the significant uncertainties
inherent in these forward-looking statements, the inclusion of this information
should not be regarded as a representation by us or any other person that our
objectives and plans, which we consider to be reasonable, will be achieved.
S-1
<PAGE>
STATUS OF THE OFFERING
We completed the minimum offering of common shares at $9 per share on
August 23, 1999. We are continuing the offering at $10 per share in accordance
with the prospectus.
As of March 17, 2000, we had closed on the following sales of our common
shares:
<TABLE>
<CAPTION>
PROCEEDS NET OF SELLING
PRICE PER NUMBER OF GROSS COMMISSIONS AND MARKETING
COMMON SHARE COMMON SHARES SOLD PROCEEDS EXPENSE ALLOWANCE
-------------- -------------------- -------------- --------------------------
<S> <C> <C> <C>
$ 9 1,666,666.67 $15,000,000 $13,500,000
$ 10 2,256,256.00 22,562,560 20,306,304
------------ ----------- -----------
Total 3,922,922.67 $37,562,560 $33,806,304
============ =========== ===========
</TABLE>
We have purchased, either directly or through our subsidiaries, a total of
11 extended-stay hotels with the net proceeds of our offering. All of our
hotels are licensed with Homewood Suites(Reg. TM) by Hilton, which is a
registered service mark of Hilton Hotels Corporation. A summary of our hotels
appears below.
RECENT DEVELOPMENTS
As discussed in detail below, we have a total of $68.6 million in notes
payable in connection with the purchase of our hotels. Final principal payments
are due as follows: (a) $34 million on October 1, 2000, (b) $30.2 million on
November 1, 2000, and (c) $4.4 million on January 1, 2001. We plan to pay these
notes with the proceeds from our continuous "best efforts" offering of common
shares. However, based on the current rate at which equity is being raised by
the offering, we may need to seek other measures to repay these loans. We
currently are holding discussions with several lenders to obtain financing for
the hotels and are exploring both unsecured and secured financing arrangements.
Although no firm financing commitments have been received, we believe,
based on discussions with lenders and other market indicators, that we can
obtain sufficient financing prior to maturity of the notes. Obtaining
refinancing is dependent upon a number of factors, including: (a) continued
operation of the hotels at or near current occupancy and room rate levels, as
the hotel leases are based on a percentage of hotel suite income, (b) the
general level of interest rates, including credit spreads for real estate based
lending, and (c) general economic conditions.
There is no assurance that we will be able to obtain financing to repay
our current outstanding debt. If we are unable to obtain such financing and if
our offering proceeds are insufficient, we would be subject to a number of
default remedies, including possible loss of the hotels through foreclosure.
Depending on the terms of any financing we obtain, we may need to modify our
borrowing policy, as described in the prospectus, of holding our properties on
an all-cash basis over the long-term.
COMPANY MANAGEMENT
On August 16, 1999, we added four individuals to our board of directors.
Those four individuals are Lisa B. Kern, Bruce H. Matson, Michael S. Waters and
Robert M. Wily (all of whom are described in the prospectus).
S-2
<PAGE>
On the same date, Glade M. Knight, who is our Chairman, Chief Executive
Officer and President, was authorized by the board of directors to close the
purchase of hotels on our behalf as he deems in our best interests. He also was
authorized to cause us to borrow, on either a secured or an unsecured basis, up
to 75% of the purchase price for such hotels. We expect to repay any such
borrowing from the proceeds of our ongoing offering and sale of common shares.
There can be no assurance, however, that we will actually receive proceeds
sufficient for that purpose.
From August 1999 through March 2000, C. Douglas Schepker served as our
Senior Vice President and Chief Operating Officer. His duties were assumed by
Glade M. Knight in March 2000.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
S-3
<PAGE>
OUR PROPERTIES
(Map of United States shows general location of hotels)
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
DATE OF NAME TOTAL DATE OF NAME TOTAL
PURCHASE OF HOTEL SUITES PURCHASE OF HOTEL SUITES
---------------- ------------------------------- -------- ---------------- ----------------------------- -------
<S> <C> <C> <C> <C> <C>
September 1999 Dallas - Addison 120 September 1999 Dallas - Irving/Las Colinas 136
September 1999 North Dallas - Plano 99 September 1999 Richmond - West End 123
October 1999 Atlanta - Galleria/Cumberland 124 November 1999 Atlanta - Peachtree 92
November 1999 Baltimore - BWI Airport 147 November 1999 Clearwater 112
November 1999 Detroit - Warren 76 November 1999 Salt Lake City - Midvale 98
December 1999 Jackson - Ridgeland 91
</TABLE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
S-4
<PAGE>
PROPERTY ACQUISITIONS
OVERVIEW
We used the proceeds from our offering of common shares to pay 25% of the
purchase price for each hotel to Promus Hotels, Inc., or an affiliate, as the
seller. Promus Hotels, Inc. is a wholly-owned subsidiary of Hilton Hotels
Corporation. The balance, or 75% of the purchase price for each hotel, is being
financed by Promus Hotels, Inc. as short-term or "bridge financing" (described
in further detail below). We paid a 2% real estate commission on the total
purchase price for each hotel to Apple Suites Realty Group, Inc., as our real
estate broker. This corporation is owned by Glade M. Knight, who is our
president and chief executive officer. The following table summarizes the
purchase information for our hotels:
<TABLE>
<CAPTION>
HOTEL PURCHASE AMOUNT REAL ESTATE
NAME PRICE FINANCED (75%) COMMISSION
--------------------------------------- ------------- ---------------- ------------
<S> <C> <C> <C>
Dallas - Addison ...................... $ 9,500,000 $ 7,125,000 $ 190,000
Dallas - Irving/Las Colinas ........... 11,200,000 8,400,000 224,000
North Dallas - Plano .................. 5,400,000 4,050,000 108,000
Richmond - West End ................... 9,400,000 7,050,000 188,000
Atlanta - Galleria/Cumberland ......... 9,800,000 7,350,000 196,000
Atlanta - Peachtree ................... 4,033,000 3,024,750 80,660
Baltimore - BWI Airport ............... 16,348,000 12,261,000 326,960
Clearwater ............................ 10,416,000 7,812,000 208,320
Detroit - Warren ...................... 4,330,000 3,247,500 86,600
Salt Lake City - Midvale .............. 5,153,000 3,864,750 103,060
Jackson - Ridgeland ................... 5,846,000 4,384,500 116,920
----------- ----------- ----------
Total ................................. $91,426,000 $68,569,500 $1,828,520
=========== =========== ==========
</TABLE>
OWNERSHIP AND LEASING OF HOTELS
We directly purchased the hotels located in states other than Texas. The
hotels that we own directly have been leased to Apple Suites Management, Inc.
under a master hotel lease agreement dated as of September 20, 1999. This
agreement is among the material contracts described below.
We purchased the hotels in Texas through one of our subsidiaries, Apple
Suites REIT Limited Partnership, a Virginia limited partnership, based on
business and tax planning considerations. We have two wholly-owned subsidiaries
that serve as the sole general partner and sole limited partner of this limited
partnership. The sole general partner is Apple Suites General, Inc., a Virginia
corporation. It holds a one percent partnership interest. The sole limited
partner is Apple Suites LP, Inc., a Virginia corporation. It holds a
ninety-nine percent partnership interest. Glade M. Knight is the sole director
of these two corporate partners.
Under a master hotel lease agreement dated as of September 20, 1999, the
three hotels in Texas have been leased to Apple Suites Services Limited
Partnership, a Virginia limited partnership. This limited partnership is a
subsidiary of Apple Suites Management, Inc. Two direct wholly-owned
subsidiaries of Apple Suites Management, Inc. serve as the sole general partner
and sole limited partner of the limited partnership. The sole general partner
is Apple Suites Services General, Inc., a Virginia corporation. It holds a one
percent partnership interest. The sole limited partner is Apple Suites Services
Limited, Inc., a Virginia corporation. It holds a ninety-nine percent
partnership interest. Glade M. Knight is the sole director of these two
corporate partners.
S-5
<PAGE>
The following chart shows the ownership and leasing structure for our
hotels in Texas:
(All entities shown below are organized under Virginia law)
[GRAPHIC OMITTED]
For simplicity, the general term "Apple Suites Management" will be used
where appropriate as a combined reference to the entities that lease our hotels
(Apple Suites Management, Inc. and its subsidiary, Apple Suites Services
Limited Partnership).
HOTEL SUPPLIES AND FRANCHISE FEES
We have provided Apple Suites Management with funds for the purchase of
certain hotel supplies (such as sheets, towels and so forth), and with funds
for the payment of hotel franchise fees to Promus Hotels, Inc. Apple Suites
Management is obligated to repay us under the promissory notes described below:
<TABLE>
<CAPTION>
MONTH OF PRINCIPAL AMOUNT PRINCIPAL AMOUNT
PROMISSORY NOTE (SUPPLIES) (FRANCHISE FEES)
--------------------------------- ------------------ -----------------
<S> <C> <C>
September 1999 ................ $ 47,800 $215,550
October 1999 .................. 12,400 55,800
November 1999 ................. 52,500 251,550
December 1999 ................. 9,100 45,000
-------- --------
Total ......................... $121,800 $567,900
======== ========
</TABLE>
Each promissory note provides for an annual interest rate of nine percent
(9%), which would increase to twelve percent (12%) if a default occurs. After
the initial payment of interest only, amortized payments of principal and
interest are due in
S-6
<PAGE>
monthly installments. The promissory notes with respect to hotel supplies are
payable to us in sixty-one (61) monthly installments. The promissory notes with
respect to franchise fees are payable to us in one hundred twenty-one (121)
monthly installments.
DESCRIPTION OF FINANCING
As indicated above, Promus Hotels, Inc. is financing 75% of the purchase
price of our hotels. The amounts we owe to Promus Hotels, Inc. are evidenced by
the following promissory notes:
<TABLE>
<CAPTION>
ORIGINAL REMAINING
MONTH OF PRINCIPAL PRINCIPAL AS OF ANNUAL RATE DATE OF
PROMISSORY NOTE AMOUNT MARCH 1, 2000 OF INTEREST MATURITY
------------------------ -------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
September 1999 ......... $26,625,000 $26,625,000 8.5% October 1, 2000
October 1999 ........... $ 7,350,000 $ 7,350,000 8.5% October 1, 2000
November 1999 .......... $30,210,000 $30,210,000 8.5% December 1, 2000
December 1999 .......... $ 4,384,500 $ 4,384,500 8.5% January 1, 2001
----------- -----------
Total ............... $68,569,500 $68,569,500
=========== ===========
</TABLE>
We consider the financing from Promus Hotels, Inc. to be "bridge
financing" because of its short-term nature (that is, each promissory note
reaches maturity within approximately one year of its date of execution).
Despite the temporary use of bridge financing, over the long-term we will seek
to hold our properties on an all-cash basis, as indicated in the prospectus.
The promissory notes have several provisions in common, which include the
following:
o monthly interest payments, based on the actual number of days per
month
o our delivery of monthly notices to specify the net equity proceeds
from our offering
o our right to prepay the notes, in whole or in part, without premium or
penalty
o a late payment premium of four percent (4%) for any payment not made
within ten (10) days of its due date
Revenue from the operation of the hotels will be used to pay interest
under the promissory notes we have made to Promus Hotels, Inc. The "net equity
proceeds" from our offering of common shares will be the source of our
principal payments. The phrase "net equity proceeds" means the total proceeds
from our offering of common shares, as reduced by selling commissions, a
marketing expense allowance, closing costs, various fees and charges (legal,
accounting, and so forth), a working capital reserve and a reserve for
renovations, repairs and replacements of capital improvements.
Under an October 1999 letter agreement, we were permitted to use such net
equity proceeds to pay 25% of the purchase price for additional hotels,
including the hotels we purchased in November and December of 1999.
Furthermore, Hilton Hotels Corporation, the parent company of Promus Hotels,
Inc. has agreed to defer principal payments until the earlier of April 28, 2000
or our purchase of two additional extended-stay hotels licensed with Homewood
Suites(Reg. TM) by Hilton. Otherwise, to the extent that we have such net
equity proceeds, we are obligated to make monthly
S-7
<PAGE>
principal payments under the promissory notes dated as of September 20, 1999
and October 5, 1999. Once those promissory notes are paid in full, we will have
a similar obligation to make monthly principal payments under the other
promissory notes. Assuming the September and October promissory notes are paid
in full by their common maturity date of October 1, 2000, principal under the
November promissory note will be due in two monthly installments ending on
December 1, 2000, and principal under the remaining promissory note will be due
in a single installment on its maturity date of January 1, 2001.
To date, we have made all scheduled interest payments under the promissory
notes. The aggregate amount of our interest payments through March 2000 is
$2,508,767.
There can be no assurance that the net equity proceeds from our offering
of common shares will be sufficient to pay principal under the promissory notes
on or before the required due dates. The following amounts would be due on the
maturity dates of the promissory notes, assuming that interest payments
continue to be made on schedule and that no payments of principal are made
before those maturity dates:
<TABLE>
<CAPTION>
MONTH OF DATE OF IF PRINCIPAL DUE THEN TOTAL DUE
PROMISSORY NOTE MATURITY AT MATURITY EQUALS AT MATURITY EQUALS
----------------- ------------------ -------------------- -------------------
<S> <C> <C> <C>
September 1999 October 1, 2000 $26,625,000 $26,811,010
October 1999 October 1, 2000 $ 7,350,000 $ 7,401,349
November 1999 December 1, 2000 $30,210,000 $30,421,056
December 1999 January 1, 2001 $ 4,384,500 $ 4,415,131
----------- -----------
Total $68,569,500 $69,048,546
=========== ===========
</TABLE>
In the event of a default under the promissory notes, various remedies are
available to Promus Hotels, Inc. under certain deeds of trust, which are
described below in the Summary of Material Contracts.
LICENSING AND MANAGEMENT
We expect that our hotels will continue to be licensed with Homewood
Suites(Reg. TM) by Hilton. To help achieve that result, Apple Suites Management
has executed separate license agreements with Promus Hotels, Inc. for each of
our hotels. Promus Hotels, Inc. is managing each of the hotels under separate
management agreements with Apple Suites Management. These license and
management agreements are among the material contracts described below.
POTENTIAL ECONOMIC RISK AND BENEFIT INVOLVING APPLE SUITES MANAGEMENT
Because federal tax laws prohibit us from directly operating our hotels,
we have leased them to Apple Suites Management, Inc. or its subsidiary (Apple
Suites Services Limited Partnership). Our president and chief executive
officer, Glade M. Knight, is the sole shareholder of Apple Suites Management,
Inc.
The master hotel lease agreements have been structured to minimize, to the
extent possible, the economic benefit to Apple Suites Management, Inc. and to
maximize the rental income we receive from the hotels. However, revenues from
operating the hotels may exceed payment obligations under the master hotel
lease agreements, the license agreements and the management agreements. To the
extent that operating income
S-8
<PAGE>
remains after those payment obligations are met, Apple Suites Management, Inc.
will realize an economic benefit. The extent of this potential economic benefit
cannot be determined at this time because it depends, in part, on future hotel
revenues.
Apple Suites Management, Inc. has agreed that it will retain its net
income, if any, rather than distribute such income to Glade M. Knight. This
agreement will remain in effect for the duration of the master hotel lease
agreements, to help ensure that Apple Suites Management, Inc. will be able to
make its rent payments.
If the cash flow from the operations of the hotels and the retained
earnings of Apple Suites Management, Inc. are insufficient to make the rental
payments due under the master lease agreements, Apple Suites Management, Inc.
can receive additional funding under two funding commitments. The funding
commitments are dated as of September 17, 1999, and have been made by Glade M.
Knight and Apple Suites Realty Group, Inc., which is wholly-owned by Mr.
Knight. These funding commitments are payable on demand by Apple Suites
Management, Inc. Under each funding commitment, Apple Suites Management, Inc.
can make one or more demands for funding, subject to two qualifications. First,
the aggregate payments under the funding commitments shall not exceed $2
million. Second, the demands for payment shall be limited, in amount and
frequency, to those demands that are reasonably necessary to satisfy any
capitalization or net worth requirements of Apple Suites Management, Inc., or
payment obligations under the master hotel lease agreements for our hotels.
Apple Suites Management, Inc. is not required to repay the funds it receives
under the funding commitments.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
S-9
<PAGE>
SUMMARY OF MATERIAL CONTRACTS
DEEDS OF TRUST AND RELATED DOCUMENTS
Each of our hotels is subject to a mortgage on its real property, a
security interest in its personal property, and an assignment of hotel rents
and revenues, all in favor of Promus Hotels, Inc. (As described above, Promus
Hotels, Inc. provided financing for our hotel purchases). These encumbrances
are created by substantially similar documents. For simplicity, we will refer
to each of these documents as a "deed of trust."
Each deed of trust corresponds to one of the promissory notes we made to
Promus Hotels, Inc., and secures the payment of principal and interest under
that promissory note. The encumbrance created by a deed of trust will terminate
when its corresponding promissory note is paid in full.
We are subject to various requirements under the deeds of trust. For
instance, we must maintain adequate insurance on the hotels and we must not
grant any further assignments of rents or leases with respect to the hotels.
Each deed of trust contains a substantially similar definition of events
of default. In each case, the events of default include (without limitation)
any default that occurs under any of the promissory notes or under another deed
of trust, and any sale of the secured property without the prior consent of
Promus Hotels, Inc. Upon any event of default, various remedies are available
to Promus Hotels, Inc. Those remedies include, for example (a) declaring the
entire principal balance under the promissory notes, and all accrued and unpaid
interest, to be due and payable immediately; (b) taking possession of the
secured property, including the hotels; and (c) collecting hotel rents and
revenues, or foreclosing on the hotels, to satisfy unpaid amounts under the
promissory notes. Each deed of trust requires us to pay any costs that may be
incurred in exercising such remedies.
At each closing on our purchase of a hotel or group of hotels, we further
encumbered the hotels we already owned with additional deeds of trust or with
negative pledges. The negative pledges apply to three of our hotels
(Richmond-West End, Clearwater and Baltimore-BWI Airport). The negative pledges
prohibit any transfer or further encumbrance of the hotels, in whole or in
part, without the prior written consent of Promus Hotels, Inc. Each negative
pledge was executed concurrently with a particular promissory note, and will
terminate when its corresponding promissory note is paid in full.
ENVIRONMENTAL INDEMNITIES
A separate environmental indemnity applies to each of our hotels. The
indemnities are substantially similar and protect Promus Hotels, Inc. in the
event that we undertake any corrective work to remove or eliminate hazardous
materials from the hotels. Hazardous materials are defined in the indemnities
to include, for example, asbestos and other toxic materials. We are not aware
of any hazardous materials at the hotels, but there can be no assurance that
such materials are not present.
Under the indemnities, we have agreed to indemnify and protect Promus
Hotels, Inc. from any losses that it may incur because of (a) the
nonperformance, or delayed performance and completion, of corrective work; or
(b) the enforcement of the
S-10
<PAGE>
indemnities. The indemnity for a particular hotel corresponds to the promissory
note that was executed at closing on the purchase of that hotel. In general,
each indemnity will terminate when its corresponding promissory note is paid in
full. However, the indemnities will continue with respect to those litigation
or administrative claims, if any, that involve indemnified losses and that are
pending at the date of full payment. In addition, for a period of four years
after the date of such full payment, we will be obligated to pay any
enforcement costs for subsequent litigation or administrative claims.
MASTER HOTEL LEASE AGREEMENTS
All of our hotels, except the hotels in Texas, have been leased to Apple
Suites Management, Inc. These leases were created by a master hotel lease
agreement dated September 20, 1999, which has been supplemented to include the
hotels we purchased after that date. The hotels in Texas have been leased to
Apple Suites Services Limited Partnership under a separate and substantially
similar master hotel lease agreement dated September 20, 1999.
Each master hotel lease agreement has an initial term of ten years. Apple
Suites Management has the option to extend the lease term for two additional
five-year periods, provided that Apple Suites Management is not in default at
the end of the prior term or at the time the option is exercised. If the first
option is exercised, rental payments would continue to be adjusted as provided
in the master lease agreement. If the second option is exercised, we must
negotiate in good faith with Apple Suites Management to adjust the rental
payments to a market rate for similar hotels. If no agreement can be reached,
rental terms would be determined by an independent panel of experts in
evaluating hotel REIT leases.
We may terminate a master hotel lease agreement if we sell the hotels to a
third party, if there is a change of control of Apple Suites Management, or
based on any amendments to the Internal Revenue Code that would permit our
direct operation of the hotels or would make the lease structure unnecessary.
Upon any termination, we must compensate Apple Suites Management by paying the
fair market value of the lease as of such termination, or by offering to lease
one or more substitute hotels.
The master hotel lease agreements provide for an annual base rent, a
quarterly percentage rent and a quarterly sundry rent. Base rent is payable in
advance in equal monthly installments. Beginning in 2001, the base rent will be
adjusted annually in proportion to the Consumer Price Index. The following
table shows the initial base rents for each hotel:
<TABLE>
<CAPTION>
BASE RENT
NAME OF HOTEL (1999 AND 2000)
------------------------------------------------- ----------------
<S> <C>
Dallas-Addison ................................ $638,220
Dallas-Irving/Las Colinas ..................... 824,340
North Dallas-Plano ............................ 501,930
Richmond-West End ............................. 674,190
Atlanta-Galleria/Cumberland ................... 661,320
Atlanta-Peachtree ............................. 414,150
Baltimore-BWI Airport ......................... 895,750
Clearwater .................................... 664,150
Detroit-Warren ................................ 408,450
Salt Lake City-Midvale ........................ 438,150
Jackson-Ridgeland ............................. 462,750
</TABLE>
S-11
<PAGE>
Percentage rent is payable quarterly. The percentage rent for a particular
hotel depends on a formula that compares fixed "suite revenue breakpoints" with
a portion of "suite revenue," which is equal to gross revenue from suite
rentals (less sales and room taxes). Specifically, the percentage rent is equal
to the sum of (a) 17% of all year-to-date suite revenue, up to the applicable
suite revenue breakpoint; plus (b) 55% of the year-to-date suite revenue in
excess of the applicable suite revenue breakpoint, as reduced by base rent and
percentage rent paid year-to-date. Beginning in 2001, the suite revenue
breakpoints will be adjusted in proportion to the Consumer Price Index. Suite
revenue breakpoints have been determined for the first quarter of each year
during the initial term of the master hotel lease agreements. The suite revenue
breakpoints for subsequent quarters are determined by multiplying the first
quarter values by two, three or four, respectively. The following table shows
the initial suite revenue breakpoints for each hotel, before any adjustment due
to the Consumer Price Index:
SUITE REVENUE BREAKPOINTS
FOR THE FIRST QUARTER OF THE INDICATED YEARS
<TABLE>
<CAPTION>
NAME OF HOTEL 2000 2001 2002 2003
-------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Dallas-Addison ....................... $256,255 $261,090 $265,925 $270,760
Dallas-Irving/Las Colinas ............ 330,985 337,230 343,475 349,720
North Dallas-Plano ................... 201,533 205,335 209,138 212,940
Richmond-West End .................... 270,698 275,805 280,913 286,020
Atlanta-Galleria/Cumberland .......... 265,530 270,540 275,550 280,560
Atlanta-Peachtree .................... 134,599 138,740 144,953 149,094
Baltimore-BWI Airport ................ 291,119 300,076 313,513 322,470
Clearwater ........................... 215,849 222,490 232,453 239,094
Detroit-Warren ....................... 132,746 136,831 142,958 147,042
Salt Lake City-Midvale ............... 142,399 146,780 153,353 157,734
Jackson-Ridgeland .................... 150,394 155,021 161,963 166,590
</TABLE>
<TABLE>
<CAPTION>
NAME OF HOTEL 2004 2005 2006 2007 2008
------------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Dallas-Addison ..................... $275,595 $280,430 $285,265 $290,100 $294,935
Dallas-Irving/Las Colinas .......... 355,965 362,210 368,455 374,700 380,945
North Dallas-Plano ................. 216,742 220,545 224,348 228,150 231,953
Richmond-West End .................. 291,128 296,235 301,343 306,450 311,558
Atlanta-Galleria/Cumberland......... 285,570 290,580 295,590 300,600 305,610
Atlanta-Peachtree .................. 153,236 157,377 161,519 165,660 169,802
Baltimore-BWI Airport .............. 331,428 340,385 349,343 358,300 367,258
Clearwater ......................... 245,736 252,377 259,019 265,660 272,302
Detroit-Warren ..................... 151,127 155,211 159,296 163,380 167,465
Salt Lake City-Midvale ............. 162,116 166,497 170,879 175,260 179,642
Jackson-Ridgeland .................. 171,218 175,845 180,473 185,100 189,728
</TABLE>
The sundry rent is payable quarterly and equals 99% of all sundry revenue,
which consists of revenue other than suite revenue less the amount of sundry
rent paid year-to-date.
Under the master hotel lease agreements, Apple Suites Management must pay
all taxes, other than real estate and personal property taxes, imposed on the
hotels. In addition, Apple Suites Management must provide and pay for hotel
utilities, such as
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<PAGE>
electricity, gas, oil, water and sewer service. Apple Suites Management also
must maintain and pay for insurance with respect to the hotels, including
building insurance (with earthquake and flood insurance), equipment insurance
(against loss or damage to steam boilers and similar apparatus) and loss of
income insurance.
The master hotel lease agreements require Apple Suites Management to
maintain the hotels in good order and repair, except for ordinary wear and
tear. This requirement applies to any underground utilities and the structural
elements of the hotels, including the exterior walls and roofs. We are
obligated to maintain a reserve fund for periodic repair, replacement or
refurbishing of furniture, fixtures and equipment. Our payments to this reserve
fund may equal up to 5% of suite revenue.
HOTEL LICENSE AGREEMENTS
Each of our hotels is licensed with Homewood Suites(Reg. TM) by Hilton
under separate and substantially similar license agreements with Promus Hotels,
Inc. Under the license agreements, Apple Suites Management has the right to
operate the hotels using the "System" established for all properties licensed
with Homewood Suites(Reg. TM) by Hilton. The "System" includes access to a
reservation system, to advertising methods, to a "Standards Manual," and to
other training, information, programs and policies.
In exchange, Apple Suites Management has agreed to numerous requirements
and restrictions applicable to its operation of the hotel. Apple Suites
Management is also required to pay royalties and other fees, as described
below.
Apple Suites Management will be subject to various operational
requirements pursuant to the license agreements and the Standards Manual. The
Standards Manual is subject to change at any time. (As described below, Promus
Hotels, Inc. will act as the manager of the hotels under separate management
agreements.) As a practical matter, many of the requirements in the license
agreements and Standards Manual will be the responsibility of Promus Hotels,
Inc. However, certain requirements will remain the practical responsibility of
Apple Suites Management. Furthermore, the failure of Promus Hotels, Inc. to
comply with the management agreements will not, by itself, relieve Apple Suites
Management from its obligations under the license agreements. In such event,
the remedies available to Apple Suites Management may be limited to monetary
damages for breach of the hotel management agreements.
The hotels must be operated in accordance with the requirements
established by Promus Hotels, Inc. These requirements cover matters such as the
types of services and products that may be offered at the hotel, the style and
type of signage, the appearance and condition of the hotel, the use of the
reservations system for guests, adherence to a 100% Satisfaction Guarantee rule
of operation, required insurance coverage and other requirements.
Under the license agreements, Apple Suites Management may use the System
only during the 20-year term of the license agreements. The license agreements
are subject to early termination for various reasons, including default by
Apple Suites Managemen or its efforts to obtain bankruptcy protection. If a
license agreement is terminated for any reason, the hotel must immediately
cease to identify itself as having a license with Homewood Suites(Reg. TM) by
Hilton.
S-13
<PAGE>
Apple Suites Management must pay the following monthly amounts to Promus
Hotels, Inc. in accordance with the license agreements: (a) A royalty fee equal
to 4% of the gross suites revenues (less sales and room taxes) received from
rental of suites at the hotels; (b) a marketing contribution equal to 4% of
gross suites revenues; (c) any amounts due Promus Hotels, Inc. for goods or
services provided by Promus Hotels, Inc. to Apple Suites Management; and (d)
the amount of sales, gross receipts or similar taxes imposed on Promus Hotels,
Inc. as a result of each payment described above. The 4% marketing contribution
is subject to change by Promus Hotels, Inc. from time to time. Furthermore,
there is no assurance that the marketing contribution from a hotel will be used
to fund advertising or marketing with respect to the hotel actually making the
contribution.
Under the license agreements, Promus Hotels, Inc. may require Apple Suites
Management to upgrade hotel facilities from time to time to meet current
standards, as then specified in the Standards Manual. We expect to pay the
costs of any required upgrades from the proceeds of our ongoing offering of
common shares, although there can be no assurance that such proceeds will be
sufficient for this purpose.
HOTEL MANAGEMENT AGREEMENTS
Each of our hotels is being managed by Promus Hotels, Inc. or an
affiliate. To simplify the following discussion, the manager will be referred
to as "Promus Hotels." The management of our hotels is governed by separate and
substantially similar management agreements with Apple Suites Management.
The management agreements require Promus Hotels to operate the hotels in
conformity with the hotel license agreements described above. Promus Hotels
will be responsible for directing the day-to-day activities of the hotels and
establishing policies and procedures relating to the management and operation
of the hotels.
As part of its responsibilities for directing the day-to-day activities of
the hotels, Promus Hotels will hire, supervise and determine the compensation
and terms of employment of all hotel personnel. Promus Hotels also will
determine the terms for admittance, room rates and all use of hotel rooms.
Promus Hotels will select and purchase all operating equipment and supplies for
the hotels. Promus Hotels will be responsible for (a) advertising and promoting
the hotels in coordination with the requirements of the license agreements
described above; and (b) obtaining and maintaining any permits and licenses
required to operate the hotels.
Each year, Promus Hotels will submit a proposed operating budget for each
hotel to Apple Suites Management for its approval. Each budget will include a
business plan describing the business objectives and strategies for each hotel
for the period covered by the budget. In addition, Promus Hotels will submit a
recommended capital budget to Apple Suites Management for its approval. The
capital budget will apply to furnishings, equipment and ordinary hotel capital
replacements needed to operate the hotels in accordance with the hotel license
agreements. At a minimum, each year's budget for capital improvements will
provide for capital expenditures that are required to meet the minimum
standards of the hotel license agreement, subject to the following limits: (a)
3% of adjusted gross revenues for the first full year after the commencement
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<PAGE>
of the management agreement; (b) 4% of adjusted gross revenues for the second
full year after the commencement of the management agreement; and (c) 5% of
adjusted gross revenues for each year thereafter.
In exchange for performing the services described above, Promus Hotels
will receive a management fee, payable monthly. The management fee will equal
4% of adjusted gross revenues. Adjusted gross revenues are defined generally as
all revenues derived from the hotels, as reduced by (a) refunds; (b) sales and
other similar taxes; (c) proceeds from the sale or other disposition of the
hotels, furnishings and other capital assets; (d) fire and extended coverage
insurance proceeds; (e) credits or refunds made to customers; (f) condemnation
awards; (g) proceeds of financing or refinancing of the hotels; (h) interest on
bank accounts; and (i) gratuities or service charges added to a customer's
bill.
Prior to the second anniversary of the management agreement, a portion of
the management fee, equal to 1% of adjusted gross revenues, will be
subordinated to payment of a basic return to Apple Suites Management. The basic
return is generally equal to 11% of the purchase price for each hotel (and
related acquisition costs).
Each management agreement has a 15-year term. However, Apple Suites
Management may terminate any management agreement after its tenth anniversary.
If it does so, Promus Hotels will be entitled to a termination fee. The
termination fee generally is equal to (a) the aggregate management fees earned
during the preceding 24 months, if the termination occurs after the tenth
anniversary but on or before the 14th anniversary of the effective date of the
management agreement; or (b) the average monthly management fee earned during
the preceding 24 months times the number of full calendar months remaining in
the term, if the termination occurs after the 14th anniversary of the effective
date of the management agreement.
In addition, if the hotel license agreement for a particular hotel is
terminated, Promus Hotels may terminate the corresponding management agreement.
If Promus Hotels terminates the management agreement it will be entitled to a
termination fee equal to (a) an amount that ranges from $426,690 to $899,000
(depending on the hotel involved) if the termination occurs within two years of
the effective date of the management agreement; (b) 150% of the aggregate
monthly management fees earned during the preceding 24 months, if the
termination occurs after the second anniversary but on or before the tenth
anniversary of the effective date of the management agreement; (c) 75% of the
aggregate monthly management fees earned during the preceding 24 months, if the
termination occurs after the tenth anniversary but on or before the 14th
anniversary of the effective date of the management agreement; or (d) the
average monthly management fee earned during the preceding 24 months times the
number of full calendar months remaining in the term, if the termination occurs
after the 14th anniversary of the effective date of the management agreement.
Beginning in the first full calendar year of operations, Apple Suites
Management may terminate a management agreement if Promus Hotels fails to
achieve, in any two consecutive calendar years, a gross operating profit which
is at least equal to 85% of the annual budgeted gross operating profit. Promus
Hotels can avoid termination by making a cash payment to Apple Suites
Management that equals the difference
S-15
<PAGE>
between the gross operating profits achieved and 85% of the budgeted gross
operating profits for the second such year. Generally, gross operating profit
is defined as the amount by which adjusted gross revenues exceed operating
costs.
COMFORT LETTERS
Our decision to lease our hotels to Apple Suites Management is based upon
certain technical tax considerations that apply to us as a REIT for federal
income tax purposes. To address operational complexities and other potential
problems that may arise from using Apple Suites Management as the lessee of our
hotels and the party to the license agreements and management agreements, we
have entered into separate and substantially similar "Comfort Letters" with
Promus Hotels, Inc. with respect to each hotel. The comfort letters grant us
certain rights if problems arise under such agreements, or if the lease
structure is no longer necessary for tax purposes. The chief provisions of the
comfort letters are described below.
First, as long as we are the owner of the hotel and its corresponding
license agreement is in effect, Promus Hotels, Inc. has agreed to notify us of
any breach of any license agreement or management agreement by the lessee. We
will have 10 days to cure any monetary default and 30 days to cure any
non-monetary default. There is no opportunity to cure defaults not capable of
being cured (such as bankruptcy of the lessee or a transfer in violation of the
license agreement), but in such situation, a default would occur under the
lease and we would be able to terminate the lease.
Second, if there is a default under the lease and we elect to terminate
the lease, we have the right, which may be exercised within 90 days after
giving notice of termination to Promus Hotels, Inc., to enter into a new lease
agreement with a successor lessee. In general, any such successor lessee must
be majority owned and controlled by us or our affiliates (which includes our
directors and executive officers), must be a person or entity that has adequate
financial resources to perform under the lease and must have a favorable
reputation for integrity. The successor lessee cannot be the franchisor or
operator of a competing chain of hotels. If we enter into a new lease, the
successor lessee will have a right to enter into a new license agreement and
new management agreement with Promus Hotels, Inc. for the balance of the
original terms of those agreements. However, if we are unable to provide a
qualified successor lessee within such 90-day period, the license agreement may
be terminated at the option of Promus Hotels, Inc. and we will be obligated to
pay liquidated damages to Promus Hotels, Inc. In general, liquidated damages
are an amount equal to the total fees payable under the license agreement for
the three years prior to termination. If the hotel has been open for less than
three years, the amount is equal to the greater of: (a) 36 times the monthly
average of fees payable for the period during which the hotel has been open; or
(b) 36 times the amount payable for the last full month of operation prior to
termination. If the hotel is open but has not been in operation for a full
month, liquidated damages equal $3,000 per suite in the hotel.
Third, the comfort letters provide that if the income tax rules that apply
to REITs are amended to permit us to operate the hotel directly, we may give
notice of such tax change to Promus Hotels, Inc. and of our election to
terminate the lease. We then have the right to enter into a new license
agreement and a new management agreement for a term equal to the balance of the
original terms of such agreements.
S-16
<PAGE>
DESCRIPTION OF PROPERTIES
Each of our hotels is an extended-stay hotel, and is licensed with
Homewood Suites(Reg. TM) by Hilton. We believe that the majority of the guests
at the hotels during the past 12 months have been business travelers. We expect
that this pattern will continue.
Each suite consists of a bedroom and a living room, with an adjacent
kitchen area. The basic suite is known as a "Homewood Suite," which generally
has one double or king-size bed. Larger suites, known as "Master Suites" or
"Extended Double Suites" are also available. These suites have larger rooms,
with either one king-size bed or two smaller beds. The largest suites contain
two separate bedrooms. Wheelchair-accessible suites are available at each
hotel.
The suites have many features and amenities in common. Most suites have
ceiling fans and two color televisions (one in the bedroom and one in the
living room). Some suites have fireplaces. Typical living room furniture
includes a sofa (often a fold-out sleeper sofa), coffee table and work/dining
table with chairs. Some living rooms contain a recliner and a videocassette
player. The kitchens vary, but generally have a microwave, refrigerator,
dishwasher, coffee maker and stove, together with basic cookware and utensils.
The hotel are marketed, in part, through the website for Homewood
Suites(Reg. TM) by Hilton (http://www.homewood-suites.com), which is generally
available 24 hours a day, seven days a week, around the world. Reservations may
be made directly through the web site. The reservation system and the web site
are linked to, and cross-marketed with, the reservation systems and web sites
for other hotel franchises that are owned and operated by Hilton Hotel
Corporation. Such cross-marketing may affect occupancy at our hotels by
directing travelers or potential guests toward, or away from, our hotels.
The hotels were actively conducting business on the date of purchase. We
believe that the purchases were conducted without materially disrupting any
daily hotel operations. During the past 12 months, the hotels have been covered
with property and liability insurance, and we have arranged to continue such
coverage. We believe the hotels are adequately covered by insurance.
DALLAS - ADDISON
The Homewood Suites(Reg. TM) Dallas - Addison is located on a 3.3 acre site
at 4451 Beltline Road, Addison, Texas 75244. The hotel is approximately 15 miles
from downtown Dallas and 25 miles from the Dallas/Fort Worth International
Airport. The hotel opened in July 1990. It has wood frame construction, with an
exterior of brick veneer and stucco. The hotel consists of four buildings, each
with two or three stories. The hotel contains 120 suites, which have a combined
rentable area of 61,440 square feet. The following types of suites are
available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET/PER SUITE
------------------------------------- ------------------ ----------------------
<S> <C> <C>
Master Suite ...................... 24 590
Homewood Suite .................... 88 460
Two-Bedroom Suite ................. 8 850
</TABLE>
S-17
<PAGE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 136 spaces. The hotel provides complimentary shuttle service
within a 3 mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $400,000 on renovations or improvements. We expect that the
principal renovations and improvements will include: upgrading bathrooms and
kitchens, providing additional signage and replacing exterior doors. We expect
to pay for the costs of these renovations and improvements with proceeds from
our ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 6.2 nights,
and approximately 64.3% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, for the last five
years:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
--------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C>
83.9% 78.4% 78.1% 76.9 % 73.8%
</TABLE>
During 1999, the average daily rate per suite was $89.87, and the average
daily revenue per available suite was $66.30. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 20.9% of the hotel's revenue
would be needed to cover its portion of the interest payments.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY MASTER MASTER
(NUMBER OF NIGHTS) HOMEWOOD (KING) (DOUBLE) TWO BEDROOM
---------------------------- ---------- -------- ---------- ------------
<S> <C> <C> <C> <C>
1 to 4 ................. $139 $139 $139 $179
5 to 11 ................. 109 109 109 149
12 to 29 ................. 89 89 89 129
30 or more ............... 79 79 79 119
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain corporate accounts. These discounts are often negotiated
with the corporate customer and vary from account to account. During 1999, we
estimate that approximately 36.7% of the hotel's guests received a corporate
discount.
S-18
<PAGE>
The chief corporate accounts (as designated in the hotel's records)
include: MBNA, CSC, Santa Fe International, Lucent Technologies, Lawson
Software, People Soft, Business Jet, Stonebridge Technology and Acclivus.
During 1999, the 10 largest corporate accounts were responsible for
approximately 6.8% of the hotel's occupancy. There can be no assurance,
however, that the hotel will continue to receive significant occupancy, or any
occupancy, from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
for the last five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
$ 56.35 $ 55.18 $ 54.05 $ 54.25 $ 47.26
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $7,312,316 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
TAX ASSESSED TAX RATE AMOUNT
JURISDICTION VALUE (PER $100) OF TAX
----------------------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
County of Dallas ................ $8,100,000 0.447699 $ 36,263.62
City of Dallas .................. $8,100,000 1.460530 $ 118,302.93
Town of Addison ................. $8,100,000 0.384600 $ 31,152.60
------------
TOTAL $ 185,719.15
============
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $4,500 or less.
At least five competing hotels are located within two miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) Three of the competing hotels are newer than the
hotel. The newer competing hotels have franchises with Country Inn Suites,
Hilton Inn and Quality Inns. The other competing hotels have franchises with
Courtyard by Marriott and Residence Inn. We believe that the rates charged by
the hotel are generally competitive with the rates charged by these other
hotels. We are aware of ongoing or proposed construction for three
extended-stay hotels within approximately three miles of the hotel. We expect
these new hotels to be franchised with Marriott (in two instances) and Budget
Suites.
DALLAS - IRVING/LAS COLINAS
The Homewood Suites(Reg. TM) Dallas - Irving/Las Colinas is located on a
3.4 acre site at 4300 Wingren Drive, Irving, Texas 75039. The hotel is
approximately 11 miles from downtown Dallas and 10 miles from the Dallas/Fort
Worth International Airport.
The hotel opened in January 1990. It has wood frame construction, with an
exterior of brick veneer, stucco, and wood siding. The hotel consists of five
buildings, each with two or three stories. The hotel contains 136 suites, which
have a combined rentable area of 80,144 square feet. The following types of
suites are available:
S-19
<PAGE>
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET/PER SUITE
------------------------------------ ------------------ -----------------------
<S> <C> <C>
Master Suite ..................... 20 620
Homewood Suite ................... 108 560
Two-Bedroom Suite ................ 8 908
</TABLE>
The hotel offers a meeting room that accommodates 25 to 30 people, and a
business center that offers guests the use of a personal computer, a
photocopier and an electric typewriter. Recreational facilities include an
outdoor pool, a whirlpool, a basketball court and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 181 spaces. The hotel provides complimentary shuttle service
within a 3 mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $450,000 on renovations or improvements. We expect that the
principal renovations and improvements will include upgrading bathrooms,
repairing the parking lot and improving the meeting room. We expect to pay for
the costs of these renovations and improvements with proceeds from our ongoing
offering of common shares.
During 1999, the average stay at the hotel was approximately 4.5 nights,
and approximately 69.3% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, for the last five
years:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
--------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
75.2% 75.2% 77.8% 75.8% 76.4%
</TABLE>
During 1999, the average daily rate per suite was $94.71, and the average
daily revenue per available suite was $72.35. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 19.9% of the hotel's revenue
would be needed to cover its portion of the interest payments.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
------------------------------ ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 ................... $134 $134 $174
5 to 12 ................... 119 119 159
13 to 29 ................... 109 109 149
30 or more ................. 89 89 129
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain
S-20
<PAGE>
corporate accounts. These discounts are often negotiated with the corporate
customer and vary from account to account. During 1999, we estimate that
approximately 65.4% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include: GTE, SAP America, Amdocs, Ernst & Young, Sprint, Oracle Corp., The
Associates, Caltex, Associates Corp. of North America and Olympus America Inc.
During 1999, the 10 largest corporate accounts were responsible for
approximately 25% of the hotel's occupancy. There can be no assurance, however,
that the hotel will continue to receive significant occupancy, or any
occupancy, from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
for the last five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
$ 42.17 $ 44.42 $ 46.85 $ 47.48 $ 44.81
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $8,292,872 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
TAX ASSESSED TAX RATE AMOUNT
JURISDICTION VALUE (PER $100) OF TAX
------------------------------------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
County of Dallas ....................... $9,519,990 0.447699 $ 42,620.90
City of Irving ......................... $9,519,990 0.488000 $ 46,457.55
Irving School District ................. $9,519,990 1.668400 $ 158,831.51
Dallas County Utility District ......... $9,519,990 1.189800 $ 113,268.84
------------
TOTAL $ 361,178.80
============
</TABLE>
We estimate that the annual real estate tax on the expected improvements
will be approximately $8,500 or less.
At least five competing hotels are located within three miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) Three of the competing hotels are
newer than the hotel. The newer competing hotels have franchises with
AmeriSuites, StudioPlus and Summerfield Suites. The other competing hotels have
franchises with Harvey Hotel Suites and Residence Inn. We believe that the
rates charged by the hotel are generally competitive with the rates charged by
these other hotels. We are aware of ongoing or proposed construction for two
extended-stay hotels within approximately five miles of the hotel. We have no
definite franchising information for these hotels.
S-21
<PAGE>
NORTH DALLAS - PLANO
The Homewood Suites(Reg. TM) Dallas - Plano is located on a 2.67 acre site
in the Preston Park Business Center. Its address is 4705 Old Sheppard Place,
Plano, Texas 75093. The hotel is approximately 23 miles from downtown Dallas
and 20 miles from the Dallas/Fort Worth International Airport.
The hotel opened in April 1997. It has wood frame construction, with an
exterior of brick veneer and stucco. The hotel consists of a single four-story
building. The hotel contains 99 suites, which have a combined rentable area of
50,120 square feet. The following types of suites are available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET/PER SUITE
-------------------------------- ------------------ ----------------------
<S> <C> <C>
Extended Double Suite .......... 37 510
Homewood Suite ................. 55 460
Two-Bedroom Suite .............. 7 850
</TABLE>
The hotel offers a meeting room that accommodates 20-25 people, and a
business center that offers guests the use of a personal computer, a
photocopier and an electric typewriter. Recreational facilities include an
outdoor pool and whirlpool, an exercise room, and a sports court. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 123 spaces. The hotel provides complimentary shuttle service
within a 5 mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $28,000 on renovations or improvements. We expect that the
principal renovations and improvements will include interior upgrades and
landscaping. We expect to pay for the costs of these renovations and
improvements with proceeds from our ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 7.5 nights,
and approximately 63.7% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, since the opening of
the hotel:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1997 1998 1999
--------- ---------- ------------
<S> <C> <C>
64.4% 70.9% 71.9%
</TABLE>
During 1999, the average daily rate per suite was $79.86, and the average
daily revenue per available suite was $57.43. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 16.6% of the hotel's revenue
would be needed to cover its portion of the interest payments.
S-22
<PAGE>
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY EXTENDED
(NUMBER OF NIGHTS) HOMEWOOD DOUBLE TWO BEDROOM
------------------------- ---------- --------- ------------
<S> <C> <C> <C>
1 to 6 ........... $109 $109 $149
7 to 29 ........... 69 69 109
30 or more ......... 59 59 99
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain corporate accounts. These discounts are often negotiated
with the corporate customer and vary from account to account. During 1999, we
estimate that approximately 49.5% of the hotel's guests received a corporate
discount.
The chief corporate accounts (as designated in the hotel's records)
include J.C. Penney, Dr. Pepper/7-Up, Alcatel, Arco, Raytheon, State Farm
Insurance, Rug Doctor, Sterling Software, Oracle Corp and Frito Lay . During
1999, the 10 largest corporate accounts were responsible for approximately 34%
of the hotel's occupancy. There can be no assurance, however, that the hotel
will continue to receive significant occupancy, or any occupancy, from the
corporate accounts identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ----------- -------------
<S> <C> <C>
$ 38.87 $ 43.99 $ 41.41
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $4,713,290 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
TAX ASSESSED TAX RATE AMOUNT
JURISDICTION VALUE (PER $100) OF TAX
----------------------------------- ------------- ------------ ----------------
<S> <C> <C> <C>
County of Collin ................ $7,124,145 2.35655 $167,884.04
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $500 or less.
At least nine competing hotels are located within five miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) Five of the competing hotels are newer than the
hotel. The newer competing hotels have franchises with AmeriSuites, Candlewood
Suites, Homegate Suites, Hawthorne Suites and Residence Inn. The other
competing hotels have franchises with Courtyard by Marriott (in two cases),
Hampton Inn Suites and Mainstay Suites. We believe that the rates charged by
the hotel are generally competitive with the rates
S-23
<PAGE>
charged by these other hotels. We are aware of ongoing or proposed construction
for three extended-stay hotels within approximately five miles of the hotel.
Although we do not have complete franchising information for these hotels, we
expect three of them to be franchised with Doubletree Suites, Marriott
Townplace and Weston Suites.
RICHMOND - WEST END
The Homewood Suites(Reg. TM) Richmond - West End is located on a 3.8 acre
site in the Innsbrook Corporate Center. Its address is 4100 Innslake Drive,
Glen Allen, Virginia 23060. The hotel is approximately 14 miles from downtown
Richmond and 20 miles from the Richmond International Airport.
The hotel opened in May 1998. It has metal stud frame construction, with
an exterior of brick veneer and stucco. The hotel consists of a single
four-story building. The hotel contains 123 suites, which have a combined
rentable area of 63,600 square feet. The following types of suites are
available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET/PER SUITE
---------------------------------------- ------------------ ----------------------
<S> <C> <C>
Homewood King Suite ............ 98 500
Homewood Double Suite .......... 18 500
Two-Bedroom Suite .............. 7 800
</TABLE>
The hotel offers a meeting room that accommodates up to 80 people, and a
business center that offers guests the use of a personal computer, a
photocopier and an electric typewriter. Recreational facilities include an
outdoor pool, a whirlpool and an exercise room. The hotel also contains a guest
convenience store and laundry. The hotel has its own parking lot with 136
spaces. The hotel provides complimentary shuttle service within a 5 mile
radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $100,000 on renovations or improvements. We expect that the
principal renovations and improvements will include installing new telephone
system and purchasing new furniture. We expect to pay for the costs of these
renovations and improvements with proceeds from our ongoing offering of common
shares.
During 1999, the average stay at the hotel was approximately 3.1 nights,
and approximately 52.1% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, since the opening of
the hotel:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1998 1999
--------- ------------
<S> <C>
61.7% 75.2%
</TABLE>
During 1999, the average daily rate per suite was $82.95, and the average
daily revenue per available suite was $62.41. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our
S-24
<PAGE>
purchase of the hotel. There can be no assurance, however, the proceeds of the
offering will be sufficient to permit such payments of principal. Assuming that
no principal payments are made until the maturity of the promissory note, and
that the hotel continues to have the level of revenue specified above,
approximately 21.4% of the hotel's revenue would be needed to cover its portion
of the interest payments.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY HOMEWOOD HOMEWOOD
(NUMBER OF NIGHTS) (KING BED) (DOUBLE BED) TWO BEDROOM
---------------------------- ------------ -------------- ------------
<S> <C> <C> <C>
1 to 4 ................. $114 $114 $154
5 to 29 ................. 84 84 124
30 to 89 ................. 74 74 114
90 or more ............... 74 74 114
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain corporate accounts. These discounts are often negotiated
with the corporate customer and vary from account to account. During 1999, we
estimate that approximately 79% of the hotel's guests received a corporate
discount.
The chief corporate accounts (as designated in the hotel's records)
include Target, Capital One, Circuit City, First Union National Bank, Virginia
Power, Owens Minor, Saxon Mortgage Corp., Promus Hotels, Inc., Deloitte &
Touche and Old Dominion Electric Cooperative. During 1999, the 10 largest
corporate accounts were responsible for approximately 55% of the hotel's
occupancy. There can be no assurance, however, that the hotel will continue to
receive significant occupancy, or any occupancy, from the corporate accounts
identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C>
$ 37.80 $ 44.06
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $8,461,493 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
TAX ASSESSED TAX RATE AMOUNT
JURISDICTION VALUE (PER $100) OF TAX
------------------------------------- ------------- ------------ ---------------
<S> <C> <C> <C>
County of Henrico ................. $5,806,300 0.9400 $54,579.22
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $500 or less.
S-25
<PAGE>
At least seven competing hotels are located within one mile of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) Three of the competing hotels are newer than the
hotel. The newer competing hotels have franchises with Candlewood Suites,
Comfort Suites and Courtyard by Marriott. The other competing hotels have
franchises with AmeriSuites, Hampton Inn, Homestead Village and Residence Inn.
We believe that the rates charged by the hotel are generally competitive with
the rates charged by these other hotels. We are aware of ongoing or proposed
construction for three extended-stay hotels within approximately three miles of
the hotel. We expect these new hotels to be franchised with Holiday Inn
Express, Hilton Garden Inn and Marriott.
ATLANTA - GALLERIA/CUMBERLAND
The Homewood Suites(Reg. TM) Atlanta - Galleria/Cumberland is located on a
3.7 acre site at 3200 Cobb Parkway, Atlanta, Georgia 30339. The hotel is
approximately 17 miles from downtown Atlanta and 35 miles from the Hartsfield
Atlanta International Airport.
The hotel opened in July 1990. It has wood frame construction, with an
exterior of brick veneer and wood siding. The hotel consists of four buildings,
each with two or three stories. The hotel contains 124 suites, which have a
combined rentable area of 85,600 square feet. The following types of suites are
available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET PER SUITE
------------------------------------- ------------------ ----------------------
<S> <C> <C>
Master Suite ...................... 96 700
Homewood Suite .................... 24 600
Two-Bedroom Suite ................. 4 1,000
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 15 to 20 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 150 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $285,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement and
furniture acquisitions (sofas, recliners and televisions). We expect to pay for
the costs of these renovations and improvements with proceeds obtained from our
ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 4.7 nights,
and approximately 72% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, for the last five
years:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
--------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
76.7% 71.7% 77.2% 77.4% 79.2%
</TABLE>
S-26
<PAGE>
During 1999, the average daily rate per suite was $86.62, and the average
daily revenue per available suite was $68.64. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 20.1% of the hotel's revenue
would be needed to cover its portion of the interest payments.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
------------------------------ ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 ................... $119 $119 $159
5 to 11 ................... 109 109 149
12 to 29 ................... 92 92 132
30 or more ................. 79 79 119
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain corporate accounts. These discounts are often negotiated
with the corporate customer and vary from account to account. During 1999, we
estimate that approximately 39% of the hotel's guests received a corporate
discount.
The chief corporate accounts (as designated in the hotel's records)
include Boeing, J.D. Edwards & Company, SITA, Worldspan, Sprint, IBM, Lockheed
Martin Corporation, Southcorp, Atlantic Envelope Corp. and Concert. During
1999, the 10 largest corporate accounts were responsible for approximately
12.8% of the hotel's occupancy. There can be no assurance, however, that the
hotel will continue to receive significant occupancy, or any occupancy, from
the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
for the last five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
$ 34.44 $ 34.16 $ 36.45 $ 36.57 $ 36.29
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $7,445,773 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
TAX ASSESSED TAXABLE TAX AMOUNT
JURISDICTION VALUE PORTION (40%) RATE OF TAX
-------------------------- ------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Cobb County ......... $5,217,693 $2,087,077 0.03427 $ 71,524.14
</TABLE>
S-27
<PAGE>
We estimate that the annual property tax on the expected improvements will
be approximately $3,900 or less.
At least seven competing hotels are located within three miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) Three of the competing hotels are
newer than the hotel. The newer competing hotels have franchises with Homestead
Village, Sheraton Suites and Summer Suites. The other competing hotels have
franchises with Courtyard by Marriott, Embassy Suites, Hawthorne Suites and
Residence Inn. We believe that the rates charged by the hotel are generally
competitive with the rates charged by these other hotels. We are aware of one
proposed construction project to build an extended-stay hotel within
approximately one mile of the hotel. We expect this hotel to be franchised with
Hampton Inn Suites.
ATLANTA - PEACHTREE
The Homewood Suites(Reg. TM) Atlanta - Peachtree is located on a 3.45 acre
site at 450 Technology Parkway, Norcross, Georgia 30092. The hotel is
approximately 25 miles from downtown Atlanta and 35 miles from the Hartsfield
Atlanta International Airport.
The hotel opened in February 1990. It has wood frame construction, with an
exterior of brick veneer and wood siding. The hotel consists of four buildings,
each with one, two or three stories. The hotel contains 92 suites, which have a
combined rentable area of 53,920 square feet. The following types of suites are
available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET PER SUITE
------------------------------------- ------------------ ----------------------
<S> <C> <C>
Master Suite ...................... 12 650
Homewood Suite .................... 76 550
Two-Bedroom Suite ................. 4 1,080
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 117 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $500,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement,
furniture replacement, bathroom upgrades and parking lot resurfacing and
restriping. We expect to pay for the costs of these renovations and
improvements with proceeds obtained from our ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 5 nights, and
approximately 56% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, for the last five
years:
S-28
<PAGE>
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
--------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
79.5% 77.4% 74.8% 72.9% 70.1%
</TABLE>
During 1999, the average daily rate per suite was $81.17, and the average
daily revenue per available suite was $56.86. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 13.5% of the hotel's revenue
would be needed to cover its portion of the interest payments.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $99 $99 $139
5 to 11 85 85 125
12 to 29 75 75 115
30 or more 59 59 99
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain corporate accounts. These discounts are often negotiated
with the corporate customer and vary from account to account. During 1999, we
estimate that approximately 42% of the hotel's guests received a corporate
discount.
The chief corporate accounts (as designated in the hotel's records)
include Hitachi, Perkin Elmer Corporation, CIBA Vision, Ultimate Software,
Valmet, Federated Systems, IBM, Sunds Defibrator, Unisys and Mizuno. During
1999, the 10 largest corporate accounts were responsible for approximately
13.2% of the hotel's occupancy. There can be no assurance, however, that the
hotel will continue to receive significant occupancy, or any occupancy, from
the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
for the last five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
$ 42.53 $ 47.16 $ 45.42 $ 41.95 $ 35.41
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $2,911,697 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
S-29
<PAGE>
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
ASSESSED TAXABLE TAX AMOUNT
TAX JURISDICTION VALUE PORTION (40%) RATE OF TAX
------------------- ------------- --------------- ------------ ----------
<S> <C> <C> <C> <C>
Gwinnett County $5,688,440 $2,275,380 0.03225 $73,381
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $3,300 or less.
At least six competing hotels are located within three miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) Three of the competing hotels are newer than the
hotel. The newer competing hotels have franchises with AmeriSuites, Hilton
Garden Inn and Residence Inn. The other competing hotels have franchises with
Courtyard by Marriott, Marriott and Holiday Inn. We believe that the rates
charged by the hotel are generally competitive with the rates charged by these
other hotels. To our knowledge, no extended-stay hotels are being constructed
within five miles of the hotel.
BALTIMORE - BWI AIRPORT
The Homewood Suites(Reg. TM) Baltimore - BWI Airport is located on a 4.69
acre site at 1181 Winterson Road, Linthicum, Maryland 21090. The hotel is
approximately 8 miles from downtown Baltimore and 2 miles from the
Baltimore-Washington International Airport.
The hotel opened in March 1998. It has concrete masonry construction, with
a stucco exterior. The hotel consists of one building with four stories. The
hotel contains 147 suites, which have a combined rentable area of 75,600 square
feet. The following types of suites are available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET PER SUITE
------------------------------ ------------------ ----------------------
<S> <C> <C>
Master Suite ............... 20 500
Homewood Suite ............. 120 500
Two-Bedroom Suite .......... 7 800
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, and three meeting rooms
that accommodate up to 125 people, and a business center that offers guests the
use of a personal computer, a photocopier and an electric typewriter.
Recreational facilities include an outdoor pool, a whirlpool and an exercise
room. The hotel also contains a guest convenience store and laundry. The hotel
has its own parking lot with 157 spaces. The hotel provides complimentary
shuttle service within a five mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $60,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement,
furniture replacement, bathroom upgrades and parking lot resurfacing and
restriping. We expect to pay for the costs of these renovations and
improvements with proceeds obtained from our ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 7.5 nights,
and approximately 67.9% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, since the opening of
the hotel:
S-30
<PAGE>
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1998 1999
--------- ------------
<S> <C>
67.0% 83.2%
</TABLE>
During 1999, the average daily rate per suite was $94.17, and the average
daily revenue per available suite was $78.39. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 24.8% of the hotel's revenue
would be needed to cover its portion of the interest payments.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $129 $129 $169
5 to 11 119 229 159
12 to 29 109 109 149
30 or more 89 89 129
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain corporate accounts. These discounts are often negotiated
with the corporate customer and vary from account to account. During 1999, we
estimate that approximately 93% of the hotel's guests received a corporate
discount.
The chief corporate accounts (as designated in the hotel's records)
include Defense Security Services, Gap, Ciera, Northcorp Grumman, National
Security Agency, Boeing, International Paper, Lockheed Martin Corporation,
Dept. of Defense and Carmax. During 1999, the 10 largest corporate accounts
were responsible for approximately 13% of the hotel's occupancy. There can be
no assurance, however, that the hotel will continue to receive significant
occupancy, or any occupancy, from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C>
$ 33.46 $ 55.64
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $14,719,686 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
S-31
<PAGE>
The following table summarizes the hotel's real estate tax information for
1999 (and is based on a formula that uses the assessed values for the current
and prior years to determine a separate taxable amount):
<TABLE>
<CAPTION>
ASSESSED ASSESSED TAXABLE TAX RATE AMOUNT
TAX JURISDICTION VALUE (1999) VALUE (1998) AMOUNT (PER $100) OF TAX
--------------------------------------- -------------- -------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
State of Maryland/Anne Arundel County $11,085,900 $10,316,100 $4,229,080 2.57 $108,687.36
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $800 or less.
At least five competing hotels are located within two miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) One of the competing hotels is newer than the
hotel. The newer competing hotel has a franchise with Candlewood Suites. The
other competing hotels have franchises with AmeriSuites, Comfort Suites,
DoubleTree Suites and Residence Inn. We believe that the rates charged by the
hotel are generally competitive with the rates charged by these other hotels.
We are aware of ongoing or proposed construction for two extended-stay hotels
within approximately seven miles of the hotel. We expect these new hotels to be
franchised with Hilton Garden Inn and Town Place Suites.
CLEARWATER
The Homewood Suites(Reg. TM) Clearwater is located on a 5.91 acre site at
2233 Ulmerton Road, Clearwater, Florida 33762. The hotel is approximately 12
miles from downtown Tampa/St. Petersburg and 15 miles from the Tampa
International Airport.
The hotel opened in February 1998. It has concrete masonry construction,
with a stucco exterior. The hotel consists of one buildings with two stories.
The hotel contains 112 suites, which have a combined area of 58,400 square
feet. The following types of suites are available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET PER SUITE
------------------------------------ ------------------ ----------------------
<S> <C> <C>
Homewood King Suite ............ 88 500
Homewood Double Suite .......... 16 500
Two-Bedroom Suite .............. 8 800
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates up to 75 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 118 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $15,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement, common
area upgrades and bathroom upgrades. We expect to pay for the costs of these
renovations and improvements with proceeds obtained from our ongoing offering
of common shares.
S-32
<PAGE>
During 1999, the average stay at the hotel was approximately 2.9 nights,
and approximately 45% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, since the opening of
the hotel:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1998 1999
--------- ------------
<S> <C>
63.4% 75.8%
</TABLE>
During 1999, the average daily rate per suite was $89.68, and the average
daily revenue per available suite was $67.93. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 24% of the hotel's revenue
would be needed to cover its portion of the interest payments.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY HOMEWOOD HOMEWOOD TWO
(NUMBER OF NIGHTS) KING DOUBLE BEDROOM
-------------------- ---------- ---------- --------
<S> <C> <C> <C>
1 to 4 $109 $109 $149
5 to 11 99 99 139
12 to 29 99 89 129
30+ 69 69 109
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain corporate accounts. These discounts are often negotiated
with the corporate customer and vary from account to account. During 1999, we
estimate that approximately 78.7% of the hotel's guests received a corporate
discount.
The chief corporate accounts (as designated in the hotel's records)
include Raymond James, Home Shopping Network, Lucent Technologies, Tech Data,
Honeywell, Unisys, Franklin Templeton Group, PSCU, Raytheon and Digital
Lightwave. During 1999, the 10 largest corporate accounts were responsible for
approximately 31% of the hotel's occupancy. There can be no assurance, however,
that the hotel will continue to receive significant occupancy, or any
occupancy, from the corporate accounts identified above.
S-33
<PAGE>
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C>
$ 35.31 $ 47.55
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $7,561,172 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
ASSESSED TAX RATE AMOUNT
TAX JURISDICTION VALUE (PER $1000) OF TAX
------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
Pinellas County $4,312,200 22.9033 $98,763.61
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $180 or less.
At least seven competing hotels are located within three miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) Three of the competing hotels are
newer than the hotel. The newer competing hotels have franchises with
Candlewood Suites, Fairfield Inn and Town Place Suites. The other competing
hotels have franchises with Courtyard by Marriott, Holiday Inn Select, La
Quinta Inns and Residence Inn. We believe that the rates charged by the hotel
are generally competitive with the rates charged by these other hotels. We are
aware of ongoing or proposed construction for four extended-stay hotels within
approximately three miles of the hotel. We expect these new hotels to be
franchised with Hawthorn Suites, Radisson Suites, Spring Hill Suites and
Woodbridge Suites.
DETROIT - WARREN
The Homewood Suites(Reg. TM) Detroit - Warren is located on a 2.84 acre
site at 30180 N. Civic Center Drive, Warren, Michigan 48093. The hotel is
approximately 17 miles from downtown Detroit and 31 miles from the Detroit
Metropolitan Wayne County Airport.
The hotel opened in March 1990. It has wood frame construction, with a
plaster and wood trim exterior. The hotel consists of three buildings, each
with one, two or three stories. The hotel contains 76 suites, which have a
combined rentable area of 31,520 square feet. The following types of suites are
available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET PER SUITE
-------------------------------- ------------------ ----------------------
<S> <C> <C>
Master Suite ............... 8 540
Homewood Suite ............. 60 360
Two-Bedroom Suite .......... 8 700
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities
S-34
<PAGE>
include an outdoor pool, a whirlpool and an exercise room. The hotel also
contains a guest convenience store and laundry. The hotel has its own parking
lot with 77 spaces. The hotel provides complimentary shuttle service within a
five mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $330,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet repairs, sidewalk
and parking area repairs, common area upgrades and exercise equipment upgrades.
We expect to pay for the costs of these renovations and improvements with
proceeds obtained from our ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 6.2 nights,
and approximately 55.9% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, for the last five
years:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
--------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
71.5% 71.6% 80.3% 76.2% 74.3%
</TABLE>
During 1999, the average daily rate per suite was $88.11, and the average
daily revenue per available suite was $65.46. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 15.2% of the hotel's revenue
would be needed to cover its portion of the interest payments.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 6 $104 $104 $144
7 to 29 95 95 135
30 to 89 89 89 129
90 or more 79 79 119
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain corporate accounts. These discounts are often negotiated
with the corporate customer and vary from account to account. During 1999, we
estimate that approximately 59% of the hotel's guests received a corporate
discount.
The chief corporate accounts (as designated in the hotel's records)
include General Motors, Raytheon, Chrysler, Ernst &Young, Optima Package,
Electronic Systems, Boeing, Chrysler First, IBM, PBS and J. Liebherr Machine
Tool. During 1999, the 10 largest
S-35
<PAGE>
corporate accounts were responsible for approximately 19.6% of the hotel's
occupancy. There can be no assurance, however, that the hotel will continue to
receive significant occupancy, or any occupancy, from the corporate accounts
identified above.
The table below shows the average effective annual rental per square foot
since for the last five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
$ 45.37 $ 49.68 $ 57.14 $ 58.75 $ 57.61
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $3,755,879 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
ASSESSED TAX RATE
TAX JURISDICTION VALUE (PER $100) AMOUNT OF TAX
-------------------- ------------- -------------- --------------
<S> <C> <C> <C>
County of Macomb $1,131,410 5.0171 $ 5,676.40
City of Warren $1,131,410 16.0468 $ 18,155.51
School District $1,131,410 28.6050 $ 32,363.98
-----------
TOTAL $ 56,195.89
===========
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $8,200 or less.
At least five competing hotels are located within three miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) Three of the competing hotels are
newer than the hotel. The newer competing hotels have franchises with Extended
Stay America, Residence Inn and Studio Plus. The other competing hotels have
franchises with Best Western and Courtyard by Marriott. We believe that the
rates charged by the hotel are generally competitive with the rates charged by
these other hotels. We are aware of ongoing or proposed construction for two
extended-stay hotels within approximately five miles of the hotel. We expect
these new hotels to be franchised with Red Roof Inn and Sleep Inn.
SALT LAKE CITY - MIDVALE
The Homewood Suites(Reg. TM) Salt Lake City - Midvale is located on a 3.44
acre site at 844 E. North Union Avenue, Midvale, Utah 84047. The hotel is
approximately 11 miles from downtown Salt Lake City and 15 miles from the Salt
Lake City International Airport.
The hotel opened in November 1996. It has concrete masonry construction,
with an aluminum siding exterior. The hotel consists of one buildings with
three stories. The hotel contains 98 suites, which have a combined rentable
area of 60,070 square feet. The following types of suites are available:
S-36
<PAGE>
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET PER SUITE
------------------------------------- ------------------ -----------------------
<S> <C> <C>
Master Suite ...................... 21 590
Homewood Suite .................... 71 590
Two-Bedroom Suite ................. 6 965
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 110 spaces. The hotel provides complimentary shuttle service
within a five mile radius.
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $72,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement,
landscaping, parking lot restriping and common area upgrades. We expect to pay
for the costs of these renovations and improvements with proceeds obtained from
our ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 3.5 nights,
and approximately 47.7% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, since the opening of
the hotel:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1997 1998 1999
--------- ---------- ------------
<S> <C> <C>
51.1% 63.8% 63.5%
</TABLE>
During 1999, the average daily rate per suite was $89.03, and the average
daily revenue per available suite was $56.55. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 16.2% of the hotel's revenue
would be needed to cover its portion of the interest payments.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY HOMEWOOD HOMEWOOD
(NUMBER OF NIGHTS) (KING) (DOUBLE) MASTER TWO BEDROOM
-------------------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C>
1 to 4 $99 $99 $99 $139
5 to 12 89 89 89 129
13 to 29 79 79 99 119
30 or more 69 69 69 109
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain
S-37
<PAGE>
corporate accounts. These discounts are often negotiated with the corporate
customer and vary from account to account. During 1999, we estimate that
approximately 49% of the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include American Express, The Associates, Meridian Diagnostics, Regency Blue
Cross, Cimetrix, Baxter Healthcare, Fed-Ex, Onyx Acceptance, 3M and United
Healthcare. During 1999, the 10 largest corporate accounts were responsible for
approximately 10% of the hotel's occupancy. There can be no assurance, however,
that the hotel will continue to receive significant occupancy, or any
occupancy, from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ----------- -------------
<S> <C> <C>
$ 27.30 $ 35.09 $ 33.67
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $4,657,834 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
ASSESSED TAX RATE AMOUNT
TAX JURISDICTION VALUE (PER $1000) OF TAX
----------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
County of Salt Lake $5,632,000 0.013595 $ 76,567.04
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $500 or less.
At least five competing hotels are located within five miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) None of the competing hotels are newer than the
hotel. The other competing hotels have franchises with Candlewood Suites,
Courtyard by Marriott, Crystal Inn and Residence Inn (in two cases). We believe
that the rates charged by the hotel are generally competitive with the rates
charged by these other hotels. We are aware of proposed construction to build
one extended-stay hotel within approximately three miles of the hotel. We
expect this hotel to be franchised with Microtel.
JACKSON - RIDGELAND
The Homewood Suites(Reg. TM) Jackson - Ridgeland is located on a 3.9 acre
site at 853 Centre Street, Ridgeland, Mississippi 39157. The hotel is
approximately 10 miles from downtown Jackson and 15 miles from the Jackson
Municipal Airport.
S-38
<PAGE>
The hotel opened in February 1997. It has wood frame construction and
consists of a single building with three stories. The hotel contains 91 suites,
which have a combined rentable area of 41,729 square feet. The following types
of suites are available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET PER SUITE
-------------------------------- ------------------ ----------------------
<S> <C> <C>
Master Suite ............... 56 406 to 510
Homewood Suite ............. 29 458 to 557
Two-Bedroom Suite .......... 6 690
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 45 to 50 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 108 spaces. The hotel provides complimentary shuttle service
within a five mile radius (and to the airport).
We believe that the hotel has been generally well maintained and is
generally in very good condition. Over the next 12 months, we plan to spend
approximately $58,000 on renovations or improvements. We expect that the
principal renovations and improvements will include carpet replacement,
furniture replacement, bathroom upgrades and parking lot resurfacing and
restriping. We expect to pay for the costs of these renovations and
improvements with proceeds obtained from our ongoing offering of common shares.
During 1999, the average stay at the hotel was approximately 3.2 nights,
and approximately 47.4% of the guests have stayed for five nights or more. In
general, occupancy at the hotel is not seasonal. The following table shows
average daily occupancy rates, expressed as a percentage, since the opening of
the hotel:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
1997 1998 1999
--------- ---------- ------------
<S> <C> <C>
63.8% 80.6% 77.6%
</TABLE>
During 1999, the average daily rate per suite was $81.96, and the average
daily revenue per available suite was $63.63. As explained above, revenue from
the hotel's operations will be used to pay interest due under the promissory
note we executed in connection with our purchase of the hotel. There can be no
assurance, however, the proceeds of the offering will be sufficient to permit
such payments of principal. Assuming that no principal payments are made until
the maturity of the promissory note, and that the hotel continues to have the
level of revenue specified above, approximately 17.6% of the hotel's revenue
would be needed to cover its portion of the interest payments.
S-39
<PAGE>
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $92 $92 $132
5 to 11 82 82 122
12 to 28 74 74 114
29 or more 69 69 109
</TABLE>
The hotel offers a weekend discount, which varies by type of suite and may
equal up to 33% off the basic rate. The discount is not available to guests who
stay for five nights or more. The hotel also offers discounts to guests who
stay under certain corporate accounts. These discounts are often negotiated
with the corporate customer and vary from account to account. During 1999, we
estimate that approximately 65% of the hotel's guests received a corporate
discount.
The chief corporate accounts (as designated in the hotel's records)
include Fire Victims, Entergy, Baptist Healthcare, Mississippi Diversified,
Copac, Athena Computer Learning, Ergon, International Paper, Illinois Central
and Nissan. During 1999, the 10 largest corporate accounts were responsible for
approximately 16% of the hotel's occupancy. There can be no assurance, however,
that the hotel will continue to receive significant occupancy, or any
occupancy, from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ----------- -------------
<S> <C> <C>
$ 33.32 $ 50.70 $ 50.65
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $5,287,765 and will be depreciated over a life
of 39 years (or less, as permitted by the Internal Revenue Code) using the
straight-line method. The basis of the personal property component of the hotel
will be depreciated in accordance with the modified accelerated cost recovery
system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
1999:
<TABLE>
<CAPTION>
ESTIMATED VALUE TAXABLE PORTION TAX AMOUNT
TAX JURISDICTION (TAX PURPOSES) (OF ESTIMATED VALUE) RATE OF TAX
------------------ ----------------- ---------------------- ------------ ---------------
<S> <C> <C> <C> <C>
Madison County $4,044,310 $606,650 0.09917 $ 60,161.48
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $500 or less.
At least six competing hotels are located within seven miles of the hotel.
(The names of the competing franchises, as listed below, may be registered as
service marks or trade names.) One of the competing hotels is newer than the
hotel. The newer competing hotel has a franchise with Townplace Suites. The
other competing hotels have franchises with Residence Inn, Cabot Lodge,
Courtyard by Marriott, Harvey Hotel and Hilton. We believe that the rates
charged by the hotel are generally competitive with the rates charged by these
other hotels. We are aware of ongoing or proposed construction for up to six
new extended-stay hotels within 12 miles of the hotel. We expect these new
hotels to be franchised with Comfort Inn, Hawthorne Suites, Jameson Inn, King
Edward Hotel, Hilton Gardens and Springhill Suites.
S-40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Apple Suites, Inc. (the "company") owns extended-stay hotels. During 1999,
the company acquired 11 hotels with 1,218 suites from Promus Hotels, Inc. or an
affiliate. Promus Hotels, Inc. was subsequently acquired by Hilton Hotels
Corporation ("Hilton") and is now a wholly-owned subsidiary of Hilton. The
hotels were acquired for an aggregate purchase price of $91,426,000. Since
current federal income tax laws prohibit a real estate investment trust from
actively operating hotels, all of the company's hotels are leased to Apple
Suites Management, Inc. or its subsidiary (the "lessee") pursuant to master
hotel lease agreements ("Percentage Leases"). Each Percentage Lease obligates
the lessee to pay rent equal to the sum of a base rent and a percentage rent
based on suite revenues and sundry other revenues of each hotel. The lessee's
ability to make payments to the company pursuant to the Percentage Leases is
dependent primarily upon the operations of the hotels. See Note 9 to the
consolidated financial statements for further lease information.
The lessee holds the franchise and market reservation agreement for each
of the hotels, which are operated as Homewood Suites(Reg. TM) by Hilton. The
lessee engages a third-party manager, Promus Hotels, Inc. ("Promus"), to
operate the hotels. The company is externally advised and has contracted with
Apple Suites Advisors, Inc. (the "Advisor") to manage its day-to-day operations
and make investment decisions. The company has contracted with Apple Suites
Realty Group, Inc. ("ASRG") to provide brokerage and acquisition services in
connection with its hotel acquisitions. The lessee, the Advisor and ASRG are
all owned by Mr. Glade Knight, the company's Chairman and Chief Executive
Officer. See Note 6 to the consolidated financial statements for further
information on related party transactions.
RESULTS OF OPERATIONS
Apple Suites, Inc. (The Company)
Revenues: As operations of the company commenced effective September 1,
1999 with the purchase of four hotels, a comparison to 1998 is not possible.
During the period ended December 31, 1999, the company had revenues of
$2,518,031. All of the company's lease revenue is derived from the Percentage
Leases covering the hotels in operations with the lessee.
The company's other income consists of $158,171 of interest income earned
from the investments of its cash and cash reserves and $10,915 of interest
earned from the promissory notes with the lessee for franchise and hotel
supplies.
Expenses: The expenses of the company consist of property taxes,
insurance, general and administrative expenses, interest on notes payable, and
depreciation on the hotels. Total expenses, exclusive of interest and
depreciation, for the period ended December 31, 1999 were $580,399 or 22% of
total revenue.
Interest expense was $1,245,044 for the period ended December 31, 1999 and
represented interest on short-term notes payable to Hilton at an interest rate
of 8.5%.
Depreciation expense was $496,209 for the period ended December 31, 1999.
S-41
<PAGE>
Taxes, insurance, and other was $426,592 for the period ended December 31,
1999 or 16% of total revenue.
General and administrative expense totaled 6% of total revenues. These
expenses represent the administrative expenses of the company. This percentage
is expected to decrease as the company's asset base grows.
Apple Suites Management, Inc. (The Lessee)
The lessee incurred an operating loss for the period ending December 31,
1999 of $141,104 primarily due to the timing of the hotel acquisitions and the
seasonality of the hotel industry. Historically, the hotel industry has
seasonal variations in occupancy that can be expected to cause quarterly
fluctuations in the company's lease revenues, particularly in the fourth
quarter.
Revenues: As operations commenced effective September 1, 1999, a
comparison to 1998 is not possible. Total revenues were $5,671,075 consisting
primarily of suite revenue, which was $5,335,925 for the period ended December
31, 1999.
For the period ended December 31, 1999 the average occupancy rate was 71%,
average daily rate ("ADR") was $83, and revenue per available room ("REVPAR")
was $59.
Expenses: Total expenses for the period ended December 31, 1999 were
$5,812,179. Rent expense represents $2,518,031 or 44% of total revenue. The
lessee contracts with Promus to manage the day-to-day operations of the hotels.
The lessee pays Promus fees of 4% of suite revenue for these functions. The
lessee also pays Promus a fee of 4% of suite revenue for franchise licenses to
operate as a Homewood Suites(Reg. TM) by Hilton and to participate in its
reservation system. Total expense for these services was $653,010 during the
period.
LIQUIDITY AND CAPITAL RESOURCES
Equity: The company commenced operations effective September 1, 1999 with
the acquisition of four hotels using a combination of proceeds from the
company's ongoing "best efforts" offering and notes. During 1999, the company
sold 3,429,414 shares (1,666,667 shares at $9 per share and 1,762,747 shares at
$10 per share) of its common stock to its investors. Included in the 1,762,747
shares sold is 9,294 common shares sold through the company's additional share
option. The total gross proceeds from the shares sold were $32,627,476, which
netted $28,591,260 to the company after the payment of selling commissions and
other offering costs.
During 1999, the company acquired 11 hotels with a total purchase price of
$91,426,000. In conjunction with these acquisitions, the company executed notes
in the aggregate of $68,569,500.
The lessee's obligations under the Percentage Leases are unsecured. The
lessee has limited capital resources, and, accordingly its ability to make
lease payments under the Percentage Leases is substantially dependent on the
ability of the lessee to generate sufficient cash flow from operations of the
hotels. The company has certain abilities to cancel the lease with the lessee
if the lessee does not perform under the terms of the lease.
S-42
<PAGE>
To support the lessee's obligations, the lessee has two funding
commitments of $1 million each from Mr. Knight and ASRG, respectively (together
"Payor"). The funding commitments are contractual obligations of the Payor to
pay funds to the lessee. Funds paid to the lessee under the commitments are to
be used to satisfy any capitalization or net worth requirements applicable to
the lessee or the lessee's payment obligations under the lease agreements, do
not represent indebtedness, and are not subject to interest. The funding
commitments terminate upon the expiration of the Master Hotel Lease agreements,
written agreement between the Payor and the lessee, or payment of all
commitment amounts by the Payor to the lessee. As of December 31, 1999, no
contributions have been made by the Payor to the lessee under the funding
commitments.
Notes Payable: On April 20, 1999, the company obtained a line of credit in
a principal amount of $1 million with a commercial bank guaranteed by Mr.
Knight. The line required interest at LIBOR plus 1.50%. Interest was payable
monthly and the principal balance and all accrued interest were paid in full by
September 30, 1999.
In conjunction with purchase of the 11 hotels, notes were executed by the
company made payable to the order of Hilton in the amount of $68,569,500. The
notes bear an effective interest rate of 8.5% per annum. Interest payments are
due monthly. Principal payments are to be made from net proceeds from the
offering of common shares. Hilton, which controls Promus, agreed to defer
principal payments until the earlier of April 29, 1999 or such time as two
additional hotels have been purchased by the company. At December 31, 1999, the
company's borrowings were $68,569,500.
The company has $68.6 million in notes payable with Hilton have principal
payments of $34 million due on October 1, 2000, $30.2 million due on November
1, 2000 and $4.4 million due on January 1, 2001. The company plans to pay these
notes with the proceeds from its continuous "best efforts" offering of common
shares. However, based on the current rate at which equity is being raised by
the offering, the company may have to seek other measures to repay these loans.
The company is currently holding discussions with several lenders to obtain
financing for its hotels and is exploring both unsecured and secured financing
arrangements. Although no firm financing commitments have been received, the
company believes that based on discussions with lenders and other market
indicators it can obtain sufficient financing prior to maturity of the notes.
Obtaining refinancing is dependent upon a number of factors, including: (1)
continued operation of the hotels at or near current occupancy and room rate
levels as the company's leases are based on a percentage of hotel suite income,
(2) general level of interest rates including credit spreads for real estate
based lending, and (3) general economic conditions. For each of the notes
payable, all of the Company's 11 hotels serve as collateral.
Cash and Cash Equivalents: Cash and cash equivalents totaled $581,344 at
December 31, 1999.
Capital Requirements: The company has an ongoing capital commitment to
fund its capital improvements. The company is required under the Percentage
Leases to make available to the lessee for the repair, replacement, or
refurbishing of furniture, fixtures, and equipment an amount equal to 5% of
suite revenue monthly on a cumulative basis,
S-43
<PAGE>
provided that such amount may be used for capital expenditures made by the
company with respect to the hotels. The company expects that this amount will
be adequate to fund the required repair, replacement, and refurbishments and to
maintain its hotels in a competitive condition. The company capitalized
improvements of $290,741 in 1999. At December 31, 1999, $753,926 was held by
Hilton, restricted for funding of these improvements.
The company expects to acquire additional hotels during 2000. The company
plans to have monthly equity closings in 2000, until the offering is fully
funded, or until such time as the company may opt to discontinue the offering.
During January and February 2000, the company closed the sale to investors of
335,487 shares at $10 per share representing net proceeds to the company of
$3,019,377. It is anticipated that the equity funds will be invested in
additional hotels and principal payments on the notes incurred in conjunction
with the existing acquisitions.
Capital resources are expected to grow with the future sale of its shares.
Approximately 10% of the 1999 common stock dividend distribution, or $83,646,
was reinvested in additional common shares. In general, the company's liquidity
and capital resources are believed to be more than adequate to meet its cash
requirements during 2000, given current and anticipated financing arrangements.
The company is operated as, and will annually elect to be taxed as, a real
estate investment trust under the Internal Revenue Code. As a result, the
company has no provision for taxes, and thus there is no effect on the
company's liquidity from taxes.
Inflation: All of the company's Percentage Leases provide, on an annual
basis, for adjustments in the rent payable thereunder, and thus may enable the
company to obtain increased base rents, which generally serves to minimize the
risk to the company of adverse effects of inflation. Operators of hotels, in
general, possess the ability to adjust room rates daily to reflect the effects
of inflation. Competitive pressures may, however, limit the operator's ability
to raise room rates.
Seasonality: The hotel industry historically has been seasonal in nature,
reflecting higher occupancy rates primarily during the first three quarters of
the year. Seasonal variations in occupancy at the company's hotels may cause
quarterly fluctuations in the company's lease revenues, particularly during the
fourth quarter, to the extent that it receives percentage rent. To the extent
the cash flow from operations is insufficient during any quarter, due to
temporary or seasonal fluctuations in lease revenue, the company expects to
utilize cash on hand or funds from equity raised through its "best efforts"
offering to make distributions.
Impact of Year 2000: The company and lessee completed the year 2000
project as planned. The company and lessee have not experienced any year 2000
problems company-wide or from external sources and do not anticipate any. The
company's total costs incurred to meet year 2000 compliance were not
significant.
Market Risk Disclosures: In connection with the acquisition of the 11
hotels, the company incurred $68,569,500 of short-term borrowings at a fixed
interest rate of 8.5%. The company has repricing risk associated with any
refinancing of these debt obligations which have various maturity dates through
January 2001.
S-44
<PAGE>
REIT Modernization Act: In December 1999, the REIT Modernization Act
("RMA") was signed into law. The most important feature of this legislation to
the company is the ability under certain conditions to operate our hotels
through a taxable REIT subsidiary without using a third party lessee. This
provision of the RMA is not effective until after December 31, 2000. Our
current lease agreements provide for termination of the lease agreements for
changes in tax law such as the RMA. Currently, we are evaluating the impact of
the RMA on our operating structure.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
S-45
<PAGE>
SELECTED FINANCIAL DATA
March 26, 1999 to December 31, 1999 (b)
<TABLE>
<S> <C>
REVENUES:
Lease revenue ....................................... $ 2,518,031
Interest income and other revenue ................... 169,086
-------------
Total revenue ....................................... 2,687,117
Expenses:
Taxes, insurance, and other ......................... 426,592
General and administrative .......................... 153,807
Depreciation ........................................ 496,209
Interest ............................................ 1,245,044
-------------
Total expenses ...................................... 2,321,652
Net income .......................................... $ 365,465
=============
PER SHARE
Earnings per share -- basic and diluted ............. $ 0.14
Distributions to common shareholders ................ $ 0.33
Weighted-average common shares outstanding .......... 2,648,196
Balance Sheet Data at December 31, 1999:
Cash and cash equivalents .......................... $ 581,344
Investment in hotels, net .......................... $ 93,719,632
Total assets ....................................... $ 99,489,008
Notes payable -- secured ........................... $ 68,569,500
Shareholders Equity ................................ $ 28,098,000
=============
OTHER DATA
Cash flow from: .....................................
Operating activities ............................... $ 548,015
Investing activities ............................... $ (28,411,941)
Financing activities ............................... $ 28,445,170
Number of hotels owned at December 31, 1999 ......... 11
FUNDS FROM OPERATIONS CALCULATION
Net income .......................................... $ 365,465
Depreciation of real estate owned .................. 496,209
Start-up costs ..................................... 22,002
-------------
Funds from Operations (a) ........................... $ 883,676
=============
</TABLE>
(a) "Funds from operations" is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. This definition conforms
to the recommendations set forth in a White Paper adopted by the National
Association of Real Estate Investment Trusts (NAREIT). The company considers
funds from operations in evaluating property acquisitions and its operating
performance, and believes that funds from operations should be considered along
with, but not as an alternative to, net income and cash flows as a measure of
the company's operating performance and liquidity. Funds from operations, which
may not be comparable to other similarly titled measures of other
S-46
<PAGE>
REITs, does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs.
(b) The company was initially capitalized on March 26, 1999; however,
operations did not commence until September 1, 1999.
UPDATE CONCERNING PRIOR PROGRAMS
The prospectus contains information on prior programs sponsored by Glade
M. Knight to invest in real estate. The information in the prospectus on the
prior programs is generally current as of June 15, 1999 except where a
different date is specified. The following information describes recent
developments affecting these prior programs and is generally current through
December 31, 1999 except where a different date is specified.
As indicated in the prospectus, the information on prior programs should
not be considered to be indicative of our operations, and purchasers of our
common shares will not have any interest in these other programs or in any of
the properties owned by them.
On July 23, 1999, Apple Residential Income Trust, Inc. was merged into a
subsidiary of Cornerstone Realty Income Trust, Inc. Thus, as a result of that
merger, Apple Residential Income Trust, Inc. ceased to exist and its properties
became properties of Cornerstone Realty Income Trust, Inc.
As of February 29, 2000, Cornerstone had approximately 18,000 holders of
its common shares and approximately 10,000 holders of its preferred shares. Its
common shares are listed and traded on the New York Stock Exchange under the
symbol "TCR," but its preferred shares are not listed. At December 31, 1999,
Cornerstone owned a total of 87 apartment communities in Georgia, North
Carolina, South Carolina and Virginia. On March 10, 2000, Cornerstone sold 16
apartment communities and now owns 71 apartment communities as of the date of
this supplement.
As indicated in the prospectus, on June 15, 1999, Mr. Knight had ceased to
hold an interest in all but one of the 40 privately-offered partnerships
sponsored by him. Mr. Knight disposed of his interest in that one remaining
partnership during 1999.
For more information, prospective investors should refer to the updated
tabular information on prior programs sponsored by Mr. Knight that appears
immediately after this paragraph. In addition, Part II of our Registration
Statement (which is not included in the prospectus or this supplement) contains
a more detailed summary of the property acquisitions by Cornerstone Realty
Income Trust, Inc. and Apple Residential Income Trust, Inc. that occurred on or
before December 31, 1999. Also included is information on the acquisition by
Cornerstone Realty Income Trust, Inc. of the properties owned by Apple
Residential Income Trust, Inc. as a result of the merger described above. We
will provide a copy of the summary of property acquisitions without charge upon
request of any investor or prospective investor.
S-47
<PAGE>
TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds
by Cornerstone and Apple, whose investment objectives are similar to those of
the Company and whose offering closed within the three years ending December
31, 1999.
<TABLE>
<CAPTION>
CORNERSTONE APPLE
----------------- -------------------
<S> <C> <C>
Dollar amount offered ..................................... $409,409,897 $ 300,000,000
Dollar amount raised ...................................... $409,409,897 $ 302,867,348*
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%
Percentage leverage (excluding unsecured debt) ............ 11.43% 10.84%
Date offering began ....................................... May 1993 January 1997
Length of offering (in months) ............................ 66 31
Months to invest amount available for investment .......... 66 31
</TABLE>
* Amount includes shares purchased by Cornerstone Realty Income Trust, Inc.
exclusive of the offering.
S-48
<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 the three
years ended December 31, 1999, and (ii) by all other programs during the three
years ended December 31, 1999
<TABLE>
<CAPTION>
CORNERSTONE APPLE OTHER PROGRAMS
--------------- --------------- ---------------
<S> <C> <C> <C>
Date offering commenced ........................... May 1993 January 1997 Various
Dollar Amount raised .............................. $409,409,897 $302,867,348 $9,868,220
AMOUNTS PAID TO PRIOR PROGRAM SPONSOR FROM PROCEEDS
OF OFFERING:
Acquisition fees
Real estate commission ......................... $ 4,075,337 $ 4,882,032 $ --
Advisory fees .................................. $ 515,689 $ 1,140,874 $ --
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 $ 3,859,448 $2,828,330
Reimbursements ................................... $ 2,717,655 $ -- $ --
Leasing fees ..................................... $ -- $ -- $ --
Other fees ....................................... $ -- $ -- $ --
</TABLE>
There have been no fees from property sales or refinancings
S-49
<PAGE>
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for
Cornerstone and Apple, the offerings closed in the five years ending December
31, 1999. 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>
1999 1999 1998
CORNERSTONE APPLE CORNERSTONE
---------------- ---------------- ----------------
<S> <C> <C> <C>
Capital contributions by year ...... $ 9,168,728 $ 32,497,218 $ 38,905,636
Gross revenue ...................... 125,041,524 26,243,431 93,637,948
Operating expenses ................. 46,940,388 15,307,051 33,797,439
Interest income (expense) .......... (14,953,613) (302,919) (12,175,940)
Depreciation ....................... 29,310,325 5,893,349 20,741,130
Net income (loss) GAAP basis ....... 30,037,102 (16,328,050) 23,210,642
Taxable income ..................... -- -- --
Cash generated from operations ..... 62,310,895 10,680,641 45,027,655
Less cash distributions to ......... 42,050,415 19,346,455 38,317,602
Cash generated after cash .......... 20,260,480 (8,665,814) 6,710,053
Special items
Capital contributions, net ........ 9,168,728 32,497,218 38,905,636
Fixed asset additions ............. 332,558,553 44,755,816 97,863,162
Line of credit .................... (44,392,999) -- 50,323,852
Cash generated ..................... 13,677,972 (21,366,155) (1,923,622)
End of period cash ................. $ 16,268,336 $ 18,707,044 $ 2,590,364
Tax and distribution data
Cash distributions to investors
Investment income ................. 95 46 82
Return of capital ................. 12 21 21
Source (on Cash basis)
Sales .............................. -- -- --
Refinancings ....................... -- -- --
Operations ......................... 107 67 103
Other .............................. -- -- --
<CAPTION>
1998 1997 1997 1996 1995
APPLE CORNERSTONE APPLE CORNERSTONE CORNERSTONE
--------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Capital contributions by year ...... $142,800,094 $ 63,485,868 $109,090,359 $144,798,035 $71,771,027
Gross revenue ...................... 30,764,904 71,970,624 12,005,968 40,261,674 16,266,610
Operating expenses ................. 14,958,699 27,339,955 5,993,492 17,198,882 7,457,574
Interest income (expense) .......... 900,669 (7,230,205) (235,708) (1,140,667) (68,061)
Depreciation ....................... 5,788,476 15,163,593 1,898,003 8,068,063 2,788,818
Net income (loss) GAAP basis ....... 10,079,908 19,225,553 3,499,194 (4,169,849) 5,229,715
Taxable income ..................... -- -- -- -- --
Cash generated from operations ..... 17,122,276 34,973,533 7,075,025 20,162,776 9,618,956
Less cash distributions to ......... 13,040,936 31,324,870 3,249,098 15,934,901 6,316,185
Cash generated after cash .......... 4,081,340 3,648,663 3,825,927 4,227,875 3,302,771
Special items
Capital contributions, net ........ 142,800,094 63,485,868 109,090,359 144,798,035 71,771,027
Fixed asset additions ............. 125,017,627 157,859,343 88,753,814 194,519,406 75,589,089
Line of credit .................... -- 96,166,147 -- 41,603,000 3,300,000
Cash generated ..................... 15,910,626 1,331,335 24,162,472 (3,890,496) 2,784,709
End of period cash ................. $ 40,073,198 $ 4,513,986 $ 24,162,572 $ 3,182,651 $ 7,073,147
Tax and distribution data
Cash distributions to investors
Investment income ................. -- 77 -- 85 80
Return of capital ................. 82 23 60 14 16
Source (on Cash basis)
Sales .............................. -- -- -- -- --
Refinancings ....................... -- -- -- -- --
Operations ......................... 82 100 60 99 96
Other .............................. -- -- -- -- --
</TABLE>
S-50
<PAGE>
TABLE IV: RESULTS OF COMPLETED PROGRAMS
Table IV shows the results of programs sponsored by affiliates of ASA
which completed operations in the five years ending December 31, 1999. All of
these programs had investment objectives dissimilar to those of the Company.
<TABLE>
<CAPTION>
MOUNTAIN TEAL
PROGRAM NAME VIEW WESTFIELD SUNSTONE POINT APPLE
---------------------------------------- ------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Dollar amount raised ................... $2,605,800 $1,825,600 $1,890,000 $3,310,620 $302,867,348
Number of properties ................... 1 1 1 1 29
Date of closing of offering ............ Oct 1984 Nov 1984 July 1984 Dec 1989 Jan 1997
Date of first sale of property ......... Aug 1995 Apr 1996 Nov 1995 Dec 1997 July 1999
Date of final sale of property ......... Aug 1995 Apr 1996 Nov 1995 Dec 1997 July 1999
Tax and Distribution data per $1,000
investment through-- ..................
Federal income tax results:
Ordinary income
From Operations ..................... $ 68 $ 80 $ 122 $ (4) $ 46
From recapture ...................... $ 1,200 $ 1,302 $ 526 $ -- $ 21
Capital gain .......................... $ -- $ -- $ -- $ 2,126 $ --
Deferred gain
Capital ............................. $ -- $ -- $ -- $ -- $ --
Ordinary ............................ $ -- $ -- $ -- $ -- $ --
Cash distributions to investors
Source(On GAAP basis)
Investment income ................... $ 68 $ 80 $ 122 $ (4) $ 46
Return of capital ................... $ 38 $ 233 $ -- $ -- $ 21
Source (On cash basis)
Sales ............................... $ 38 $ 233 $ 122 $ 2,126 $ --
Refinancing ......................... $ -- $ -- $ -- $ -- $ --
Operations .......................... $ 68 $ 80 $ -- $ (4) $ 67
Other ............................... $ -- $ -- $ -- $ -- $ --
Receivable on net purchase money
financing ............................. $ -- $ -- $ -- $ -- $ --
</TABLE>
S-51
<PAGE>
TABLE V: SALES OR DISPOSALS OF PROPERTIES
On July 23, 1999, Apple Residential Income Trust, Inc. merged with a
wholly-owned subsidiary of Cornerstone Realty Income Trust, Inc. Prior to the
merger, Apple owned 29 apartment communities containing 7,503 apartment homes.
The aggregate acquisition price in the merger was $311 million. In addition,
Apple's debt of approximately $32 million was assumed by Cornerstone.
EXPERTS
The following financial statements for our hotels are set forth below: (a)
combined financial statements pertaining to the Atlanta - Galleria/Cumberland;
Dallas - Addison; Dallas - Irving/Las Colinas; North Dallas - Plano; and
Richmond - West End hotels; (b) combined financial statements pertaining to the
Atlanta - Peachtree, Baltimore - BWI Airport, Clearwater, Detroit - Warren, and
Salt Lake City - Midvale hotels; and (c) the financial statements for the
Jackson - Ridgeland hotel. These financial statements have been included herein
in reliance on the report of L. P. Martin & Company, P.C., independent
certified public accountants, which is also included herein, and upon the
authority of that firm as an expert in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited Apple Suites, Inc.'s
consolidated financial statements and schedule at December 31, 1999 and March
26, 1999, and for the period March 26, 1999 through December 31, 1999, as set
forth in their report. We've included our financial statements and schedule in
the prospectus supplement and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have audited Apple Suites
Management, Inc.'s consolidated financial statements at December 31, 1999 and
for the period March 11, 1999 through December 31, 1999, as set forth in their
report. We've included those financial statements in the prospectus supplement
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
S-52
<PAGE>
APPLE SUITES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROPERTY FINANCIAL STATEMENTS
Atlanta -- Galleria/Cumberland; Dallas -- Addison; Dallas -- Irving/Las Colinas; North
Dallas -- Plano; Richmond -- West End
Independent Auditors' Report ........................................................ F-3
Combined Balance Sheets -- December 31, 1998 and December 31, 1997 .................. F-4
Combined Statements of Shareholders' Equity -- Years ended
December 31, 1997 and December 31, 1998 ............................................ F-5
Combined Income Statements -- Years ended
December 31, 1998 and December 31, 1997 ............................................ F-6
Combined Statements of Cash Flows -- Years ended
December 31, 1998 and December 31, 1997 ............................................ F-7
Notes to the Combined Financial Statements -- December 31, 1998 and December 31,
1997 ............................................................................... F-8
Combined Balance Sheet -- June 30, 1999 (unaudited) ................................. F-11
Combined Statement of Shareholders' Equity -- For the Period
January 1, 1999 through June 30, 1999 (unaudited) .................................. F-12
Combined Income Statement -- For the Period
January 1, 1999 through June 30, 1999 (unaudited) .................................. F-13
Combined Statement of Cash Flows -- For the Period
January 1, 1999 through June 30, 1999 (unaudited) .................................. F-14
Notes to the Combined Financial Statements -- For the Period
January 1, 1999 through June 30, 1999 (unaudited) .................................. F-15
Atlanta -- Peachtree, Baltimore -- BWI Airport, Clearwater, Detroit -- Warren, and Salt
Lake City -- Midvale
Independent Auditors' Report ........................................................ F-18
Combined Balance Sheets -- December 31, 1998 and December 31, 1997 .................. F-19
Combined Statements of Shareholders' Equity -- Years ended
December 31, 1997 and December 31, 1998 ............................................ F-20
Combined Income Statements -- Years ended
December 31, 1998 and December 31, 1997 ............................................ F-21
Combined Statements of Cash Flows -- Years ended
December 31, 1998 and December 31, 1997 ............................................ F-22
Notes to the Combined Financial Statements -- December 31, 1998 and December 31,
1997 ............................................................................... F-23
Combined Balance Sheet -- August 31, 1999 (unaudited) ............................... F-26
Combined Statement of Shareholders' Equity -- For the Period January 1, 1999 through
August 31, 1999 (unaudited) ........................................................ F-27
Combined Income Statement -- For the Period January 1, 1999 through August 31, 1999
(unaudited) ........................................................................ F-28
Combined Statement of Cash Flows -- For the Period January 1, 1999 through August 31,
1999 (unaudited) ................................................................... F-29
Notes to the Combined Financial Statements -- For the Period
January 1, 1999 through August 31, 1999 (unaudited) ................................ F-30
Jackson -- Ridgeland
Independent Aud itors' Report ....................................................... F-33
Balance Sheets -- December 31, 1998 and December 31, 1997 ........................... F-34
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Statements of Shareholders' Equity -- Years ended
December 31, 1997 and December 31, 1998 ................................................. F-35
Income Statements -- Years ended December 31, 1998 and December 31, 1997 ............. F-35
Statements of Cash Flows -- Years ended December 31, 1998 and December 31, 1997....... F-36
Notes to the Financial Statements -- December 31, 1998 and December 31, 1997 ......... F-37
Balance Sheet -- August 31, 1999 (unaudited) ......................................... F-40
Statement of Shareholders' Equity -- For the Period January 1, 1999 through August 31,
1999 (unaudited) .................................................................... F-41
Income Statement -- For the Period January 1, 1999 through August 31, 1999
(unaudited) ......................................................................... F-41
Statement of Cash Flows -- For the Period January 1, 1999 through August 31, 1999
(unaudited) ......................................................................... F-42
Notes to the Financial Statements -- For the Period January 1, 1999 through August 31,
1999 (unaudited) .................................................................... F-43
APPLE SUITES, INC.
Report of Independent Auditors ....................................................... F-45
Consolidated Balance Sheets as of December 31, 1999 and March 26, 1999 ............... F-46
Consolidated Statement of Operations for the Period March 26, 1999 through
December 31, 1999 ................................................................... F-47
Consolidated Statement of Shareholders Equity for the Period March 26, 1999 through
December 31, 1999 ................................................................... F-48
Consolidated Statement of Cash Flows for the Period March 26, 1999 through
December 31, 1999 ................................................................... F-49
Notes to the Consolidated Financial Statements ....................................... F-50
Schedule III -- Real Estate and Accumulated Depreciation (as of December 31, 1999) ...... F-60
APPLE SUITES MANAGEMENT, INC.
Report of Independent Auditors ....................................................... F-61
Consolidated Balance Sheet as of December 31, 1999 ................................... F-62
Consolidated Statement of Operations and Retained Deficit for the Period March 11,
1999 through December 31, 1999 ...................................................... F-63
Consolidated Statement of Cash Flows for the Period March 11, 1999 through
December 31, 1999 ................................................................... F-64
Notes to Consolidated Financial Statements ........................................... F-65
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Apple Suites, Inc. Pro Forma Condensed Consolidated Statement of Operations for the
Years Ended December 31, 1999 ....................................................... F-69
Apple Suites Management, Inc. Pro Forma Condensed Consolidated Statement of
Operations for the Years Ended December 31, 1999 .................................... F-71
</TABLE>
F-2
<PAGE>
[L.P. MARTIN & COMPANY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Apple Suites, Inc.
Richmond, Virginia
We have audited the accompanying combined balance sheets of the Homewood
Suites Acquisition Hotels (described in Note 1) as of December 31, 1998 and
1997, and the related combined statements of income, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the management of the hotels. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. The accompanying financial statements were prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission as described in Note 1 to the financial statements and are
not intended to be a complete presentation of the Homewood Suites Acquisition
Hotels.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Homewood
Suites Acquisition Hotels as of December 31, 1998 and 1997, and the combined
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ L.P. Martin & Co., P.C.
August 23, 1999
F-3
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................. $ 374,092 $ 393,079
Accounts Receivable, Net ............................. 714,718 330,540
Prepaids and Other ................................... 8,355 15,904
------------- ------------
Total Current Assets ............................... 1,097,165 739,523
------------- ------------
INVESTMENT IN HOTEL PROPERTIES
Land and Improvements ................................ 8,031,122 7,454,360
Buildings and Improvements ........................... 29,091,731 22,188,107
Furniture, Fixtures and Equipment .................... 10,822,281 8,417,814
------------- ------------
Total .............................................. 47,945,134 38,060,281
============= ============
Less: Accumulated Depreciation ..................... (11,098,460) (8,704,166)
------------- ------------
Net Investment in Hotel Properties ................... 36,846,674 29,356,115
------------- ------------
OTHER ASSETS
Construction in Progress ............................. -- 5,994,799
------------- ------------
Total Assets ....................................... $ 37,943,839 $ 36,090,437
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ..................................... $ 440,076 $ 845,173
Accrued Taxes ........................................ 997,897 787,680
Accrued Expenses -- Other ............................ 252,761 158,670
------------- ------------
Total Current Liabilities .......................... 1,690,734 1,791,523
------------- ------------
SHAREHOLDERS' EQUITY
Contributed Capital .................................. 11,000,030 12,499,235
Retained Earnings .................................... 25,253,075 21,799,679
------------- ------------
Total Shareholders' Equity ......................... 36,253,105 34,298,914
------------- ------------
Total Liabilities and Shareholders' Equity ......... $ 37,943,839 $ 36,090,437
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
--------------- -------------- ----------------
<S> <C> <C> <C>
Balances, January 1, 1997 ........... $ 5,966,169 $17,961,115 $ 23,927,284
Net Income .......................... -- 3,838,564 3,838,564
Capital Contributions, Net .......... 6,533,066 -- 6,533,066
------------ ----------- ------------
Balances, December 31, 1997 ......... 12,499,235 21,799,679 34,298,914
Net Income .......................... -- 3,453,396 3,453,396
Capital Distributions, Net .......... (1,499,205) -- (1,499,205)
------------ ----------- ------------
Balances, December 31, 1998 ......... $ 11,000,030 $25,253,075 $ 36,253,105
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
GROSS OPERATING REVENUE
Suite Revenue .................................................. $14,075,852 $10,683,420
Other Customer Revenue ......................................... 811,817 555,232
----------- -----------
Total Revenue ................................................ 14,887,669 11,238,652
----------- -----------
EXPENSES
Property and Operating ......................................... 5,586,712 3,843,073
General and Administrative ..................................... 348,088 208,174
Advertising and Promotion ...................................... 648,273 476,762
Utilities ...................................................... 626,269 473,887
Real Estate and Personal Property Taxes, and Property Insurance. 1,040,638 789,462
Depreciation Expense ........................................... 2,394,294 1,487,077
Franchise Fees ................................................. 563,035 --
Pre-Opening Expenses ........................................... 226,964 121,653
----------- -----------
Total Expenses ............................................... 11,434,273 7,400,088
----------- -----------
Net Income ................................................... $ 3,453,396 $ 3,838,564
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income ......................................................... $ 3,453,396 $ 3,838,564
------------ ------------
Adjustments to Reconcile Net Income to Net Cash Provided by .........
Operating Activities:
Depreciation ....................................................... 2,394,294 1,487,077
Change In:
Accounts Receivable ................................................ (384,178) (138,055)
Prepaids and Other Current Assets .................................. 7,549 (7,691)
Accounts Payable ................................................... (405,097) 38,368
Accrued Taxes ...................................................... 210,217 195,246
Accrued Expenses -- Other .......................................... 94,091 (1,058)
------------ ------------
Net Adjustments .. ................................................. 1,916,876 1,573,887
------------ ------------
Net Cash Flows from Operating Activities . ......................... 5,370,272 5,412,451
CASH FLOWS TO FINANCING ACTIVITIES
Capital Distributions, Net ......................................... (5,389,259) (5,266,712)
------------ ------------
Net Increase (Decrease) in Cash . ................................ (18,987) 145,739
Cash, Beginning of Year .......................................... 393,079 247,340
------------ ------------
Cash, End of Year ................................................ $ 374,092 $ 393,079
============ ============
SUPPLEMENTAL DISCLOSURES:
NONCASH FINANCING AND INVESTING ACTIVITIES
</TABLE>
December 31, 1997 construction in progress totaling $5,994,799 was
reclassified to investment in hotel properties during 1998.
Investment in hotel properties totaling $3,890,054 in 1998 and $11,799,781
in 1997 was financed with capital contributions.
During 1997, the hotels disposed of fully depreciated furniture, fixtures
and equipment in the amount of $503,106.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Acquisition Hotels (the Hotels) consist of the
following:
<TABLE>
<CAPTION>
HOTEL DATE # OF
PROPERTY LOCATION OPENED SUITES
---------------------------------------- ---------------------- ------------- -------
<S> <C> <C> <C>
Atlanta - Galleria/ Cumberland ......... Atlanta, Georgia 1990 124
Dallas - Addison ....................... Addison, Texas 1990 120
Dallas - Los Colinas ................... Irving, Texas 1990 136
North Dallas - Plano ................... Plano, Texas April, 1997 99
Richmond - West End .................... Glen Allen, Virginia May, 1998 123
</TABLE>
The Owner purchased the North Dallas-Plano hotel October 1, 1997. The
financial statements include the results of the operations from this date
forward.
The Hotels specialize in providing extended stay lodging to business or
leisure travelers. While customers may rent rooms for a night, terms of up to a
month or longer are available. Services offered, which are particularly
attractive to the extended stay traveler, include laundry services, 24 hour on
site convenience stores and grocery shopping services.
The Hotels have been owned and managed by various affiliates of Promus
Hotels, Inc. (the Owner) throughout the financial statement periods. The
accompanying combined financial statements of the Hotels have been presented on
a combined basis because the Owner has a contract pending to sell the five
hotels to Apple Suites, Inc., a real estate investment trust established to
acquire equity interests in hotel properties. The statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for inclusion in a filing by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the combined financial statements have been presented on a pretax
basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Property -- The Hotel properties are recorded at cost. Depreciation has
been recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 12-15 Years
Buildings and Improvements ................. 30-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
Major renewals, betterments and improvements are capitalized while ongoing
maintenance and repairs are expensed as incurred. Building costs include
interest capitalized during the construction period. Construction in progress
represents Hotel
F-8
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
properties under construction. At the point construction is completed and the
Hotels are ready to be placed in service, the costs are reclassified to
investment in Hotel properties for financial statement presentation.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
Annually, management of the hotels reviews the carrying value and
remaining depreciable lives of the Hotel properties and related assets.
Management does not believe there are any current indications of impairment.
However, it is possible that estimates of the remaining useful lives will
change in the near term.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Pre-Opening Costs -- Pre-opening costs represent operating expenses
incurred prior to initial opening of the hotels. In 1998, pre-opening expenses
of $226,964 for the Richmond-West End hotel were expensed as incurred. In 1997,
pre-opening expenses of $66,045 for the North Dallas -- Plano hotel and
pre-opening expenses of $55,608 for the Richmond -- West End hotel were
expensed as incurred.
Inventories -- The Hotels maintain supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
The Owner allocates a monthly accounting fee of $1,000 to each hotel.
These fees totaled $56,000 in 1998 and $39,000 in 1997. The Owner also charges
each Hotel a fee for corporate advertising, training and reservations equal to
four percent of net suite revenue. These fees totaled $566,569 in 1998 and
$427,337 in 1997. In 1998, the Owner charged a franchise fee of $563,035 to
these hotels, also computed at four percent of suite revenue. No franchise fee
was charged in 1997. Effective in 1999, the Owner will be charging a "base
management fee" of three percent of suite revenue to each hotel.
The acquisition costs of the properties and related furnishings and
equipment was financed by the owner. For all properties, excluding North Dallas
- Plano which was a purchased project, the owner allocated interest to each
property on monies advanced to
F-9
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
fund the construction costs. The interest costs have been capitalized and
depreciated in accordance with the Hotels' normal depreciation policy. During
1998, interest capitalized and included in the cost basis of the Richmond-West
End hotel totaled $445,782.
Each Hotel maintains a depository bank account into which customer
revenues have been deposited. The bulk of each Hotel's operating expenditures
are paid through the Owner's corporate accounts. Funds are transferred from the
Hotel's depository bank accounts to the owner periodically. The transfers to
the owner and expenditures made on behalf of the Hotels by the Owner are
accounted for through various intercompany accounts. No interest has been
charged on these intercompany advances from ongoing operations. There is no
intention to repay any advances to or from the owner. Accordingly, the net
amounts have been included in shareholders' equity with 1998 and 1997
intercompany/intracompany transfers being reflected as net capital
contributions or distributions.
NOTE 4 -- CONCENTRATIONS AND CONTINGENCIES
Approximately sixty percent of the Richmond-West End hotel's revenues are
from Capital One Financial Corporation, a non affiliated entity.
The Hotels' depository bank accounts are maintained with two financial
institutions; Bank of America and First Union. A concentration of credit risk
exists to the extent that cash deposits exceed amounts insured by FDIC;
$100,000 per financial institution. At December 31, 1998, cash deposits
exceeded FDIC insurable amounts by $150,132 and $170,079, respectively.
The general contractor who constructed the Richmond-West End hotel has
filed a $3,800,000 lien against the property. Management believes that the
general contractor's case is grossly exaggerated and that the matter will be
satisfactorily resolved in a prompt manner. Management also believes that in
the event they are unable to prevail entirely, any aspect of the claim should
not have a material adverse affect on the Hotels' financial position or results
of operations.
F-10
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEET
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash ................................................... $ 326,301
Accounts Receivable, Net ............................... 727,247
Prepaids and Other ..................................... 6,050
-------------
Total Current Assets ................................. 1,059,598
-------------
INVESTMENT IN HOTEL PROPERTIES
Land and Improvements .................................. 8,044,305
Buildings and Improvements ............................. 29,188,026
Furniture, Fixtures and Equipment ...................... 11,401,756
-------------
Total ................................................ 48,634,087
Less: Accumulated Depreciation ....................... (12,435,726)
-------------
Net Investment in Hotel Properties ..................... 36,198,361
-------------
Total Assets ......................................... $ 37,257,959
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ....................................... $ 283,849
Accrued Taxes .......................................... 673,966
Accrued Expenses -- Other .............................. 298,719
-------------
Total Current Liabilities ............................ 1,256,534
-------------
SHAREHOLDERS' EQUITY
Contributed Capital .................................... 9,074,634
Retained Earnings ...................................... 26,926,791
-------------
Total Shareholders' Equity ........................... 36,001,425
-------------
Total Liabilities and Shareholders' Equity 3 ......... $ 37,257,959
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
--------------- -------------- ----------------
<S> <C> <C> <C>
Balances, January 1, 1999 .......... $ 11,000,030 $25,253,075 $ 36,253,105
Net Income ......................... -- 1,673,716 1,673,716
Capital Distributions, Net ......... (1,925,396) -- (1,925,396)
------------ ----------- ------------
Balances, June 30, 1999 ............ $ 9,074,634 $26,926,791 $ 36,001,425
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED INCOME STATEMENT
FOR THE PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C>
GROSS OPERATING REVENUE
Suit Revenue ............................................................ $ 7,364,098
Other Customer Revenue .................................................. 420,072
-----------
Total Revenue ......................................................... 7,784,170
-----------
EXPENSES
Property and Operating .................................................. 2,845,653
General and Administrative .............................................. 187,738
Advertising and Promotion ............................................... 329,239
Utilities ............................................................... 265,585
Real Estate and Personal Property Taxes, and Property Insurance ......... 616,949
Depreciation Expense .................................................... 1,337,266
Franchise and Management Fees ........................................... 528,024
-----------
Total Expenses ........................................................ 6,110,454
-----------
Net Income ............................................................ $ 1,673,716
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income .......................................................... $ 1,673,716
------------
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Depreciation ...................................................... 1,337,266
Change in:
Accounts Receivable ............................................... (12,529)
Prepaids and Other Current Assets ................................. 2,305
Accounts Payable .................................................. (156,227)
Accrued Taxes ..................................................... (323,931)
Accrued Expenses -- Other ......................................... 45,958
------------
Net Adjustments ..................................................... 892,842
------------
Net Cash Flows from Operating Activities .......................... 2,566,558
CASH FLOWS FROM (TO) FINANCING ACTIVITIES
Net Equity Distributions ............................................ (2,614,349)
------------
Net Decrease in Cash .............................................. (47,791)
Cash, January 1, 1999 ............................................. 374,092
------------
Cash, June 30, 1999 ............................................... $ 326,301
============
SUPPLEMENTAL DISCLOSURES:
Noncash Financing and Investing Activities
</TABLE>
During the period January 1, 1999 through June 30, 1999, additions to
Investment in Hotel Properties totaling $688,953 ere financed with capital
contributions.
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Acquisition Hotels (the Hotels) consist of the
following:
<TABLE>
<CAPTION>
HOTEL DATE # OF
PROPERTY LOCATION OPENED SUITES
---------------------- ---------------------- ------------- -------
<S> <C> <C> <C>
Atlanta - Galleria/
Cumberland Atlanta, Georgia 1990 124
Dallas - Addison Addison, Texas 1990 120
Dallas - Los Colinas Irving, Texas 1990 136
North Dallas - Plano Plano, Texas April, 1997 99
Richmond - West End Glen Allen, Virginia May, 1998 123
</TABLE>
The Hotels specialize in providing extended stay lodging to business or
leisure travelers. While customers may rent rooms for a night, terms of up to a
month or longer are available. Services offered, which are particularly
attractive to the extended stay traveler, include laundry services, 24 hour on
site convenience stores and grocery shopping services.
The Hotels have been owned and managed by various affiliates of Promus
Hotels, Inc. (the Owner) throughout the financial statement period. The
accompanying combined financial statements of the Hotels have been presented on
a combined basis because the Owner has a contract pending to sell the five
hotels to Apple Suites, Inc., a real estate investment trust established to
acquire equity interests in hotel properties. The statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for inclusion in a filing by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the combined financial statements have been presented on a pretax
basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Property -- The Hotel properties are recorded at cost. Depreciation has
been recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 12-15 Years
Buildings and Improvements ................. 30-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
Major renewals, betterments and improvements are capitalized while ongoing
maintenance and repairs are expensed as incurred. Building costs include
interest capitalized during the construction period.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
F-15
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999 -- (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Annually, management of the hotels reviews the carrying value and
remaining depreciable lives of the Hotel properties and related assets.
Management does not believe there are any current indications of impairment.
However, it is possible that estimates of the remaining useful lives will
change in the near term.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Inventories -- The Hotels maintain supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
During the period January 1, 1999 through June 30, 1999, the following
fees were expensed to the owner.
<TABLE>
<CAPTION>
BASIS FOR TOTAL
FEE TYPE DETERMINATION EXPENSE
--------------------------------------- ---------------------------- -----------
<S> <C> <C>
Accounting Fees $1,000 per hotel per month $ 30,000
Corporate Advertising, Training
and Reservations 4% of net suite revenue 294,568
Franchise Fees 4% of net suite revenue 294,568
Management Fees 3% of net suite revenue 233,456
</TABLE>
The acquisition costs of the properties and related furnishings and
equipment was financed by the owner. For all properties, excluding North Dallas
-- Plano which was a purchased project, the owner allocated interest to each
property on monies advanced to fund the construction costs. The interest costs
have been capitalized and depreciated in accordance with the Hotels' normal
depreciation policy.
Each Hotel maintains a depository bank account into which customer
revenues have been deposited. The bulk of each Hotel's operating expenditures
are paid through the Owner's corporate accounts. Funds are transferred from the
Hotel's depository bank accounts to the owner periodically. The transfers to
the owner and expenditures made on behalf of the Hotels by the Owner are
accounted for through various intercompany accounts. No interest has been
charged on these intercompany advances from ongoing operations. There is no
intention to repay any advances to or from the owner. Accordingly, the net
amounts have been included in shareholders' equity with current period
intercompany/intracompany transfers being reflected as net contributions or
distributions.
F-16
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH JUNE 30, 1999 -- (CONTINUED )
NOTE 4 -- CONCENTRATIONS AND CONTINGENCIES
Approximately sixty percent of the Richmond-West End hotel's revenues are
from Capital One Financial Corporation, a non affiliated entity.
The Hotels' depository bank accounts are maintained with two financial
institutions; Bank of America and First Union. A concentration of credit risk
exists to the extent that cash deposits exceed amounts insured by FDIC;
$100,000 per financial institution. At June 30, 1999, cash deposits exceeded
FDIC insurable amounts by $108,909.
The general contractor who constructed the Richmond-West End hotel has
filed a $3,800,000 lien against the property. Management believes that the
general contractor's case is grossly exaggerated and that the matter will be
satisfactorily resolved in a prompt manner. Management also believes that in
the event they are unable to prevail entirely, any aspect of the claim should
not have a material adverse affect on the Hotels' financial position or results
of operations.
F-17
<PAGE>
[L.P. MARTIN & COMPANY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Apple Suites, Inc.
Richmond, Virginia
We have audited the accompanying combined balance sheets of the Homewood
Suites Acquisition Hotels (described in Note 1) as of December 31, 1998 and
1997, and the related combined statements of income, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the management of the hotels. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. The accompanying financial statements were prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission as described in Note 1 to the financial statements and are
not intended to be a complete presentation of the Homewood Suites Acquisition
Hotels.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Homewood
Suites Acquisition Hotels as of December 31, 1998 and 1997, and the combined
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ L.P. Martin & Co, P.C.
November 7, 1999
F-18
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................. $ 298,981 $ 218,853
Accounts Receivable, Net ............................. 388,352 316,723
Prepaids and Other ................................... 66,670 --
------------ ------------
Total Current Assets ............................... 754,003 535,576
------------ ------------
INVESTMENT IN HOTEL PROPERTIES
Land and Improvements ................................ 5,363,981 3,035,089
Buildings and Improvements ........................... 29,417,804 13,842,622
Furniture, Fixtures and Equipment .................... 7,882,778 4,243,800
------------ ------------
Total .............................................. 42,664,563 21,121,511
Less: Accumulated Depreciation ..................... (6,272,356) (4,057,854)
------------ ------------
Net Investment in Hotel Properties ................. 36,392,207 17,063,657
------------ ------------
OTHER ASSETS
Construction in Progress ............................. -- 8,080,834
------------ ------------
Total Assets ....................................... $ 37,146,210 $ 25,680,067
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ..................................... $ 368,287 $ 695,044
Accrued Taxes ........................................ 107,272 96,401
Accrued Expenses -- Other ............................ 247,767 117,154
------------ ------------
Total Current Liabilities .......................... 723,326 908,599
------------ ------------
SHAREHOLDERS' EQUITY
Contributed Capital .................................. 30,113,336 20,467,543
Retained Earnings .................................... 6,309,548 4,303,925
------------ ------------
Total Shareholders' Equity ......................... 36,422,884 24,771,468
------------ ------------
Total Liabilities and Shareholders' Equity ......... $ 37,146,210 $ 25,680,067
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
------------- ------------- --------------
<S> <C> <C> <C>
Balances, January 1, 1997 ........... $ 9,295,112 $3,139,210 $12,434,322
Net Income .......................... -- 1,164,715 1,164,715
Capital Contributions, Net .......... 11,172,431 -- 11,172,431
----------- ---------- -----------
Balances, December 31, 1997 ......... 20,467,543 4,303,925 24,771,468
Net Income .......................... -- 2,005,623 2,005,623
Capital Contributions, Net .......... 9,645,793 -- 9,645,793
----------- ---------- -----------
Balances, December 31, 1998 ......... $30,113,336 $6,309,548 $36,422,884
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
GROSS OPERATING REVENUE
Suite Revenue ....................................... $10,812,372 $4,659,633
Other Customer Revenue .............................. 733,318 275,311
----------- ----------
Total Revenue ..................................... 11,545,690 4,934,944
----------- ----------
EXPENSES
Property and Operating .............................. 4,748,240 1,910,407
General and Administrative .......................... 315,165 165,060
Advertising and Promotion ........................... 502,899 209,918
Utilities ........................................... 543,828 267,938
Real Estate and Personal Property Taxes, and Property
Insurance ......................................... 432,979 200,113
Depreciation Expense ................................ 2,214,501 803,385
Franchise Fees ...................................... 432,494 --
Pre-Opening Expenses ................................ 349,961 213,408
----------- ----------
Total Expenses .................................... 9,540,067 3,770,229
----------- ----------
Net Income ........................................ $ 2,005,623 $1,164,715
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income .......................................... $ 2,005,623 $ 1,164,715
------------ ------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation ...................................... 2,214,501 803,385
Change In:
Accounts Receivable ............................... (71,629) (274,291)
Prepaids and Other Current Assets ................. (66,670) --
Accounts Payable .................................. (326,757) 222,328
Accrued Taxes ..................................... 10,871 (3,724)
Accrued Expenses -- Other ......................... 130,613 89,823
------------ ------------
Net Adjustments ................................... 1,890,929 837,521
------------ ------------
Net Cash Flows From Operating Activities ......... 3,896,552 2,002,236
CASH FLOWS TO FINANCING ACTIVITIES
Capital Distributions, Net .......................... (3,816,424) (2,077,731)
------------ ------------
Net Increase (Decrease) in Cash .................. 80,128 (75,495)
Cash, Beginning of Year .......................... 218,853 294,348
------------ ------------
Cash, End of Year ................................ $ 298,981 $ 218,853
============ ============
SUPPLEMENTAL DISCLOSURES:
NONCASH FINANCING AND INVESTING ACTIVITIES
</TABLE>
YEAR ENDED DECEMBER 31, 1998
Investments in hotel properties in the amount of $13,462,218 were financed
with capital contributions.
Construction in progress in the amount of $8,080,834 was reclassified to
investment in hotel properties.
YEAR ENDED DECEMBER 31, 1997
Investments in hotel properties and construction in progress in the
amounts of $8,048,540 and $5,201,622, respectively, were financed with capital
contributions.
Fully depreciated investments in hotel properties at a cost of $654,112
were disposed of during the year.
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Acquisition Hotels (the Hotels) consist of the
following:
<TABLE>
<CAPTION>
PROPERTY HOTEL LOCATION DATE OPENED # OF SUITES
--------------------------- --------------------- ---------------- ------------
<S> <C> <C> <C>
Detroit/Warren Warren, Michigan March, 1990 76
Atlanta/Peachtree Corners Norcross, Georgia February, 1990 92
Clearwater Clearwater, Florida February, 1998 112
Salt Lake Midvale, Utah November, 1996 98
Baltimore/BWI Linthicum, Maryland March, 1998 147
</TABLE>
The Owner purchased the Salt Lake Hotel October 1, 1997. The financial
statements include the results of the Salt Lake hotel operations from this date
forward.
Economic conditions in the localities in which the individual Hotels are
located impact revenues and the ability to collect accounts receivable.
The Hotels specialize in providing extended stay lodging to business or
leisure travelers. While customers may rent rooms for a night, terms of up to a
month or longer are available. Services offered, which are particularly
attractive to the extended stay traveler, include laundry services, 24 hour
on-site convenience stores and grocery shopping services.
The Hotels have been owned and managed by various affiliates of Promus
Hotels, Inc. (the Owner) throughout the financial statement periods. The
accompanying combined financial statements of the Hotels have been presented on
a combined basis because the Owner has a contract pending to sell the five
Hotels to an affiliate of Apple Suites, Inc., a real estate investment trust
established to acquire equity interests in hotel properties. The statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for inclusion in a filing by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the combined financial statements have been presented on a pretax
basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Property -- The Hotel properties are recorded at cost. Depreciation has
been recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 10-15 Years
Buildings and Improvements ................. 15-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
Major renewals, betterments and improvements are capitalized, while
ongoing maintenance and repairs are expensed as incurred. Building costs
include interest capitalized during the construction period. Construction in
progress represents Hotel
F-23
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997-- (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
properties under construction. At the point construction is completed and the
Hotels are ready to be placed in service, the costs are reclassified to
investment in Hotel properties for financial statement presentation.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
Annually, management of the Hotels reviews the carrying value and
remaining depreciable lives of the Hotel properties and related assets.
Management does not believe there are any current indications of impairment.
However, it is possible that estimates of the remaining useful lives will
change in the near term.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Pre-opening Expenses -- Pre-opening expenses represent operating expenses
incurred prior to initial opening of the Hotels. In 1998, pre-opening expenses
of $148,131 and $201,830 were expensed as incurred for the Clearwater and
Baltimore/BWI Hotels, respectively. In 1997, pre-opening expenses of $64,588,
$111,225 and $37,595 were expensed as incurred for the Clearwater, Salt Lake
and Baltimore/BWI Hotels, respectively.
Inventories -- The Hotels maintain supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
The Owner allocates a monthly accounting fee of $1,000 to each hotel.
These fees totaled $56,000 in 1998 and $27,000 in 1997. The Owner also charges
each Hotel a fee for corporate advertising, training and reservations equal to
four percent of net suite revenue. These fees totaled $432,749 in 1998 and
$186,386 in 1997. In 1998, the Owner charged a franchise fee of $432,494 to
these Hotels, also computed at four percent of suite revenue. No franchise fee
was charged in 1997. Effective in 1999, the Owner will be charging a "base
management fee" of three percent of suite revenue to each Hotel.
The acquisition costs of the properties and related furnishings and
equipment was financed by the Owner. For all properties, excluding Salt Lake,
which was a purchased project, the Owner allocated interest to each property on
monies advanced to fund the
F-24
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997-- (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
construction costs. The interest costs have been capitalized and depreciated in
accordance with the Hotels' normal depreciation policy. During 1998, interest
capitalized and included in the cost basis of the hotels totaled $484,495.
On most property and equipment purchases, excluding base Hotel
construction contracts, the following fees have been paid to Promus Hotels,
Inc.:
Purchase Fee -- 4% of Asset Cost
Project Management Fee -- 4.5% and 5.5.% of labor portion of capitalized
asset costs in 1998 and 1997, respectively.
Each Hotel maintains a depository bank account into which customer
revenues have been deposited. The bulk of each Hotel's operating expenditures
are paid through the Owner's corporate accounts. Funds are transferred from the
Hotel's depository bank accounts to the Owner periodically. The transfers to
the Owner and expenditures made on behalf of the Hotels by the Owner are
accounted for through various intercompany accounts. No interest has been
charged on these intercompany advances from ongoing operations. There is no
intention to repay any advances to or from the Owner. Accordingly, the net
amounts have been included in shareholders' equity, with 1998 and 1997
intercompany/intracompany transfers being reflected as net capital
contributions or distributions.
F-25
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEET
AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash ................................................. $ 247,392
Accounts Receivable, Net ............................. 472,340
Prepaids and Other ................................... 25,892
------------
Total Current Assets ............................... 745,624
------------
INVESTMENT IN HOTEL PROPERTIES
Land and Improvements ................................ 5,378,751
Buildings and Improvements ........................... 29,280,084
Furniture, Fixtures and Equipment .................... 8,352,742
------------
Total .............................................. 43,011,577
Less: Accumulated Depreciation ..................... (7,884,812)
------------
Net Investment in Hotel Properties ................... 35,126,765
------------
Total Assets ....................................... $ 35,872,389
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ..................................... $ 314,045
Accrued Taxes ........................................ 433,300
Accrued Expenses -- Other ............................ 233,596
------------
Total Current Liabilities .......................... 980,941
------------
SHAREHOLDERS' EQUITY
Contributed Capital .................................. 26,576,118
Retained Earnings .................................... 8,315,330
------------
Total Shareholders' Equity ......................... 34,891,448
------------
Total Liabilities and Shareholders' Equity ......... $ 35,872,389
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-26
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
--------------- ------------- ----------------
<S> <C> <C> <C>
Balances, January 1, 1999 .......... $ 30,113,336 $6,309,548 $ 36,422,884
Net Income ......................... -- 2,005,782 2,005,782
Capital Distributions, Net ......... (3,537,218) -- (3,537,218)
------------ ---------- ------------
Balances, August 31, 1999 .......... $ 26,576,118 $8,315,330 $ 34,891,448
============ ========== ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-27
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED INCOME STATEMENT
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
GROSS OPERATING REVENUE
Suite Revenue ........................................................... $8,787,181
Other Customer Revenue .................................................. 515,811
----------
Total Revenue ......................................................... 9,302,992
EXPENSES
Property and Operating .................................................. 3,541,888
General and Administrative .............................................. 218,472
Advertising and Promotion ............................................... 422,228
Utilities ............................................................... 400,988
Real Estate and Personal Property Taxes, and Property Insurance ......... 470,709
Depreciation Expense .................................................... 1,612,457
Franchise and Management Fees ........................................... 630,468
----------
Total Expenses ........................................................ 7,297,210
----------
Net Income ............................................................ $2,005,782
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-28
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income ....................................................................... $ 2,005,782
------------
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: .
Depreciation ..................................................................... 1,612,457
Change in:
Accounts Receivable ............................................................ (83,988)
Prepaids and Other Current Assets .............................................. 40,778
Accounts Payable ............................................................... (54,242)
Accrued Taxes .................................................................. 326,028
Accrued Expenses -- Other ...................................................... (14,171)
------------
Net Adjustments ................................................................ 1,826,862
------------
Net Cash flows from Operating Activities ....................................... 3,832,644
CASH FLOWS (TO) FINANCING ACTIVITIES
Net Equity Distributions ......................................................... (3,884,233)
------------
Net Decrease in Cash ........................................................... (51,589)
Cash, January 1, 1999 .......................................................... 298,981
------------
Cash, August 31, 1999 .......................................................... $ 247,392
============
SUPPLEMENTAL DISCLOSURES:
Noncash Financing and Investing Activities .......................................
</TABLE>
During the period January 1, 1999 through August 31, 1999, additions to
Investment in Hotel Properties totaling $347,015 were financed with capital
contributions.
The accompanying notes are an integral part of this financial statement.
F-29
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Acquisition Hotels (the Hotels) consist of the
following:
<TABLE>
<CAPTION>
PROPERTY HOTEL LOCATION DATE OPENED # OF SUITES
---------------------------- --------------------------- ---------------- ------------
<S> <C> <C> <C>
Detroit/Warren ............. Warren, Michigan March, 1990 76
Atlanta/Peachtree .......... Corners Norcross, Georgia February, 1990 92
Clearwater ................. Clearwater, Florida February, 1998 112
Salt Lake .................. Midvale, Utah November, 1996 98
Baltimore/BWI .............. Linthicum, Maryland March, 1998 147
</TABLE>
The Owner purchased the Salt Lake hotel October 1, 1997. The financial
statements include the results of the Salt Lake Hotel operations from this date
forward.
Economic conditions in the localities in which the individual Hotels are
located impact revenues and the ability to collect accounts receivable.
The Hotels specialize in providing extended stay lodging to business or
leisure travelers. While customers may rent rooms for a night, terms of up to a
month or longer are available. Services offered, which are particularly
attractive to the extended stay traveler, include laundry services, 24 hour
on-site convenience stores and grocery shopping services.
The Hotels have been owned and managed by various affiliates of Promus
Hotels, Inc. (the Owner) throughout the financial statement period. The
accompanying combined financial statements of the Hotels have been presented on
a combined basis because the Owner has a contract pending to sell the five
Hotels to an affiliate of Apple Suites, Inc., a real estate investment trust
established to acquire equity interests in hotel properties. The statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for inclusion in a filing by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the combined financial statements have been presented on a pretax
basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Property -- The Hotel properties are recorded at cost. Depreciation has
been recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 10-15 Years
Buildings and Improvements ................. 15-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
Major renewals, betterments and improvements are capitalized, while
ongoing maintenance and repairs are expensed as incurred. Building costs
include interest capitalized during the construction period.
F-30
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 -- (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
Annually, management of the Hotels reviews the carrying value and
remaining depreciable lives of the Hotel properties and related assets.
Management does not believe there are any current indications of impairment.
However, it is possible that estimates of the remaining useful lives will
change in the near term.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Inventories -- The Hotels maintain supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
During the period January 1, 1999 through August 31, 1999, the following
Owner related fees were expensed.
<TABLE>
<CAPTION>
FEE TYPE BASIS FOR DETERMINATION TOTAL EXPENSE
--------------------------------------- ---------------------------- --------------
<S> <C> <C>
Accounting Fees $1,000 per hotel per month $ 40,000
Corporate Advertising, Training
and Reservations 4% of net suite revenue 351,487
Franchise Fees 4% of net suite revenue 351,487
Management Fees 3% of net suite revenue 278,981
</TABLE>
The acquisition costs of the properties and related furnishings and
equipment was financed by the Owner. For all properties, excluding Salt Lake,
which was a purchased project, the Owner allocated interest to each property on
monies advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotels' normal depreciation
policy.
F-31
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 -- (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
On most property and equipment purchases, excluding base Hotel
construction contracts, the following fees have been paid to Promus Hotels,
Inc.:
Purchase Fee -- 4% of Asset Cost
Project Management Fee -- 4.5% of labor portion of capitalized asset costs
Each Hotel maintains a depository bank account into which customer
revenues have been deposited. The bulk of each Hotel's operating expenditures
are paid through the Owner's corporate accounts. Funds are transferred from the
Hotel's depository bank accounts to the Owner periodically. The transfers to
the Owner and expenditures made on behalf of the Hotels by the Owner are
accounted for through various intercompany accounts. No interest has been
charged on these intercompany advances from ongoing operations. There is no
intention to repay any advances to or from the Owner. Accordingly, the net
amounts have been included in shareholders' equity, with
intercompany/intracompany transfers being reflected as net capital
distributions.
F-32
<PAGE>
[L.P. MARTIN & COMPANY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Apple Suites, Inc.
Richmond, Virginia
We have audited the accompanying balance sheets of the Homewood Suites
Hotel -- Jackson as of December 31, 1998 and 1997, and the related statements of
income, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the management of the hotel. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. The
accompanying financial statements were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission as
described in Note 1 to the financial statements and are not intended to be a
complete presentation of the Homewood Suites Hotel -- Jackson.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Homewood Suites Hotel --
Jackson as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ L.P. Martin & Co., P.C.
November 7, 1999
F-33
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................. $ 34,756 $ 13,970
Accounts Receivable, Net ............................. 148,205 104,456
Prepaids and Other ................................... 25,350 25,350
---------- ----------
Total Current Assets ............................... 208,311 143,776
---------- ----------
INVESTMENT IN HOTEL PROPERTY
Land and Improvements ................................ 749,969 749,969
Buildings and Improvements ........................... 5,284,823 5,161,652
Furniture, Fixtures and Equipment .................... 1,197,181 1,182,151
---------- ----------
Total .............................................. 7,231,973 7,093,772
Less: Accumulated Depreciation ..................... (797,849) (380,298)
---------- ----------
Net Investment in Hotel Property ..................... 6,434,124 6,713,474
---------- ----------
Total Assets ....................................... $6,642,435 $6,857,250
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ..................................... $ 98,225 $ 144,491
Accrued Taxes ........................................ 87,475 43,165
Accrued Expenses -- Other ............................ 41,034 39,523
---------- ----------
Total Current Liabilities .......................... 226,734 227,179
---------- ----------
SHAREHOLDERS' EQUITY
Contributed Capital .................................. 6,046,570 6,734,271
Retained Earnings (Accumulated Deficit) .............. 369,131 (104,200)
---------- ----------
Total Shareholders' Equity ......................... 6,415,701 6,630,071
---------- ----------
Total Liabilities and Shareholders' Equity ......... $6,642,435 $6,857,250
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS TOTAL
CONTRIBUTED (ACCUMULATED SHAREHOLDERS'
CAPITAL DEFICIT) EQUITY
------------- -------------- --------------
<S> <C> <C> <C>
Balances, January 1, 1997 ........... $4,638,129 $ (70,003) $4,568,126
Net Loss ............................ -- (34,197) (34,197)
Capital Contributions, Net .......... 2,096,142 -- 2,096,142
---------- ---------- ----------
Balances, December 31, 1997 ......... 6,734,271 (104,200) 6,630,071
Net Income .......................... -- 473,331 473,331
Capital Distributions, Net .......... (687,701) -- (687,701)
---------- ---------- ----------
Balances, December 31, 1998 ......... $6,046,570 $ 369,131 $6,415,701
========== ========== ==========
</TABLE>
INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
GROSS OPERATING REVENUE
Suite Revenue ....................................... $2,115,861 $1,390,347
Other Customer Revenue .............................. 161,811 130,494
---------- ----------
Total Revenue ..................................... 2,277,672 1,520,841
---------- ----------
EXPENSES
Property and Operating .............................. 927,878 700,874
General and Administrative .......................... 69,009 56,870
Advertising and Promotion ........................... 128,067 87,703
Utilities ........................................... 87,815 73,585
Real Estate and Personal Property Taxes, and Property
Insurance ......................................... 89,387 43,959
Depreciation Expense ................................ 417,551 380,298
Franchise Fees ...................................... 84,634 --
Pre-Opening Expenses ................................ -- 211,749
---------- ----------
Total Expenses .................................... 1,804,341 1,555,038
---------- ----------
Net Income (Loss) ................................. $ 473,331 $ (34,197)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
------------ --------------
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income (Loss) ................................... $ 473,331 $ (34,197)
---------- ----------
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation ........................................ 417,551 380,298
Change In:
Accounts Receivable ............................... (43,749) (104,456)
Prepaids and Other Current Assets ................. -- (25,350)
Accounts Payable .................................. (46,266) 7,278
Accrued Taxes ..................................... 44,310 42,292
Accrued Expenses -- Other ......................... 1,511 36,532
---------- ----------
Net Adjustments ................................... 373,357 336,594
---------- ----------
Net Cash Flows from Operating Activities .......... 846,688 302,397
CASH FLOWS TO FINANCING ACTIVITIES
Capital Distributions, Net .......................... (825,902) (290,927)
---------- ----------
Net Increase in Cash .............................. 20,786 11,470
Cash, Beginning of Year ........................... 13,970 2,500
---------- ----------
Cash, End of Year ................................. $ 34,756 $ 13,970
========== ==========
SUPPLEMENTAL DISCLOSURES:
NONCASH FINANCING AND INVESTING ACTIVITIES
</TABLE>
YEAR ENDED DECEMBER 31, 1998
Investments in hotel properties in the amount of $138,201 were financed
with capital contributions.
YEAR ENDED DECEMBER 31, 1997
Investments in hotel properties in the amount of $7,093,772, were financed
with capital contributions.
Construction in progress in the amount of $5,186,984 was reclassified to
investment in hotel properties.
Accounts payable for construction costs totaling $480,281 was curtailed
with capital contributions.
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Hotel -- Jackson is a 91 suite hotel, located in
Ridgeland, Mississippi, which opened for business on February 20, 1997. The
Hotel specializes in providing extended stay lodging to business or leisure
travelers. While customers may rent rooms for a night, terms of up to a month
or longer are available. Services offered, which are particularly attractive to
the extended stay traveler, include laundry services, 24 hour on-site
convenience stores and grocery shopping services.
Economic conditions in the area in which the Hotel is located impact
revenues and the ability to collect accounts receivable.
The Hotel has been owned and managed by an affiliate of Promus Hotels,
Inc. (the Owner) throughout the financial statement periods. The Owner has a
contract pending to sell the Hotel to an affiliate of Apple Suites, Inc., a
real estate investment trust established to acquire equity interests in hotel
properties. The statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for inclusion in a filing
by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the financial statements have been presented on a pretax basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLCIIES
Property -- The hotel property is recorded at cost. Depreciation has been
recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 10-15 Years
Buildings and Improvements ................. 15-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
Major renewals, betterments and improvements are capitalized, while
ongoing maintenance and repairs are expensed as incurred. Building costs
include interest capitalized during the construction period. Construction in
progress represents Hotel assets under construction. At the point construction
is completed and the Hotel is ready to be placed in service, the costs are
reclassified to investment in Hotel property for financial statement
presentation. Construction in progress totaling $5,186,984 was reclassified to
investment in hotel property during 1997.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
F-37
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLCIIES -- (CONTINUED)
Annually, management of the hotel reviews the carrying value and remaining
depreciable lives of the Hotel property and related assets. Management does not
believe there are any current indications of impairment. However, it is
possible that estimates of the remaining useful lives will change in the near
term.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Pre-Opening Expenses -- Pre-opening expenses represent operating expenses
incurred prior to initial opening of the Hotel. In 1997, pre-opening expenses
of $211,749, were expensed as incurred.
Inventories -- The Hotel maintains supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
The Owner allocates a monthly accounting fee of $1,000 to the Hotel. These
fees totaled $12,000 in 1998 and $10,338 in 1997. The Owner also charges the
Hotel a fee for corporate advertising, training and reservations equal to four
percent of net suite revenue. These fees totaled $84,634 in 1998 and $53,614 in
1997. In 1998, the Owner charged a franchise fee of $84,634 to the Hotel, also
computed at four percent of suite revenue. No franchise fee was charged in
1997. Effective in 1999, the Owner will be charging a "base management fee" of
three percent of suite revenue to the hotel.
The acquisition cost of the property and related furnishings and equipment
was financed by the Owner. The Owner allocated interest to the property on
monies advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotel's normal depreciation
policy. Interest capitalized and included in the cost basis of the Hotel
totaled $235,723 in 1997.
On most property and equipment purchases, excluding base hotel
construction contracts, the following fees paid to Promus Hotels, Inc. have
been capitalized:
Purchase Fee -- 4% of Asset Cost
Project Management Fee -- 4.5% and 5.5.% of labor portion of capitalized
asset costs in 1998 and 1997, respectively.
F-38
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 -- (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Hotel maintains a depository bank account into which customer revenues
have been deposited. The bulk of the Hotel's operating expenditures are paid
through the Owner's corporate accounts. Funds are transferred from the Hotel's
depository bank accounts to the Owner periodically. The transfers to the Owner
and expenditures made on behalf of the Hotel by the Owner are accounted for
through various intercompany accounts. No interest has been charged on these
intercompany advances from ongoing operations. There is no intention to repay
any advances to or from the Owner. Accordingly, the net amounts have been
included in shareholders' equity with 1998 and 1997 intercompany/intracompany
transfers being reflected as net capital contributions or distributions.
F-39
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
BALANCE SHEET (UNAUDITED)
AUGUST 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash ................................................. $ 43,476
Accounts Receivable, Net ............................. 227,188
Prepaids and Other ................................... 25,350
------------
Total Current Assets ............................... 296,014
------------
INVESTMENT IN HOTEL PROPERTY
Land and Improvements ................................ 754,803
Buildings and Improvements ........................... 5,278,927
Furniture, Fixtures and Equipment .................... 1,197,295
------------
Total .............................................. 7,231,025
Less: Accumulated Depreciation ..................... (1,082,506)
------------
Net Investment in Hotel Property ..................... 6,148,519
------------
Total Assets ....................................... $ 6,444,533
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ..................................... $ 1,626
Accrued Taxes ........................................ 69,100
Accrued Expenses -- Other ............................ 47,842
------------
Total Current Liabilities .......................... 118,568
------------
SHAREHOLDERS' EQUITY ..................................
Contributed Capital .................................. 5,625,316
Retained Earnings .................................... 700,649
------------
Total Shareholders' Equity ......................... 6,325,965
------------
Total Liabilities and Shareholders' Equity ......... $ 6,444,533
============
</TABLE>
The acompanying notes are an integral part of these financial statements.
F-40
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
------------- ---------- --------------
<S> <C> <C> <C>
Balances, January 1, 1999 .......... $6,046,570 $369,131 $6,415,701
Net Income ......................... -- 331,518 331,518
Capital Distributions, Net ......... (421,254) -- (421,254)
---------- -------- ----------
Balances, August 31, 1999 .......... $5,625,316 $700,649 $6,325,965
========== ======== ==========
</TABLE>
INCOME STATEMENT
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
GROSS OPERATING REVENUE
Suite Revenue ........................................................... $1,487,301
Other Customer Revenue .................................................. 112,292
----------
Total Revenue ......................................................... 1,599,593
==========
EXPENSES
Property and Operating .................................................. 636,068
General and Administrative .............................................. 51,587
Advertising and Promotion ............................................... 75,268
Utilities ............................................................... 50,426
Real Estate and Personal Property Taxes, and Property Insurance ......... 62,589
Depreciation Expense .................................................... 284,657
Franchise and Management Fees ........................................... 107,480
----------
Total Expenses ........................................................ 1,268,075
----------
Net Income ............................................................ $ 331,518
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-41
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income ..................................................................... $ 331,518
----------
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation ................................................................... 284,657
Change in:
Accounts Receivable ............................................................ (78,983)
Accounts Payable ............................................................... (96,599)
Accrued Taxes .................................................................. (18,375)
Accrued Expenses -- Other ...................................................... 6,808
----------
Net Adjustments ................................................................ 97,508
----------
Net Cash Flows from Operating Activities ....................................... 429,026
CASH FLOWS FROM INVESTING ACTIVITIES
Net Disposal of Investment in Hotel Property ................................... 948
CASH FLOWS TO FINANCING ACTIVITIES
Net Equity Distributions ....................................................... (421,254)
----------
Net Increase in Cash ......................................................... 8,720
Cash, January 1, 1999 ........................................................ 34,756
----------
Cash, August 31, 1999 ........................................................ $ 43,476
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-42
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Hotel -- Jackson is a 91 suite hotel, located in
Ridgeland, Mississippi, which opened in February, 1997. The Hotel specializes
in providing extended stay lodging to business or leisure travelers. While
customers may rent rooms for a night, terms of up to a month or longer are
available. Services offered, which are particularly attractive to the extended
stay traveler, include laundry services, 24 hour on-site convenience stores and
grocery shopping services.
Economic conditions in the area in which the Hotel is located impact
revenues and the ability to collect accounts receivable.
The Hotel has been owned and managed by an affiliate of Promus Hotels,
Inc. (the Owner) throughout the financial statement period. The Owner has a
contract pending to sell the Hotel to an affiliate of Apple Suites, Inc., a
real estate investment trust established to acquire equity interests in hotel
properties. The statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for inclusion in a filing
by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the financial statements have been presented on a pretax basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Property -- The Hotel property is recorded at cost. Depreciation has been
recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 10-15 Years
Buildings and Improvements ................. 15-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
Major renewals, betterments and improvements are capitalized, while
ongoing maintenance and repairs are expensed as incurred. Building costs
include interest capitalized during the construction period.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
Annually, management of the Hotel reviews the carrying value and remaining
depreciable lives of the Hotel property and related assets. Management does not
believe there are any current indications of impairment. However, it is
possible that estimates of the remaining useful lives will change in the near
term.
F-43
<PAGE>
HOMEWOOD SUITES HOTEL -- JACKSON
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIOD JANUARY 1, 1999 THROUGH AUGUST 31, 1999 -- (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Inventories -- The Hotel maintains supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
During the period January 1, 1999 through August 31, 1999, the following
Owner related fees were expensed.
<TABLE>
<CAPTION>
FEE TYPE BASIS FOR DETERMINATION TOTAL EXPENSE
-------------------------------- -------------------------- --------------
<S> <C> <C>
Accounting Fees $1,000 per month $ 8,000
Corporate Advertising, Training
and Reservations 4% of net suite revenue 59,492
Franchise Fees 4% of net suite revenue 59,492
Management Fees 3% of net suite revenue 47,988
</TABLE>
The acquisition cost of the property and related furnishings and equipment
was financed by the Owner. The Owner allocated interest to the property on
monies advanced to fund the construction costs. The interest costs have been
capitalized and depreciated in accordance with the Hotel's normal depreciation
policy.
On most property and equipment purchases, excluding base hotel
construction contracts, the following fees paid to Promus Hotels, Inc. have
been capitalized:
Purchase Fee -- 4% of Asset Cost
Project Management Fee -- 4.5% of labor portion of capitalized asset costs
The Hotel maintains a depository bank account into which customer revenues
have been deposited. The bulk of the Hotel's operating expenditures are paid
through the Owner's corporate accounts. Funds are transferred from the Hotel's
depository bank accounts to the Owner periodically. The transfers to the Owner
and expenditures made on behalf of the Hotel by the Owner are accounted for
through various intercompany accounts. No interest has been charged on these
intercompany advances from ongoing operations. There is no intention to repay
any advances to or from the Owner. Accordingly, the net amounts have been
included in shareholders' equity with intercompany/intracompany transfers being
reflected as net capital distributions.
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Apple Suites, Inc.
We have audited the accompanying consolidated balance sheets of Apple
Suites, Inc. (the "Company") as of December 31, 1999 and March 26, 1999, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the period from March 26, 1999 through December 31, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 36. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimate made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Apple Suites, Inc. at December 31, 1999 and March 26, 1999, and the
consolidated results of its operations and its cash flows for the period from
March 26, 1999 through December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Richmond, Virginia
February 28, 2000
F-45
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 26, 1999
------------------- ---------------
<S> <C> <C>
ASSETS
Investment in hotels (net of $496,209 accumulated depreciation).......... $ 93,719,632 --
Cash and cash equivalents ............................................... 581,344 $ 100
Restricted cash ......................................................... 1,023,721 --
Rent receivable from Apple Suites Management, Inc. ...................... 2,123,136 --
Notes and other receivables from Apple Suites Management, Inc. .......... 717,019 --
Capital improvements reserve ............................................ 753,927 --
Prepaid expenses ........................................................ 270,229 --
Other assets ............................................................ 300,000 --
------------ -----
Total Assets ......................................................... $ 99,489,008 $ 100
============ =====
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable -- secured ................................................ $ 68,569,500 --
Interest payable ........................................................ 466,140 --
Accounts payable ........................................................ 65,214 --
Accrued expenses ........................................................ 868,668 --
Accounts payable -- affiliates .......................................... 708,751 --
Distributions payable ................................................... 712,735 --
------------ -----
Total Liabilities .................................................... $ 71,391,008 --
============ =====
SHAREHOLDERS' EQUITY
Common Stock, no par value, authorized 200,000,000 shares; issued and
outstanding 3,429,414 shares and 10 shares, respectively ............... $ 28,591,260 $ 100
Class B Convertible Stock, no par value, authorized 240,000 shares;
issued and outstanding 240,000 shares .................................. 24,000 --
Distributions greater than net income ................................... (517,260) --
------------ -----
Total Shareholders' Equity ............................................. $ 28,098,000 100
------------ -----
Total Liabilities and Shareholders' Equity ............................. $ 99,489,008 $ 100
============ =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period March 26, 1999 through December 31, 1999(a)
<TABLE>
<S> <C>
REVENUES
Lease revenue ...................................... $ 2,518,031
Interest income and other revenue .................. 169,086
EXPENSES
Taxes, insurance, and other ........................ 426,592
General and administrative ......................... 153,807
Depreciation of real estate owned .................. 496,209
Interest ........................................... 1,245,044
------------
Total expenses ................................... 2,321,652
------------
Net income .......................................... $ 365,465
============
Basic and diluted earnings per common share ......... $ 0.14
============
</TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Period March 26, 1999 through December 31, 1999(a)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------
NUMBER OF
SHARES AMOUNT
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at March 26, 1999 ........................................................ 10 $ 100
Issuance of Class B
Convertible Stock ............................................................... -- --
Net proceeds from the sale
of common shares ................................................................ 3,420,110 28,507,514
Net income ....................................................................... -- --
Cash distributions declared
to shareholders ($.33 per
share) .......................................................................... -- --
Common stock issued
through reinvestment of
distributions ................................................................... 9,294 83,646
--------- -----------
Balance at December 31,
1999 ............................................................................ 3,429,414 $28,591,260
-----------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
CONVERTIBLE STOCK
----------------------
DISTRIBUTIONS
NUMBER OF GREATER THAN
SHARES AMOUNT NET INCOME
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 26, 1999 ........................................................ -- -- --
Issuance of Class B
Convertible Stock ............................................................... 240,000 $24,000 --
Net proceeds from the sale
of common shares ................................................................ -- -- --
Net income ....................................................................... -- -- $ 365,465
Cash distributions declared
to shareholders ($.33 per
share) .......................................................................... -- -- (882,725)
Common stock issued
through reinvestment of
distributions ................................................................... -- -- --
------- ------- ----------
Balance at December 31,
1999 ............................................................................ 240,000 $24,000 $ (517,260)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOTAL
SHARHOLDERS'
EQUITY
------------------------------------------------------------------------------------------------
<S> <C>
Balance at March 26, 1999 ........................................................ $ 100
Issuance of Class B
Convertible Stock ............................................................... 24,000
Net proceeds from the sale
of common shares ................................................................ 28,507,514
Net income ....................................................................... 365,465
Cash distributions declared
to shareholders ($.33 per
share) .......................................................................... (882,725)
Common stock issued
through reinvestment of
distributions ................................................................... 83,646
-----------
Balance at December 31,
1999 ............................................................................ $28,098,000
------------------------------------------------------------------------------------------------
</TABLE>
(a) The company was initially capitalized on March 26, 1999; however,
operations did not commence until September 1, 1999.
See accompanying notes to consolidated financial statements.
F-47
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period March 26, 1999 through December 31, 1999 (a)
<TABLE>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 365,465
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of real estate owned ................................................... 496,209
Changes in operating assets and liabilities:
Prepaid expenses .................................................................... (270,229)
Due from Apple Suites Management, Inc. .............................................. (2,152,203)
Accounts payable .................................................................... 65,214
Accounts payable--affiliates ........................................................ 708,751
Accrued expenses .................................................................... 868,668
Interest payable .................................................................... 466,140
-------------
Net cash provided by operating activities ......................................... 548,015
CASH FLOW FROM INVESTING ACTIVITIES:
Payments received on notes receivable ............................................... 1,748
Cash paid for acquisitions of hotels ................................................ (26,045,300)
Capital improvements ................................................................ (290,741)
Restricted cash for property improvement plan ....................................... (1,023,721)
Capital improvements reserve held by third-party manager ............................ (753,927)
Earnest deposit money for pending acquisitions ...................................... (300,000)
-------------
Net cash used in investing activities ............................................. (28,411,941)
CASH FLOW FROM FINANCING ACTIVITIES:
Payment from officer-shareholder for Class B Convertible Stock ...................... 24,000
Net proceeds from issuance of common stock .......................................... 28,591,160
Cash distributions paid to shareholders ............................................. (169,990)
-------------
Net cash provided by financing activities ......................................... 28,445,170
Increase in cash and cash equivalents ............................................. 581,244
Cash and cash equivalents, beginning of period ...................................... 100
-------------
Cash and cash equivalents, end of period ............................................ $ 581,344
=============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ........................................................................ $ 550,147
Non-cash transaction:
Notes payable--secured issued by seller in connection with hotel acquisitions ....... $ 68,569,500
</TABLE>
(a) The company was initially capitalized on March 26, 1999; however,
operations did not commence until September 1, 1999.
See accompanying notes to consolidated financial statements.
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Apple Suites, Inc., together with its subsidiaries (the
"company"), is a Virginia corporation formed in March of 1999, which commenced
operations as a hotel real estate investment trust on September 1, 1999, the
effective date of its first four hotel acquisitions. The accompanying
consolidated financial statements include the accounts of the company along
with its subsidiaries. All significant intercompany transactions and balances
have been eliminated.
The company operates in one defined business segment consisting of
extended-stay hotels. The hotels are located throughout the United States and
operate as Homewood Suites(Reg. TM) by Hilton. The company leased to Apple
Suites Management, Inc. or its subsidiary (the "lessee") all of its hotels
acquired during 1999.
The lessee is wholly owned by Glade M. Knight, Chairman and Chief
Executive Officer of the company.
The lessee hired Promus Hotels, Inc. ("Promus"), a wholly owned subsidiary
of Hilton Hotels Corporation ("Hilton") to manage the company's hotels under
the terms of a management agreement between Promus and the lessee.
Relationship with Lessee -- The company must rely on the lessee to
generate sufficient cash flow from the operation of the hotels to enable the
lessee to meet its rent obligation to the company under the master hotel lease
agreements ("Percentage Leases"). At December 31, 1999, the lessee's rent
payable to the company amounted to $2,123,136. The original terms under the
Percentage Leases allow monthly base rent to be paid in arrears and quarterly
percentage rent to be paid 15 days following the quarter-end.
Refinancing -- The company has $68.6 million in notes payable with Hilton
with principal payments of $34 million due on October 1, 2000, $30.2 million
due on November 1, 2000 and $4.4 million due on January 1, 2001. The company
plans to pay these notes with the proceeds from its continuous "best efforts"
offering of common shares. However, based on the current rate at which equity
is being raised by the offering, the company may have to seek other measures to
repay these loans. The company is currently holding discussions with several
lenders to obtain financing for its hotels and is exploring both unsecured and
secured financing arrangements. Although no firm financing commitments have
been received, the company believes that based on discussions with lenders and
other market indicators it can obtain sufficient financing prior to maturity of
the notes. Obtaining refinancing is dependent upon a number of factors,
including: (1) continued operation of the hotels at or near current occupancy
and room rate levels as the company's leases are based on a percentage of hotel
suite income, (2) general level of interest rates including credit spreads for
real estate based lending, and (3) general economic conditions. For each of the
notes payable, all of the Company's 11 hotels serve as collateral.
F-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(CONTINUED)
Cash and Cash Equivalents -- Cash equivalents include highly liquid
investments with original maturities of three months or less. The fair market
value of cash and cash equivalents approximate their carrying value.
Restricted Cash -- Restricted cash consists of cash restricted for
property improvements.
Investment in Hotels -- The hotels are stated at cost, net of
depreciation, and including real estate brokerage commissions paid to Apple
Suites Realty Group, Inc., a related party (see Note 6). Repair and maintenance
costs are expensed as incurred while significant improvements, renovations, and
replacements are capitalized. Depreciation is computed using the straight-line
method over estimated useful lives of the assets, which are 39 years for
buildings and major improvements and 5 to 7 years for furniture and equipment.
The carrying values of each hotel are evaluated periodically to determine
if circumstances exist indicating an impairment in the carrying value of the
investment in the hotel. Adjustments are made based on fair value of the
underlying property if impairment is indicated. No impairment losses have been
recorded to date.
Revenue Recognition -- Lease revenue is reported as income over the lease
term as it becomes due from the lessee according to the provisions of the
Percentage Lease agreements. At December 31, 1999, the lessee is in compliance
with its rental obligations under the Percentage Leases.
Stock Incentive Plans -- The company elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and related Interpretations in accounting for its employee stock
options. As discussed in Note 5, the alternative fair value accounting provided
for under FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
(FASB 123) requires use of option valuation models that were not developed for
use in valuing employee stock options. Under APB 25, because the exercise price
of the company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Earnings Per Common Share -- Basic earnings per common share is computed
based upon the weighted average number of shares outstanding during the year.
Diluted earnings per share is calculated after giving effect to all potential
common shares that were dilutive and outstanding for the year. Class B
Convertible Shares are not included in earnings per common share calculations
until such time it becomes probable that such shares can be converted to common
shares (see Note 4).
Federal Income Taxes -- The company is operated as, and will annually
elect to be taxed as, a real estate investment trust under the Internal Revenue
Code of 1986, as amended (the "Code"). Generally, a real estate investment
trust which complies with
F-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(CONTINUED)
the provisions of the Code and distributes at least 95% of its taxable income
to its shareholders does not pay federal income taxes on its distributed
income. Accordingly, no provision has been made for federal income taxes.
For federal income tax purposes, distributions paid to shareholders
consist of ordinary income and return of capital or a combination thereof.
Distributions declared per share were $.33 for the period ended December 31,
1999. In 1999, of the total distribution, 68% was taxable as ordinary income,
and 32% was a non-taxable return of capital.
Use of Estimates -- The preparation of financial statements in accordance
with accounting principles generally accepted in the United States requires
management to make certain estimates and assumptions that affect amounts
reported in the financial statements and accompanying notes. Actual results may
differ from those estimates.
Comprehensive Income -- The company does not currently have any items of
comprehensive income requiring separate reporting and disclosure.
NOTE 2 -- INVESTMENT IN HOTELS
At December 31, 1999, the company owned the following Homewood Suites(Reg.
TM) by Hilton:
<TABLE>
<CAPTION>
ACQUISITION CARRYING ACCUMULATED FIRST MORTGAGE DATE
LOCATION COST VALUE* DEPRECIATION ENCUMBRANCES ACQUIRED
----------------------------- ------------- -------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Dallas/Addison, Texas $ 9,500,000 $ 9,780,937 $ 70,349 $ 7,141,500 September 1999
Dallas/Las Colinas, Texas 11,200,000 11,555,748 80,052 8,383,500 September 1999
Dallas/Plano, Texas 5,400,000 5,558,623 46,204 4,050,000 September 1999
Richmond, Virginia 9,400,000 9,667,166 80,046 7,050,000 September 1999
Atlanta/Cumberland, Georgia 9,800,000 10,199,600 55,013 7,350,000 October 1999
Baltimore, Maryland 16,348,000 16,857,511 65,349 12,261,000 November 1999
Clearwater, Florida 10,416,000 10,712,279 34,082 7,812,000 November 1999
Detroit, Michigan 4,330,000 4,466,485 17,209 3,247,500 November 1999
Atlanta/Peachtree, Georgia 4,033,000 4,137,785 13,728 3,024,750 November 1999
Salt Lake City, Utah 5,153,000 5,314,389 21,546 3,864,750 November 1999
Jackson, Mississippi 5,846,000 5,965,318 12,631 4,384,500 December 1999
----------- ----------- -------- -----------
$91,426,000 $94,215,841 $496,209 $68,569,500
</TABLE>
* Includes real estate commissions (see Note 6), closing costs, and
improvements capitalized since the date of acquisition for hotels acquired
to date.
Investment in hotels at December 31, 1999 consist of the following:
<TABLE>
<S> <C>
Land ................................... $15,683,084
Building and improvements .............. 77,165,860
Furniture and equipment ................ 1,366,897
-----------
$94,215,841
Less accumulated depreciation .......... (496,209)
-----------
Investments in hotels, net ............. $93,719,632
</TABLE>
F-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
NOTE 3 -- NOTES PAYABLE
On April 20, 1999, the company obtained a line of credit in a principal
amount of $1 million with a commercial bank. The line of credit was guaranteed
by Mr. Knight, Chairman and Chief Executive Officer. The line required interest
at LIBOR plus 1.50%. The principal balance and all accrued interest were paid
in full by September 30, 1999.
In conjunction with the purchase of 11 hotels, notes were executed by the
company made payable to the order of Hilton in the amount of $68,569,500. The
notes bear a fixed interest rate of 8.5% per annum and are cross-collateralized
by the 11 hotels owned by the company. Interest payments are due monthly. Notes
amounting to $64,185,000 mature during the fourth quarter of 2000, and the
remaining $4,384,500 note matures in January 2001. Principal payments are to be
made to the extent of net equity proceeds from the offering of common shares.
Hilton has agreed to defer principal payments until the earlier of April 29,
2000 or such time as two additional hotels have been purchased by the company.
The company paid $550,147 in interest for the period ended December 31, 1999.
The company's borrowings were $68,569,500 at December 31, 1999. The carrying
value of the notes at December 31, 1999 approximates fair value.
NOTE 4 -- SHAREHOLDERS' EQUITY
The company is raising equity capital through a "best-efforts" offering of
shares by David Lerner Associates, Inc. (the "Managing Dealer"), which will
receive selling commissions of 7.5% and a marketing expense allowance of 2.5%
based on proceeds of the shares sold. The company received gross proceeds of
$32,627,476 from the sale of 1,666,667 shares at $9 per share and 1,762,747
shares at $10 per share during 1999. The net proceeds of the offering, after
deducting selling commissions and other offering costs were $28,591,260.
The company provides a plan which allows shareholders to reinvest
distributions in the purchase of additional shares of the company ("Additional
Share Option"). Of the total proceeds raised from common shares during the year
ended December 31, 1999, $92,940 (net $83,646) was provided through the
reinvestment of distributions.
The company issued 240,000 Class B Convertible Shares, consisting of
202,500 shares to Mr. Knight, and a combined 37,500 Class B Convertible Shares
to two other individuals. The Class B Convertible Shares were issued by the
company 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 dividend 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
distributions 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
F-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 -- SHAREHOLDERS' EQUITY - (CONTINUED)
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 Apple Suites Advisors, Inc., and if the company
ceases to use Apple Suites Realty Group, Inc. to provide substantially all of
its property acquisition and disposition services.
Upon the occurrence of either conversion event, each of the Class B
Convertible Shares 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>
GROSS PROCEEDS RAISED FROM SALES OF COMMON SHARES NUMBER OF COMMON SHARES THROUGH CONVERSION OF EACH
THROUGH DATE OF CONVERSION CLASS B CONVERTIBLE SHARE (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.
The Company has authorized 15 million shares of preferred stock. There
were no shares issued and outstanding at December 31, 1999.
NOTE 5 -- STOCK INCENTIVE PLANS
In July 1999, the Board of Directors approved a Non-Employee Directors
Stock Option Plan (the "Directors Plan") whereby Directors, who are not
employees of the company or affiliates (see Note 6), automatically receive
options to purchase stock for 10 years from the adoption of the plan. Under the
Directors Plan, the number of shares to be issued is equal to 45,000 plus 1.8%
of the number of shares sold in excess of 1,666,667. This plan currently
relates to the initial public offering of 30,166,667 shares; therefore the
maximum number of shares to be issued under the Directors Plan currently is
558,000. The options expire ten years from the date of grant. As of December
31, 1999, 76,729 had been reserved for issuance.
F-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 -- STOCK INCENTIVE PLANS - (CONTINUED)
In July 1999, the Board of Directors approved an Incentive Stock Option
Plan (the "Incentive Plan") whereby incentive awards may be granted to certain
employees of the company or affiliates. Under the Incentive Plan, the number of
shares to be issued is equal to 35,000 plus 4.625% of the number of shares sold
in excess of 1,666,667. This plan also currently relates to the initial public
offering of 30,166,667 shares; therefore, the maximum number of shares that can
be issued under the Incentive Plan currently is 1,353,125. As of December 31,
1999, 116,527 shares had been reserved for issuance.
Both plans generally provide, among other things, that options be granted
at exercise prices not lower than the market value of the shares on the date of
grant. Under the Incentive Plan, at the earliest, options become exercisable at
the date of grant. The optionee has up to 10 years from the date on which the
options first become exercisable during which to exercise the options. In 1999,
the company granted 22,000 options to purchase shares under the Directors Plan
and no options under the Incentive Plan. Activity in the company's share option
plan during 1999 is summarized in the following table:
<TABLE>
<CAPTION>
1999
--------------------------------------------
OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE
--------- --------------------------------
<S> <C> <C>
Outstanding, beginning of period ............. -- --
Granted ...................................... 22,000 $ 9.00
Exercised .................................... -- --
Forfeited .................................... -- --
Outstanding, end of year ..................... 22,000 $ 9.00
Exercisable at end of year ................... 22,000 $ 9.00
Weighted-average fair value of options granted
during the year ............................. $ .31
</TABLE>
Pro forma information regarding net income and earnings per share is
required by FASB 123, under the fair value method described in that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999: risk-free interest rates of 5.6%; a dividend yield of
10.0%; and volatility factor of the expected market price of the company's
common stock of .208; and a weighted average expected life of the options of 10
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.
F-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 -- STOCK INCENTIVE PLANS - (CONTINUED)
For purposes of FASB 123 pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. As the
options are exercisable within six months of the date of grant, the full impact
of the pro forma adjustment to net income is disclosed below.
<TABLE>
<CAPTION>
1999
-------------
<S> <C>
Net income available to common shareholders
Pro forma ................................. $ 358,645
As reported ............................... $ 365,465
Earnings per common share -- diluted
Pro forma ................................. $ .14
As reported ............................... $ .14
</TABLE>
NOTE 6 -- COMMITMENTS AND RELATED PARTIES
The company receives rental income from the lessee under the Percentage
Leases which expire in 2009 subject to earlier termination by the company with
30 days notice. The Leases contain two optional five-year extensions. The rent
due under the Percentage Lease is the sum of base rent and percentage rent.
Percentage rent is calculated by multiplying fixed percentages by the total
amounts of suite revenues with reference to specified threshold amounts. Both
the base rent and the revenue thresholds used in computing percentage rents are
subject to annual adjustments based on increases in the Consumer Price Index
("CPI"). The company earned rents of $2,518,031 for the period ended December
31, 1999.
Minimum future rental income (i.e. base rents) payable to the company
under the Percentage Leases in effect at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 ..................... $ 6,583,400
2001 ..................... 6,583,400
2002 ..................... 6,583,400
2003 ..................... 6,583,400
2004 ..................... 6,583,400
Thereafter ............... 31,564,507
-----------
$64,481,507
===========
</TABLE>
Under the Percentage Leases, the company is obligated to pay the costs of
real estate and personal property taxes, property insurance, maintenance of
underground utilities and structural elements of the hotels. The company is
committed under certain agreements to fund 5% of suite revenues per month for
capital expenditures to include periodic replacement or refurbishment of
furniture, fixtures, and equipment. At December 31, 1999, $753,927 was held by
Promus for capital improvement reserves. In addition in accordance with the
franchise agreements, $1,023,721 was held for the property improvement plan
with a financial institution and treated as restricted cash.
F-55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 -- COMMITMENTS AND RELATED PARTIES - (CONTINUED)
The company loaned the lessee $567,900 for franchise fees and $121,800 for
hotel supplies for the 11 hotels. The debt agreements are evidenced by
promissory notes bearing interest at a rate of 9% per annum. Principal and
interest payments are due monthly. The promissory notes have various maturity
dates through January 2010.
The company has contracted with Apple Suites Realty Group, Inc. ("ASRG")
to acquire and dispose of real estate assets for the company. In accordance
with the contract ASRG is to be paid a fee of 2% of the purchase price of any
acquisitions or sale price of any dispositions of real estate investments,
subject to certain conditions. During 1999, ASRG earned $1,828,520 under the
agreement of which $849,628 was payable at December 31, 1999.
The company has contracted with Apple Suites Advisors, Inc. ("ASA") to
advise and provide day to day management services to the company. In accordance
with the contract, the company will pay ASA a fee equal to .1% to .25% of total
equity contributions received by the company in addition to certain
reimbursable expenses. During 1999, ASA earned $23,574 under this agreement of
which $18,513 was payable at December 31, 1999.
The lessee, ASRG and ASA are 100% owned by Mr. Knight. ASRG and ASA may
purchase in the "best efforts" offering up to 2.5% of the total number of
shares of the company sold in the "best efforts" offering.
Mr. Knight also serves as the Chairman and Chief Executive Officer of
Cornerstone Realty Income Trust, Inc., an apartment REIT. During 1999,
Cornerstone Realty Income Trust, Inc. provided the company with services and
rental space and was paid approximately $55,000.
NOTE 7 -- 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 issuance, 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 may be required to register the Warrants under the
Securities Act during the Warrant Exercise Term.
F-56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
NOTE 8 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
------------------
<S> <C>
NUMERATOR:
Net income and numerator for basic and diluted earnings ................................. $ 365,465
DENOMINATOR:
Denominator for basic earnings per share-weighted-average shares ........................ 2,648,196
EFFECT OF DILUTIVE SECURITIES:
Stock options ........................................................................... 2,200
Denominator for diluted earnings per share -- adjusted weighted -- average shares and
assumed conversions .................................................................... 2,650,396
Basic and diluted earnings per common share ............................................. $ .14
</TABLE>
NOTE 9 -- LESSEE
All of the company's lease revenue is derived from the Percentage Leases
with the lessee. Certain information, related to the lessee's financial
statements, is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
<S> <C>
BALANCE SHEET INFORMATION:
Cash and cash equivalents ......... $2,395,000
Total assets ...................... 3,826,155
Due to Apple Suites, Inc. ......... 2,123,136
Shareholders' Deficit ............. (141,004)
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 1 THROUGH
DECEMBER 31, 1999
--------------------
<S> <C>
STATEMENT OF OPERATIONS INFORMATION:
Total revenue .............................. $5,671,075
Rent expense -- Apple Suites, Inc. ......... 2,518,031
Total expenses ............................. 5,812,179
Net loss ................................... (141,104)
</TABLE>
At December 31, 1999, the company owned 11 hotels operating as Homewood
Suites(Reg. TM) by Hilton. The hotels operate pursuant to franchise license
agreements which require the payment of fees based on a percentage of suite
revenue and sundry revenue. These fees are paid by the lessee.
The lessee engages Promus as a third-party manager to operate the hotels
leased by it and pays the manager a 4% management fee based on a percentage of
adjusted gross revenue. During the first two years of the management agreement,
a portion of the management fee equal to 1% of adjusted gross revenues is
subordinated to the lessee's receipt of a return equal to 11% of the purchase
price of each hotel. The lessee pays the manager a franchise fee and a
marketing fee, equal to 4% of gross revenues, respectively.
F-57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 -- QUARTERLY AND FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results of operations for the year
ended December 31, 1999:
<TABLE>
<CAPTION>
1999
--------------------------------
THIRD QUARTER* FOURTH QUARTER
---------------- ---------------
<S> <C> <C>
Revenues ................................. $481,676 $2,205,441
Net income ............................... 38,708 326,757
Basic and diluted ........................ .02 .12
Distributions declared per share ......... -- .33
</TABLE>
* Operations commenced on September 1, 1999.
NOTE 11 -- PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information for the period ended
December 31, 1999 is presented as if the acquisition of the 11 hotels occurred
on January 1, 1999. The pro forma information does not purport to represent
what the company's results of operations would actually have been if such
transaction, in fact, had occurred on January 1, 1999, nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED 12/31/99
---------------
<S> <C>
Lease revenue ..................................... $ 14,102,040
Net income ........................................ $ 3,828,096
Net income per share -- basic and diluted ......... $ 1.31
</TABLE>
The pro forma information reflects adjustments for actual lease revenue
and expenses of the 11 hotels acquired in 1999 for the respective period in
1999 prior to acquisition by the company. Net income has been adjusted as
follows: (1) depreciation has been adjusted based on the company's basis in the
hotels; (2) advisory expenses have been adjusted based on the company's
contractual arrangements; (3) interest expense has been adjusted to reflect the
acquisition as of January 1, 1999; and (4) common stock raised during 1999 to
purchase these hotels has been adjusted to reflect issuance as of January 1,
1999.
NOTE 12 -- SUBSEQUENT EVENTS
During January and February of 2000, the company closed the sale to
investors of 335,487 shares at $10 per share representing net proceeds to the
company of $3,019,377.
The company has entered into contracts to purchase two additional hotels
from Hilton on or before April 28, 2000 for a total purchase price of $30.4
million. The purchase is subject to a number of customary closing conditions.
In addition, the ability of the company to purchase the hotels is contingent
upon its obtaining sufficient funds, either through the sale of sufficient
common shares under the company's "best efforts" offering or through alternate
financing sources. Therefore, there can be no assurance
F-58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 -- SUBSEQUENT EVENTS - (CONTINUED)
that the proposed purchase will occur as scheduled, or at all. There is a
required deposit with Hilton of $400,000 against the aggregate purchase price.
If the company does not complete the purchase, it could lose the monies
deposited.
F-59
<PAGE>
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION (AS OF DECEMBER 31,
1999)
<TABLE>
<CAPTION>
INITIAL COST
----------------------------
ENCUM-
DESCRIPTION BRANCES LAND BLDG. & IMP.
-------------------------- ------------- ------------- --------------
<S> <C> <C> <C>
1. Addison, Texas $ 7,141,500 $ 2,090,000 $ 7,410,000
2. Las Colinas, Texas 8,383,500 2,800,000 8,400,000
3. Plano, Texas 4,050,000 594,000 4,806,000
4. Richmond, Virginia 7,050,000 846,000 8,554,000
5. Atlanta, Georgia
(Galleria) 7,350,000 2,254,000 7,546,000
6. Baltimore, Maryland 12,261,000 1,634,800 14,713,200
7. Clearwater, Florida 7,812,000 2,395,680 8,020,320
8. Detroit, Michigan 3,247,500 412,240 3,917,760
9. Atlanta, Georgia
Peachtree 3,024,750 519,600 3,513,400
10. Salt Lake City, Utah 3,864,750 1,048,580 4,104,420
11. Jackson, Mississippi 4,384,500 467,680 5,378,320
TOTALS $68,569,500 $15,062,580 $76,363,420
<CAPTION>
GROSS AMOUNT CARRIED
----------------------------
SUBSEQUENT
CAPITALIZED
DESCRIPTION IMP. LAND BLDG. & IMP. TOTAL
-------------------------- ------------ ------------- -------------- ----------------------
<S> <C> <C> <C> <C>
1. Addison, Texas $ 280,937 $ 2,117,035 $ 7,663,902 $ 9,780,937
2. Las Colinas, Texas 355,748 2,835,140 8,720,608 11,555,748
3. Plano, Texas 158,623 600,481 4,958,142 5,558,623
4. Richmond, Virginia 267,166 858,975 8,808,191 9,667,166
5. Atlanta, Georgia
(Galleria) 399,600 2,282,915 7,916,685 10,199,600
6. Baltimore, Maryland 509,511 1,671,050 15,186,461 16,857,511
7. Clearwater, Florida 296,279 2,853,277 7,859,002 10,712,279
8. Detroit, Michigan 136,485 526,858 3,939,627 4,466,485
9. Atlanta, Georgia
Peachtree 104,785 1,051,850 3,085,935 4,137,785
10. Salt Lake City, Utah 161,389 415,557 4,898,832 5,314,389
11. Jackson, Mississippi 119,318 469,946 5,495,372 5,965,318
TOTALS $2,789,840 $15,683,084 $78,532,757 $ 94,215,841 (1)
</TABLE>
<TABLE>
<CAPTION>
DATE DATE
ACC. DEPR. CONSTRUCTED ACQUIRED DEP. LIFE
------------ ------------- ----------- ----------
<S> <C> <C> <C> <C>
1. Addison, Texas $ 70,349 1990 Sept 1999 39 yrs.
2. Las Colinas, Texas 80,052 1990 Sept 1999 39 yrs.
3. Plano, Texas 46,204 1997 Sept 1999 39 yrs.
4. Richmond, Virginia 80,046 1998 Sept 1999 39 yrs.
5. Atlanta, Georgia
(Galleria) 55,013 1990 Oct 1999 39 yrs.
6. Baltimore, Maryland 65,349 1998 Nov 1999 39 yrs.
7. Clearwater, Florida 34,082 1998 Nov 1999 39 yrs.
8. Detroit, Michigan 17,209 1990 Nov 1999 39 yrs.
9. Atlanta, Georgia
(Peachtree) 13,728 1990 Nov 1999 39 yrs.
10. Salt Lake City,
Utah 21,546 1996 Nov 1999 39 yrs.
11. Jackson, Mississippi 12,631 1997 Dec 1999 39 yrs.
TOTALS $496,209
</TABLE>
(1) Represents the aggregate cost for federal income tax purposes.
(2) The reconciliation of the carrying amount of real estate owned is as
follows:
CARRYING VALUE:
<TABLE>
<S> <C>
Beginning balance ........................ $ --
Acquisition of hotel properties .......... 91,426,000
Subsequent costs capitalized ............. 2,789,841
-----------
Balance at December 31, 1999 ............. $94,215,841
===========
</TABLE>
F-60
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Management
Apple Suites Management, Inc.
We have audited the accompanying consolidated balance sheet of Apple
Suites Management, Inc. (the "Company") as of December 31, 1999, and the
related consolidated statements of operations and retained deficit and cash
flows for the period from March 11, 1999 (date of inception) through December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimate made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Apple Suites Management, Inc. at December 31, 1999, and the consolidated
results of its operations and its cash flows for the period from March 11, 1999
(date of inception) through December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Richmond, Virginia
February 28, 2000
F-61
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1999
------------------
<S> <C>
CURRENT ASSETS
Cash and cash equivalents .......................................................... $2,395,000
Net receivables .................................................................... 738,361
Inventories ........................................................................ 121,801
Other assets ....................................................................... 8,142
----------
Total current assets ............................................................. 3,263,304
Deferred franchise fees ............................................................. 562,851
----------
Total assets ........................................................................ $3,826,155
==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable ................................................................... $ 48,586
Rent payable to Apple Suites, Inc. ................................................. 2,123,136
Due to third party manager ......................................................... 454,147
Due to Apple Suites, Inc. .......................................................... 28,991
Accrued expenses ................................................................... 624,346
Current portion of long-term notes payable to Apple Suites, Inc. ................... 56,939
----------
Total current liabilities ........................................................ 3,336,145
Long-term notes payable to Apple Suites, Inc. ....................................... 631,014
----------
Total liabilities ................................................................... 3,967,159
SHAREHOLDERS' DEFICIT
Common stock, no par value, 5,000 authorized; 10 shares issued and outstanding ..... 100
Retained deficit ................................................................... (141,104)
----------
Total shareholders' deficit ...................................................... (141,004)
----------
Total Liabilities and Shareholders' Deficit ...................................... $3,826,155
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-62
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED DEFICIT
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 11, 1999
THROUGH
DECEMBER 31, 1999(A)
<S> <C>
REVENUE
Suite revenue ................................. $5,335,925
Other revenue and interest income ............. 335,150
----------
Total revenue ............................... 5,671,075
EXPENSES
Rent expense--Apple Suites, Inc. .............. 2,518,031
Operating expense ............................. 1,656,540
General and administrative .................... 494,377
Advertising and promotion ..................... 472,787
Utilities ..................................... 199,907
Franchise fees ................................ 213,437
Management fees ............................... 226,136
Other ......................................... 30,964
----------
Total expenses .............................. 5,812,179
Loss before income taxes ...................... (141,104)
Income tax benefit ............................ --
----------
Net loss .................................... $ (141,104)
Retained deficit, beginning of period ......... --
----------
Retained deficit, end of period ............... $ (141,104)
==========
</TABLE>
(a) The Lessee commenced operations on September 1, 1999.
See accompanying notes to consolidated financial statements.
F-63
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 11, 1999
THROUGH
DECEMBER 31, 1999(A)
---------------------
<S> <C>
ASH FLOW FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (141,104)
Adjustment to reconcile net loss to net cash provided by operating activities
Amortization of deferred franchise fees .................................... 5,049
Changes in operating assets and liabilities:
Receivables ................................................................ (738,361)
Other assets ............................................................... (8,142)
Due to Apple Suites, Inc. .................................................. 28,991
Rent payable to Apple Suites, Inc. ......................................... 2,123,136
Accounts payable ........................................................... 48,586
Due to third party manager ................................................. 454,147
Accrued expenses ........................................................... 624,346
----------
Net cash provided by operating activities ................................ 2,396,648
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments of notes payable ................................................ (1,748)
Proceeds from sale of common stock ......................................... 100
----------
Net cash used in financing activities .................................... (1,648)
Increase in cash and cash equivalents .................................... 2,395,000
Cash and cash equivalents, beginning of period ............................. --
----------
Cash and cash equivalents, end of period ................................... $2,395,000
==========
SUPPLEMENTAL CASH FLOW INFORMATION:
NON-CASH TRANSACTIONS:
Notes payables-issued by Apple Suites, Inc. ................................. $ 689,701
Payment of deferred franchise fees .......................................... $ 567,900
Acquisition of inventory .................................................... $ 121,801
</TABLE>
(a) The Lessee commenced operations on September 1, 1999.
See accompanying notes to consolidated financial statements.
F-64
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Apple Suites Management, Inc. (together with its
subsidiaries, the "Lessee") was formed on March 11, 1999 and is owned 100% by
Glade M. Knight. Mr. Knight also serves as the Chairman and CEO of Apple
Suites, Inc. (the "Company"). The Lessee commenced operations effective
September 1, 1999 with the acquisition of 4 extended-stay hotels by the
Company.
The Lessee operates in one business segment. Each hotel is leased by the
Company to the Lessee under a master hotel lease agreement ("Percentage Lease")
having an initial term of ten years, subject to earlier termination at the
option of the Company upon 30 day notice. The lease agreement provides for two
optional five year extensions. The Percentage Leases require base rent payments
to be made to the Company on a monthly basis and additional quarterly payments
to be made based upon percentages of suite and sundry revenue. Promus Hotels,
Inc. or an affiliate ("Promus") manages the hotels under a management agreement
with the Lessee. Promus Hotels, Inc. is a wholly-owned subsidiary of Hilton
Hotel Corporation ("Hilton"). The hotels are located throughout the United
States and are licensed with Homewood Suites(Reg. TM) by Hilton.
The accompanying financial statements include the accounts of the Lessee and
its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
Cash and Cash Equivalents -- cash equivalents include highly liquid
investments with original maturities of three months or less. the fair market
value of cash and cash equivalents approximate their carrying value.
Inventories -- Inventories, consisting primarily of food and beverages and
hotel supplies are stated at the lower of cost or market, with cost determined
on a method that approximates the first-in, first-out basis.
Revenue Recognition -- Revenue is recognized as earned, which is generally
defined as the date upon which a guest occupies a room or utilizes the hotel's
services.
Other Revenue -- Other revenue consists of revenues derived from hotel
services such as telephone, TV, valet and vending machines. These sundry
revenues are recognized in the period the related services are provided.
Advertising and Promotion Costs -- Advertising and promotion costs are
expensed when incurred. Advertising and promotion costs represent the expense
for franchise advertising and reservation systems under the terms of the hotel
franchise agreements and general and administrative expenses that are directly
attributable to advertising and promotion.
Deferred Franchise Fees -- deferred franchise fees represent the costs
incurred in connection with entering into hotel license agreements, which have
a term of 20 years. deferred franchise fees are being amortized over the term
of the hotel license agreements.
F-65
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(CONTINUED)
Rent Expense -- Rent expense is recognized as incurred by the Company
under the Percentage Leases commencing on the date the lease is executed.
Percentage rent is accrued prior to the Lessee achieving the baseline revenue
that triggers the percentage rental expense when achievement of the baseline
revenue is considered probable. Baseline revenue amounts are determined on a
quarterly basis for each hotel.
Income Taxes -- The Lessee provides for income taxes under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for
Income Taxes". SFAS No. 109 requires an asset and liability based approach in
accounting for income taxes.
Comprehensive Income -- The Company does not currently have any items of
comprehensive income requiring separate reporting and disclosure.
Use of Estimates -- The preparation of financial statements in accordance
with accounting principles generally accepted in the United States requires
management to make certain estimates and assumptions that affect amounts
reported in the financial statements and accompanying notes. Actual results may
differ from those estimates.
Seasonality -- The hotel industry is seasonal in nature. Seasonal
variations in revenues at the hotels under lease may cause quarterly
fluctuations in the Company's revenues. Revenues for 1999 primarily consist of
fourth quarter revenues which may not be indicative of a full year.
NOTE 2 -- PERCENTAGE LEASES
The Percentage Leases expire in 2009, subject to earlier termination by
the Company upon 30 day notice. The Percentage Leases provide for two optional
five-year extensions. The rent due for each hotel is the sum of a base rent and
a percentage rent. Percentage rent is calculated on a quarterly basis by
multiplying fixed percentages by the total amounts of year-to-date suite
revenues with reference to specified threshold amounts, known as breakpoints.
Both the base rent and the breakpoints used in computing percentage rents are
subject to annual adjustments based on increases in the Consumer Price Index
("CPI").
The Lessee's future commitments to the Company for base rent in effect at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---------------- --------------
<S> <C>
2000 $ 6,583,400
2001 6,583,400
2002 6,583,400
2003 6,583,400
2004 6,583,400
Thereafter 31,564,507
$64,481,507
</TABLE>
F-66
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- PERCENTAGE LEASES - (CONTINUED)
Base rent is payable to the Company in arrears and percentage rent is
payable 15 days following a quarter-end. The Lessee incurred rent expense of
$2,518,031 for the year ended December 31, 1999 and had rent payable of
$2,123,136 at December 31, 1999.
NOTE 3 -- COMMITMENTS AND RELATED PARTY TRANSACTIONS
On September 17, 1999, the Lessee entered into various debt agreements
with the Company. The Lessee borrowed from the Company $567,900 for franchise
fees and $121,800 for hotel supplies. The promissory notes relating to these
debt agreements bear interest at a rate of 9% per annum. Principal and interest
payments are due monthly. The Lessee incurred interest expense of $10,915
related to the promissory notes and $7,557 was payable at December 31, 1999.
The aggregate maturities of principal for promissory notes subsequent to
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
----------------------- -----------
<S> <C>
2000 $ 56,939
2001 62,612
2002 68,485
2003 74,909
2004 79,687
Thereafter 345,321
$687,953
</TABLE>
The Lessee has entered into license agreements with Promus to operate the
hotels as Homewood Suites(Reg. TM) by Hilton properties. These agreements have
terms of 20 years and expire in 2019. These agreements require the Lessee to,
among other things, pay monthly franchise fees equal to 4% of suite revenue.
License and franchise agreements contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the hotels
which are established by Promus to maintain uniformity in the system for
Homewood Suites(Reg. TM) by Hilton. Such standards generally regulate the
appearance of the hotel, quality and type of goods and services offered,
signage, and protection of marks. Compliance with such standards may from time
to time require significant expenditures for capital improvements which will be
borne by the Company. In addition, the agreements provide that Promus will
manage the daily operations of the hotels and provide advertising and promotion
to include access to the reservation system for Homewood Suites(Reg. TM) by
Hilton. The Lessee pays Promus 4% of monthly suite revenue for each of these
functions, respectively. Total expenses incurred by the Lessee for franchise
fees, advertising and promotion fees, and management fees totaled $653,010.
NOTE 4 -- SHAREHOLDER'S EQUITY
The Lessee requires or may require funds to capitalize its business to
satisfy its obligations under Percentage Leases with the Company, dated
September 17, 1999. To
F-67
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 -- SHAREHOLDER'S EQUITY - (CONTINUED)
meet these objectives, the Lessee has two funding commitment agreements
(together "Payor") of $1 million each from Mr. Knight and Apple Suites Realty
Group, Inc., ("ASRG"), respectively. ASRG is owned by Mr. Knight. The funding
commitments are contractual obligations of the Payor to provide funds to the
Lessee. Funds paid to the Lessee under the commitments are to be used to
satisfy any capitalization or net worth requirements applicable to the Lessee
or the Lessee's payment obligations under the lease agreements and does not
represent any indebtedness. The funding commitments terminate upon the
expiration of the Percentage Leases, written agreement between the Payor and
the Lessee, or repayment of all amounts to the Payor. As of December 31, 1999,
no contributions have been made by the Payor to the Lessee.
NOTE 5 -- INCOME TAXES
The Lessee is subject to federal and state income taxes. The Lessee
incurred a loss during the period and as such has no income tax liability at
December 31, 1999. No deferred income tax asset has been recorded in the
consolidated balance sheet since realization is uncertain. At December 31,
1999, the Lessee has $110,000 of net operating loss carryforwards which expire
in 2020.
NOTE 6 -- CREDIT RISK
The Lessee maintains cash on deposit with Promus in a pooled investment
account that potentially subjects the Lessee to a concentration of credit risk.
At December 31, 1999 the Lessee has $1,107,399 on deposit with Promus.
F-68
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statement of
Operations of Apple Suites, Inc. (the "Company") are presented as if the
acquisition and leasing of the eleven extended-stay hotels by the Company had
occurred at the beginning of the period presented. The seller was Promus
Hotels, Inc., or an affiliate. Promus Hotels, Inc. is a wholly-owned subsidiary
of Hilton Hotel Corporation ("Hilton"). The hotels have been leased to Apple
Suites Management, Inc. or its subsidiary (the "Lessee") pursuant to master
hotel lease agreements. Such pro forma information is based in part upon the
Consolidated Statement of Operations of the Company, the Pro Forma Statement of
Operations of the Lessee and the historical Statements of Operations of the
acquired hotels. In management's opinion, all adjustments necessary to reflect
the effects of these transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Statement of
Operations for the period presented are not necessarily indicative of what
actual results of operations of the Company would have been assuming such
transactions had been completed as of the beginning of the period presented,
nor does it purport to represent the results of operations for future periods.
The master hotel lease agreements between the Company and the Lessee were based
on economic conditions existing at the time of acquisition. Application of
these agreements to periods prior to the acquisition may not be meaningful. The
most significant assumption which may not be indicative of future operations is
the amount of financial leverage employed. This Pro Forma Statement assume 75%
of the purchase price was funded with debt for the entire period presented. The
Company intends to repay this debt with the proceeds from its "best efforts"
offering. This repayment of debt would result in lower interest expense, higher
net income, but lower earnings per share.
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------
HOMEWOOD
HISTORICAL SUITES
STATEMENT OF ACQUISITION
OPERATIONS (A I)
-------------- --------------------
<S> <C> <C>
Revenue:
Percentage lease revenue ............ $ 2,518,031 $ 4,510,834 (B)
Interest income and other income..... 169,086 --
Expenses:
Taxes and insurance ................. 426,592 822,599 (C)
General and administrative .......... 153,807 82,649 (D)
Depreciation ........................ 496,209 656,623 (E)
Interest expense .................... 1,245,044 1,977,313 (F)
----------- --------------
Total expenses ....................... 2,321,652 3,539,184
----------- --------------
Net income ........................... $ 365,465 $ 971,650
=========== ==============
Earnings per common share:
Basic and diluted .................... $ 0.14
===========
Basic and diluted weighted average
common shares outstanding ........... 2,648,196 -- (G)
===========
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------------------------------------
HOMEWOOD HOMEWOOD
SUITES SUITES
ACQUISTION ACQUISITION TOTAL
(A II) (A III) PRO FORMA
-------------------- -------------------- ----------------
<S> <C> <C> <C>
Revenue:
Percentage lease revenue ............ $ 5,932,615 (B) 1,140,560 (B) $ 14,102,040
Interest income and other income..... -- -- 169,086
Expenses:
Taxes and insurance ................. 647,225 (C) 93,884 (C) 1,990,300
General and administrative .......... 86,636 (D) 65,659 (D) 388,751
Depreciation ........................ 821,580 (E) 140,664 (E) 2,115,076
Interest expense .................... 2,353,863 (F) 372,683 (F) 5,948,903
-------------- ------------- ------------
Total expenses ....................... 3,909,304 672,890 10,443,030
-------------- ------------- ------------
Net income ........................... $ 2,023,311 $ 467,670 $ 3,828,096
============== ============= ============
Earnings per common share:
Basic and diluted .................... $ 1.31
============
Basic and diluted weighted average
common shares outstanding ........... 99,283 (G) 176,360 (G) 2,923,839
============
</TABLE>
F-69
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents results of operations for the eleven hotels acquired on a pro
forma basis as if the eleven hotels were owned by the Company at the
beginning of the period presented.
<TABLE>
<CAPTION>
DATE COMMENCED DATE
PROPERTY OPERATION ACQUIRED
----------------------------------------------------------------- ---------------- ------------------
<S> <C> <C>
I Homewood Suites -- Dallas, TX ................................ 1990 September 1, 1999
I Homewood Suites -- Las Colinas, TX ........................... 1990 September 1, 1999
I Homewood Suites -- Plano, TX ................................. 1997 September 1, 1999
I Homewood Suites -- Richmond. VA .............................. May 1998 September 1, 1999
I Homewood Suites -- Atlanta, GA ............................... 1990 October 1, 1999
---------------------------------------------------------------------------------------------------------
II Homewood Suites -- Clearwater, FL ........................... February 1998 November 24, 1999
II Homewood Suites -- Salt Lake, UT ............................ 1996 November 24, 1999
II Homewood Suites -- Atlanta, GA .............................. 1990 November 24, 1999
II Homewood Suites -- Detroit, MI .............................. 1990 November 24, 1999
II Homewood Suites -- Baltimore, MD ............................ March 1998 November 24, 1999
---------------------------------------------------------------------------------------------------------
III Homewood Suites -- Jackson, MS .............................. February 1997 December 22, 1999
</TABLE>
(B) Represents lease payment from the Lessee to the Company calculated on a pro
foma basis by applying the rent provisions in the master hotel lease
agreements to the historical room revenue of the hotels as if the beginning
of the period was the beginning of the lease year. The base rent and the
percentage rent will be calculated and paid based on the terms of the lease
agreement. Refer to the discussion of the master hotel lease agreement for
details.
(C) Represents historical real estate and personal property taxes and insurance
which will be paid by the Company pursuant to the master hotel lease
agreements. Such amounts are the historical amounts paid by the respective
hotels.
(D) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company and anticipated legal and accounting fees, employee costs, salaries
and other costs of operating as a public company.
(E) Represents the depreciation on the eleven hotels acquired based on the
purchase price, excluding amounts allocated to land, of $37,450,320 for the
first acquisition, $41,085,600 for the second acquisition, and $5,485,886
for the third acquisition, for the period of time not owned by the Company.
The average life of the depreciable assets was 39 years. The estimated
useful lives are based on management's knowledge of the properties and the
hotel industry in general.
(F) Represents the interest expense for the eleven hotel acquisitions for the
period in which the hotels were not owned, interest was computed using the
interest rates of 8.5% on mortgage debt of $33,975,000 for the first
acquisition, $30,210,000 for the second acquisition and $4,384,500 for the
third acquisition that was incurred at acquisition.
(G) Represents additional common shares assuming the properties were acquired
at the beginning of the period presented with the net proceeds from the
"best efforts" offering of $9 per share (net $8.06 per share) for the first
$15,000,000 and $10 per share (net $8.95 per share) for the remainder.
F-70
<PAGE>
APPLE SUITES MANAGEMENT, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statement of
Operations of Apple Suites Management, Inc. (the "Lessee") are presented as if
the leasing of the eleven extended-stay hotels from Apple Suites, Inc. (the
"Company") to the Lessee or its subsidiary had occurred at the beginning of the
period presented. The Company purchased the hotels from Promus Hotels, Inc., or
an affiliate. Promus Hotels, Inc. is a wholly-owned subsidiary of Hilton Hotel
Corporation ("Hilton"). The hotels have been leased to the Lessee or its
subsidiary pursuant to master hotel lease agreements. Further, the results of
operations reflect the hotel management agreements and hotel license agreements
between Promus and the Lessee or its subsidiary. The master hotel lease
agreements were based on economic conditions existing at the time of
acquisition. Application of these agreements to periods prior to the
acquisition may not be meaningful. Such pro forma information is based in part
upon the Consolidated Statement of Operations of the Lessee and the hotels and
should be read in conjunction with the financials statement contained herein.
In management's opinion, all adjustments necessary to reflect the effects of
these transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Statement of
Operations for the period are not necessarily indicative of what the actual
results of operations of the Lessee would have been assuming such transactions
had been completed as of the beginning of the period presented, nor does it
purport to represent the results of operations for the future periods.
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
HOMEWOOD HOMEWOOD
HISTORICAL SUITES SUITES
STATEMENT OF ACQUISITIONS ACQUISTIONS
OPERATIONS (A I) (A II)
-------------- -------------- -----------------
<S> <C> <C> <C>
REVENUES:
Suite revenue ................. $5,335,925 $9,818,797 $12,082,374
Other income .................. 335,150 560,096 709,240
EXPENSES:
Operating expenses ............ 1,656,540 3,794,204 4,870,096
General and administrative..... 494,377 250,317 300,399
Advertising and promotion...... 472,787 438,985 580,564
Utilities ..................... 199,907 354,113 551,359
Taxes and insurance ........... -- 822,599 647,225
Depreciation expense .......... -- 1,783,021 2,217,128
Franchise fees ................ 213,437 392,757 483,295
Management fees ............... 226,136 311,275 383,599
1,130,796 (K)
Rent expense--Apple Suites,
Inc. ........................ 2,518,031 -- --
Other ......................... 30,964 -- --
---------- ---------- -----------
Total expenses ................. 5,812,179 8,147,271 10,033,665
Income before income tax ....... (141,104) 2,231,622 2,757,949
Income tax expense ............. -- -- --
---------- ---------- -----------
Net income .................... $ (141,104) $2,231,622 $ 2,757,949
========== ========== ===========
<CAPTION>
HOMEWOOD
SUITES
ACQUISITION PRO FORMA TOTAL
(A III) ADJUSTMENTS PRO FORMA
------------- ----------------------- --------------
<S> <C> <C> <C>
REVENUES:
Suite revenue ................. $2,230,952 -- $29,468,048
Other income .................. 168,438 -- 1,772,924
EXPENSES:
Operating expenses ............ 954,102 -- 11,274,942
General and administrative..... 77,381 $ (107,000)(B) 1,034,510
19,036 (C)
Advertising and promotion...... 112,902 (965,290) (D) 1,605,233
965,285 (E)
Utilities ..................... 75,639 -- 1,181,018
Taxes and insurance ........... 93,884 (1,563,708) (F) --
Depreciation expense .......... 426,986 (4,427,135) (G) --
Franchise fees ................ 89,238 (965,290) (H) 1,178,722
965,285 (I)
Management fees ............... 71,982 (766,856) (J) 1,356,932
Rent expense--Apple Suites,
Inc. ........................ -- 11,584,009 (L) 14,102,040
Other ......................... -- -- 30,964
---------- ---------------- -----------
Total expenses ................. 1,902,114 5,869,132 31,764,361
Income before income tax ....... 497,276 (5,869,132) (523,389)
Income tax expense ............. -- -- --
---------- ---------------- -----------
Net income .................... $ 497,276 $ (5,869,132) $ (523,389)
========== ================ ===========
</TABLE>
F-71
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(A) Represents results of operations for the eleven Homewood Suites hotel
acquisitions on a pro forma basis as if the hotels acquired were leased and
operated by the Lessee at the beginning of the period presented, see below.
The hotels acquired are as follows:
<TABLE>
<CAPTION>
DATE COMMENCED DATE
PROPERTY OPERATION ACQUIRED
-------------------------------------------------------------------------- ---------------- ------------------
<S> <C> <C>
I Homewood Suites -- Dallas, TX ......................................... 1990 September 1, 1999
I Homewood Suites -- Las Colinas, TX .................................... 1990 September 1, 1999
I Homewood Suites -- Plano, TX .......................................... 1997 September 1, 1999
I Homewood Suites -- Richmond. VA ....................................... May 1998 September 1, 1999
I Homewood Suites -- Atlanta, GA ........................................ 1990 October 1, 1999
------------------------------------------------------------------------------------------------------------------
II Homewood Suites -- Clearwater, FL .................................... February 1998 November 24, 1999
II Homewood Suites -- Salt Lake, UT ..................................... 1996 November 24, 1999
II Homewood Suites -- Atlanta, GA ....................................... 1990 November 24, 1999
II Homewood Suites -- Detroit, MI ....................................... 1990 November 24, 1999
II Homewood Suites -- Baltimore, MD ..................................... March 1998 November 24, 1999
------------------------------------------------------------------------------------------------------------------
III Homewood Suites -- Jackson, MS February .............................. 1997 December 22, 1999
</TABLE>
(B) Represents the elimination of the historical accounting fee allocated to
the hotels by the prior owner.
(C) Represents the addition of the anticipated legal and accounting and other
expenses to operate as a stand alone company.
(D) Represents the elimination of the historical advertising, training and
reservation fee allocated to the hotels by the prior owner.
(E) Represents the addition of the marketing fee to be incurred under the new
license agreements. The marketing fee is calculated based on the terms of
the license agreements which is 4% of suite revenue.
(F) Represents the elimination of the taxes and insurance. Under the terms of
the lease these expenses will be incurred by the Company and, accordingly,
are reflected in the Company's Pro Forma Condensed Consolidated Statement
of Operations.
(G) Represents the elimination of the depreciation expense. This expense will
be reflected in the Company's Pro Forma Condensed Consolidated Statement of
Operations.
(H) Represents the elimination of the historical franchise fee allocated to the
hotels by the prior owner.
(I) Represents the addition of franchise fees to be incurred under the new
license agreements. The franchise fees are calculated based on the terms of
the agreement , which is 4% of suite revenue.
(J) Represents the elimination of the historical management fees for the year
ended December 31, 1999.
(K) Represents the addition of the management fees of 4% of gross revenue and
the accounting fee $1,000 per hotel per month to be incurred under the new
management agreements for the period presented.
(L) Represents lease payments from the Lessee to the Company calculated on a
pro forma basis by applying the rent provisions in the master hotel lease
agreements to the historical room revenue of the hotels as if the beginning
of the period was the beginning of the lease year. The base rent and the
percentage rent will be calculated and paid based on the terms of the lease
agreement. Refer to the discussion of the master hotel lease agreements for
details.
F-72
<PAGE>
SUPPLEMENT NO. 6 DATED MAY 31, 2000
TO PROSPECTUS DATED AUGUST 3, 1999
APPLE SUITES, INC.
The following information supplements the prospectus of Apple Suites, Inc.
dated August 3, 1999 and is part of the prospectus. THIS SUPPLEMENT NO. 6
RELATES TO MATTERS THAT HAVE CHANGED OR OCCURRED SINCE MARCH 21, 2000. OTHER
IMPORTANT MATTERS WERE DISCUSSED IN SUPPLEMENT NO. 5, WHICH INCORPORATED AND
REPLACED ALL PRIOR SUPPLEMENTS. THIS SUPPLEMENT DOES NOT INCORPORATE OR REPLACE
ANY PRIOR SUPPLEMENT.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE PROSPECTUS, SUPPLEMENT
NO. 5 AND THIS SUPPLEMENT.
TABLE OF CONTENTS FOR SUPPLEMENT NO. 6
<TABLE>
<S> <C>
Status of the Offering ................................................... S-2
Recent Developments ...................................................... S-2
Our Properties ........................................................... S-3
Property Acquisition ..................................................... S-4
Overview ................................................................ S-4
Hotel Supplies and Franchise Fees ....................................... S-4
Description of Financing ................................................ S-5
Summary of Material Contracts ............................................ S-7
Description of Property .................................................. S-10
Index to Management's Discussion and Analysis and to Financial Statements F-1
</TABLE>
The prospectus and the supplements contain forward-looking statements
within the meaning of the federal securities laws which are intended to be
covered by the safe harbors created by those laws. These statements include our
plans and objectives for future operations, including plans and objectives
relating to future growth and availability of funds. These forward-looking
statements are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to these statements involve judgments with
respect to, among other things, the continuation of our offering of common
shares, our ability to repay or refinance our significant short-term debt,
future economic, competitive and market conditions and future business
decisions. All of these matters are difficult or impossible to predict
accurately and many of them are beyond our control. Although we believe the
assumptions underlying the forward-looking statements, and the forward-looking
statements themselves, are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that these forward-looking
statements will prove to be accurate. In light of the significant uncertainties
inherent in these forward-looking statements, the inclusion of this information
should not be regarded as a representation by us or any other person that our
objectives and plans, which we consider to be reasonable, will be achieved.
S-1
<PAGE>
STATUS OF THE OFFERING
We completed the minimum offering of common shares at $9 per share on
August 23, 1999. We are continuing the offering at $10 per common share in
accordance with the prospectus.
As of May 19, 2000, we had closed on the following sales of our common
shares:
<TABLE>
<CAPTION>
PROCEEDS NET OF SELLING
PRICE PER NUMBER OF GROSS COMMISSIONS AND MARKETING
COMMON SHARE COMMON SHARES SOLD PROCEEDS EXPENSE ALLOWANCE
-------------- -------------------- -------------- --------------------------
<S> <C> <C> <C>
$ 9 1,666,666.67 $15,000,000 $13,500,000
$ 10 2,862,737.00 28,627,370 25,764,633
------------ ----------- -----------
TOTAL 4,529,403.67 $43,627,370 $39,264,633
============ =========== ===========
</TABLE>
We have used the net proceeds of our offering to acquire, by deed or
lease, a total of 12 extended-stay hotels. We hold these hotels directly or
through wholly-owned subsidiaries. For simplicity, we will refer to these
hotels as "our hotels." All of our hotels have franchises with Homewood
Suites(Reg. TM) by Hilton, which is a registered service mark of Hilton Hotels
Corporation.
RECENT DEVELOPMENTS
As discussed in detail below, we have approximately $80 million in notes
payable in connection with our hotels. Our goal is to pay these notes with the
proceeds from our offering of common shares. Based on the current rate at which
equity is being raised by the offering, we may need to seek other measures to
repay these loans. We are holding discussions with several lenders to obtain
financing for the hotels and are exploring both unsecured and secured financing
arrangements.
Although no firm financing commitments have been received, we believe,
based on discussions with lenders and other market indicators, that we can
obtain sufficient financing prior to the maturity of the notes, if necessary.
Obtaining refinancing is dependent upon a number of factors, including: (a)
continued operation of the hotels at or near current occupancy and room rate
levels, as the hotel leases are based in part on a percentage of hotel suite
income; (b) the general level of interest rates, including credit spreads for
real estate based lending; and (c) general economic conditions.
There is no assurance that we will obtain financing to repay our current
outstanding debt. If we are unable to obtain such financing and if our offering
proceeds are insufficient, we would be subject to a number of default remedies,
including possible loss of the hotels through foreclosure. Depending on the
terms of any financing we obtain and the progress of our offering, we may need
to modify our borrowing policy, as described in the prospectus, of holding our
properties on an all-cash basis over the long-term.
S-2
<PAGE>
OUR PROPERTIES
(Map of United States shows general location of hotels)
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
MONTH OF NAME TOTAL MONTH OF NAME TOTAL
PURCHASE OF HOTEL SUITES PURCHASE OF HOTEL SUITES
---------------- ------------------------------- -------- --------------- --------------------------- -------
<S> <C> <C> <C> <C> <C>
September 1999 Dallas - Addison 120 November 1999 Baltimore - BWI Airport 147
September 1999 Dallas - Irving/Las Colinas 136 November 1999 Clearwater 112
September 1999 North Dallas - Plano 99 November 1999 Detroit - Warren 76
September 1999 Richmond - West End 123 November 1999 Salt Lake City - Midvale 98
October 1999 Atlanta - Galleria/Cumberland 124 December 1999 Jackson - Ridgeland 91
November 1999 Atlanta - Peachtree 92 May 2000 Philadelphia/Great Valley 123
---
TOTAL FOR ALL HOTELS 1,341
=====
</TABLE>
S-3
<PAGE>
PROPERTY ACQUISITION
OVERVIEW
We acquired the Philadelphia/Great Valley hotel, an existing Homewood
Suites(Reg. TM) by Hilton hotel, when we purchased a long-term leasehold
interest in the hotel, which is substantially equivalent to acquiring
ownership. This leasehold interest was purchased through an assignment and
assumption of lease, dated as of May 8, 2000 with respect to a ground lease,
dated as of July 1, 1996. The total purchase price was $15,489,000. We used the
net proceeds from our offering of common shares to pay 25% of this total, or
$3,872,250, at closing in cash. The balance of 75%, or $11,616,750, is being
financed by the seller, Promus Hotels, Inc., as short-term or "bridge
financing." The financing and the ground lease are described in further detail
in other sections below.
We made this purchase through a newly organized subsidiary, Apple Suites
Pennsylvania Business Trust (a business trust organized under Pennsylvania
law), based on business and tax planning considerations. We are the sole
trustee and sole beneficiary of Apple Suites Pennsylvania Business Trust. The
Philadelphia/Great Valley hotel has been leased to Apple Suites Management,
Inc. under a master hotel lease agreement dated as of May 8, 2000.
We paid a real estate commission on this purchase to Apple Suites Realty
Group, Inc., as our real estate broker. This corporation is owned by Glade M.
Knight, who is our president and chief executive officer. The total amount of
the real estate commission was $309,780, which equals 2% of the total purchase
price.
HOTEL SUPPLIES AND FRANCHISE FEES
We have provided Apple Suites Management, Inc. with funds for the purchase
of certain hotel supplies (such as sheets, towels and so forth) for the
Philadelphia/Great Valley hotel. Apple Suites Management, Inc. is obligated to
repay us under a promissory note made in the principal amount of $12,300. This
promissory note provides for an annual interest rate of nine percent (9%),
which would increase to twelve percent (12%) if a default occurs, and repayment
in monthly installments. The first installment consists of interest only and
has a due date of June 1, 2000. The remaining installments consist of principal
and interest on an amortized basis. The maturity date is June 1, 2005.
We have also provided Apple Suites Management, Inc. with funds for the
payment of hotel franchise fees to Promus Hotels, Inc. Apple Suites Management,
Inc. is obligated to repay us under a promissory note made in the principal
amount of $55,350. This promissory note is substantially similar to the one
described above, but has a maturity date of June 1, 2010.
S-4
<PAGE>
DESCRIPTION OF FINANCING
As indicated above, Promus Hotels, Inc. is financing 75% of the purchase
price with respect to the Philadelphia/Great Valley hotel. This financing is
substantially similar to the financing provided by Promus Hotels, Inc. when we
purchased our other hotels. The amounts we owe to Promus Hotels, Inc. are
evidenced by the following promissory notes:
<TABLE>
<CAPTION>
ORIGINAL
MONTH OF PRINCIPAL ANNUAL RATE DATE OF
PROMISSORY NOTE AMOUNT OF INTEREST MATURITY
----------------------------- -------------- ------------- -----------------
<S> <C> <C> <C>
September 1999 ......... $26,625,000 8.5% October 1, 2000
October 1999 ........... $ 7,350,000 8.5% October 1, 2000
November 1999 .......... $30,210,000 8.5% December 1, 2000
December 1999 .......... $ 4,384,500 8.5% January 1, 2001
May 2000 ............... $11,616,750 8.5% April 28, 2001
-----------
TOTAL ..................... $80,186,250
===========
</TABLE>
We consider the financing from Promus Hotels, Inc. to be "bridge
financing" because of its short-term nature (that is, each promissory note
reaches maturity within approximately one year of its date of execution). The
promissory notes have several provisions in common, which include the
following:
o monthly interest payments, based on the actual number of days per
month
o our delivery of monthly notices to specify the net equity proceeds
from our offering, which will be the intended source of principal
payments, as explained below
o our right to prepay the notes, in whole or in part, without premium or
penalty
o a late payment premium of four percent for any payment not made within
10 days of its due date
Revenue from the hotels will be used to pay interest under the promissory
notes we have made to Promus Hotels, Inc. This revenue will include lease
payments made to us by Apple Suites Management, Inc. (or a subsidiary) under
the master hotel lease agreements.
The promissory notes contemplate that the "net equity proceeds" from our
offering of common shares will be the source of our principal payments. As
discussed above, however, we may need to seek alternate financing if the net
equity proceeds are not sufficient for this purpose. The phrase "net equity
proceeds" means the total proceeds from our offering of common shares, as
reduced by selling commissions, a marketing expense allowance, closing costs,
various fees and charges (legal, accounting, and so forth), a working capital
reserve and a reserve for renovations, repairs and replacements of capital
improvements.
Under a letter agreement dated May 8, 2000, we are permitted to use such
net equity proceeds to pay 25% of the purchase price for the leasehold interest
in the Philadelphia/Great Valley hotel. Otherwise, to the extent that we have
such net equity proceeds, we generally are obligated to make monthly principal
payments under the promissory notes listed above.
S-5
<PAGE>
We have made all scheduled interest payments under the promissory notes.
The aggregate amount of our interest payments through May 2000 is $2,948,444.
To date, we have not made any principal payments under any of the
promissory notes. There can be no assurance that the net equity proceeds from
our offering of common shares will be sufficient to enable us to make all
principal payments under the promissory notes when due. The following amounts
would be due on the maturity dates of the promissory notes, assuming that
interest payments continue to be made on schedule and that no payments of
principal are made before those maturity dates:
<TABLE>
<CAPTION>
MONTH OF DATE OF TOTAL DUE
PROMISSORY NOTE MATURITY AT MATURITY
----------------------------- ------------------ --------------
<S> <C> <C>
September 1999 ......... October 1, 2000 $26,811,010
October 1999 ........... October 1, 2000 $ 7,401,349
November 1999 .......... December 1, 2000 $30,421,056
December 1999 .......... January 1, 2001 $ 4,415,131
May 2000 ............... April 28, 2001 $11,697,908
-----------
TOTAL $80,746,454
===========
</TABLE>
In the event of a default under the promissory notes, various remedies are
available to Promus Hotels, Inc. under certain deeds of trust, which are
described below.
[Remainder of Page Intentionally Left Blank]
S-6
<PAGE>
SUMMARY OF MATERIAL CONTRACTS
DEEDS OF TRUST AND RELATED DOCUMENTS
Each of our hotels, including the Philadelphia/Great Valley hotel, is
encumbered. In general, the encumbrances consist of a mortgage on the hotel
building and its underlying real property, a security interest in any personal
property and an assignment of hotel rents and revenues, all in favor of Promus
Hotels, Inc. (As described above, Promus Hotels, Inc. provided financing for
our hotel purchases).
These encumbrances are created by substantially similar documents having a
variety of names, many of which depend on state law. For simplicity, we will
refer to each of these documents as a "deed of trust." At each closing on a
purchase with respect to a hotel or group of hotels, we further encumbered our
other hotels with additional deeds of trust or with negative pledges. These
additional encumbrances are designed to provide additional security for the
earlier promissory notes.
Each deed of trust corresponds to one of the promissory notes we made to
Promus Hotels, Inc., and secures the payment of principal and interest under
that promissory note. The encumbrance created by a particular deed of trust
will terminate when its corresponding promissory note is paid in full. Other
encumbrances created by additional deeds of trust or by negative pledges will
remain in effect until the promissory notes to which they correspond are also
paid in full.
We are subject to various requirements under the deeds of trust. For
instance, we must maintain adequate insurance on the hotels and we must not
grant any further encumbrances, or make any further assignments of rents or
leases, with respect to the hotels.
Each deed of trust contains a substantially similar definition of events
of default. In each case, the events of default include (without limitation)
any default that occurs under any of the promissory notes or under another deed
of trust, and any sale of the secured property without the prior consent of
Promus Hotels, Inc. Upon any event of default, various remedies are available
to Promus Hotels, Inc. Those remedies include, for example (a) declaring the
entire principal balance under the promissory notes, and all accrued and unpaid
interest, to be due and payable immediately; (b) taking possession of the
secured property, including the hotels; and (c) collecting hotel rents and
revenues, or foreclosing on the hotels, to satisfy unpaid amounts under the
promissory notes. Each deed of trust requires us to pay any costs that may be
incurred in exercising such remedies.
Negative pledges apply to the three hotels in Florida, Maryland and
Virginia. The negative pledges prohibit any transfer or further encumbrance of
the hotels, in whole or in part, without the prior written consent of Promus
Hotels, Inc. The negative pledges will terminate when our promissory notes to
Promus Hotels, Inc. are paid in full.
GROUND LEASE
The Philadelphia/Great Valley hotel is subject to a ground lease dated as
of July 1, 1996. We caused Apple Suites Pennsylvania Business Trust, in our
capacity as its sole trustee and sole beneficiary, to become the tenant under
the ground lease. This result
S-7
<PAGE>
was achieved through an assignment and assumption of lease dated as of May 8,
2000. For purposes of applicable state law, the long-term leasehold interest is
substantially equivalent to ownership and we expect to be treated as the owner
of the hotel building. We intend to take depreciation deductions with respect
to the hotel building for federal income tax purposes.
The ground lease applies to the hotel building, as well as the underlying
real property. The ground lease has an initial term of 30 years. The tenant has
the option to extend the ground lease for three additional periods of 10 years
each. When the ground lease expires, or is terminated in accordance with its
terms, the tenancy for the land terminates and the building and other
improvements become the property of the landlord. Therefore, unless we purchase
the landlord's interest, we will not own the hotel past the term of the ground
lease.
The ground lease provides for annual rent, payable by the tenant in
advance in monthly installments. The annual rent is $100,000 for each of the
first five years (that is, until August 1, 2000). Every five years, the annual
rent will be adjusted in proportion to the Consumer Price Index for the
metropolitan Philadelphia area, but will not be less than $100,000 for any
year.
The tenant has certain obligations under the ground lease. For example,
the tenant must operate the premises in accordance with applicable law and must
maintain general public liability insurance on the premises. For a default that
involves the tenant's failure to provide insurance and that continues for 10
days after written notice to the tenant, the landlord may arrange for
substitute insurance at the tenant's expense. Furthermore, because a hotel has
been constructed on the premises, the permitted uses of the premises during the
first 10 years under the ground lease are limited to hotel and related uses.
Under the ground lease, the tenant has 30 days after written notice to
cure any payment default under the ground lease, and 60 days after written
notice to cure any other default. If the default cannot be cured in 60 days,
the cure period will be extended if the tenant promptly begins to cure the
default and diligently continues to do so. In general, if a default occurs and
is not cured within the appropriate time period, the landlord's remedies
include terminating the ground lease and requiring the tenant to vacate the
premises. If the landlord terminates the ground lease following any uncured
default, we will remain obligated to pay the full amount of the remaining
purchase price to Promus Hotels, Inc. under the promissory note dated as of May
8, 2000, even though we will not be receiving further revenues with respect to
the hotel.
If the landlord wishes to sell the premises and the tenant is not in
default, the landlord must notify the tenant in writing and grant it the first
option to purchase the premises. If this option is declined, the landlord may
sell the premises within six months, but the terms and conditions of the sale
cannot be materially more favorable to the buyer than those offered to the
tenant.
MASTER HOTEL LEASE AGREEMENT
We have caused the tenant under the ground lease to further lease the
Philadelphia/Great Valley hotel to Apple Suites Management, Inc. pursuant to a
master
S-8
<PAGE>
hotel lease agreement dated as of May 8, 2000. This agreement is substantially
similar to the master hotel lease agreements, dated as of September 20, 1999,
that apply to our other hotels.
The agreement provides for an initial term of 10 years. Apple Suites
Management, Inc. has the option to extend the lease term for two additional
five-year periods, provided it is not in default at the end of the prior term
or at the time the option is exercised. The master hotel lease agreement
provides that Apple Suites Management, Inc. will pay an annual base rent, a
quarterly percentage rent and a quarterly sundry rent. Each type of rent is
explained below.
Annual base rent is payable in advance in equal monthly installments.
Beginning in 2001, the base rent will be adjusted each year in proportion to
the Consumer Price Index (based on the U.S. City Average). The annual base rent
for the Philadelphia/Great Valley hotel is currently $942,375.
Percentage rent is payable quarterly. Percentage rent depends on a formula
that compares fixed "suite revenue breakpoints" with a portion of "suite
revenue," which is equal to gross revenue from suite rentals less sales and
room taxes, credit card fees and sundry rent (as described below). Beginning in
2001, the suite revenue breakpoints will be adjusted each year in proportion to
the Consumer Price Index (based on the U.S. City Average). The suite revenue
breakpoints for the second, third and fourth quarters of 2000 are $196,669,
$529,219 and $861,769, respectively. Suite revenue breakpoints (before
adjustment) have been determined for the first quarter of the remaining years
during the initial term of the master hotel lease agreement. The suite revenue
breakpoints for subsequent quarters are determined by multiplying the first
quarter values by two, three or four, respectively. The following table shows
the other suite revenue breakpoints for the first quarter for 2001 through
2009, before any adjustment due to the Consumer Price Index:
SUITE REVENUE BREAKPOINTS FOR THE FIRST QUARTER
<TABLE>
<CAPTION>
2001 2002 2003 2004 2005 2006 2007 2008 2009
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$300,219 $309,456 $323,313 $332,550 $341,700 $351,025 $360,263 $369,500 $378,738
</TABLE>
Specifically, the percentage rent is equal to the sum of (a) 17% of all
year-to-date suite revenue, up to the applicable suite revenue breakpoint; plus
(b) 55% of the year-to-date suite revenue in excess of the applicable suite
revenue breakpoint, as reduced by base rent and the percentage rent paid year
to date.
The sundry rent is payable quarterly and equals 55% of all sundry revenue,
which consists of revenue other than suite revenue, less the amount of sundry
rent paid year-to-date.
OTHER AGREEMENTS
The Philadelphia/Great Valley hotel is subject to a license agreement and
a management agreement with Promus Hotels, Inc. We have entered into an
environmental indemnity agreement with Promus Hotels, Inc., as well as a
comfort letter agreement regarding the lease with Apple Suites Management, Inc.
and certain other issues. These agreements are substantially similar to
agreements that exist with respect to our other hotels.
S-9
<PAGE>
DESCRIPTION OF PROPERTY
OVERVIEW
Each of our hotels is an extended-stay hotel, and is licensed to operate
under a franchise with Homewood Suites(Reg. TM) by Hilton. We believe that the
majority of the guests at our hotels during the past 12 months have been
business travelers. We expect this pattern to continue.
Each suite consists of a bedroom and a living room, with an adjacent
kitchen area. The basic suite is known as a "Homewood Suite," which generally
has one double or king-size bed. Larger suites, known as "Master Suites" or
"Extended Double Suites" are also available. These suites have larger rooms,
with either one king-size bed or two smaller beds. The largest suites contain
two separate bedrooms. Wheelchair-accessible suites are available at each
hotel.
The suites have many features and amenities in common. Most suites have
ceiling fans and two color televisions (one in the bedroom and one in the
living room). Some suites have fireplaces. Typical living room furniture
includes a sofa (often a fold-out sleeper sofa), coffee table and work/dining
table with chairs. Some living rooms contain a recliner and a videocassette
player. The kitchens vary, but generally have a microwave, refrigerator,
dishwasher, coffee maker and stove, together with basic cookware and utensils.
The hotel are marketed, in part, through the web site for Homewood
Suites(Reg. TM) by Hilton (http://www.homewood-suites.com), which is generally
available 24 hours a day, seven days a week, around the world. Reservations may
be made directly through the web site. The reservation system and the web site
are linked to, and cross-marketed with, the reservation systems and web sites
for other hotel franchises that are owned and operated by Hilton Hotels
Corporation. Such cross-marketing may affect occupancy at our hotels by
directing travelers toward, or away from, Homewood Suites(Reg. TM) by Hilton.
Our hotels were actively conducting business at the time of purchase. We
believe that the purchases were conducted without materially disrupting any
daily hotel operations. During the past 12 months, the hotels have been covered
with property and liability insurance, and we have arranged to continue such
coverage. We believe our hotels are adequately covered by insurance.
PHILADELPHIA/GREAT VALLEY
The Philadelphia/Great Valley hotel has a franchise with Homewood
Suites(Reg. TM) by Hilton and is located on a 4.1 acre site at 12 East
Swedesford Road, Malvern, Pennsylvania 19355. The hotel is approximately 22
miles from downtown Philadelphia and 25 miles from the Philadelphia
International Airport.
S-10
<PAGE>
The hotel opened in January 1998. It was constructed with a masonry frame
and has a sand stucco exterior finish. The hotel consists of a single
four-story building. The hotel contains 123 suites, which have a combined
rentable area of 63,600 square feet. The following types of suites are
available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET/PER SUITE
------------------------------------- ------------------ ----------------------
<S> <C> <C>
Master Suite ...................... 95 500
Homewood Suite .................... 21 500
Two-Bedroom Suite ................. 7 800
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with 136 spaces. The hotel provides complimentary shuttle service
within a 5-mile radius.
We believe that the hotel has been well maintained and is generally in
very good condition. Over the next 12 months, we plan to spend approximately
$100,000 on renovations or improvements. We expect that the principal
renovations and improvements will include the addition of exterior lighting and
the replacement or repair of sofas, interior doors and kitchen flooring. We
expect to pay for the costs of these renovations and improvements with proceeds
from our ongoing offering of common shares.
During 2000 (through April 30), the average stay at the hotel has been
approximately five nights, and approximately 59% of the guests have stayed for
five nights or more. In general, occupancy at the hotel is not significantly
affected by seasonal variations. The following table shows average daily
occupancy rates, expressed as a percentage, since the opening of the hotel:
AVERAGE DAILY OCCUPANCY RATE
<TABLE>
<CAPTION>
2000
1998 1999 (THROUGH APRIL 30)
------------ ---------- -------------------
<S> <C> <C>
66.7% 76.4% 74.4%
</TABLE>
During 2000 (through April 30), the average daily rate per suite has been
$122.01, and the average daily net revenue per suite has been $90.79. As
explained above, revenues from the hotel, including lease revenue that is paid
to us under the master hotel lease agreement, will be used to pay interest due
under the promissory note dated as of May 8, 2000. Our goal is to use the
proceeds of our offering of common shares to make principal payments. There can
be no assurance, however, the proceeds of the offering will be sufficient for
this purpose. Assuming that no principal payments are made until the maturity
of the promissory note, and that the hotel continues to have the level of net
revenue specified above, approximately 24.2% of the hotel's revenue would be
needed to cover its portion of the interest payments.
S-11
<PAGE>
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
----------------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 ................... $145 $145 $194
5 to 11 .................. 129 129 185
12 to 29 .................. 124 124 179
30 or more ................ 99 99 159
</TABLE>
The hotel offers a weekend discount. This discount varies by type of suite
and generally reduces the basic rate by 38%. The weekend discount is not
available to guests who stay for five nights or more. The hotel also offers
discounts to guests who stay under certain corporate accounts. These discounts
are often negotiated with the corporate customer and vary from account to
account. We estimate that approximately 43% of the hotel's guests during 2000
(through April 30) received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include: SAP, Astra Zeneca, Vanguard, Shared Medical Systems, Centocor, Unisys,
Wyeth, Supplyforce.com, Decision One, and SCT (Systems/Computer Training).
During 2000 (through April 30), the 10 largest corporate accounts were
responsible for approximately 43% of the hotel's occupancy. There can be no
assurance, however, that the hotel will continue to receive significant
occupancy, or any occupancy, from the corporate accounts identified above.
The table below shows the average effective annual rental per square foot
since the opening of the hotel:
<TABLE>
<CAPTION>
2000
1998 1999 (ANNUALIZED)
------------- ----------- -------------
<S> <C> <C>
$ 52.85 $ 59.58 $ 63.72
</TABLE>
The depreciable real property component of the hotel, based upon our
long-term leasehold interest, has a currently estimated Federal tax basis of
$14,898,789 and will be depreciated using the straight-line method over a life
of 39 years (or less, as permitted by the Internal Revenue Code). The basis of
the personal property component of the hotel will be depreciated in accordance
with the modified accelerated cost recovery system of the Internal Revenue
Code.
The following table summarizes the hotel's real estate tax information for
2000:
<TABLE>
<CAPTION>
TAX ASSESSED TAX RATE AMOUNT
JURISDICTION VALUE (PER $1000) OF TAX
------------------------------------------ -------------- ------------- -----------
<S> <C> <C> <C>
School District ................. $14,248,760 11.670 $166,283
County of Chester ............... 14,248,760 3.014 42,946
East Whiteland Township ......... 14,248,760 0.445 6,341
--------
TOTAL $215,570
========
</TABLE>
We estimate that the annual property tax on the expected improvements will
be approximately $1,600 or less.
At least seven competing hotels are located within eight miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks
S-12
<PAGE>
or trade names.) Of these competing hotels, two are newer than the hotel. The
newer competing hotels have franchises with Choice Hotels and Hampton Inn. The
other competing hotels have franchises with Marriott (in two cases), Sheraton,
Summerfield Suites and Wyndham. We believe that the rates charged by our hotel
are generally competitive with the rates charged by these other hotels. We are
aware of ongoing or proposed construction for two other extended-stay hotels
within approximately six miles of the hotel. We expect these new hotels to be
franchised with Residence Inn and Springhill Suites.
S-13
<PAGE>
APPLE SUITES, INC.
INDEX TO FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................................................... F-2
APPLE SUITES, INC.
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 ................ F-5
Consolidated Statement of Operations for the three months ended March 31, 2000 ........ F-6
Consolidated Statement of Shareholders' Equity for the three months ended March 31, F-6
2000.
Consolidated Statement of Cash Flows for the three months ended March 31, 2000 ........ F-7
Notes to Consolidated Financial Statements ............................................ F-8
APPLE SUITES MANAGEMENT, INC.
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 ................ F-13
Consolidated Statement of Operations for the three months ended March 31, 2000 ........ F-14
Consolidated Statement of Cash Flows for the three months ended March 31, 2000 ........ F-14
Notes to Consolidated Financial Statements ............................................ F-15
</TABLE>
F-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(By Apple Suites, Inc. for the Dates or Periods, as Applicable,
Addressed by the Following Financial Statements)
GENERAL
During 1999, we acquired 11 hotels with 1,218 suites from Promus Hotels,
Inc. (or its affiliates), which is now a wholly-owned subsidiary of Hilton
Hotels Corporation. All of our hotels are leased to Apple Suites Management,
Inc. or its subsidiary (the "Lessee") pursuant to two master hotel lease
agreements. Each master hotel lease agreement obligates the Lessee to pay rent
equal to the sum of an annual base rent, a quarterly percentage rent and a
quarterly sundry rent. The Lessee's ability to make these rent payments to us
is dependent primarily upon the operations of the hotels. See Note 5 to our
consolidated financial statements for further lease information.
The hotels are licensed to operate under the Homewood Suites(Reg. TM) by
Hilton franchise pursuant to separate license agreements. The Lessee engages
Promus Hotels, Inc. to manage and operate the hotels under separate hotel
management agreements. We are externally advised and have contracted with Apple
Suites Advisors, Inc. (the "Advisor") to manage our day-to-day operations and
to make investment decisions. We have contracted with Apple Suites Realty
Group, Inc. ("ASRG") to provide brokerage and acquisition services in
connection with our hotel acquisitions. The Lessee, the Advisor, and ASRG are
all owned by Mr. Glade Knight, our Chairman. See Note 5 to our consolidated
financial statements for further information on related-party transactions.
RESULTS OF OPERATIONS APPLE SUITES, INC.
Revenues: Because we commenced operations effective September 1, 1999, a
comparison to the first quarter of 1999 is not possible. During the three
months ended March 31, 2000, we had revenues of $3,454,685. All of our lease
revenue is derived from the master hotel lease agreements.
Our other income consists of $32,732 of interest income earned from the
investments of cash and cash reserves and $15,275 of interest on the promissory
notes payable by the Lessee to us for our funding of franchise fees and hotel
supplies.
Expenses: Our expenses consist of property taxes, insurance, general and
administrative expenses, interest on notes payable and depreciation on the
hotels. Total expenses, exclusive of interest and depreciation, for the three
months ended March 31, 2000 were $946,311 or 27% of total revenue. The interest
expense was $1,453,110 for the three months ended March 31, 2000 and
represented interest on short-term notes payable to Promus Hotels, Inc. at an
interest rate of 8.5%.
The depreciation expense was $549,201 for the three months ended March 31,
2000. Taxes, insurance, and other was $691,575 for the three months ended March
31, 2000 or 20% of total revenue. The general and administrative expense
totaled 7% of total revenues. These expenses represent our administrative
expenses. We expect these percentages to decrease as our asset base grows.
F-2
<PAGE>
APPLE SUITES MANAGEMENT, INC.
Revenues: As operations commenced effective September 1, 1999, a
comparison to the first quarter of 1999 is not possible. Total revenues were
$8,103,171. Total revenues consist primarily of suite revenue, which was
$7,682,355 for the three months ended March 31, 2000
For the three months ended March 31, 2000 the average occupancy rate was
78%, the average daily rate was $89, and the revenue per available room was
$69.
Expenses: Total expenses for the three months ended March 31, 2000 were
$8,060,470. Rent expense represents $3,406,678 or 42% of total revenue. The
Lessee has agreed to pay Promus Hotels, Inc. a fee of 4% of suite revenue for
management of the hotels. The Lessee also has agreed to pay Promus Hotels, Inc.
a fee of 4% of suite revenue to cover fees for the Homewood Suites(Reg. TM) by
Hilton franchise and to participate in its reservation system. Total expenses
for these services were $937,354 during the period.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2000, we sold 493,509 of our common shares, at
$10 per share, to investors. The total gross sale proceeds were $4,935,083,
which netted $4,393,756 to us after the payment of selling commissions and
other offering costs. The Lessee's obligations under the master hotel lease
agreements are unsecured. The Lessee has limited capital resources, and,
accordingly its ability to make rent payments is substantially dependent on the
ability of the Lessee to generate sufficient cash flow from operations of the
hotels. We have certain rights to cancel a master hotel lease agreement if the
Lessee does not perform under the applicable terms. To support the Lessee's
obligations, the Lessee has received two funding commitments of $1 million each
from Mr. Knight and ASRG, respectively (together "Payor"). The funding
commitments are contractual obligations of the Payor to pay funds to the
Lessee. Funds paid to the Lessee under the commitments are to be used to
satisfy any capitalization or net worth requirements applicable to the Lessee
or the Lessee's payment obligations under the master hotel lease agreements, do
not represent indebtedness, and are not subject to interest. The funding
commitments terminate upon the expiration of the master hotel lease agreements,
a written agreement between the Payor and the Lessee, or the payment of all
commitment amounts by the Payor to the Lessee. As of March 31, 2000, no
contributions had been made by the Payor to the Lessee under the funding
commitments.
Notes payable: In conjunction our purchase of the 11 hotels, we made
promissory notes payable to the order of Promus Hotels, Inc. in the aggregate
amount of $68,569,500. The notes provide for an effective interest rate of 8.5%
per annum. Interest payments are due monthly. Principal payments are to be made
from net proceeds of our offering of common shares. The holder of the notes has
agreed to defer principal payments until the earlier of June 30, 2000 or such
time as we purchase two additional hotels. At March 31, 2000, we had not made
any principal payments under these promissory notes.
The promissory notes have various maturity dates. The approximate
principal amounts and their due dates are as follows: $34 million due on
October 1, 2000, $30.2
F-3
<PAGE>
million due on November 1, 2000, and $4.4 million due on January 1, 2001. Our
goal is to pay these notes with the proceeds from our continuous "best efforts"
offering of common shares. Based on the current rate at which equity is being
raised by the offering, we may need to seek other measures to repay these
loans. We are holding discussions with several lenders to obtain financing for
the hotels and are exploring both unsecured and secured financing arrangements.
Although no firm financing commitments have been received, we believe,
based on discussions with lenders and other market indicators, that we can
obtain sufficient financing prior to the maturity of the notes. Obtaining
refinancing is dependent upon a number of factors, including: (1) continued
operation of the hotels at or near current occupancy and room rate levels, as
the master hotel lease agreements are based in part on a percentage of hotel
suite income; (2) the general level of interest rates, including credit spreads
for real estate based lending; and (3) general economic conditions. In general,
for each of the notes payable, all of our 11 hotels serve as collateral.
Cash and cash equivalents: Cash and cash equivalents totaled $3,781,922 at
March 31, 2000.
Capital requirements: We have an ongoing capital commitment to fund our
capital improvements. We are required under the master hotel lease agreements
to make an amount equal to 5% of suite revenue available monthly to the Lessee
for the repair, replacement, or refurbishing of furniture, fixtures, and
equipment on a cumulative basis, provided that such amount may be used for
capital expenditures made by us with respect to the hotels. We expect that this
amount will be adequate to fund the required repair, replacement, and
refurbishments and to maintain our hotels in a competitive condition. We
capitalized improvements of $280,532 in 2000. At March 31, 2000, a total of
$696,869 was held for funding of these improvements.
We expect to acquire additional hotels during 2000. We plan to have
monthly equity closings in 2000, until the offering is fully funded, or until
such time as we may opt to discontinue the offering. We anticipate that the
equity funds will be invested in additional hotels and will be used to make
principal payments on the notes incurred in conjunction with the our current
hotels.
Capital resources are expected to grow with the future sale of our common
shares. Approximately 46% of the 2000 common share dividend distribution, or
$329,215, was reinvested in additional common shares. In general, our liquidity
and capital resources are believed to be more than adequate to meet our cash
requirements during 2000, given current and anticipated financing arrangements.
Seasonality: The hotel industry historically has been seasonal in nature,
reflecting higher occupancy rates primarily during the first three quarters of
the year. Seasonal variations in occupancy at our hotels may cause quarterly
fluctuations in the our lease revenues, particularly during the fourth quarter,
to the extent that we receive percentage rent. To the extent that cash flow
from operations is insufficient during any quarter, due to temporary or
seasonal fluctuations in lease revenue, we expect to utilize cash on hand or
funds from equity raised through our "best efforts" offering to make
distributions.
F-4
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- ------------------
<S> <C> <C>
ASSETS
Investment in hotel-net of accumulated depreciation of $1,045,410 and
$496,209, respectively.................................................. $ 93,450,963 $93,719,632
Cash and cash equivalents ............................................... 3,781,922 581,344
Restricted cash ......................................................... 696,869 1,023,721
Rent receivable from Apple Suites Management, Inc. ...................... 2,641,141 2,123,136
Notes and other receivables from Apple Suites Management, Inc. .......... 694,766 717,019
Capital improvement reserve ............................................. 753,927 753,927
Prepaid expenses ........................................................ 263,781 270,229
Other assets ............................................................ 531,470 300,000
------------ -----------
Total Assets ......................................................... $102,814,839 $99,489,008
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable -- secured ................................................ $ 68,569,500 $68,569,500
Interest payable ........................................................ -- 466,140
Accounts payable ........................................................ 161,258 65,214
Accrued expenses ........................................................ 554,977 868,668
Account payable -- affiliate ............................................ 531,285 708,751
Distributions payable ................................................... -- 712,735
------------ -----------
Total Liabilities .................................................... $ 69,817,020 $71,391,008
============ ===========
SHAREHOLDERS' EQUITY
Common stock, no par value, authorized 200,000,000 shares; issued and
outstanding 3,922,923 shares and 3,429,414, respectively ............... $ 32,985,016 $28,591,260
Class B convertible stock, no par value, authorized 240,000 shares;
issued and outstanding 240,000 shares .................................. 24,000 24,000
Distributions greater than net income ................................... (11,197) (517,260)
------------ -----------
Total Shareholders' Equity ............................................. 32,997,819 28,098,000
------------ -----------
Total Liabilities and Shareholders' Equity ............................. $102,814,839 $99,489,008
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
APPLE SUITES INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------
<S> <C>
REVENUES:
Lease revenue ...................................... $ 3,406,678
Interest income and other revenue .................. 48,007
EXPENSES:
Taxes, insurance and other ......................... 691,575
General and administrative ......................... 254,736
Depreciation of real estate owned .................. 549,201
Interest ........................................... 1,453,110
-----------
Total expenses ................................... 2,948,622
-----------
Net income .......................................... $ 506,063
===========
Basic and diluted earnings per common share ......... $ 0.14
===========
</TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
NUMBER OF
SHARES AMOUNT
--------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1999 3,429,414 $28,591,260
Net proceeds from the sale of
common shares ................................................................... 456,873 4,064,541
Net income ....................................................................... -- --
Common stock issued through
reinvestment of distribution 36,636 329,215
--------- -----------
Balance at March 31, 2000 ........................................................ 3,922,923 $32,985,016
========= ===========
<CAPTION>
CLASS B
CONVERTIBLE STOCK
----------------------
DISTRIBUTIONS
NUMBER OF GREATER THAN
SHARES AMOUNT NET INCOME
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1999 240,000 $24,000 $ (517,260)
Net proceeds from the sale of
common shares ................................................................... -- -- --
Net income ....................................................................... -- -- 506,063
Common stock issued through
reinvestment of distribution -- -- --
------- ------- ----------
Balance at March 31, 2000 ........................................................ 240,000 $24,000 $ (11,197)
======= ======= ==========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
--------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1999 $28,098,000
Net proceeds from the sale of
common shares ................................................................... 4,064,541
Net income ....................................................................... 506,063
Common stock issued through
reinvestment of distribution 329,215
-----------
Balance at March 31, 2000 ........................................................ $32,997,819
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
APPLE SUITES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000
-------------------
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ....................................................................... $ 506,063
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of real estate owned ................................................ 549,201
Changes in operating assets and liabilities:
Prepaid expenses ................................................................. 6,448
Rent and notes receivable from Apple Suites Management, Inc. ..................... (509,566)
Other assets ..................................................................... (31,395)
Accounts payable ................................................................. 96,044
Accounts payable -- affiliates ................................................... (177,466)
Accrued expenses ................................................................. (313,691)
Interest payable ................................................................. (466,140)
----------
Net cash used in operating activities .......................................... (340,502)
CASH FLOW FROM INVESTING ACTIVITIES:
Payments received on notes receivable ............................................ 13,739
Capital improvements ............................................................. (280,532)
Restricted cash for property improvement plan .................................... 326,852
Earnest deposit money for pending acquisitions ................................... (200,000)
----------
Net cash used in investing activities .......................................... (139,941)
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common shares ...................................... 4,394,265
Cash distributions paid to shareholders .......................................... (713,244)
----------
Net cash provided by financing activities ...................................... 3,681,021
Increase in cash and cash equivalents .......................................... 3,200,578
Cash and cash equivalents, beginning of period ................................... 581,344
----------
Cash and cash equivalents, end of period ......................................... $3,781,922
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The accompanying unaudited consolidated financial
statements have been prepared in accordance with the instructions for Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information required by generally accepted accounting principles. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the period ended December
31, 2000. These consolidated financial statements should be read in conjunction
with the Company's December 31, 1999 Annual Report on Form 10-K.
The Company commenced operations in September 1999, therefore,
consolidated statements of operations and cash flows for the three month period
ended March 31, 1999 are not presented.
Apple Suites, Inc., (the "Company") leased to Apple Suites Management,
Inc. or its subsidiary (the "Lessee") all of its hotels acquired during 1999.
The Lessee hired Promus Hotels, Inc. ("Promus"), a wholly owned subsidiary
of Hilton Hotels Corporation ("Hilton") to manage the Company's hotels under
the terms of a management agreement between Promus and the Lessee.
Relationship with Lessee -- The Company must rely on the Lessee to
generate sufficient cash flow from the operation of the hotels to enable the
Lessee to meet its rent obligation to the Company under the master hotel lease
agreement ("Percentage Leases"). At March 31, 2000, the Lessee's rent payable
to the Company amounted to $2,641,141. The original terms under the Percentage
Leases allow monthly base rent to be paid in arrears and quarterly percentage
rent to be paid 15 days following the quarter-end.
The Company did not have any items of comprehensive income requiring
separate reporting and disclosure for the periods presented.
(2) INVESTMENT IN HOTELS
At March 31, 2000, the Company owned 11 hotels. Investment in hotels at
March 31, 2000 consist of the following:
<TABLE>
<S> <C>
Land ................................... $ 15,687,640
Building ............................... 77,336,538
Furniture and equipment ................ 1,472,195
------------
$ 94,496,373
Less accumulated depreciation .......... (1,045,410)
------------
$ 93,450,963
------------
</TABLE>
F-8
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED )
(3) NOTES PAYABLE
In conjunction with the purchase of 11 hotels, notes were executed by the
Company made payable to the order of Hilton in the amount of $68,569,500. The
notes bear a fixed interest rate of 8.5% per annum and are cross-collateralized
by the 11 hotels owned by the Company. Interest payments are due monthly. Notes
amounting to $64,185,000 mature during the fourth quarter of 2000, and the
remaining $4,384,500 note matures in January 2001. Principal payments are to be
made to the extent of net equity proceeds from the offering of common shares.
Hilton has agreed to defer principal payments until the earlier of June 30,
2000 or such time as two additional hotels have been purchased by the Company.
The Company paid $1,453,110 in interest for the period ended March 31, 2000.
(4) SHAREHOLDERS' EQUITY
The Company is raising equity capital through a "best-efforts" offering of
shares by David Lerner Associates, Inc. (the "Managing Dealer"), which will
receive selling commissions and a marketing expense allowance based on proceeds
of the shares sold. The Company received gross proceeds of $4,568,723 from the
sale of 456,873 shares at $10 per share during the three month period ended
March 31, 2000. The net proceeds of the offering, after deducting selling
commissions and other offering costs were $4,064,541 for the period.
The Company provides a plan which allows shareholders to reinvest
distributions in the purchase of additional shares of the Company ("Additional
Share Option"). Of the total proceeds raised from common shares during the
period ended March 31, 2000, $366,360 (net $329,215) was provided through the
reinvestment of distributions.
(5) COMMITMENTS AND RELATED PARTIES
The Company receives rental income from the Lessee under the Percentage
Leases which expire in 2009, subject to earlier termination by the Company with
30 days notice. The Leases contain two optional five-year extensions. The rent
due under the Percentage Leases is the sum of base rent and percentage rent.
Percentage rent is calculated by multiplying fixed percentages by the total
amounts of suite revenues with reference to specified threshold amounts. Both
the base rent and the revenue thresholds used in computing percentage rents are
subject to annual adjustments based on increases in the Consumer Price Index
("CPI"). The Company earned rents of $3,406,678 for the three month period
ended March 31, 2000.
Under the Percentage Leases, the Company is obligated to pay the costs of
real estate and personal property taxes, property insurance, maintenance of
underground utilities and structural elements of the hotels. The Company is
committed under certain agreements to fund 5% of suite revenues per month for
capital expenditures to include periodic replacement or refurbishment of
furniture, fixtures, and equipment. At
F-9
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(5) COMMITMENTS AND RELATED PARTIES -- (CONTINUED)
March 31, 2000, $753,927 was held by Promus for these capital improvement
reserves. In addition, in accordance with the franchise agreements, $696,869
was held for the property improvement plan with a financial institution and
treated as restricted cash.
The Lessee engages Promus as a third-party manager to operate the hotels
leased by it and pays the manager based on a percentage fee of 4% of adjusted
gross revenues. During the first two years of the management agreement, a
portion of the management fee equal to 1% of adjusted gross revenues is
subordinated to the Lessee's receipt of a return equal to 11% of the purchase
price of each hotel. The Lessee pays the manager a franchise fee and a
marketing fee, equal to 4% of gross revenues, respectively.
The Company loaned the Lessee $567,900 for franchise fees and $121,800 for
hotel supplies for the 11 hotels. The debt agreements are evidenced by
promissory notes bearing interest at a rate of 9% per annum. Principal and
interest payments are due monthly. The promissory notes have various maturity
dates through January 2010.
The Company has contracted with Apple Suites Realty Group, Inc. ("ASRG")
to acquire and dispose of real estate assets for the Company. In accordance
with the contract ASRG is to be paid a fee of 2% of the purchase price of any
acquisitions or sale price of any dispositions of real estate investments,
subject to certain conditions. At March 31, 2000, the Company owed ASRG
$490,238.
The Company has contracted with Apple Suites Advisors, Inc. ("ASA") to
advise and provide day to day management services to the Company. In accordance
with the contract, the Company will pay ASA a fee equal to .1% to .25% of total
equity contributions received by the Company in addition to certain
reimbursable expenses. For the three months ended March 31, 2000, ASA earned
$22,533 under this agreement and $41,046 was payable at March 31, 2000.
The Lessee, ASRG and ASA are 100% owned by Glade M. Knight, Chairman and
President of the Company. ASRG and ASA may purchase in the "best efforts"
offering up to 2.5% of the total number of shares of the Company sold in the
offering.
F-10
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED )
(6) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with FAS 128:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
3/31/00
-------------
<S> <C>
Numerator:
Net Income
Numerator for basic and diluted earnings ........................... $ 506,063
Denominator:
Denominator for basic earnings per share-weighted-average shares ... 3,607,458
Effect of dilutive securities:
Stock options ...................................................... 2,200
-----------
Denominator for diluted earnings per share-adjusted weighted-average
shares and assumed conversions ................................... 3,609,658
-----------
Basic and diluted earnings per common share ........................ $ 0.14
-----------
</TABLE>
(7) ACQUISITIONS
The following unaudited pro forma information for the three months ended
March 31, 1999 is presented as if the acquisition of the 11 hotels occurred on
January 1, 1999. The pro forma information does not purport to represent what
the Company's results of operations would actually have been if such
transactions, in fact, had occurred on January 1, 1999, nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
3/31/99
---------------
<S> <C>
Lease revenue .................................. $ 3,398,637
Net income ..................................... 748,633
Net income per share-basic and diluted ......... $ .22
</TABLE>
The pro forma information applies the Company's Percentage Lease
Agreements to actual suite revenue and expenses of the 11 hotels acquired in
1999 for the respective period in 1999 prior to acquisition by the Company. Net
income has been adjusted as follows: (1) depreciation has been adjusted based
on the Company's basis in the hotels; (2) advisory expenses have been adjusted
based on the Company's contractual arrangements; (3) interest expense has been
adjusted to reflect the acquisition as of the beginning of the periods; and (4)
common stock raised during 1999 to purchase these hotels has been adjusted to
reflect issuances as of January 1, 1999.
(8) SUBSEQUENT EVENTS
In April, 2000 the Company distributed to its shareholders approximately
$904,918 ($.25 per share) of which approximately $448,641 was reinvested in the
purchase of additional shares. On April 18, 2000, the Company closed the sale
to investors of 301,514 shares at $10 per share representing net proceeds to
the Company of $2,350,227.
F-11
<PAGE>
APPLE SUITES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(8) SUBSEQUENT EVENTS -- (CONTINUED)
On May 8, 2000, the Company acquired a Homewood Suites(Reg. TM) hotel in
Malvern, Pennsylvania for $15,489,000. The hotel was purchased through a
combination of equity proceeds from the equity offering and a note in the
amount of $11,616,750 made payable to the order of Promus. The note has a fixed
interest rate of 8.5% per annum. Interest payments are due monthly and the
maturity date is May, 2001. This hotel will be leased by the Lessee and managed
by Promus in substantially the same manner as the other 11 Homewood Suites(Reg.
TM) hotels owned at March 31, 2000.
F-12
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ........................................ $2,329,310 $2,395,000
Accounts receivables, net ........................................ 1,514,431 738,361
Inventories ...................................................... 125,970 121,801
Other assets ..................................................... 2,188 8,142
---------- ----------
Total Current Assets ........................................... 3,971,899 3,263,304
NON-CURRENT ASSETS
Deferred franchise fees ........................................... 555,753 562,851
---------- ----------
Total Assets ................................................... $4,527,652 $3,826,155
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Account payable .................................................. $ 105,247 $ 48,586
Rent payable to Apple Suites, Inc. ............................... 2,641,141 2,123,136
Due to third party manager ....................................... 482,084 454,147
Due to Apple Suites, Inc. ........................................ 20,552 28,991
Accrued expenses ................................................. 704,153 624,346
Current portion of note payable to Apple Suites, Inc. ............ 58,350 56,939
---------- ----------
Total Current liabilities ...................................... 4,011,527 3,336,145
NON-CURRENT LIABILITIES
Note payable to Apple Suites, Inc. ................................ 615,864 631,014
---------- ----------
Total Liabilities .............................................. 4,627,391 3,967,159
SHAREHOLDERS' DEFICIT
Common Stock, no par value, 5,000 authorized; 10 shares issued and
outstanding .................................................... 100 100
Retained deficit ................................................. (99,839) (141,104)
---------- ----------
Total Shareholders' deficit .................................... (99,739) (141,004)
---------- ----------
Total Liabilities and Shareholders' Deficit .................... $4,527,652 $3,826,155
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
APPLE SUITES MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 2000
---------------
<S> <C>
REVENUE
Suite revenue .............................. $7,682,355
Other revenue .............................. 420,816
----------
Total revenue ............................ 8,103,171
EXPENSES
Operating expense .......................... 2,295,392
General and administrative ................. 670,943
Advertising and promotion .................. 662,647
Utilities .................................. 283,263
Franchise fees ............................. 307,294
Management fees ............................ 322,766
Rent expense -- Apple Suites, Inc. ......... 3,406,678
Interest expense ........................... 15,275
Other ...................................... 96,212
----------
Total expenses ........................... 8,060,470
Income before income taxes ................. 42,701
Income tax expense ......................... --
----------
Net income ............................... $ 42,701
==========
</TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000
-------------------
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 42,701
Adjustments to reconcile net income to net cash used in operating activities
Amortization of deferred franchise fees ................................... 7,098
Changes in operating assets and liabilities:
Receivables ............................................................... (776,070)
Other assets .............................................................. 349
Due to Apple Suites, Inc. ................................................. (8,439)
Rent payable to Apple Suites, Inc. ........................................ 518,005
Accounts payable .......................................................... 56,661
Due to third party manager ................................................ 27,937
Accrued expenses .......................................................... 79,807
----------
Net cash used in operating activities ................................... (51,951)
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments of notes payable ............................................... (13,739)
----------
Net cash used in financing activities ................................... (13,739)
Decrease in cash and cash equivalents ................................... (65,690)
Cash and cash equivalents, beginning of period ............................ 2,395,000
----------
Cash and cash equivalents, end of period .................................. $2,329,310
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Apple Suites Management, Inc. (the "Lessee") operates in one business
segment. Each hotel is leased by the Company to the Lessee under a master hotel
lease agreement ("Percentage Lease") having an initial term of ten years,
subject to earlier termination at the option of the Company upon 30 days
notice. The lease agreement provides for two optional five-year extensions. The
Percentage Leases require base rent payments to be made to the Company on a
monthly basis and additional quarterly payments to be made based upon
percentages of suite and sundry revenue. Promus Hotels, Inc. or an affiliate
("Promus") manages the hotels under a management agreement with the Lessee.
Promus Hotels, Inc. is a wholly-owned subsidiary of Hilton Hotel Corporation
("Hilton"). The hotels are located throughout the United States and are
licensed with Homewood Suites(Reg. TM) by Hilton.
The Lessee commenced operations in September 1999, therefore, consolidated
statements of operations and cash flows for the three month period ended March
31, 1999 are not presented.
(2) PERCENTAGE LEASES
The Percentage Leases expire in 2009, subject to earlier termination by
the Company upon 30 days notice. The Percentage Leases provide for two optional
five-year extensions. The rent due for each hotel is the sum of a base rent and
a percentage rent. Percentage rent is calculated on a quarterly basis by
multiplying fixed percentages by the total amounts of year-to-date suite
revenues with reference to specified threshold amounts known as breakpoints.
Both the base rent and the breakpoints used in computing percentage rents are
subject to annual adjustments based on increases in the Consumer Price Index
("CPI").
The Lessee has entered into license agreements with Promus to operate the
hotels as Homewood Suites(Reg. TM) by Hilton properties. These agreements have
terms of 20 years and expire in 2019. These agreements require the Lessee to,
among other things, pay monthly franchise fees equal to 4% of suite revenue.
License and franchise agreements contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the hotels
which are established by Promus to maintain uniformity in the system for
Homewood Suites(Reg. TM) by Hilton. Such standards generally regulate the
appearance of the hotel, quality and type of goods and services offered,
signage, and protection of marks. Compliance with such standards may from time
to time require significant expenditures for capital improvements which will be
borne by the Company. In addition, the agreements provide that Promus will
manage the daily operations of the hotels and provide advertising and promotion
to include access to the reservation
F-15
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(2) PERCENTAGE LEASES -- (CONTINUED)
system for Homewood Suites(Reg. TM) by Hilton. The Lessee pays Promus 4% of
monthly suite revenue for each of these functions, respectively. Total expenses
incurred by the Lessee for franchise fees, advertising and promotion fees, and
management fees for the three months ended March 31, 2000 totaled $937,354.
(3) SHAREHOLDER'S EQUITY
The Lessee requires or may require funds to capitalize its business to
satisfy its obligations under Percentage Leases with the Company. To meet these
objectives, the Lessee has two funding commitment agreements of $1 million each
from Mr. Knight and Apple Suites Realty Group, Inc., ("ASRG"), respectively,
(together "Payor"). ASRG is owned by Mr. Knight. The funding commitments are
contractual obligations of the Payor to provide funds to the Lessee. Funds paid
to the Lessee under the commitments are to be used to satisfy any
capitalization or net worth requirements applicable to the Lessee or the
Lessee's payment obligations under the lease agreements and does not represent
any indebtedness. The funding commitments terminate upon the expiration of the
Percentage Leases, written agreement between the Payor and the Lessee, or
payment of all commitments amounts by the Payor to the Lessee. As of March 31,
2000, no contributions have been made by the Payor to the Lessee.
(4) SUBSEQUENT EVENTS
Effective May 8, 2000, the Company acquired a hotel property in Malvern,
Pennsylvania. This hotel will be leased by the Lessee and managed by Promus in
substantially the same manner as the other 11 Homewood Suites(Reg. TM) hotels.
F-16
<PAGE>
SUPPLEMENT NO. 7 DATED JUNE 20, 2000
TO PROSPECTUS DATED AUGUST 3, 1999
APPLE SUITES, INC.
The following information supplements the prospectus of Apple Suites, Inc.
dated August 3, 1999 and is part of the prospectus. THIS SUPPLEMENT NO. 7
RELATES TO MATTERS THAT HAVE CHANGED OR OCCURRED SINCE MAY 31, 2000. OTHER
IMPORTANT MATTERS WERE DISCUSSED IN SUPPLEMENT NO. 6 AND IN SUPPLEMENT NO. 5,
WHICH INCORPORATED AND REPLACED ALL PRIOR SUPPLEMENTS. THIS SUPPLEMENT DOES NOT
INCORPORATE OR REPLACE ANY PRIOR SUPPLEMENT.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE PROSPECTUS, SUPPLEMENT
NO. 5, SUPPLEMENT NO. 6 AND THIS SUPPLEMENT NO. 7.
TABLE OF CONTENTS FOR SUPPLEMENT NO. 7
Status of the Offering .................. S-2
Recent Developments ..................... S-2
Potential Refinancing .................. S-2
Status of Payments ..................... S-3
Probable Hotel Acquisition .............. S-4
Overview ............................... S-4
Description of Hotel ................... S-4
Property Description Updates ............ S-7
Selected Financial Information .......... S-13
Experts ................................. S-14
Index to Financial Statements ........... F-1
The prospectus and the supplements contain forward-looking statements
within the meaning of the federal securities laws which are intended to be
covered by the safe harbors created by those laws. These statements include our
plans and objectives for future operations, including plans and objectives
relating to future growth and availability of funds. These forward-looking
statements are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to these statements involve judgments with
respect to, among other things, the continuation of our offering of common
shares, our ability to repay or refinance our significant short-term debt,
future economic, competitive and market conditions and future business
decisions. All of these matters are difficult or impossible to predict
accurately and many of them are beyond our control. Although we believe the
assumptions underlying the forward-looking statements, and the forward-looking
statements themselves, are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that these forward-looking
statements will prove to be accurate. In light of the significant uncertainties
inherent in these forward-looking statements, the inclusion of this information
should not be regarded as a representation by us or any other person that our
objectives and plans, which we consider to be reasonable, will be achieved.
S-1
<PAGE>
STATUS OF THE OFFERING
We completed the minimum offering of common shares at $9 per share on
August 23, 1999. We are continuing the offering at $10 per common share in
accordance with the prospectus.
As of June 19, 2000, we had closed on the following sales of our common
shares:
<TABLE>
<CAPTION>
PROCEEDS NET OF SELLING
PRICE PER NUMBER OF GROSS COMMISSIONS AND MARKETING
COMMON SHARE COMMON SHARES SOLD PROCEEDS EXPENSE ALLOWANCE
-------------- -------------------- --------------- --------------------------
<S> <C> <C> <C>
$ 9 1,666,666.67 $ 15,000,000 $ 13,500,000
$ 10 3,278,875.00 32,788,750 29,509,875
------------ ------------ -------------
TOTAL 4,945,541.67 $ 47,788,750 $ 43,009,875
============ ============ =============
</TABLE>
We have used the net proceeds of our offering to acquire, by deed or
lease, a total of 12 extended-stay hotels, which collectively have 1,341
suites. We hold these hotels directly or through wholly-owned subsidiaries. For
simplicity, we will refer to these hotels as "our hotels." All of our hotels
have franchises with Homewood Suites(Reg. TM) by Hilton, which is a registered
service mark of Hilton Hotels Corporation.
RECENT DEVELOPMENTS
POTENTIAL REFINANCING
We have five notes payable in connection with our hotel purchases in the
total amount of approximately $80 million. These notes are payable to Promus
Hotels, Inc., which is a wholly-owned subsidiary of Hilton Hotels Corporation.
The maturity dates for these notes occur on different dates ranging from
October 1, 2000 to April 28, 2001. Our goal is to use the net proceeds from our
offering of common shares to make full or partial payments of principal on the
various maturity dates. Our ability to achieve this goal depends on the rate at
which our common shares are sold.
We are negotiating to refinance these notes on commercially reasonable
terms and conditions. We have applied for a commercial loan from a national
bank in the amount of $58 million to be secured by the 11 hotels we purchased
in 1999. There can be no assurance that the loan will occur in accordance with
the terms of the loan application or at all. If the loan occurs in accordance
with the application, repayment would be made in monthly installments over 10
years, on an amortized basis, at a fixed annual interest rate of 9.17%.
If the loan closes, we expect the lender to impose additional conditions
or requirements that are customary for loans of this type. The loan would
represent a change to our borrowing policy, as originally described in the
prospectus, because we would no longer hold our properties over the long-term
on an all-cash basis.
We have made an aggregate deposit of $1 million in connection with our
loan application. If the closing on the loan does not occur within 90 days
after the date of the application (June 9, 2000), we may be required to forfeit
some or all of our deposit. We
S-2
<PAGE>
also have entered into an agreement, dated as of June 5, 2000, with the
prospective lender, which guarantees the interest rate and provides for our
payment of certain fees if we terminate our loan application.
We have entered into a letter agreement, dated May 8, 2000, with Promus
Hotels, Inc. in regard to potential refinancing. This letter agreement pertains
to the latest promissory note regarding the Philadelphia/Great Valley hotel and
any new promissory note regarding a hotel in Boulder, which we are negotiating
to purchase. (The probable acquisition of the Boulder hotel is described in
detail in another section below). Under this letter agreement, if we obtain
refinancing, repay our initial four promissory notes in full, and are not in
default under the other promissory notes, the first 11 hotels we purchased
would be released as collateral. Furthermore, if our refinancing has both
senior and junior levels of priority, and if the junior level does not exceed
$13 million, we would be permitted to apply the net equity proceeds from our
"best efforts" to the principal amount of such junior debt, rather than to our
promissory notes with respect to the Philadelphia/Great Valley hotel and the
Boulder hotel (if acquired).
STATUS OF PAYMENTS
We have made all scheduled interest payments under the promissory notes
payable to Promus Hotels, Inc. The aggregate amount of our interest payments
from acquisition through June 19, 2000 is $3,499,851.
To date, we have not made any principal payments under any of these
promissory notes. The following amounts would be due on the maturity dates of
the promissory notes, assuming that we do not obtain refinancing, that interest
payments continue to be made on schedule and that no payments of principal are
made before those maturity dates:
<TABLE>
<CAPTION>
MONTH OF PROMISSORY NOTE DATE OF MATURITY TOTAL DUE AT MATURITY
-------------------------- ------------------ ----------------------
<S> <C> <C>
September 1999 October 1, 2000 $26,811,010
October 1999 October 1, 2000 7,401,349
November 1999 December 1, 2000 30,421,056
December 1999 January 1, 2001 4,415,131
May 2000 April 28, 2001 11,697,908
-----------
TOTAL $80,746,454
===========
</TABLE>
In the event of a default under the promissory notes, various remedies are
available to Promus Hotels, Inc. under certain deeds of trust, which are
described in Supplement No. 6.
We have advanced a total of $960,000 to the lessees of the hotels under
the master hotel lease agreements (Apple Suites Management, Inc. or its
subsidiary). We made this advance to assist the lessees in satisfying working
capital account requirements that have been established by Promus Hotels, Inc.,
as licensor with respect to our 12 hotels. At one time, the lessees
contemplated funding the working capital requirements with rental income from
the hotels. It was determined, however, that an advance from us would be more
administratively convenient.
The total advance was based on an allocation of $80,000 per hotel. To
evidence the repayment obligation of the lessees, we have received 12
substantially identical
S-3
<PAGE>
promissory notes, each of which relates to a particular hotel and is made in
the principal amount of $80,000. Each note provides for an annual interest rate
of 9% and for repayment in monthly installments of principal and interest, on
an amortized basis, over a 10-year period.
PROBABLE HOTEL ACQUISITION
OVERVIEW
We are negotiating to purchase an extended-stay hotel in Boulder,
Colorado. This hotel is currently in operation and is owned by Promus Hotels,
Inc., which is a wholly-owned subsidiary of Hilton Hotels Corporation. We
purchased all of our other hotels from Promus Hotels, Inc. (or an affiliate).
Like our other hotels, the Boulder hotel operates under a franchise with
Homewood Suites(Reg. TM) by Hilton.
Under a letter agreement dated May 8, 2000 with Promus Hotels, Inc. (and
affiiliates), we are permitted to use the net equity proceeds from our "best
efforts" offering to pay 25% of the purchase price for the Boulder hotel. This
permission will expire if we do not purchase the Boulder hotel on or before
June 30, 2000. If we purchase the Boulder hotel, we would expect Promus Hotels,
Inc. to finance 75% of any purchase price, as it did with our other hotels. We
currently expect that the total purchase price for the Boulder hotel would be
approximately $14,885,000.
There can be no assurance, however, that we will purchase the Boulder
hotel at this price or at all, or that any financing will be similar to our
existing financing. If we decline to purchase the Boulder hotel, we will
forfeit a deposit in the amount of $200,000. The Boulder hotel is described in
more detail below.
DESCRIPTION OF HOTEL
The Boulder hotel has a franchise with Homewood Suites(Reg. TM) by Hilton
and is located on a 3.0 acre site at 4950 Baseline Road, Boulder, Colorado
80303. The hotel is approximately 3 miles from downtown Boulder and 52 miles
from the Denver International Airport.
The hotel opened in January 1991. It has wood frame construction, with an
exterior of brick veneer and stucco . The hotel consists of four buildings,
each with three stories. The hotel contains 112 suites, which have a combined
rentable area of 57,040 square feet. The following types of suites are
available:
<TABLE>
<CAPTION>
TYPE OF SUITE NUMBER AVAILABLE SQUARE FEET PER SUITE
-------------------------- ------------------ ----------------------
<S> <C> <C>
Master Suite 28 560
Homewood Suite 76 440
Two-Bedroom Suite 8 990
</TABLE>
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has a parking
lot with 114 spaces. The hotel provides complimentary shuttle service within a
five mile radius.
S-4
<PAGE>
We believe that the hotel has been well maintained and is generally in
very good condition. If we purchase the hotel, we plan to spend approximately
$287,450 on renovations or improvements over the subsequent 12 months. We
expect that the principal renovations and improvements will include interior
painting and the replacement of exterior lights, carpet and kitchen flooring.
If we purchase the hotel, we would expect to pay for the costs of these
renovations and improvements with the proceeds from our offering of common
shares.
During 2000 (through May), the average stay at the hotel has been
approximately 3.2 nights, and approximately 49.6% of the guests have stayed for
five nights or more. In general, occupancy at the hotel is not significantly
affected by seasonal variations. The following table shows average daily
occupancy rates, expressed as a percentage, since 1995:
AVERAGE DAILY OCCUPANCY RATE (CALENDAR YEAR)
<TABLE>
<CAPTION>
2000
1995 1996 1997 1998 1999 THROUGH MAY
------------ ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
79.7% 80.3% 80.4% 79.8% 77.5% 74.9%
</TABLE>
During 2000 (through May), the average daily rate per suite has been
$115.32, and the average daily net revenue per suite has been $86.38. As with
our other properties, revenue from the hotel, including lease revenue that is
paid to us under any master hotel lease agreement for the hotel, would be used
to pay interest due under any promissory note we execute in connection with a
purchase of the hotel. Our goal would be to use the proceeds of our offering of
common shares to make principal payments. There can be no assurance, however,
the proceeds of the offering would be sufficient for this purpose.
The hotel's current rate structure is based on length of stay and type of
suite, as summarized below:
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $159 $169 $235
5 to 11 144 154 225
12 to 29 144 154 225
30 or more 124 134 225
</TABLE>
The hotel offers a weekend discount. This discount varies by type of suite
and generally reduces the basic rate by approximately 30%. The weekend discount
is not available to guests who stay for five nights or more. The hotel also
offers discounts to guests who stay under certain corporate accounts. These
discounts are often negotiated with the corporate customer and vary from
account to account. We estimate that, through May 2000, approximately 70% of
the hotel's guests received a corporate discount.
The chief corporate accounts (as designated in the hotel's records)
include: IBM, Micro Motion, Dieterich Standard, Printrak, SCC, Valleylab,
NCAR/UCAR, Ball Aerospace, Sybase, Sun Microsystems, US West, Xilinx, and
Storagetek. During 2000 (through May), the 10 largest corporate accounts were
responsible for approximately 37% of the hotel's occupancy. There can be no
assurance, however, that the hotel will continue to receive significant
occupancy, or any occupancy, from the corporate accounts identified above.
S-5
<PAGE>
The table below shows the average effective annual rental per square foot
since 1995:
<TABLE>
<CAPTION>
2000
1995 1996 1997 1998 1999 (ANNUALIZED)
------------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 55.80 $ 62.25 $ 65.26 $ 66.84 $ 63.64 $ 68.94
</TABLE>
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $11,461,450 and would be depreciated by us, if
we purchase the hotel, using the straight-line method over a life of 39 years
(or less, as permitted by the Internal Revenue Code). The basis of the personal
property component of the hotel would be depreciated in accordance with the
modified accelerated cost recovery system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
2000:
<TABLE>
<CAPTION>
ASSESSED TAX RATE AMOUNT
TAX JURISDICTION VALUE (PER $1000) OF TAX
------------------------ ------------- ------------- -----------
<S> <C> <C> <C>
County of Boulder $2,500,590 75.767 $189,462
</TABLE>
We estimate that the annual tax for 2000 on the expected improvements will
be approximately $11,000 or less.
At least five competing hotels are located within three miles of the
hotel. (The names of the competing franchises, as listed below, may be
registered as service marks or trade names.) Of these competing hotels, one is
newer than the hotel. The newer competing hotel has a franchise with Marriott.
The other competing hotels have franchises with Courtyard by Marriott,
Residence Inn by Marriott and Regal (the fourth hotel is a local, unfranchised
property). We believe that the rates charged by the Boulder hotel are generally
competitive with the rates charged by these other hotels. We are not aware of
any ongoing or proposed construction for other extended-stay hotels.
[REMAINDER OF PAGE IS INTENTIONALLY BLANK]
S-6
<PAGE>
PROPERTY DESCRIPTION UPDATES
The following sections provide updated information about our hotels. The
selected hotel information relates to the period from January 1, 2000 through
May 31, 2000 (unless indicated to the contrary). Please refer to Supplement No.
5 and Supplement No. 6 for additional information about the hotels.
1. DALLAS -- ADDISON
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation ......... $ 424,000
Improvement Funds Committed Since Hotel Acquisition ....... $ 283,376
Occupancy Rate ............................................ 81.78%
Average Effective Rental per Square Foot (annualized) ..... $ 51.42
Average Daily Rate per Suite .............................. $ 88.24
Average Daily Revenue per Available Suite ................. $ 72.16
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER (KING) MASTER (DOUBLE) TWO BEDROOM
-------------------- ---------- --------------- ----------------- ------------
<S> <C> <C> <C> <C>
1 to 4 $139 $149 $149 $181
5 to 11 119 129 129 169
12 to 29 99 109 109 149
30 or more 89 99 99 139
</TABLE>
Real estate tax information for 2000 is not currently available from the
local taxing authorities.
2. DALLAS -- IRVING/LAS COLINAS
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation ......... $507,000
Improvement Funds Committed Since Hotel Acquisition ....... $344,180
Occupancy Rate ............................................ 75.22 %
Average Effective Rental per Square Foot (annualized) ..... $ 44.41
Average Daily Rate per Suite .............................. $ 95.37
Average Daily Revenue per Available Suite ................. $ 71.73
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $139 $139 $199
5 to 12 119 119 159
13 to 29 109 109 149
30 or more 89 89 129
</TABLE>
Real estate tax information for 2000 is not currently available from the
local taxing authorities.
S-7
<PAGE>
3. NORTH DALLAS -- PLANO
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation .............. $27,500
Improvement Funds Committed Since Hotel Acquisition ............ $14,979
Occupancy Rate ................................................. 86.14 %
Average Effective Rental per Square Foot (annualized) .......... $ 44.89
Average Daily Rate per Suite ................................... $ 72.33
Average Daily Revenue per Available Suite ...................... $ 62.30
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD EXTENDED DOUBLE TWO BEDROOM
-------------------- ---------- ----------------- ------------
<S> <C> <C> <C>
1 to 4 $129 $129 $159
5 to 12 109 109 139
13 to 29 99 99 129
30 or more 79 79 119
</TABLE>
Real estate tax information for 2000 is not currently available from the
local taxing authorities.
4. RICHMOND -- WEST END
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation ......... $ 106,500
Improvement Funds Committed Since Hotel Acquisition ....... none
Occupancy Rate ............................................ 76.12%
Average Effective Rental per Square Foot (annualized) ..... $ 44.14
Average Daily Rate per Suite .............................. $ 82.19
Average Daily Revenue per Available Suite ................. $ 62.56
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY HOMEWOOD HOMEWOOD
(NUMBER OF NIGHTS) (KING BED) (DOUBLE BED) TWO BEDROOM
-------------------- ------------ -------------- ------------
<S> <C> <C> <C>
1 to 4 $124 $129 $179
5 to 29 114 119 149
30 or more 89 99 129
</TABLE>
REAL ESTATE TAXES FOR 2000
<TABLE>
<CAPTION>
ASSESSED TAX RATE AMOUNT
TAX JURISDICTION VALUE (PER $100) OF TAX
------------------------ ------------- ------------ ----------
<S> <C> <C> <C>
County of Henrico $5,806,300 0.94 $54,579
</TABLE>
We estimate that the annual tax for 2000 on the expected improvements will
be approximately $500 or less.
S-8
<PAGE>
5. ATLANTA -- GALLERIA/CUMBERLAND
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation ......... $435,500
Improvement Funds Committed Since Hotel Acquisition ....... $265,666
Occupancy Rate ............................................ 66.92 %
Average Effective Rental per Square Foot (annualized) ..... $ 33.48
Average Daily Rate per Suite .............................. $ 94.67
Average Daily Revenue per Available Suite ................. $ 63.35
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $119 $129 $179
5 to 11 99 109 169
12 to 29 85 95 159
30 or more 79 89 149
</TABLE>
Real estate tax information for 2000 is not currently available from the
local taxing authorities.
6. ATLANTA -- PEACHTREE
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation ......... $ 505,500
Improvement Funds Committed Since Hotel Acquisition ....... $ 121,400
Occupancy Rate ............................................ 85.35%
Average Effective Rental per Square Foot (annualized) ..... $ 40.59
Average Daily Rate per Suite .............................. $ 76.45
Average Daily Revenue per Available Suite ................. $ 65.25
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $109 $119 $159
5 to 11 89 109 149
12 to 29 84 99 139
30 or more 79 89 129
</TABLE>
REAL ESTATE TAXES FOR 2000
<TABLE>
<CAPTION>
ASSESSED TAXABLE TAX AMOUNT
TAX JURISDICTION VALUE PORTION (40%) RATE OF TAX
---------------------- ------------- --------------- ------------ ----------
<S> <C> <C> <C> <C>
Gwinnett County $5,688,440 $2,275,376 0.03225 $73,381
</TABLE>
We estimate that the annual tax for 2000 on the expected improvements will
be approximately $3,300 or less.
S-9
<PAGE>
7. BALTIMORE -- BWI AIRPORT
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation .............. $59,500
Improvement Funds Committed Since Hotel Acquisition ............ $52,941
Occupancy Rate ................................................. 86.59 %
Average Effective Rental per Square Foot (annualized) .......... $ 59.96
Average Daily Rate per Suite ................................... $ 97.62
Average Daily Revenue per Available Suite ...................... $ 84.52
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $139 $139 $179
5 to 11 119 119 179
12 to 29 109 109 179
30 or more 95 95 179
</TABLE>
REAL ESTATE TAXES FOR 2000
(based on a formula that uses the assessed values for multiple years
to determine a separate taxable amount)
<TABLE>
<CAPTION>
TAXABLE TAX RATE AMOUNT
TAX JURISDICTION AMOUNT (PER $100) OF TAX
---------------------------- ------------- ------------ -----------
<S> <C> <C> <C>
State of Maryland/
Anne Arundel County $4,331,720 2.57 $111,325
</TABLE>
We estimate that the annual tax for 2000 on the expected improvements will
be approximately $800 or less.
8. CLEARWATER
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation .............. $16,000
Improvement Funds Committed Since Hotel Acquisition ............ $5,678
Occupancy Rate ................................................. 84.03 %
Average Effective Rental per Square Foot (annualized) .......... $ 58.52
Average Daily Rate per Suite ................................... $ 99.53
Average Daily Revenue per Available Suite ...................... $ 83.64
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY HOMEWOOD HOMEWOOD
(NUMBER OF NIGHTS) KING DOUBLE TWO BEDROOM
-------------------- ---------- --------- ------------
<S> <C> <C> <C>
1 to 4 $119 $129 $159
5 to 29 99 109 139
30 or more 69 79 125
</TABLE>
Real estate tax information for 2000 is not currently available from the
local taxing authorities.
S-10
<PAGE>
9. DETROIT -- WARREN
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation ......... $ 331,000
Improvement Funds Committed Since Hotel Acquisition ....... $ 23,831
Occupancy Rate ............................................ 70.57%
Average Effective Rental per Square Foot (annualized) ..... $ 60.71
Average Daily Rate per Suite .............................. $ 97.81
Average Daily Revenue per Available Suite ................. $ 69.02
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $114 $139 $169
5 to 12 104 129 149
13 to 29 99 119 149
30 or more 89 109 149
</TABLE>
REAL ESTATE TAXES FOR 2000
<TABLE>
<CAPTION>
ASSESSED TAX RATE AMOUNT
TAX JURISDICTION VALUE (PER $100) OF TAX
----------------------- ------------- ------------------ ----------
<S> <C> <C> <C>
City of Warren $1,152,900 1.605 $18,504
County of Macomb $1,152,900 2.86 $32,973
School District $1,152,900 0.497 $ 5,730
-------
TOTAL $57,207
=======
</TABLE>
We estimate that the annual tax for 2000 on the expected improvements will
be approximately $8,200 or less.
10. SALT LAKE CITY -- MIDVALE
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation .............. $ 72,000
Improvement Funds Committed Since Hotel Acquisition ............ $ 9,592
Occupancy Rate ................................................. 65.03%
Average Effective Rental per Square Foot (annualized) .......... $ 35.02
Average Daily Rate per Suite ................................... $ 90.49
Average Daily Revenue per Available Suite ...................... $ 58.85
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY HOMEWOOD HOMEWOOD
(NUMBER OF NIGHTS) (KING) (DOUBLE) MASTER TWO BEDROOM
-------------------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C>
1 to 4 $99 $99 $109 $179
5 to 12 89 89 99 169
13 to 29 79 79 89 159
30 or more 69 69 79 149
</TABLE>
Real estate tax information for 2000 is not currently available from the
local taxing authorities.
S-11
<PAGE>
11. JACKSON -- RIDGELAND
SELECTED HOTEL INFORMATION
<TABLE>
<S> <C>
Total Expected Cost of Improvements or Renovation .............. $58,500
Improvement Funds Committed Since Hotel Acquisition ............ $2,805
Occupancy Rate ................................................. 74.07%
Average Effective Rental per Square Foot (annualized) .......... $ 49.98
Average Daily Rate per Suite ................................... $ 84.82
Average Daily Revenue per Available Suite ...................... $ 62.83
</TABLE>
RATE STRUCTURE
<TABLE>
<CAPTION>
LENGTH OF STAY
(NUMBER OF NIGHTS) HOMEWOOD MASTER TWO BEDROOM
-------------------- ---------- -------- ------------
<S> <C> <C> <C>
1 to 4 $99 $99 $159
5 to 11 89 89 129
12 to 28 74 74 119
29 or more 69 69 109
</TABLE>
Real estate tax information for 2000 is not currently available from the
local taxing authorities.
12. PHILADELPHIA/GREAT VALLEY
The depreciable real property component of the hotel, based on our
leasehold interest, has a currently estimated Federal tax basis of $15,519,572
and will be depreciated using the straight-line method over a life of 39 years
(or less, as permitted by the Internal Revenue Code).
For additional 2000 information, see Supplement No. 6.
[REMAINDER OF PAGE IS INTENTIONALLY BLANK]
S-12
<PAGE>
SELECTED FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (EXCEPT AS NOTED)
<TABLE>
<S> <C>
REVENUES:
Lease revenue .................................................. $ 3,406,678
Interest income and other revenue .............................. 48,007
-------------
Total revenue .................................................. 3,454,685
EXPENSES:
Taxes, insurance, and other .................................... 691,575
General and administrative ..................................... 254,736
Depreciation ................................................... 549,201
Interest ....................................................... 1,453,110
Total expenses ................................................. 2,948,622
-------------
Net income ..................................................... $ 506,063
=============
PER SHARE
Earnings per share -- basic and diluted ........................ $ 0.14
Distributions to common shareholders ........................... $ --
Weighted-average common shares outstanding ..................... 3,607,458
Balance Sheet Data at March 31, 2000:
Cash and cash equivalents ..................................... $ 3,781,922
Investment in hotels, net ..................................... $ 93,450,963
Total assets .................................................. $ 102,814,839
Notes payable -- secured ...................................... $ 68,569,500
Shareholders Equity ........................................... $ 32,997,819
OTHER DATA
Cash flow from:
Operating activities .......................................... $ (340,502)
Investing activities .......................................... $ (139,941)
Financing activities .......................................... $ 3,681,021
Number of hotels owned at March 31, 2000 ....................... 11
Number of hotel rooms (suites) owned at March 31, 2000 ......... 1,218
FUNDS FROM OPERATIONS CALCULATION
Net income ..................................................... $ 506,063
Depreciation of real estate owned ............................. 549,201
Funds from Operations (a) ...................................... $ 1,055,264
=============
</TABLE>
(a) "Funds from operations" is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. We consider funds from
operations in evaluating property acquisitions and operating performance, and
believe that funds from operations should be considered along with, but not as
an alternative to, net income and cash flows as a measure of our operating
performance and liquidity. Funds from operations, which may not be comparable
to other similarly titled measures of other REITs, does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to
fund cash needs.
S-13
<PAGE>
EXPERTS
The combined financial statements for the Philadelphia/Great Valley and
Boulder hotels are set forth below. These financial statements have been
included herein in reliance on the report of L.P. Martin & Company, P.C.,
independent certified public accountants, which is also included herein, and
upon the authority of that firm as an expert in accounting and auditing.
[REMAINDER OF PAGE IS INTENTIONALLY BLANK]
S-14
<PAGE>
APPLE SUITES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
PROPERTY FINANCIAL STATEMENTS -----
<S> <C>
Philadelphia/Great Valley and Boulder Hotels
Independent Auditors' Report ................................................... F-3
Combined Balance Sheets -- December 31, 1999 and December 31, 1998 ............. F-4
Combined Statements of Shareholders' Equity -- Years ended December 31, 1999 and
December 31, 1998 ............................................................. F-5
Combined Income Statements -- Years ended December 31, 1999 and December 31,
1998 .......................................................................... F-5
Combined Statements of Cash Flows -- Years ended December 31, 1999 and
December 31, 1998 ............................................................. F-6
Notes to the Combined Financial Statements -- December 31, 1999 and December 31,
1998 .......................................................................... F-7
* * *
Combined Balance Sheet -- March 31, 2000 (unaudited) ........................... F-11
Combined Statement of Shareholders' Equity -- For the Period January 1, 2000
through March 31, 2000 (unaudited) ............................................ F-12
Combined Income Statement -- For the Period January 1, 2000 through March 31,
2000 (unaudited) .............................................................. F-12
Combined Statement of Cash Flows -- For the Period January 1, 2000 through
March 31, 2000 (unaudited) .................................................... F-13
Notes to the Combined Financial Statements -- For the Period January 1, 2000
through March 31, 2000 (unaudited) ............................................ F-14
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) ------
<S> <C>
Apple Suites, Inc.
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2000 ........... F-18
Notes to Pro Forma Condensed Consolidated Balance Sheet ....................... F-19
Pro Forma Condensed Consolidated Statements of Operations for the Year Ended
December 31, 1999 and the Three Months Ended March 31, 2000 .................. F-20
Notes to Pro Forma Condensed Consolidated Statements of Operations ............ F-22
Apple Suites Management, Inc.
Pro Forma Condensed Consolidated Statements of Operations for the Year Ended
December 31, 1999 and the Three Months Ended March 31, 2000 .................. F-23
Notes to Pro Forma Condensed Consolidated Statements of Operations ............ F-25
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C> <C>
L.P. MARTIN & COMPANY
A PROFESSIONAL CORPORATION
MEMBERS CERTIFIED PUBLIC ACCOUNTANTS MEMBERS
VIRGINIA SOCIETY OF 4132 INNSLAKE DRIVE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS GLEN ALLEN, VIRGINIA 23060 CERTIFIED PUBLIC ACCOUNTANTS
LEE P. MARTIN, JR., C.P.A. PHONE: (804) 345-2626 ROBERT C. JOHNSON, C.P.A.
WILLIAM L. GRAHAM, C.P.A. FAX: (804) 346-9311 LEE P. MARTIN, C.P.A. (1948-76)
BERNARD G. KINZIE, C.P.A.
W. BARCLAY BRADSHAW, C.P.A.
</TABLE>
INDEPENDENT AUDITORS' REPORT
Apple Suites, Inc.
Richmond, Virginia
We have audited the accompanying combined balance sheets of the Homewood
Suites Acquisition Hotels (described in Note 1) as of December 31, 1999 and
1998, and the related combined statements of income, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the management of the hotels. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. The accompanying financial statements were prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission as described in Note 1 to the financial statements and are
not intended to be a complete presentation of the Homewood Suites Acquisition
Hotels.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Homewood
Suites Acquisition Hotels as of December 31, 1999 and 1998, and the combined
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ L.P. Martin & Co, P.C.
Richmond, Virginia
May 31, 2000
F-3
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................. $ 231,297 $ 142,363
Accounts Receivable, Net ............................. 207,653 157,754
Prepaids and Other ................................... 85,403 15,751
------------ ------------
Total Current Assets ............................... 524,353 315,868
------------ ------------
INVESTMENT IN HOTEL PROPERTIES
Land and Improvements ................................ 1,911,918 1,911,918
Buildings and Improvements ........................... 13,078,590 13,078,407
Furniture, Fixtures and Equipment .................... 4,362,527 4,091,364
------------ ------------
Total .............................................. 19,353,035 19,081,689
Less: Accumulated Depreciation ....................... (4,170,565) (3,473,189)
------------ ------------
Net Investment in Hotel Properties ................. 15,182,470 15,608,500
------------ ------------
Total Assets ....................................... $ 15,706,823 $ 15,924,368
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable ..................................... $ 17,104 $ 44,353
Accrued Taxes ........................................ 277,595 358,676
Accrued Expenses - Other ............................. 105,781 109,590
------------ ------------
Total Current Liabilities .......................... 400,480 512,619
------------ ------------
SHAREHOLDERS' EQUITY
Contributed Capital .................................. 2,364,469 5,303,463
Retained Earnings .................................... 12,941,874 10,108,286
------------ ------------
Total Shareholders' Equity ......................... 15,306,343 15,411,749
------------ ------------
Total Liabilities and Shareholders' Equity ......... $ 15,706,823 $ 15,924,368
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
--------------- ------------- --------------
<S> <C> <C> <C>
Balances, January 1, 1998 ........... $ 6,640,591 $ 7,475,355 $ 14,115,946
Net Income .......................... -- 2,632,931 2,632,931
Capital Distributions, Net .......... (1,337,128) -- (1,337,128)
------------ ----------- ------------
Balances, December 31, 1998 ......... 5,303,463 10,108,286 15,411,749
Net Income .......................... -- 2,833,588 2,833,588
Capital Distributions, Net .......... (2,938,994) -- (2,938,994)
------------ ----------- ------------
Balances, December 31, 1999 ......... $ 2,364,469 $12,941,874 $ 15,306,343
============ =========== ============
</TABLE>
COMBINED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998
------------- -------------
<S> <C> <C>
GROSS OPERATING REVENUE
Suite Revenue ........................................................... $7,419,101 $7,173,338
Other Customer Revenue .................................................. 398,812 437,197
---------- ----------
Total Revenue ......................................................... 7,817,913 7,610,535
---------- ----------
EXPENSES
Property and Operating .................................................. 2,491,119 2,400,823
General and Administrative .............................................. 105,719 95,694
Advertising and Promotion ............................................... 328,070 325,398
Utilities ............................................................... 270,080 291,153
Real Estate and Personal Property Taxes, and Property Insurance ......... 444,162 338,054
Land Rent ............................................................... 100,000 100,000
Depreciation Expense .................................................... 714,411 1,003,928
Franchise and Management Fees ........................................... 530,764 286,933
Pre-Opening Expenses .................................................... -- 135,621
---------- ----------
Total Expenses ........................................................ 4,984,325 4,977,604
---------- ----------
Net Income ............................................................ $2,833,588 $2,632,931
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income .......................................... $ 2,833,588 $ 2,632,931
------------ ------------
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation ...................................... 714,411 1,003,928
Change In:
Accounts receivable .............................. (49,899) (96,807)
Prepaids and other current assets ................ (69,652) (15,751)
Accounts payable ................................. (27,249) (491,258)
Accrued taxes .................................... (81,081) 158,299
Accrued expenses - other ......................... (3,809) 46,124
------------ ------------
Net adjustments ...................................... 482,721 604,535
------------ ------------
Net cash flows from operating activities ....... 3,316,309 3,237,466
------------ ------------
CASH FLOWS TO FINANCING ACTIVITIES
Capital distributions, net .......................... (3,227,375) (3,139,575)
------------ ------------
Net increase in cash .............................. 88,934 97,891
Cash, beginning of year ........................... 142,363 44,472
------------ ------------
Cash, end of year ................................. $ 231,297 $ 142,363
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURES:
NONCASH FINANCING AND INVESTING ACTIVITIES
Year Ended December 31, 1999
Investments in hotel properties in the amount of $288,381 were financed
with capital contributions.
Year Ended December 31, 1998
Investments in hotel properties in the amount of $1,802,447 were financed
with capital contributions.
Construction in progress in the amount of $7,510,072 was reclassified to
investment in hotel properties.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Acquisition Hotels (the Hotels) consist of the
following:
<TABLE>
<CAPTION>
PROPERTY HOTEL LOCATION DATE OPENED # OF SUITES
------------------------------ ----------------------- --------------- ------------
<S> <C> <C> <C>
Boulder Boulder, Colorado January, 1991 112
Philadelphia/Great Valley Malvern, Pennsylvania January, 1998 123
</TABLE>
Economic conditions in the localities in which the individual hotels are
located impact revenues and the ability to collect accounts receivable.
The Hotels specialize in providing extended stay lodging to business or
leisure travelers. While customers may rent rooms for a night, terms of up to a
month or longer are available. Services offered, which are particularly
attractive to the extended stay traveler, include laundry services, 24 hour
on-site convenience stores and grocery shopping services.
The Hotels were owned and managed by affiliates of Promus Hotels, Inc.
(the Owner) through November 30, 1999. Promus Hotels, Inc. and the affiliated
entities owning the Hotels were acquired by Hilton Hotels Corporation effective
November 30, 1999. Hilton Hotels Corporation has managed the Hotels since that
date. The accompanying combined financial statements of the Hotels have been
presented on a combined basis because the Owner sold the Philadelphia/Great
Valley Hotel to an affiliate of Apple Suites, Inc. on May 8, 2000 and has a
contract pending to sell the Boulder Hotel property to an affiliate of Apple
Suites, Inc. Apple Suites, Inc., is a real estate investment trust established
to acquire equity interests in hotel properties. The statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for inclusion in a filing by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the combined financial statements have been presented on a pretax
basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Property -- The Hotel properties are recorded at cost. Depreciation
through August 1999 has been recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 5-12 Years
Buildings and Improvements ................. 15-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
Major renewals, betterments and improvements are capitalized, while
ongoing maintenance and repairs are expensed as incurred. Building costs
include interest capitalized during the construction period. Construction in
progress represents Hotel
F-7
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
properties under construction. At the point construction is completed and the
Hotels are ready to be placed in service, the costs are reclassified to
investment in Hotel properties for financial statement presentation.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
Annually, management of the hotels reviews the carrying value and
remaining depreciable lives of the Hotel properties and related assets. During
1999, the Owner identified the Philadelphia/Great Valley and Boulder Hotel
properties as held for disposal. In accordance with Statement of Financial
Accounting Standards number 121, management discontinued depreciating the
assets at this time. Accordingly, the 1999 income statement includes only eight
months depreciation. Sales proceeds received from the sale of the
Philadelphia/Great Valley property on May 8, 2000 and anticipated sales
proceeds for the pending sale of the Boulder Hotel property both exceed the net
carrying values of the properties reflected in these financial statements.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Pre-Opening Expenses -- Pre-opening expenses represent operating expenses
incurred prior to initial opening of the hotels. In 1998, pre-opening expenses
of $135,621 were expensed as incurred for the Philadelphia/Great Valley hotel.
Inventories -- The Hotels maintain supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
NOTE 3 -- RELATED PARTY TRANSACTIONS
During the years ended December 31, 1999 and 1998, the following owner
related fees were expensed.
F-8
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS - (CONTINUED)
<TABLE>
<CAPTION>
TOTAL EXPENSE
-----------------------
FEE TYPE BASIS FOR DETERMINATION 1999 1998
------------------------------------ ---------------------------- ---------- ----------
<S> <C> <C> <C>
Accounting Fees .................... $1,000 per hotel per month $ 24,000 $ 24,000
Corporate Advertising,
Training and Reservations ......... 4% of Net Suite Revenue $296,764 $286,934
Franchise Fees ..................... 4% of Net Suite Revenue $296,764 $286,933
Management Fees .................... 3% of Total Revenue $234,000 $ --
</TABLE>
The acquisition cost of the properties and related furnishings and
equipment was financed by the Owner. The Owner allocated interest to each
property on monies advanced to fund the construction costs. The interest costs
have been capitalized and depreciated in accordance with the Hotels' normal
depreciation policy. Interest capitalized and included in the cost basis of the
hotels totaled $242,065 in 1998.
On most property and equipment purchases, excluding base hotel
construction contracts, the following fees paid to the Owner have been
capitalized:
Purchase Fee -- 3.0% to 4.0% of Asset Cost
Project Management Fee -- 4.0% to 4.5% of labor portion of capitalized
asset costs
Each Hotel maintains a depository bank account into which customer
revenues have been deposited. The bulk of each Hotel's operating expenditures
are paid through the Owner's corporate accounts. Funds are transferred from the
Hotel's depository bank accounts to the Owner periodically. The transfers to
the Owner and expenditures made on behalf of the Hotels by the Owner are
accounted for through various intercompany accounts. No interest has been
charged on these intercompany advances from ongoing operations. There is no
intention to repay any advances to or from the Owner. Accordingly, the net
amounts have been included in shareholders' equity with 1999 and 1998
intercompany/intracompany transfers being reflected as net capital
distributions.
NOTE 4 -- LAND LEASE
The land on which the Philadelphia/ Great Valley hotel is located is
leased. The lease is for a 30 year term beginning May 1, 1997 and includes
three 10 year renewal options. Scheduled rent is $100,000 annually, payable in
monthly installments. Rent can be increased but not decreased, every 5 years by
the CPI change, not to exceed 15%.
Below are scheduled minimum lease payments for each of the next 5 years.
<TABLE>
<S> <C>
2000 ................. $100,000
2001 ................. 100,000
2002 ................. 100,000
2003 ................. 100,000
2004 ................. 100,000
--------
$500,000
========
</TABLE>
F-9
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
NOTE 4 -- LAND LEASE - (CONTINUED)
Rent expense for each of the years ended December 31, totaled $100,000.
NOTE 5 -- CONCENTRATIONS OF CREDIT RISK
At December 31, 1999, financial instruments that subject the Company to
concentrations of credit risk consist of cash deposits in a single financial
institution which exceed maximum amounts insurable by FDIC by $52,977.
F-10
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash ................................................. $ 154,617
Accounts receivable, net ............................. 334,193
Prepaids and other ................................... 37,509
------------
Total current assets ............................... 526,319
------------
INVESTMENT IN HOTEL PROPERTIES
Land and improvements ................................ 1,911,918
Buildings and Improvements ........................... 13,078,590
Furniture, fixtures and equipment .................... 4,362,527
------------
Total .............................................. 19,353,035
Less: Accumulated depreciation ....................... (4,170,565)
------------
Net investment in hotel properties ................. 15,182,470
------------
Total assets ....................................... $ 15,708,789
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ..................................... $ 1,679
Accrued taxes ........................................ 223,311
Accrued expenses -- Other ............................ 101,583
------------
Total current liabilities .......................... 326,573
------------
SHAREHOLDERS' EQUITY
Contributed capital ................................... 1,595,274
Retained earnings .................................... 13,786,942
------------
Total Shareholders' Equity ......................... 15,382,216
------------
Total Liabilities and Shareholders' Equity ......... $ 15,708,789
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-11
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 2000 THROUGH MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
------------- -------------- --------------
<S> <C> <C> <C>
Balances, January 1, 2000 .......... $2,364,469 $12,941,874 $15,306,343
Net Income ......................... -- 845,068 845,068
Capital Distributions, Net ......... (769,195) -- (769,195)
---------- ----------- -----------
Balances, March 31, 2000 ........... $1,595,274 $13,786,942 $15,382,216
========== =========== ===========
</TABLE>
COMBINED INCOME STATEMENT
FOR THE PERIOD JANUARY 1, 2000 THROUGH MARCH 31, 2000 (UNAUDITED)
<TABLE>
<S> <C>
GROSS OPERATING REVENUE
Suite Revenue ........................................................... $1,841,936
Other Customer Revenue .................................................. 93,150
----------
Total Revenue ......................................................... 1,935,086
----------
EXPENSES
Property and Operating .................................................. 633,274
General and Administrative .............................................. 33,287
Advertising and Promotion ............................................... 82,781
Utilities ............................................................... 65,361
Real Estate and Personal Property Taxes, and Property Insurance ......... 118,585
Land Rent ............................................................... 25,000
Franchise and Management Fees ........................................... 131,730
----------
Total Expenses ........................................................ 1,090,018
----------
Net Income ............................................................ $ 845,068
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-12
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 2000 THROUGH MARCH 31, 2000 (UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES
Net Income ...................................................................... $ 845,068
----------
Adjustments to reconcile net income to net cash provided by operating activities:
Change in:
Accounts receivable .......................................................... (126,540)
Prepaids and other current assets ............................................ 47,894
Accounts payable ............................................................. (15,425)
Accrued taxes ................................................................ (54,284)
Accrued expenses - other ..................................................... (4,198)
----------
Net Adjustments .................................................................. (152,553)
----------
Net cash flows from operating activities ..................................... 692,515
CASH FLOWS TO FINANCING ACTIVITIES:
Net equity distributions ........................................................ (769,195)
----------
Net decrease in cash ......................................................... (76,680)
Cash, January 1, 2000 ........................................................ 231,297
----------
Cash, March 31, 2000 ......................................................... $ 154,617
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-13
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2000 THROUGH MARCH 31, 2000 (UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Homewood Suites Acquisition Hotels (the Hotels) consist of the
following:
<TABLE>
<CAPTION>
PROPERTY HOTEL LOCATION DATE OPENED # OF SUITES
-------------------------------- ----------------------- --------------- ------------
<S> <C> <C> <C>
Boulder Boulder, Colorado January, 1991 112
Philadelphia/Great Valley Malvern, Pennsylvania January, 1998 123
</TABLE>
Economic conditions in the localities in which the individual hotels are
located impact revenues and the ability to collect accounts receivable.
The Hotels specialize in providing extended stay lodging to business or
leisure travelers. While customers may rent rooms for a night, terms of up to a
month or longer are available. Services offered, which are particularly
attractive to the extended stay traveler, include laundry services, 24 hour
on-site convenience stores and grocery shopping services.
The Hotels have been owned and managed by Hilton Hotels Corporation (the
Owner) throughout the financial statement period. The accompanying combined
financial statements of the Hotels have been presented on a combined basis
because the Owner sold the Philadelphia/Great Valley Hotel to an affiliate of
Apple Suites, Inc. on May 8, 2000 and has a contract pending to sell the
Boulder Hotel property to an affiliate of Apple Suites, Inc. Apple Suites, Inc.
is a real estate investment trust established to acquire equity interests in
hotel properties. The statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for inclusion in a filing
by Apple Suites, Inc.
The corporate owner pays income taxes on taxable income of the company as
a whole and does not allocate income taxes to individual properties.
Accordingly, the combined financial statements have been presented on a pretax
basis.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Property -- The Hotel properties are recorded at cost. Depreciation
through August, 1999 has been recorded straight-line using the following lives:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Land Improvements .......................... 5-12 Years
Buildings and Improvements ................. 15-35 Years
Furniture, Fixtures and Equipment .......... 3-10 Years
</TABLE>
F-14
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2000 THROUGH MARCH 31, 2000 (UNAUDITED) - (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Major renewals, betterments and improvements are capitalized, while
ongoing maintenance and repairs are expensed as incurred. Building costs
include interest capitalized during the construction period.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures related thereto. Actual results could
differ from those estimates.
Annually, management of the hotels reviews the carrying value and
remaining depreciable lives of the Hotel properties and related assets. During
1999, the Owner identified the Philadelphia/Great Valley and Boulder Hotel
properties as held for disposal. In accordance with Statement of Financial
Accounting Standards number 121, management discontinued depreciating the
assets at this time. Accordingly, the January 1, 2000 through March 31, 2000
income statement does not include depreciation expense. Sales proceeds received
from the sale of the Philadelphia/Great Valley property on May 8, 2000 and
anticipated sales proceeds for the pending sale of the Boulder Hotel property
both exceed the net carrying values of the properties reflected in these
financial statements.
Accounts receivable are recorded net of an allowance for doubtful accounts
based on management's historical experience in estimating credit losses. Actual
uncollectible balances written off may be more or less than the allowance
recorded.
Cash -- Cash includes all highly liquid investments with a maturity date
of three months or less when purchased.
Advertising -- Advertising costs are expensed in the period incurred.
Inventories -- The Hotels maintain supplies of room linens and food and
beverages. However, due to the ongoing routine replacement of these items and
the difficulty in establishing market values, management has chosen to expense
these items at point of purchase.
F-15
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2000 THROUGH MARCH 31, 2000 (UNAUDITED) - (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS
During the period January 1, 2000 through March 31, 2000, the following
Owner related fees were expensed.
<TABLE>
<CAPTION>
FEE TYPE BASIS FOR DETERMINATION TOTAL EXPENSE
------------------------------- ---------------------------- --------------
<S> <C> <C>
Accounting Fees ............... $1,000 per hotel per month $ 6,000
Corporate Advertising, Training
and Reservations ............. 4% of net suite revenue 73,677
Franchise Fees ................ 4% of net suite revenue 73,677
Management Fees ............... 3% of net suite revenue 58,053
</TABLE>
The acquisition cost of the properties and related furnishings and
equipment was financed by the Owner. The Owner allocated interest to each
property on monies advanced to fund the construction costs. The interest costs
have been capitalized and depreciated in accordance with the Hotels' normal
depreciation policy.
On most property and equipment purchases, excluding base hotel
construction contracts, the following fees paid to Hilton Hotels Corporation
have been capitalized:
Purchase Fee -- 4% of Asset Cost
Project Management Fee -- 4.0 % to 4.5% of labor portion of capitalized
asset costs
Each Hotel maintains a depository bank account into which customer
revenues have been deposited. The bulk of each Hotel's operating expenditures
are paid through the Owner's corporate accounts. Funds are transferred from the
Hotel's depository bank accounts to the Owner periodically. The transfers to
the Owner and expenditures made on behalf of the Hotels by the Owner are
accounted for through various intercompany accounts. No interest has been
charged on these intercompany advances from ongoing operations. There is no
intention to repay any advances to or from the Owner. Accordingly, the net
amounts have been included in shareholders' equity with
intercompany/intracompany transfers being reflected as net capital
distributions.
F-16
<PAGE>
HOMEWOOD SUITES ACQUISITION HOTELS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2000 THROUGH MARCH 31, 2000 (UNAUDITED) - (CONTINUED)
NOTE 4 -- LAND LEASE
The land on which the Philadelphia/Great Valley hotel is located is
leased. The lease is for a 30 year term beginning May 1, 1997 and includes
three 10 year renewal options. Scheduled rent is $100,000 annually, payable in
monthly installments. Rent can be increased but not decreased, every 5 years by
the CPI change, not be exceed 15%.
Below are scheduled minimum lease payments for each of the next 5 years.
<TABLE>
<S> <C>
2000 ................. $100,000
2001 ................. 100,000
2002 ................. 100,000
2003 ................. 100,000
2004 ................. 100,000
--------
$500,000
========
</TABLE>
Rent expense for the period January 1, 2000 through March 31, 2000 totaled
$25,000.
F-17
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AS OF MARCH 31, 2000 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Balance Sheet of
Apple Suites, Inc. (the "Company") is presented as if the acquisition of the
Homewood Suites -- Malvern, PA hotel on May 8, 2000 and the probable
acquisition of the Homewood Suites -- Boulder, CO hotel from Promus Hotels,
Inc. or its affiliates ("Promus"), which is now a wholly-owned subsidiary of
Hilton Hotels Corporation, had occurred on March 31, 2000. See Note A for
individual hotel details. Such information is based in part upon the historical
Consolidated Balance Sheet of the Company as of March 31, 2000. In management's
opinion, all adjustments necessary to reflect the effects of these transactions
have been made.
The following unaudited Pro Forma Condensed Consolidated Balance Sheet is
not necessarily indicative of what the actual financial position would have
been assuming such transactions had been completed as of March 31, 2000, nor
does it purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
HOMEWOOD
SUITES
HISTORICAL ACQUISITION
BALANCE (A IV) TOTAL
SHEET ADJUSTMENTS PRO FORMA
---------------- ---------------------- ---------------
<S> <C> <C> <C>
ASSETS
Investment in hotel properties ......................... $ 93,450,963 $ 30,981,480 (A) $124,432,443
Cash and cash equivalents .............................. 3,781,922 (2,772,886)(D) 1,009,036
Restricted cash ........................................ 696,869 -- 696,869
Rent receivable from Apple Suites Management, Inc. ..... 2,641,141 -- 2,641,141
Notes and other receivable from Apple Suites
Management, Inc. ..................................... 694,766 -- 694,766
Capital improvement reserve ............................ 753,927 -- 753,927
Prepaid expenses ....................................... 263,781 -- 263,781
Other assets ........................................... 531,470 -- 531,470
------------ ------------- ------------
Total Assets ......................................... $102,814,839 $ 28,208,594 $131,023,433
============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable-secured .................................. $ 68,569,500 $ 22,780,500 (B) $ 91,350,000
Accounts payable ....................................... 161,258 -- 161,258
Accounts payable-affiliate ............................. 531,285 -- 531,285
Distributions payable .................................. -- -- --
Accrued expenses ....................................... 554,977 -- 554,977
------------ ------------- ------------
Total Liabilities .................................... 69,817,020 22,780,500 92,597,520
SHAREHOLDERS' EQUITY
Common stock, no par value, authorized 200,000,000
shares; issued and outstanding 3,922,923 shares ...... 32,985,016 5,428,094 (C) 38,413,110
Class B convertible stock, no par value, authorized
240,000 shares; issued and outstanding 240,000 shares. 24,000 -- 24,000
Distributions greater than net income .................. (11,197) -- (11,197)
------------ ------------- ------------
Total Shareholders' Equity ........................... 32,997,819 5,428,094 38,425,913
------------ ------------- ------------
Total Liabilities and Shareholders' Equity ........... $102,814,839 $ 28,208,594 $131,023,433
============ ============= ============
</TABLE>
F-18
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(A) Increase represents the purchase of 2 hotels, including the 2% acquisition
fee payable to Apple Suites Realty Group, Inc. The hotels acquired are as
follows:
<TABLE>
<CAPTION>
DATE
COMMENCED
PROPERTY OPERATIONS
----------------------------------------- --------------
<S> <C> <C>
IV Homewood Suites -- Malvern, PA .......... January 1998
IV Homewood Suites -- Boulder, CO .......... January 1991
--------------------------------------------------------------
<CAPTION>
2%
DATE PURCHASE ACQUISITION DEBT
ACQUIRED PRICE FEE TOTAL INCURRED
------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
IV May 8, 2000 15,489,000 309,780 15,798,780 11,616,750
IV PENDING 14,885,000 297,700 15,182,700 11,163,750
------------------------------------------------------------------------------
Total $30,374,000 $607,480 $30,981,480 $22,780,500
</TABLE>
(B) Represents the debt incurred at acquisition. The notes bear interest of
8.5% per annum. The maturity date for the one note in the amount of
$11,616,750 is May, 2001, the maturity date for the second note in the
amount of $11,163,750 will be one year from the date of purchase.
(C) Increase to common stock to reflect the net proceeds from the sale of
606,491 common shares from the Company's continuous offering, issued
subsequent to March 31, 2000.
(D) Reflects the use of cash on hand to purchase the hotels.
F-19
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of the Company are presented as if the acquisition and pending
acquisition of the Homewood Suites hotels from Promus Hotels, Inc. or its
affiliates ("Promus"), which is now a wholly-owned subsidiary of Hilton Hotels
Corporation, had occurred at the beginning of the periods presented for the
respective periods prior to acquisition by the Company, and all of the hotels
had been leased to Apple Suites Management, Inc. or its subsidiary (the
"Lessee") pursuant to the master hotel lease agreements. Such pro forma
information is based in part upon the Consolidated Statements of Operations of
the Company, the Pro Forma Statements of Operations of the Lessee and the
historical Statements of Operations of the acquired hotels. In management's
opinion, all adjustments necessary to reflect the effects of these transactions
have been made.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations for the periods presented are not necessarily indicative of what
actual results of operations of the Company would have been assuming such
transactions had been completed as of the beginning of the periods presented,
nor does it purport to represent the results of operations for future periods.
The lease agreements between the Company and the Lessee were based on economic
conditions existing at the time of acquisition. Application of these agreements
to periods prior to the acquisition may not be meaningful.
The Company's historical Statement of Operations for the year ended
December 31, 1999 reflect only four months of operations, as the first four
hotels were purchased on September 1, 1999.
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
STATEMENT OF
OPERATIONS
--------------
<S> <C>
Revenue:
Lease revenue ...................... $ 2,518,031
Interest income and other
revenue ........................... 169,086
Expenses:
Taxes, insurance and other ......... 426,592
General and administrative ......... 153,807
Depreciation of real estate
owned ............................. 496,209
Interest ........................... 1,245,044
Rent expense ....................... --
-----------
Total expenses ...................... 2,321,652
-----------
Net income .......................... $ 365,465
===========
Earnings per common share:
Basic and Diluted ................... $ 0.14
===========
Basic and diluted weighted average
common shares outstanding .......... 2,648,196
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------------------------------------------------
HOMEWOOD HOMEWOOD HOMEWOOD HOMEWOOD
SUITES SUITES SUITES SUITES
ACQUISITION ACQUISITION ACQUISITION ACQUISITION
(A I) (A II) (A III) (A IV)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Revenue:
Lease revenue ...................... $ 4,162,371(B) $ 5,480,272(B) $ 1,035,841(B) $ 3,487,608(B)
Interest income and other
revenue ........................... -- -- -- --
Expenses:
Taxes, insurance and other ......... 822,599(C) 647,225(C) 93,884(C) 444,162(C)
General and administrative ......... 247,028(D) 251,015(D) 230,037(D) 246,594(D)
Depreciation of real estate
owned ............................. 656,623(E) 821,580(E) 140,664(E) 688,654(E)
Interest ........................... 1,977,313(F) 2,353,863(F) 372,683(F) 1,936,343(F)
Rent expense ....................... -- -- -- 100,000(H)
------------ ------------ ------------ ------------
Total expenses ...................... 3,703,563 4,073,683 837,268 3,415,753
------------ ------------ ------------ ------------
Net income .......................... 458,808 1,406,589 198,573 71,855
============ ============ ============ ============
Earnings per common share:
Basic and Diluted ...................
Basic and diluted weighted average
common shares outstanding .......... --(G) 604,857(G) 176,360(G) 916,311(G)
<CAPTION>
TOTAL
PRO FORMA
----------------
<S> <C>
Revenue:
Lease revenue ...................... $ 16,684,123
Interest income and other
revenue ........................... 169,086
Expenses:
Taxes, insurance and other ......... 2,434,462
General and administrative ......... 1,128,481
Depreciation of real estate
owned ............................. 2,803,730
Interest ........................... 7,885,246
Rent expense ....................... 100,000
------------
Total expenses ...................... 14,351,919
------------
Net income .......................... 2,501,290
============
Earnings per common share:
Basic and Diluted ................... $ 0.58
============
Basic and diluted weighted average
common shares outstanding .......... 4,345,724
============
</TABLE>
F-20
<PAGE>
APPLE SUITES, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS -- (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------
HOMEWOOD
HISTORICAL SUITES
STATEMENT OF ACQUISITION TOTAL
OPERATIONS (A IV) PRO FORMA
-------------- ---------------------- ---------------
<S> <C> <C> <C>
Revenue:
Lease revenue ............................. $ 3,406,678 $ 861,236 (B) $ 4,267,914
Interest income and other revenue ......... 48,007 (19,919) (I) 28,088
Expenses:
Taxes, insurance and other ................ 691,575 118,585 (C) 810,160
General and administrative ................ 254,736 5,126 (D) 259,862
Depreciation of real estate owned ......... 549,201 244,159 (E) 793,360
Interest .................................. 1,453,110 484,086 (F) 1,937,196
Rent expense .............................. -- 25,000 (H) 25,000
----------- ----------- -----------
Total expenses ............................. 2,948,622 876,956 3,825,578
Net income ................................. $ 506,063 (35,639) $ 470,424
=========== =========== ===========
Earnings per common share:
Basic and Diluted .......................... $ 0.14 $ 0.11
=========== ===========
Basic and diluted weighted average common
shares outstanding ........................ 3,607,458 738,266 (G) 4,345,724
=========== =========== ===========
</TABLE>
F-21
<PAGE>
APPLE SUITES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(A) Represents results of operations for the hotels acquired on a pro forma
basis as if the hotels were owned by the Company at the beginning of the
periods presented for the respective periods prior to acquisition by the
Company. See below.
<TABLE>
<CAPTION>
DATE COMMENCED DATE
PROPERTY OPERATIONS ACQUIRED
--------------------------------------------- ---------------- ------------------
<S> <C> <C> <C>
I Homewood Suites -- Dallas, TX ............... 1990 September 1, 1999
I Homewood Suites -- Las Colinas, TX .......... 1990 September 1, 1999
I Homewood Suites -- Plano, TX ................ 1997 September 1, 1999
I Homewood Suites -- Richmond, VA ............. May 1998 September 1, 1999
I Homewood Suites -- Atlanta, GA .............. 1990 October 1, 1999
--------------------------------------------------------------------------------
II Homewood Suites -- Clearwater, FL ........... February 1998 November 24, 1999
II Homewood Suites -- Salt Lake, UT ............ 1996 November 24, 1999
II Homewood Suites -- Atlanta, GA .............. 1990 November 24, 1999
II Homewood Suites -- Detroit, MI .............. 1990 November 24, 1999
II Homewood Suites -- Baltimore, MD ............ March 1998 November 24, 1999
--------------------------------------------------------------------------------
III Homewood Suites -- Jackson, MS .............. February 1997 December 22, 1999
--------------------------------------------------------------------------------
IV Homewood Suites -- Malvern, PA .............. January 1998 May 8, 2000
IV Homewood Suites -- Boulder, CO .............. January 1991 PENDING
</TABLE>
(B) Represents lease payment from the Lessee to the Company calculated on a pro
forma basis by applying the rent provisions in the master hotel lease
agreement to the historical room revenue of the hotels as if the beginning
of the period was the beginning of the lease year. The base rent and the
percentage rent will be calculated and paid based on the terms of the
lease agreement.
(C) Represents historical real estate and personal property taxes and insurance
which will be paid by the Company pursuant to the master hotel lease
agreement. Such amounts are the historical amounts paid by the respective
hotels.
(D) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company (for the year ended December 31, 1999 and the three months ended
March 31, 2000) plus and anticipated legal and accounting fees, employee
costs, salaries and other costs of operating as a public company (for the
year ended December 31, 1999).
(E) Represents the depreciation on the hotels acquired based on the purchase
price, excluding amounts allocated to land, of $37,450,320 for the first
acquisition group, $34,954,481 for the second acquisition group,
$5,485,886 for the third acquisition group, and $30,500,611 for the fourth
acquisition group for the period of time not owned by the Company. The
weighted average life of the depreciable assets was 39 years. The
estimated useful lives are based on management's knowledge of the
properties and the hotel industry in general.
(F) Represents the interest expense for the hotel acquisitions for the period
in which the hotels were not owned. Interest was computed using the
interest rates of 8.5% on mortgage debt that was incurred at acquisition
of $33,975,000 for the first acquisition group, $30,210,000 for the second
acquisition group, $4,384,500 for the third acquisition group, and
$22,780,500 for the fourth acquisition group.
(G) Represents additional common shares assuming the properties were acquired
at the beginning of the periods presented with the net proceeds from the
"best efforts" offering of $9 per share (net $8.06 per share) for the
first $15,000,000 and $10 per share (net $8.95 per share) for the
remainder.
(H) Represents rent expense on the land lease at the Malvern, PA hotel. The
Company accounts for the land lease as a operating lease.
(I) Represents reduction in interest income associated with the $1.6 million
of cash used to purchase hotels at an interest rate of 5%.
F-22
<PAGE>
APPLE SUITES MANAGEMENT, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations of Apple Suites Management, Inc. (the "Lessee") are presented as if
the hotels purchased or to be purchased from Promus Hotels, Inc. or its
affiliates ("Promus"), which is now a wholly-owned subsidiary of Hilton Hotels
Corporation, had been leased from Apple Suites, Inc. (the "Company") pursuant
to the master hotel lease agreements from the beginning of periods presented
for the respective periods prior to acquisition by the Company. Further, the
results of operations reflect the Management Agreement and License Agreement
entered into between Promus and the Lessee or an affiliate to operate the
acquired hotels. The lease agreements between the Company and the Lessee were
based on economic conditions existing at the time of acquisition. Application
of these agreements to periods prior to the acquisition may not be meaningful.
Such pro forma information is based in part upon the historical Consolidated
Statements of Operations of the Lessee and the Homewood Suites Hotels and
should be read in conjunction with such financials statement. In management's
opinion, all adjustments necessary to reflect the effects of these transactions
have been made.
The following unaudited Pro Forma Condensed Consolidated Statements of
Operations are not necessarily indicative of what the actual results of
operations of the Lessee would have been assuming such transactions had been
completed as of the beginning of the periods presented, nor do they purport to
represent the results of operations for future periods.
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
HOMEWOOD HOMEWOOD
HISTORICAL SUITES SUITES
STATEMENT OF ACQUISITIONS ACQUISITIONS
OPERATIONS (A I) (A II)
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Suite revenue ...................... $5,335,925 $9,818,797 $12,082,374
Other income ....................... 335,150 560,096 709,240
Expenses:
Operating expenses ................. 1,656,540 3,794,204 4,870,096
General and administrative ......... 494,377 250,317 300,399
Advertising and promotion .......... 472,787 438,985 580,564
Utilities .......................... 199,907 354,113 551,359
Taxes and insurance ................ -- 822,599 647,225
Depreciation expense ............... -- 1,783,021 2,217,128
Franchise fees ..................... 213,437 392,757 483,295
Management fees .................... 226,136 311,275 383,599
Rent expense-Apple Suites, Inc. 2,518,031 -- --
Other .............................. 30,964 -- --
---------- ---------- -----------
Total expenses ...................... 5,812,179 8,147,271 10,033,665
Income before income tax ............ (141,104) 2,231,622 2,757,949
Income tax expense .................. -- -- --
---------- ---------- -----------
Net income .......................... $ (141,104) $2,231,622 $ 2,757,949
========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HOMEWOOD HOMEWOOD
SUITES SUITES
ACQUISITION ACQUISITION PRO FORMA TOTAL
(A III) (A IV) ADJUSTMENTS PRO FORMA
------------- ------------- ----------------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Suite revenue ...................... $2,230,952 $7,419,101 -- $36,887,149
Other income ....................... 168,438 398,812 -- 2,171,736
Expenses:
Operating expenses ................. 954,102 2,491,119 -- 13,766,061
General and administrative ......... 77,381 105,719 $ (131,000)(B)
50,000 (C) 1,147,193
Advertising and promotion .......... 112,902 328,070 (1,262,049)(D)
1,262,049 (E) 1,933,308
Utilities .......................... 75,639 270,079 -- 1,451,097
Taxes and insurance ................ 93,884 444,161 (2,007,869) (F) --
Depreciation expense ............... 426,986 714,411 (5,141,546)(G) --
Franchise fees ..................... 89,238 296,764 (1,262,049)(H)
1,262,049 (I) 1,475,491
Management fees .................... 71,982 234,000 (1,000,856)(J)
1,467,512 (K) 1,693,648
Rent expense-Apple Suites, Inc. -- -- 14,166,092 (L) 16,684,123
Other .............................. -- 100,000 (100,000)(M) 30,964
---------- ---------- --------------- -----------
Total expenses ...................... 1,902,114 4,984,323 7,302,333 38,181,885
Income before income tax ............ 497,276 2,833,590 (7,302,333) 877,000
Income tax expense .................. -- -- 350,800 (N) 350,800
---------- ---------- --------------- -----------
Net income .......................... $ 497,276 $2,833,590 $ (7,653,133) $ 526,200
========== ========== =============== ===========
</TABLE>
F-23
<PAGE>
APPLE SUITES MANAGEMENT, INC.
PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS -- (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
HOMEWOOD
HISTORICAL SUITES
STATEMENT OF ACQUISITION PRO FORMA TOTAL
OPERATIONS (A IV) ADJUSTMENTS PRO FORMA
-------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Suite revenue ........................... $7,682,355 $1,841,936 -- $9,524,291
Other income ............................ 420,816 93,150 -- 513,966
Expenses:
Operating expenses ...................... 2,295,392 633,274 -- 2,928,666
General and administrative .............. 670,943 33,287 $ (6,000)(B)
12,500 (C) 710,730
Advertising and promotion ............... 662,647 82,781 (73,677)(D)
73,677 (E) 745,428
Utilities ............................... 283,263 65,361 -- 348,624
Taxes and insurance ..................... -- 118,585 (118,585)(F) --
Franchise fees .......................... 307,294 73,677 (73,677)(H)
73,677 (I) 380,971
Management fees ......................... 322,766 58,053 (58,053)(J)
83,403 (K) 406,169
Rent expense-Apple Suites, Inc. ......... 3,406,678 -- 861,236 (L) 4,267,914
Interest expense ........................ 15,275 -- -- 15,275
Other ................................... 96,212 25,000 (25,000)(M) 96,212
---------- ---------- ----------- ----------
Total expenses ........................... 8,060,470 1,090,018 749,501 9,899,989
Income before income tax ................. 42,701 845,068 (749,501) 138,268
Income tax expense ....................... -- -- 55,307 (N) 55,307
---------- ---------- ----------- ----------
Net income ............................... $ 42,701 $ 845,068 $ (804,808) $ 82,961
========== ========== =========== ==========
</TABLE>
F-24
<PAGE>
APPLE SUITES MANAGEMENT, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(A) Represents results of operations for the hotels acquired on a pro forma
basis as if the hotels were leased and operated by the Lessee at the
beginning of the periods presented for the respective periods prior to
acquisition by the Company. See below.
<TABLE>
<CAPTION>
DATE COMMENCED DATE
PROPERTY OPERATIONS ACQUIRED
--------------------------------------------- ---------------- ------------------
<S> <C> <C> <C>
I Homewood Suites -- Dallas, TX ............... 1990 September 1, 1999
I Homewood Suites -- Las Colinas, TX .......... 1990 September 1, 1999
I Homewood Suites -- Plano, TX ................ 1997 September 1, 1999
I Homewood Suites -- Richmond. VA ............. May 1998 September 1, 1999
I Homewood Suites -- Atlanta, GA .............. 1990 October 1, 1999
--------------------------------------------------------------------------------
II Homewood Suites -- Clearwater, FL ........... February 1998 November 24, 1999
II Homewood Suites -- Salt Lake, UT ............ 1996 November 24, 1999
II Homewood Suites -- Atlanta, GA .............. 1990 November 24, 1999
II Homewood Suites -- Detroit, MI .............. 1990 November 24, 1999
II Homewood Suites -- Baltimore, MD ............ March 1998 November 24, 1999
--------------------------------------------------------------------------------
III Homewood Suites -- Jackson, MS .............. February 1997 December 22, 1999
--------------------------------------------------------------------------------
IV Homewood Suites -- Malvern, PA .............. January 1998 May 8, 2000
IV Homewood Suites -- Boulder, CO .............. January 1991 PENDING
</TABLE>
(B) Represents the elimination of the historical accounting fee allocated to
the hotels by the prior owner.
(C) Represents the addition of the anticipated legal and accounting and other
expenses to operate as a stand alone company.
(D) Represents the elimination of the historical advertising, training and
reservation fee allocated to the hotels by the prior owner.
(E) Represents the addition of the marketing fee to be incurred under the new
license agreements. The marketing fee is calculated based on the terms of
the license agreements which is 4% of suite revenue.
(F) Represents the elimination of the taxes and insurance. Under the terms of
the lease these expenses will be incurred by the Company and, accordingly,
are reflected in the Company's Pro Forma Condensed Consolidated Statement
of Operations.
(G) Represents the elimination of the depreciation expense. This expense will
be reflected in the Company's Pro Forma Condensed Consolidated Statement of
Operations.
(H) Represents the elimination of the historical franchise fee allocated to the
hotels by the prior owner.
(I) Represents the addition of franchise fees to be incurred under the new
license agreements. The franchise fees are calculated based on the terms of
the agreement , which is 4% of suite revenue.
(J) Represents the elimination of the historical management fees allocated to
the hotels by the prior owner.
(K) Represents the addition of the management fees of 4% of suite and other
revenue and the accounting fee $1,000 per hotel per month to be incurred
under the new management agreements for the period presented.
(L) Represents lease payments from the Lessee to the Company calculated on a
pro forma basis by applying the rent provisions in the Percentage Leases to
the historical room revenue of the hotels as if the beginning of the period
was the beginning of the lease year. The base rent and the percentage rent
will be calculated and paid based on the terms of the lease agreement.
(M) Represents the elimination of rent expense for the land lease. The rent
expense related to the land lease will be reflected on the Company's Pro
Forma Condensed Consolidated Statement of Operations.
(N) Represents the combined state and federal income tax expense estimated on a
combined rate of 40%.
F-25
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. 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 expenses ................. 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 32. SALES TO SPECIAL PARTIES.
On March 5, 1999, the Registrant sold 10 Common Shares to Apple Suites
Advisors, Inc. ("ASA") for $100 cash.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information concerning the offering and the
use of proceeds from the offering as of March 31, 2000:
<TABLE>
<CAPTION>
Common Shares Registered:
<S> <C> <C> <C> <C>
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
28,500,000.00 Common Shares $10 per Common Share $285,000,000
-------------
Totals: 30,166,666.67 Common Shares
-------------
Common Shares Sold:
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
2,256,256.00 Common Shares $10 per Common Share $ 22,562,559
------------- ------------
Totals: 3,922,922.67 Common Shares $ 37,562,559
-------------
</TABLE>
<TABLE>
<S> <C>
Expenses of Issuance and Distribution of Common Shares
1. Underwriting discounts and commissions $ 3,756,246
2. Expenses of underwriters $ --
3. Direct or indirect payments to directors or officers of
the Company or their associates, to ten percent
shareholders, or to affiliates of the Company $ --
4. Fees and expenses to third parties $ 821,297
-----------
Total Expenses of Issuance and Distribution of Common
Shares $ 4,577,543
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
Net Proceeds to the Company $32,985,016
1. Purchase of real estate (including repayment of indebtedness
incurred to purchase real estate) $22,856,500
2. Interest on indebtedness $ 2,698,154
3. Working capital $ 5,555,735
4. Fees to the following (all affiliates of officers of the
Company):
a. Apple Suites Advisors, Inc. $ 46,107
b. Apple Suites Realty Group, Inc. $ 1,828,520
5. Fees and expenses of third parties:
a. Legal $ --
b. Accounting $ --
6. Other (specify _____) $ --
-----------
Total of Application of Net Proceeds to the Company $32,985,016
</TABLE>
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company will obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (i) the directors and officers of
the Company from any claim arising out of an alleged wrongful act by the
directors and officers of the Company in their respective capacities as
directors and officers of the Company, and (ii) the Company to the extent that
the Company has indemnified the directors and officers for such loss.
The Virginia Stock Corporation Act (the "Virginia Act") permits, and the
Registrant's Articles of Incorporation and Bylaws require, indemnification of
the Registrant's directors and officers in a variety of circumstances, which
may include liabilities under the Securities Act of 1933. Under Section
13.1-697 of the Virginia Act, a Virginia corporation generally is authorized to
indemnify its directors in civil or criminal actions if they acted in good
faith and believed their conduct to be in the best interests of the corporation
and, in the case of criminal actions, had no reasonable cause to believe that
the conduct was unlawful. The Registrant's Articles of Incorporation and Bylaws
require indemnification of officers and directors with respect to any action
except in the case of willful misconduct, bad faith, reckless disregard of
duties or violations of the criminal law. In addition, the Registrant may carry
insurance on behalf of directors, officers, employees or agents that may cover
liabilities under the Securities Act of 1933. The 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 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
None of the proceeds will be credited to an account other than the
appropriate capital share account.
II-2
<PAGE>
ITEM 36. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(a) Financial Statements. See Index to Balance Sheet in Prospectus, and
the Index to Financial Statements set forth in each of Supplement No.
5, Supplement No. 6 and Supplement No. 7.
(b) Financial Statement Schedules. Schedule III -- Real Estate and
Accumulated Depreciation (as of December 31, 1999), included in
Supplement No. 5.
(c) Exhibits. Except as expressly noted otherwise, the following Exhibits
have been filed previously under the indicated Exhibit Numbers as part
of the Registrant's previous filing on Form S-11 (File No. 333-77055),
as amended, and are hereby incorporated herein by this reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- -----------------------------------------------------------------------------------------------
<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.
1.2 Escrow Agreement.
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.
4.4 Note dated September 20, 1999 in the principal amount of $ 26,625,000 made payable by
Apple Suites, Inc. to the order of Promus Hotels, Inc. (Incorporated by reference to Exhibit
4.1 to Current Report on Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No.
333-77055).
4.5 Fee and Leasehold Deed of Trust, Assignment of Lease and Rents and Security Agreement
dated September 20, 1999 from Apple Suites, Inc. and Apple Suites Management, Inc. for the
benefit of Promus Hotels, Inc. pertaining to the Richmond - West End hotel. (Incorporated
by reference to Exhibit 4.2 to Current Report on Form 8-K filed October 5, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
4.6 Fee and Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement
dated September 20, 1999 from Apple Suites REIT Limited Partnership and Apple Suites
Services Limited Partnership for the benefit of Promus Hotels, Inc. pertaining to the Dallas -
Addison hotel. (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed
October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
4.7 Fee and Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement
dated September 20, 1999 from Apple Suites REIT Limited Partnership and Apple Suites
Services Limited Partnership for the benefit of Promus Hotels, Inc. pertaining to the Dallas -
Irving/Las Colinas hotel. (Incorporated by reference to Exhibit 4.4 to Current Report on
Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- ----------------------------------------------------------------------------------------------
<S> <C>
4.8 Fee and Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement
dated September 20, 1999 from Apple Suites REIT Limited Partnership and Apple Suites
Services Limited Partnership for the benefit of Promus Hotels, Inc. pertaining to the North
Dallas - Plano hotel. (Incorporated by reference to Exhibit 4.5 to Current Report on Form
8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
4.9 Note dated October 5, 1999 in the principal amount of $ 7,350,000 made payable by Apple
Suites, Inc. to the order of Promus Hotels, Inc. (Incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K/A filed October 21, 1999 by Apple Suites, Inc.; SEC File No.
333-77055).
4.10 Fee and Leasehold Deed to Secure Debt, Assignment of Leases and Rents and Security
Agreement dated October 5, 1999 from Apple Suites, Inc. and Apple Suites Management, Inc.
for the benefit of Promus Hotels, Inc. encumbering the Atlanta - Galleria/Cumberland hotel.
(Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K/A filed October 21,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
4.11 Fee and Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement
dated October 5, 1999 from Apple Suites REIT Limited Partnership and Apple Suites
Services Limited Partnership for the benefit of Promus Hotels, Inc. imposing a second lien on
the Dallas - Addison and Dallas - Irving/Las Colinas hotels. (Incorporated by reference to
Exhibit 4.3 to Current Report on Form 8-K/A filed October 21, 1999 by Apple Suites, Inc.;
SEC File No. 333-77055).
4.12 Fee and Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement
dated October 5, 1999 from Apple Suites REIT Limited Partnership and Apple Suites
Services Limited Partnership for the benefit of Promus Hotels, Inc. imposing a second lien on
the North Dallas - Plano hotel. (Incorporated by reference to Exhibit 4.4 to Current Report
on Form 8-K/A filed October 21, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
4.13 Negative Pledge Agreement dated October 5, 1999 between Apple Suites, Inc. and Promus
Hotels, Inc. pertaining to the Richmond - West End hotel. (Incorporated by reference to
Exhibit 4.5 to Current Report on Form 8-K/A filed October 21, 1999 by Apple Suites, Inc.;
SEC File No. 333-77055).
4.14 Note dated November 29, 1999 in the principal amount of $ 30,210,000 made payable by
Apple Suites, Inc. to the order of Promus Hotels, Inc. (Incorporated by reference to Exhibit
4.1 to Current Report on Form 8-K filed December 14, 1999 by Apple Suites, Inc.; SEC File
No. 333-77055).
4.15 Fee and Leasehold Deed to Secure Debt, Assignment of Leases and Rents and Security
Agreement dated November 29, 1999 from Apple Suites, Inc. and Apple Suites Management,
Inc. for the benefit of Promus Hotels, Inc. pertaining to the Atlanta - Peachtree hotel.
(Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed December 14,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
4.16 Fee and Leasehold Deed to Secure Debt, Assignment of Leases and Rents and Security
Agreement dated November 29, 1999 from Apple Suites, Inc. and Apple Suites Management,
Inc. for the benefit of Promus Hotels, Inc., constituting a second lien on the Atlanta -
Galleria/Cumberland hotel. (Incorporated by reference to Exhibit 4.3 to Current Report on
Form 8-K filed December 14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- ----------------------------------------------------------------------------------------------
<S> <C>
4.17 Purchase Money Fee and Leasehold Deed of Trust, Assignment of Leases and Rents and
Security Agreement dated November 29, 1999 from Apple Suites, Inc. and Apple Suites
Management, Inc. for the benefit of Promus Hotels, Inc. pertaining to the Baltimore - BWI
Airport hotel. (Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed
December 14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
4.18 Fee and Leasehold Mortgage, Assignment of Leases and Rents and Security Agreement dated
November 29, 1999 from Apple Suites, Inc. and Apple Suites Management, Inc. for the benefit
of Promus Hotels, Inc. pertaining to the Clearwater hotel. (Incorporated by reference to
Exhibit 4.5 to Current Report on Form 8-K filed December 14, 1999 by Apple Suites, Inc.;
SEC File No. 333-77055).
4.19 Fee and Leasehold Mortgage, Assignment of Leases and Rents and Security Agreement dated
November 29, 1999 from Apple Suites, Inc. and Apple Suites Management, Inc. for the benefit
of Promus Hotels, Inc. pertaining to the Detroit - Warren hotel. (Incorporated by reference
to Exhibit 4.6 to Current Report on Form 8-K filed December 14, 1999 by Apple Suites, Inc.;
SEC File No. 333-77055).
4.20 Fee and Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement
and Fixture Filing dated November 29, 1999, from Apple Suites, Inc. and Apple Suites
Management, Inc., for the benefit of Promus Hotels, Inc. pertaining to the Salt Lake City -
Midvale hotel. (Incorporated by reference to Exhibit 4.7 to Current Report on Form 8-K filed
December 14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
4.21 Deed of Trust Modification Agreement dated November 29, 1999, among Promus Hotels, Inc.,
Apple Suites REIT Limited Partnership and Apple Suites Services Limited Partnership
pertaining to the North Dallas - Plano hotel. (Incorporated by reference to Exhibit 4.8 to
Current Report on Form 8-K filed December 14, 1999 by Apple Suites, Inc.; SEC File No.
333-77055).
4.22 Deed of Trust Modification Agreement dated November 29, 1999, among Promus Hotels, Inc.,
Apple Suites REIT Limited Partnership and Apple Suites Services Limited Partnership
pertaining to the Dallas - Addison and Dallas - Irving/Las Colinas hotels. (Incorporated by
reference to Exhibit 4.9 to Current Report on Form 8-K filed December 14, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
4.23 Note dated December 22, 1999 in the principal amount of $ 4,384,500 made payable by Apple
Suites, Inc. to the order of Promus Hotels, Inc. (Incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed January 6, 2000 by Apple Suites, Inc.; SEC File No.
333-77055).
4.24 Fee and Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement
dated December 22, 1999 from Apple Suites, Inc. and Apple Suites Management, Inc. for the
benefit of Promus Hotels, Inc. pertaining to the Jackson, Mississippi hotel. (Incorporated by
reference to Exhibit 4.2 to Current Report on Form 8-K filed January 6, 2000 by Apple Suites,
Inc.; SEC File No. 333-77055).
4.25 Fee and Leasehold Deed to Secure Debt, Assignment of Leases and Rents and Security
Agreement dated December 22, 1999 from Apple Suites, Inc. and Apple Suites Management,
Inc. for the benefit of Promus Hotels, Inc., constituting a second lien on the Atlanta -
Peachtree hotel (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K
filed January 6, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- -----------------------------------------------------------------------------------------------
<S> <C>
4.26 Deed to Secure Debt Modification Agreement dated December 22, 1999, among Promus
Hotels, Inc., Apple Suites, Inc. and Apple Suites Management, Inc. pertaining to the Atlanta
- Galleria/Cumberland hotel (Incorporated by reference to Exhibit 4.4 to Current Report on
Form 8-K filed January 6, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
4.27 Fee and Leasehold Mortgage, Assignment of Leases and Rents and Security Agreement dated
December 22, 1999 from Apple Suites, Inc. and Apple Suites Management, Inc. for the benefit
of Promus Hotels, Inc. constituting a second lien on the Detroit - Warren hotel (Incorporated
by reference to Exhibit 4.5 to Current Report on Form 8-K filed January 6, 2000 by Apple
Suites, Inc.; SEC File No. 333-77055).
4.28 Fee and Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement
and Fixture Filing dated December 22, 1999, from Apple Suites, Inc. and Apple Suites
Management, Inc. for the benefit of Promus Hotels, Inc. constituting a second lien on the Salt
Lake City - Midvale hotel (Incorporated by reference to Exhibit 4.6 to Current Report on
Form 8-K filed January 6, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
4.29 Second Deed of Trust Modification Agreement dated December 22, 1999, among Promus
Hotels, Inc., Apple Suites REIT Limited Partnership and Apple Suites Services Limited
Partnership pertaining to the North Dallas - Plano hotel (Incorporated by reference to
Exhibit 4.7 to Current Report on Form 8-K filed January 6, 2000 by Apple Suites, Inc.; SEC
File No. 333-77055).
4.30 Second Deed of Trust Modification Agreement dated December 22, 1999, among Promus
Hotels, Inc., Apple Suites REIT Limited Partnership and Apple Suites Services Limited
Partnership pertaining to the Dallas - Addison and Dallas - Irving/Las Colinas hotels
(Incorporated by reference to Exhibit 4.8 to Current Report on Form 8-K filed January 6, 2000
by Apple Suites, Inc.; SEC File No. 333-77055).
4.31 Note dated May 8, 2000 in the principal amount of $11,616,750 made payable by Apple Suites,
Inc. to the order of Promus Hotels, Inc. (Incorporated by reference to Exhibit 4.1 to Current
Report on Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
4.32 Leasehold and Subleasehold Mortgage, Assignment of Leases and Rents and Security
Agreement dated May 8, 2000 from Apple Suites, Inc., as Trustee for Apple Suites
Pennsylvania Business Trust, and Apple Suites Management, Inc. for the benefit of Promus
Hotels, Inc. pertaining to the Malvern, Pennsylvania hotel. (Incorporated by reference to
Exhibit 4.2 to Current Report on Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC File
No. 333-77055).
4.33 Fee and Leasehold Deed of Trust, Assignment of Leases and Rents and Security Agreement
dated May 8, 2000 from Apple Suites, Inc. and Apple Suites Management, Inc. for the benefit
of Promus Hotels, Inc., constituting a second lien on the Jackson, Mississippi hotel.
(Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed May 23, 2000
by Apple Suites, Inc.; SEC File No. 333-77055).
4.34 Deed to Secure Debt Modification Agreement dated May 8, 2000, among Promus Hotels, Inc.,
Apple Suites, Inc. and Apple Suites Management, Inc. pertaining to the Atlanta - Peachtree
hotel. (Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed May 23,
2000 by Apple Suites, Inc.; SEC File No. 333-77055).
4.35 Second Deed to Secure Debt Modification Agreement dated May 8, 2000, among Promus
Hotels, Inc., Apple Suites, Inc. and Apple Suites Management, Inc. pertaining to the Atlanta
- Galleria/Cumberland hotel. (Incorporated by reference to Exhibit 4.5 to Current Report on
Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- ------------------------------------------------------------------------------------------------
<S> <C>
4.36 Mortgage Modification Agreement dated May 8, 2000 from Apple Suites, Inc. and Apple
Suites Management, Inc. for the benefit of Promus Hotels, Inc. constituting a second lien on
the Detroit - Warren hotel. (Incorporated by reference to Exhibit 4.6 to Current Report on
Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
4.37 Deed of Trust Modification Agreement dated May 8, 2000, from Apple Suites, Inc. and Apple
Suites Management, Inc. for the benefit of Promus Hotels, Inc. constituting a second lien on
the Salt Lake City - Midvale hotel. (Incorporated by reference to Exhibit 4.7 to Current
Report on Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
4.38 Third Deed of Trust Modification Agreement dated May 8, 2000, among Promus Hotels, Inc.,
Apple Suites REIT Limited Partnership and Apple Suites Services Limited Partnership
pertaining to the North Dallas - Plano hotel. (Incorporated by reference to Exhibit 4.8 to
Current Report on Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC File No.
333-77055).
4.39 Third Deed of Trust Modification Agreement dated May 8, 2000, among Promus Hotels, Inc.,
Apple Suites REIT Limited Partnership and Apple Suites Services Limited Partnership
pertaining to the Dallas - Addison and Dallas - Irving/Las Colinas hotels. (Incorporated by
reference to Exhibit 4.9 to Current Report on Form 8-K filed May 23, 2000 by Apple Suites,
Inc.; SEC File No. 333-77055).
4.40 Note dated May 1, 2000 in the principal amount of $ 80,000 made payable by Apple Suites
Management, Inc. to the order of Apple Suites, Inc. with respect to the Richmond - West End
hotel. (FILED HEREWITH)
4.41 Schedule setting forth information on 11 substantially identical notes dated May 1, 2000 in the
principal amount of $ 80,000 made payable by Apple Suites Management, Inc. (or a
subsidiary) to the order of Apple Suites, Inc. (FILED HEREWITH)
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.
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.
10.5 Indemnity dated September 20, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining
to the Richmond - West End hotel. (Incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.6 Indemnity dated September 20, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining
to the Dallas - Addison hotel. (Incorporated by reference to Exhibit 10.2 to Current Report
on Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.7 Indemnity dated September 20, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining
to the Dallas - Irving/Las Colinas hotel. (Incorporated by reference to Exhibit 10.3 to Current
Report on Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- ------------------------------------------------------------------------------------------------
<S> <C>
10.8 Indemnity dated September 20, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining
to the to the North Dallas - Plano hotel. (Incorporated by reference to Exhibit 10.4 to Current
Report on Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.9 Master Hotel Lease Agreement dated September 20, 1999 between Apple Suites, Inc. (as
lessor) and Apple Suites Management, Inc. (as lessee). (Incorporated by reference to Exhibit
10.5 to Current Report on Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No.
333-77055).
10.10 Master Hotel Lease Agreement dated September 20, 1999 between Apple Suites REIT
Limited Partnership (as lessor) and Apple Suites Services Limited Partnership (as lessee).
(Incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed October 5,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.11 Homewood Suites License Agreement dated September 20, 1999 between Promus Hotels, Inc.
and Apple Suites Management, Inc. pertaining to the Richmond - West End hotel.
(Incorporated by reference to Exhibit 10.7 to Current Report on Form 8-K filed October 5,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.12 Homewood Suites License Agreement dated September 20, 1999 between Promus Hotels, Inc.
and Apple Suites Services Limited Partnership pertaining to the Dallas - Addison hotel.
(Incorporated by reference to Exhibit 10.8 to Current Report on Form 8-K filed October 5,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.13 Homewood Suites License Agreement dated September 20, 1999 between Promus Hotels, Inc.
and Apple Suites Services Limited Partnership pertaining to the Dallas - Irving/Las Colinas
hotel. (Incorporated by reference to Exhibit 10.9 to Current Report on Form 8-K filed
October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.14 Homewood Suites License Agreement dated September 20, 1999 between Promus Hotels, Inc.
and Apple Suites Services Limited Partnership pertaining to the North Dallas - Plano hotel.
(Incorporated by reference to Exhibit 10.10 to Current Report on Form 8-K filed October 5,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.15 Management Agreement dated September 20, 1999 between Apple Suites Management, Inc.
and Promus Hotels, Inc. pertaining to the Richmond - West End hotel. (Incorporated by
reference to Exhibit 10.11 to Current Report on Form 8-K filed October 5, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.16 Management Agreement dated September 20, 1999 between Apple Suites Services Limited
Partnership and Promus Hotels, Inc. pertaining to the Dallas - Addison hotel. (Incorporated
by reference to Exhibit 10.12 to Current Report on Form 8-K filed October 5, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.17 Management Agreement dated September 20, 1999 between Apple Suites Services Limited
Partnership and Promus Hotels, Inc. pertaining to the Dallas - Irving/Las Colinas hotel.
(Incorporated by reference to Exhibit 10.13 to Current Report on Form 8-K filed October 5,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.18 Management Agreement dated September 20, 1999 between Apple Suites Services Limited
Partnership and Promus Hotels, Inc. pertaining to the North Dallas - Plano hotel.
(Incorporated by reference to Exhibit 10.14 to Current Report on Form 8-K filed October 5,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
</TABLE>
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<TABLE>
<CAPTION>
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NUMBER DESCRIPTION OF DOCUMENT
---------- -----------------------------------------------------------------------------------------------
<S> <C>
10.19 Comfort Letter dated September 20, 1999 among Promus Hotels, Inc., Apple Suites, Inc. and
Apple Suites Management, Inc. pertaining to the Richmond - West End hotel. (Incorporated
by reference to Exhibit 10.15 to Current Report on Form 8-K filed October 5, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.20 Comfort Letter dated September 20, 1999 among Promus Hotels, Inc., Apple Suites REIT
Limited Partnership and Apple Suites Services Limited Partnership pertaining to the Dallas
- Addison hotel. (Incorporated by reference to Exhibit 10.16 to Current Report on Form 8-K
filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.21 Comfort Letter dated September 20, 1999 among Promus Hotels, Inc., Apple Suites REIT
Limited Partnership and Apple Suites Services Limited Partnership pertaining to the Dallas
- Irving/Las Colinas hotel. (Incorporated by reference to Exhibit 10.17 to Current Report on
Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.22 Comfort Letter dated September 20, 1999 among Promus Hotels, Inc., Apple Suites REIT
Limited Partnership and Apple Suites Services Limited Partnership pertaining to the North
Dallas - Plano hotel. (Incorporated by reference to Exhibit 10.18 to Current Report on Form
8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.23 Promissory Note dated September 17, 1999 in the amount of $215,550 made payable by Apple
Suites Management, Inc. and Apple Suites Services Limited Partnership to the order of Apple
Suites, Inc. (Incorporated by reference to Exhibit 10.19 to Current Report on Form 8-K filed
October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.24 Promissory Note dated September 17, 1999 in the amount of $47,800 made payable by Apple
Suites Management, Inc. and Apple Suites Services Limited Partnership to the order of Apple
Suites, Inc. (Incorporated by reference to Exhibit 10.20 to Current Report on Form 8-K filed
October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.25 Articles of Incorporation of Apple Suites General, Inc. (Incorporated by reference to Exhibit
10.21 to Current Report on Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File
No. 333-77055).
10.26 Bylaws of Apple Suites General, Inc. (Incorporated by reference to Exhibit 10.22 to Current
Report on Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.27 Articles of Incorporation of Apple Suites LP, Inc. (Incorporated by reference to Exhibit 10.23
to Current Report on Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No.
333-77055).
10.28 Bylaws of Apple Suites LP, Inc. (Incorporated by reference to Exhibit 10.24 to Current
Report on Form 8-K filed October 5, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.29 Certificate of Limited Partnership of Apple Suites REIT Limited Partnership. (Incorporated
by reference to Exhibit 10.25 to Current Report on Form 8-K filed October 5, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.30 Agreement of Limited Partnership of Apple Suites REIT Limited Partnership. (Incorporated
by reference to Exhibit 10.26 to Current Report on Form 8-K filed October 5, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.31 Indemnity dated October 5, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining to
the Atlanta - Galleria/Cumberland hotel. (Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K/A filed October 21, 1999 by Apple Suites, Inc.; SEC File No.
333-77055).
</TABLE>
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<TABLE>
<CAPTION>
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NUMBER DESCRIPTION OF DOCUMENT
---------- -------------------------------------------------------------------------------------------------
<S> <C>
10.32 Homewood Suites License Agreement dated October 5, 1999 between Promus Hotels, Inc.
and Apple Suites Management, Inc. pertaining to the Atlanta - Galleria/Cumberland hotel.
(Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A filed October
21, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.33 Management Agreement dated October 5, 1999 between Apple Suites Management, Inc. and
Promus Hotels, Inc. pertaining to the Atlanta - Galleria/Cumberland hotel. (Incorporated by
reference to Exhibit 10.3 to Current Report on Form 8-K/A filed October 21, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.34 Comfort Letter dated October 5, 1999 among Promus Hotels, Inc., Apple Suites, Inc. and
Apple Suites Management, Inc. pertaining to the Atlanta-Galleria/Cumberland hotel.
(Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K/A filed October
21, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.35 Promissory Note dated October 5, 1999 in the amount of $55,800 made payable by Apple
Suites Management, Inc. and Apple Suites Services Limited Partnership to the order of Apple
Suites, Inc. (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K/A filed
October 21, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.36 Promissory Note dated October 5, 1999 in the amount of $12,400 made payable by Apple
Suites Management, Inc. and Apple Suites Services Limited Partnership to the order of Apple
Suites, Inc. (Incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K/A filed
October 21, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.37 Indemnity dated November 29, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining
to the Atlanta - Peachtree hotel. (Incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K filed December 14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.38 Indemnity dated November 29, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining
to the Baltimore - BWI Airport hotel. (Incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K filed December 14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.39 Indemnity dated November 29, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining
to the Clearwater hotel. (Incorporated by reference to Exhibit 10.3 to Current Report on
Form 8-K filed December 14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.40 Indemnity dated November 29, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining
to the to the Detroit - Warren hotel. (Incorporated by reference to Exhibit 10.4 to Current
Report on Form 8-K filed December 14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.41 Indemnity dated November 29, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining
to the Salt Lake City - Midvale hotel. (Incorporated by reference to Exhibit 10.5 to Current
Report on Form 8-K filed December 14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.42 Exhibits A-3, A-4, A-5, A-6 and A-7, Schedules 2.1(c), 2.1(d), 2.1(e), 2.1(f) and 2.1(g),
Schedules 3.1(a)-3, 3.1(a)-4, 3.1(a)-5, 3.1(a)-6 and 3.1(a)-7, and Schedules 3.1(b)-3, 3.1(b)-4,
3.1(b)-5, 3.1(b)-6 and 3.1(b)-7 to the Master Hotel Lease Agreement dated September 20,
1999 between Apple Suites, Inc. (as lessor) and Apple Suites Management, Inc. (as lessee).
(Incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed December 14,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.43 Homewood Suites License Agreement dated November 29, 1999 between Promus Hotels, Inc.
and Apple Suites Management, Inc. pertaining to the Atlanta - Peachtree hotel.
(Incorporated by reference to Exhibit 10.7 to Current Report on Form 8-K filed December 14,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
---------- ---------------------------------------------------------------------------------------------
<S> <C>
10.44 Homewood Suites License Agreement dated November 29, 1999 between Promus Hotels, Inc.
and Apple Suites Management, Inc. pertaining to the Baltimore - BWI Airport hotel.
(Incorporated by reference to Exhibit 10.8 to Current Report on Form 8-K filed December 14,
1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.45 Homewood Suites License Agreement dated November 29, 1999 between Promus Hotels, Inc.
and Apple Suites Management, Inc. pertaining to the Clearwater hotel. (Incorporated by
reference to Exhibit 10.9 to Current Report on Form 8-K filed December 14, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.46 Homewood Suites License Agreement dated November 29, 1999 between Promus Hotels, Inc.
and Apple Suites Management, Inc. pertaining to the Detroit - Warren hotel. (Incorporated
by reference to Exhibit 10.10 to Current Report on Form 8-K filed December 14, 1999 by
Apple Suites, Inc.; SEC File No. 333-77055).
10.47 Homewood Suites License Agreement dated November 29, 1999 between Promus Hotels, Inc.
and Apple Suites Management, Inc. pertaining to the Salt Lake City - Midvale hotel.
(Incorporated by reference to Exhibit 10.11 to Current Report on Form 8-K filed December
14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.48 Management Agreement dated November 29, 1999 between Apple Suites Management, Inc.
and Promus Hotels, Inc. pertaining to the Atlanta - Peachtree hotel. (Incorporated by
reference to Exhibit 10.12 to Current Report on Form 8-K filed December 14, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.49 Management Agreement dated November 29, 1999 between Apple Suites Management, Inc.
and Promus Hotels, Inc. pertaining to the Baltimore - BWI Airport hotel. (Incorporated by
reference to Exhibit 10.13 to Current Report on Form 8-K filed December 14, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.50 Management Agreement dated November 29, 1999 between Apple Suites Management, Inc.
and Promus Hotels Florida, Inc. pertaining to the Clearwater hotel. (Incorporated by
reference to Exhibit 10.14 to Current Report on Form 8-K filed December 14, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.51 Management Agreement dated November 29, 1999 between Apple Suites Management, Inc.
and Promus Hotels, Inc. pertaining to the Detroit - Warren hotel. (Incorporated by reference
to Exhibit 10.15 to Current Report on Form 8-K filed December 14, 1999 by Apple Suites,
Inc.; SEC File No. 333-77055).
10.52 Management Agreement dated November 29, 1999 between Apple Suites Management, Inc.
and Promus Hotels, Inc. pertaining to the Salt Lake City - Midvale hotel. (Incorporated by
reference to Exhibit 10.16 to Current Report on Form 8-K filed December 14, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.53 Comfort Letter dated November 29, 1999 among Promus Hotels, Inc., Apple Suites, Inc. and
Apple Suites Management, Inc. pertaining to the Atlanta - Peachtree hotel. (Incorporated by
reference to Exhibit 10.17 to Current Report on Form 8-K filed December 14, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.54 Comfort Letter dated November 29, 1999 among Promus Hotels, Inc., Apple Suites, Inc. and
Apple Suites Management, Inc. pertaining to the Baltimore - BWI Airport hotel.
(Incorporated by reference to Exhibit 10.18 to Current Report on Form 8-K filed December
14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
---------- -----------------------------------------------------------------------------------------------
<S> <C>
10.55 Comfort Letter dated November 29, 1999 among Promus Hotels, Inc., Promus Hotels Florida,
Inc. Apple Suites, Inc. and Apple Suites Management, Inc. pertaining to the Clearwater hotel.
(Incorporated by reference to Exhibit 10.19 to Current Report on Form 8-K filed December
14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.56 Comfort Letter dated November 29, 1999 among Promus Hotels, Inc., Apple Suites, Inc. and
Apple Suites Management, Inc. pertaining to the Detroit - Warren hotel. (Incorporated by
reference to Exhibit 10.20 to Current Report on Form 8-K filed December 14, 1999 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.57 Comfort Letter dated November 29, 1999 among Promus Hotels, Inc., Apple Suites, Inc. and
Apple Suites Management, Inc. pertaining to the Salt Lake City - Midvale hotel.
(Incorporated by reference to Exhibit 10.21 to Current Report on Form 8-K filed December
14, 1999 by Apple Suites, Inc.; SEC File No. 333-77055).
10.58 Promissory Note dated November 29, 1999 in the amount of $ 251,500 made payable by Apple
Suites Management, Inc. to the order of Apple Suites, Inc. (Incorporated by reference to
Exhibit 10.22 to Current Report on Form 8-K filed December 14, 1999 by Apple Suites, Inc.;
SEC File No. 333-77055).
10.59 Promissory Note dated November 29, 1999 in the amount of $ 52,500 made payable by Apple
Suites Management, Inc. to the order of Apple Suites, Inc. (Incorporated by reference to
Exhibit 10.23 to Current Report on Form 8-K filed December 14, 1999 by Apple Suites, Inc.;
SEC File No. 333-77055).
10.60 Negative Pledge Agreements dated November 29, 1999 between Apple Suites, Inc. and
Promus Hotels, Inc. pertaining to the Richmond - West End hotel. (Incorporated by reference
to Exhibit 10.24 to Current Report on Form 8-K filed December 14, 1999 by Apple Suites,
Inc.; SEC File No. 333-77055).
10.61 Indemnity dated December 22, 1999 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining
to the Jackson, Mississippi hotel (Incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K filed January 6, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
10.62 Schedules 2.1(h), 3.1(a)-8, and 3.1(b)-8 to the Master Hotel Lease Agreement dated
September 20, 1999 between Apple Suites, Inc. (as lessor) and Apple Suites Management, Inc.
(as lessee) (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed
January 6, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
10.63 Homewood Suites License Agreement dated December 22, 1999 between Promus Hotels, Inc.
and Apple Suites Management, Inc. pertaining to the Jackson, Mississippi hotel (Incorporated
by reference to Exhibit 10.3 to Current Report on Form 8-K filed January 6, 2000 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.64 Management Agreement dated December 22, 1999 between Apple Suites Management, Inc.
and Promus Hotels, Inc. pertaining to the Jackson, Mississippi hotel (Incorporated by
reference to Exhibit 10.4 to Current Report on Form 8-K filed January 6, 2000 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.65 Letter dated December 22, 1999 interpreting Management Agreement dated December 22,
1999 among Apple Suites, Inc., Promus Hotels, Inc., Promus Hotels Florida, Inc. and
Hampton Inns, Inc. pertaining to the Jackson, Mississippi hotel (Incorporated by reference to
Exhibit 10.5 to Current Report on Form 8-K filed January 6, 2000 by Apple Suites, Inc.; SEC
File No. 333-77055).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
---------- ------------------------------------------------------------------------------------------------------
<S> <C>
10.66 Comfort Letter dated December 22, 1999 among Promus Hotels, Inc., Apple Suites, Inc. and
Apple Suites Management, Inc. pertaining to the Jackson, Mississippi hotel (Incorporated by
reference to Exhibit 10.6 to Current Report on Form 8-K filed January 6, 2000 by Apple
Suites, Inc.; SEC File No. 333-77055).
10.67 Negative Pledge Agreements dated December 22, 1999 between Apple Suites, Inc. and
Promus Hotels, Inc (Incorporated by reference to Exhibit 10.7 to Current Report on Form
8-K filed January 6, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
10.68 Promissory Note dated December 22, 1999 in the amount of $ 45,000 made payable by Apple
Suites Management, Inc. to the order of Apple Suites, Inc. (Hotel Franchise Fees)
(Incorporated by reference to Exhibit 10.8 to Current Report on Form 8-K filed January 6,
2000 by Apple Suites, Inc.; SEC File No. 333-77055).
10.69 Promissory Note dated December 22, 1999 in the amount of $ 9,100 made payable by Apple
Suites Management, Inc. to the order of Apple Suites, Inc. (Incorporated by reference to
Exhibit 10.9 to Current Report on Form 8-K filed January 6, 2000 by Apple Suites, Inc.; SEC
File No. 333-77055).
10.70 Indemnity dated May 8, 2000 from Apple Suites, Inc. to Promus Hotels, Inc. pertaining to the
Malvern, Pennsylvania hotel. (Incorporated by reference to Exhibit 10.1 to Current Report on
Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
10.71 Master Hotel Lease Agreement dated May 8, 2000 between Apple Suites, Inc., as Trustee for
Apple Suites Pennsylvania Business Trust (as lessor) and Apple Suites Management, Inc. (as
lessee). (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed May
23, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
10.72 Homewood Suites License Agreement between Promus Hotels, Inc. and Apple Suites
Management, Inc. pertaining to the Malvern, Pennsylvania hotel. (Incorporated by reference
to Exhibit 10.3 to Current Report on Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC
File No. 333-77055).
10.73 Management Agreement dated May 8, 2000 between Apple Suites Management, Inc. and
Promus Hotels, Inc. pertaining to the Malvern, Pennsylvania hotel. (Incorporated by reference
to Exhibit 10.4 to Current Report on Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC
File No. 333-77055).
10.74 Letter dated May 8, 2000 among Apple Suites, Inc., Hampton Inns, Inc., Promus Hotels
Florida, Inc. and Promus Hotels, Inc. pertaining to the repayment of notes made by Apple
Suites, Inc. in connection with the purchase of all of its Homewood Suites(Reg. TM) by Hilton hotels.
(Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed May 23, 2000
by Apple Suites, Inc.; SEC File No. 333-77055).
10.75 Letter dated May 8, 2000 between Apple Suites, Inc. and Promus Hotels, Inc. pertaining to the
release of certain hotel properties as security upon the repayment of certain debt by Apple
Suites, Inc. (Incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed
May 23, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
10.76 Comfort Letter dated May 8, 2000 among Promus Hotels, Inc., Apple Suites, Inc., as Trustee
for Apple Suites Pennsylvania Business Trust and Apple Suites Management, Inc. pertaining
to the Malvern, Pennsylvania hotel. (Incorporated by reference to Exhibit 10.7 to Current
Report on Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
---------- ---------------------------------------------------------------------------------------------
<S> <C>
10.77 Negative Pledge Agreement dated May 8, 2000 between Apple Suites, Inc. and Promus
Hotels, Inc. (Incorporated by reference to Exhibit 10.8 to Current Report on Form 8-K filed
May 23, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
10.78 Promissory Note dated May 8, 2000 in the amount of $55,350 made payable by Apple Suites
Management, Inc. to the order of Apple Suites, Inc. (Hotel Franchise Fees). (Incorporated by
reference to Exhibit 10.9 to Current Report on Form 8-K filed May 23, 2000 by Apple Suites,
Inc.; SEC File No. 333-77055).
10.79 Promissory Note dated May 8, 2000 in the amount of $12,300 made payable by Apple Suites
Management, Inc. to the order of Apple Suites, Inc. (Hotel Supplies). (Incorporated by
reference to Exhibit 10.10 to Current Report on Form 8-K filed May 23, 2000 by Apple Suites,
Inc.; SEC File No. 333-77055).
10.80 Declaration of Trust of Apple Suites Pennsylvania Business Trust. (Incorporated by reference
to Exhibit 10.11 to Current Report on Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC
File No. 333-77055).
10.81 Ground Lease dated July 1, 1996 between named Landlords and Promus Hotels, Inc. as
Tenant, as amended by Amendment to Ground Lease dated as of July 1, 1996 and Second
Amendment to Ground Lease and Amendment to Short Form Lease dated as of March 6,
2000. (Incorporated by reference to Exhibit 10.12 to Current Report on Form 8-K filed May
23, 2000 by Apple Suites, Inc.; SEC File No. 333-77055).
10.82 Assignment and Assumption of Lease dated May 8, 2000 by and among named Landlords,
Promus Hotels, Inc. as Assignor and Apple Suites, Inc., as Trustee for Apple Suites
Pennsylvania Business Trust, as Assignee. (Incorporated by reference to Exhibit 10.13 to
Current Report on Form 8-K filed May 23, 2000 by Apple Suites, Inc.; SEC File No.
333-77055).
23.1 Consent of McGuire, Woods, Battle & Boothe LLP (included in Exhibits 5, 8).
23.2 Consent of Ernst & Young, LLP (regarding prospectus).
23.3 Consent of Lisa B. Kern, Prospective Director.
23.4 Consent of Bruce H. Matson, Prospective Director.
23.5 Consent of Michael S. Waters, Prospective Director.
23.6 Consent of Robert M. Wily, Prospective Director.
23.7 Consent of L.P. Martin & Company. (FILED HEREWITH)
23.8 Consent of Ernst & Young, LLP. (FILED HEREWITH)
24.1 Power of Attorney of Lisa B. Kern.
24.2 Power of Attorney of Bruce H. Matson.
24.3 Power of Attorney of Michael S. Waters.
24.4 Power of Attorney of Robert M. Wily.
</TABLE>
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<PAGE>
ITEM 37. 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
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<PAGE>
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.
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
Commission 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.
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<PAGE>
ITEM 38.
TABLE VI: ACQUISITIONS OF PROPERTIES BY CORNERSTONE AND APPLE RESIDENTIAL
The following is a summary of rental property acquired by Cornerstone
Realty Income Trust, Inc. as of December 31, 1999. All properties are
residential communities. As of that date, Cornerstone Realty Income had not
disposed of any properties since inception. Cornerstone subsequently sold 16
properties as of March 10, 2000 (identified below with + notation). Purchasers
of our shares will not have any interest in any of the properties listed below.
<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 $6,344,761 Jun-93 176 903
The Trestles 10,350,000 11,674,666 Dec-94 280 776
The Landing 8,345,000 10,273,739 May-96 200 960
Highland Hills 12,100,000 14,777,352 Sep-96 264 1,000
Parkside at Woodlake 14,663,886 15,363,983 Sep-96 266 865
Deerfield 10,675,000 11,434,772 Nov-96 204 888
Paces Arbor + 5,588,219 6,061,500 Mar-97 101 899
Paces Forest + 6,473,481 7,061,353 Mar-97 117 883
Clarion Crossing 10,600,000 11,199,362 Sep-97 228 769
St. Regis 9,800,000 10,313,631 Oct-97 180 840
Remington Place 7,900,000 8,742,446 Oct-97 136 1,098
The Timbers 8,100,000 8,973,326 Jun-98 176 745
Charlotte, North Carolina
Hanover Landing + 5,725,000 7,688,461 Aug-95 192 832
Sailboat Bay + 9,100,000 13,760,358 Nov-95 358 906
Bridgetown Bay 5,025,000 5,978,562 Apr-96 120 867
Meadow Creek 11,100,000 12,846,737 May-96 250 860
Beacon Hill 13,579,203 14,977,670 May-96 349 734
Summerwalk 5,660,000 7,811,259 May-96 160 963
Paces Glen 7,425,000 8,283,569 Jul-96 172 907
Heatherwood 17,630,457 25,678,852 ** 476 1,186
Charleston Place 9,475,000 10,479,833 May-97 214 806
Stone Point 9,700,000 10,340,351 Jan-98 192 848
Winston-Salem, North Carolina
Mill Creek 8,550,000 9,756,845 Sep-95 220 897
Glen Eagles 7,300,000 8,387,218 Oct-95 166 952
Wilmington, North Carolina
Wimbledon Chase + 3,300,000 5,792,212 Feb-94 192 818
Chase Mooring + 3,594,000 7,033,468 Aug-94 224 867
Osprey Landing + 4,375,000 7,568,285 Nov-95 176 981
Other North Carolina
Wind Lake + 8,760,000 11,513,608 Apr-95 299 727
The Meadows 6,200,000 7,499,248 Jan-96 176 1,068
Signature Place 5,462,948 7,490,089 Aug-96 171 1,037
Pinnacle Ridge 5,731,150 6,421,295 Apr-98 168 885
</TABLE>
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<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>
GEORGIA
Atlanta, Georgia
Ashley Run $18,000,000 $19,972,413 Apr-97 348 1,150
Carlyle Club 11,580,000 13,251,328 Apr-97 243 1,089
Dunwoody Springs 15,200,000 19,090,735 Jul-97 350 948
Stone Brooke 7,850,000 8,872,988 Oct-97 188 937
Spring Lake 9,000,000 9,866,697 Aug-98 188 1,009
Other Georgia
West Eagle Greens + 4,020,000 6,426,900 Mar-96 165 796
Savannah West + 9,843,620 14,048,274 Jul-96 450 877
VIRGINIA
Richmond, Virginia
Ashley Park $12,205,000 $13,271,520 Mar-96 272 765
Trolley Square 10,242,575 13,717,622 *** 325 589
Hampton Glen 11,599,931 13,008,010 Aug-96 232 788
The Gables 11,500,000 12,710,802 Jul-98 224 700
Virginia Beach, Virginia
Mayflower Seaside 7,634,144 10,786,692 Oct-93 263 698
Harbour Club 5,250,000 6,543,804 May-94 214 813
BayWatch Pointe + 3,372,525 5,156,962 Jul-95 160 911
Tradewinds 10,200,000 11,781,289 Nov-95 284 930
Arbor Trace 5,000,000 6,141,118 Mar-96 148 850
Other Virginia
County Green + 3,800,000 5,496,059 Dec-93 180 1,000
Trophy Chase 12,628,991 16,648,166 **** 185 803
Greenbrier 11,099,525 12,606,881 Oct-96 258 251
SOUTH CAROLINA
Greenville, South Carolina
Polo Club + $ 4,300,000 $ 7,866,907 Jun-93 365 807
Breckinridge + 5,600,000 7,208,834 Jun-95 236 726
Magnolia Run + 5,500,000 7,009,512 Jun-95 212 993
Columbia, South Carolina
Stone Ridge 3,325,000 6,019,560 Dec-93 191 1,047
The Arbors at Windsor Lake 10,875,000 11,701,117 Jan-97 228 966
Other South Carolina
Westchase 11,000,000 13,212,319 Jan-97 352 806
Hampton Pointe 12,225,000 14,667,288 Mar-98 304 1,035
Cape Landing 17,100,000 19,233,648 Oct-98 288 933
</TABLE>
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<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>
TEXAS
Dallas, Texas
Brookfield $ 8,014,533 $ 8,161,716 Jul-99 232 714
Toscana 7,334,023 7,365,639 Jul-99 192 601
Pace Cove 11,712,879 11,971,802 Jul-99 328 670
Timberglen 13,220,605 13,584,884 Jul-99 304 728
Summertree 7,724,156 8,229,667 Jul-99 232 575
Devonshire 7,564,892 7,891,678 Jul-99 144 876
Courts at Pear Ridge 11,843,691 11,946,254 Jul-99 242 774
Irving, Texas
Eagle Crest $ 21,566,317 $ 21,656,922 Jul-99 484 887
Remington Hills 20,921,219 21,404,019 Jul-99 362 957
Estrada Oaks 10,786,882 11,012,434 Jul-99 248 771
Arlington, Texas
Aspen Hills 7,223,722 7,358,975 Jul-99 240 671
Mill Crossing 5,269,792 5,338,858 Jul-99 184 691
Polo Run 7,556,647 8,352,311 Jul-99 224 854
Cottonwood 6,271,756 6,768,671 Jul-99 200 751
Burney Oaks 9,965,236 10,224,472 Jul-99 240 794
Fort Worth, Texas
Copper Crossing 11,776,983 12,005,817 Jul-99 400 739
Bedford, Texas
The Arbors 9,573,954 9,617,764 Jul-99 210 804
Park Village 8,224,541 8,582,259 Jul-99 238 647
Euless, Texas
Wildwood 4,471,294 4,524,238 Jul-99 120 755
Duncanville, Texas
Main Park 9,082,967 9,201,464 Jul-99 192 939
Lewisville, Texas
Paces Point 12,980,245 13,167,942 Jul-99 300 762
Grand Prairie, Texas
Silverbrooke I 15,709,893 16,505,257 Jul-99 472 842
Silverbrooke II 5,808,250 6,022,167 Jul-99 170 741
Grapevine, Texas
Grayson Square I 9,948,959 10,238,037 Jul-99 200 840
Grayson Square II 12,210,121 12,437,775 Jul-99 250 850
Austin, Texas
The Meridian 7,539,224 7,742,932 Jul-99 200 741
Canyon Hills 12,512,502 12,586,448 Jul-99 229 799
Richardson, Texas
Cutters Point 9,859,840 10,367,834 Jul-99 196 1,010
San Antonio, Texas
Sierra Ridge 6,624,666 7,014,246 Jul-99 230 751
------------ ------------
TOTAL $799,739,444 $919,128,738
============ ============
</TABLE>
----------
* Includes real estate commissions, closing costs, and improvements
capitalized since the date of acquisition for properties acquired to date,
excluding the Apple properties. The Apple properties include the allocated
purchase price at the time of the merger and improvements capitalized since the
merger.
II-19
<PAGE>
** 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.
**** Trophy Chase Apartments is comprised of Trophy Chase and Hunter's Creek
acquired in April 1996 and July 1999, respectively, at a cost of $3,710,000 and
$8,918,991. They are adjacent properties and are operated as one apartment
community.
II-20
<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 Post-Effective
Amendment No. 3 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Richmond, Commonwealth
of Virginia, on June 20, 2000.
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, this
Post-Effective 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 June 20, 2000
--------------------------- President, the Registrant's Principal
Glade M. Knight
Executive Officer, Principal Financial
* Officer and Principal Accounting Officer June 20, 2000
--------------------------- Director
Lisa B. Kern
* Director June 20, 2000
---------------------------
Bruce H. Matson
* Director June 20, 2000
---------------------------
Michael S. Waters
* Director June 20, 2000
---------------------------
Robert M. Wily
* By: /s/ Glade M. Knight
----------------------
Glade M. Knight, as
attorney-in-fact for the
above-named persons
</TABLE>
