FILED PURSUANT TO RULE 424(B)(3)
FILE NUMBER 333-53984
PROSPECTUS [Apple Hospitality Logo]
APPLE HOSPITALITY TWO, INC.
3,157,894.7 UNITS CONSISTING OF ONE COMMON SHARE
AND ONE SERIES A PREFERRED SHARE
We plan to own upper-end, extended-stay hotel properties and qualify as a
real estate investment trust. We are offering up to 20,157,894.7 Units. Each
Unit consists of one common share and one Series A preferred share. The Series A
preferred shares will have no voting rights, no conversion rights and no
distribution rights. Moreover, the Series A preferred shares will not be
separately tradable from the common shares to which they relate. Purchasers must
purchase a minimum of $5,000 in Units, except that certain benefits plans may
purchase a minimum of $2,000 in Units. This is a blind pool company as we own no
properties at this time nor have we identified any properties to purchase with
the proceeds of this offering. If a minimum of 3,157,894.7 Units 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. If the minimum Units are sold, we will continue to offer the Units
until all Units offered by this prospectus have been sold or one year from the
date of this prospectus, unless we extend the offering for an additional year.
The Units 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 9 OF THIS PROSPECTUS.
THIS OFFERING INVOLVES MATERIAL RISKS AND INVESTMENT CONSIDERATIONS INCLUDING:
o There is no public trading market for the common shares (and accompanying
Series A preferred shares) -- that is, the Units will be highly illiquid
and difficult to trade.
o We will pay a fee of 2% of the purchase or sale price of each hotel to
Apple Suites Realty Group, Inc. and annual fee ranging from 0.1% to 0.25%
of total equity proceeds to Apple Suite Advisors, Inc., both of which are
owned by our chairman and president, Glade M. Knight.
o There are conflicts of interest between us and our chairman and president,
Glade M. Knight, because he is the sole shareholder of companies with which
we will enter into contracts for services for day-to-day operations and for
the purchase or sale of real estate.
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 Series B
convertible preferred shares.
o We have no restriction on changes in our investment and financing policies.
Further, our board may, in its sole discretion, determine the amount of our
aggregate debt.
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO COMMISSIONS & APPLE HOSPITALITY
PUBLIC MARKETING EXPENSES TWO, INC.
Per Unit(1) .................... $ 9.50 $ .95 $ 8.55
- --------------------------------------------------------------------------------------------------
Total Minimum Offering ......... $ 30,000,000 $ 3,000,000 $ 27,000,000
- --------------------------------------------------------------------------------------------------
Total Maximum Offering ......... $200,000,000 $20,000,000 $180,000,000
- --------------------------------------------------------------------------------------------------
(1) Once the minimum offering of 3,157,894.7 Units is achieved, the per Unit
offering price will rise to $10, the selling commission and marketing
expenses per Unit will become $1.00, and the proceeds per Unit to Apple
Hospitality Two, 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.
THE DATE OF THIS PROSPECTUS IS APRIL 19, 2001.
EXCEPT FOR THE STATES SPECIFICALLY DESCRIBED BELOW, EACH PURCHASER OF UNITS
MUST CERTIFY THAT HE HAS EITHER (1) A MINIMUM ANNUAL GROSS INCOME OF $50,000 AND
A NET WORTH (EXCLUSIVE OF EQUITY IN HOME, HOME FURNISHINGS AND PERSONAL
AUTOMOBILES) OF AT LEAST $50,000, OR (2) A NET WORTH (SIMILARLY 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.
NO PURCHASER OF UNITS MAY PURCHASE UNITS 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 THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, ANY OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH AN OFFER MAY
NOT LEGALLY MADE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION CONTAINED IN THIS PROSPECTUS HAS NOT CHANGED AS OF ANY TIME
AFTER ITS DATE.
TABLE OF CONTENTS
SUMMARY ........................................................................ 1
Apple Hospitality Two, Inc.................................................... 1
Apple Suites Advisors, Inc. and Apple Suites Realty Group, Inc. .............. 1
Risk Factors ................................................................. 3
The Offering ................................................................. 3
Use of Proceeds .............................................................. 4
Conflicts of Interest ........................................................ 5
Liquidity .................................................................... 5
Investment and Distribution Policy ........................................... 6
Borrowing Policy ............................................................. 6
Compensation ................................................................. 7
RISK FACTORS ................................................................... 9
There is no public market for our common shares, so investors may be
unable to dispose of their investment........................................ 9
There will never be a public market for our Series A preferred shares and
investors will not be able to separately dispose of their Series A
preferred shares without disposing of the common shares to which the
Series A preferred shares relate............................................. 9
The board of directors may decide in its sole discretion to dissolve us. ..... 9
The compensation to Apple Suites Advisors and Apple Suites Realty is
payable before distributions and will reduce investors' return. ............. 10
There were no arms-length negotiations for our agreements with Apple
Suites Advisors and Apple Suites Realty...................................... 10
Commissions, acquisition, advisory and other fees and expenses will limit
our ability to make distributions to investors. ............................. 10
The compensation to Apple Suites Realty and Apple Suites Advisors is
indeterminable and cannot be stated with certainty. ......................... 10
There are conflicts of interest with our president and chairman of the
board........................................................................ 11
There are conflicts of interest with our advisor and broker................... 11
Our management will spend time on other activities............................ 12
Apple Suites Advisors may terminate the Advisory Agreement.................... 12
We have no operating history and we have no assurance of success. ............ 12
We own no properties at this time. ........................................... 12
We are not diversified and are dependent on our investment in a single
industry..................................................................... 12
We will be dependent upon Apple Hospitality Management for our
revenues..................................................................... 13
There are conflicts of interest with our lessee. ............................. 13
There may be operational limitations associated with franchise agreements
affecting our properties..................................................... 13
There is a possible lack of diversification and lower return due to the
minimum size of our offering................................................. 14
There may be delays in investment in real property, and this delay may
decrease the return to shareholders.......................................... 14
i
The actual amount of proceeds available for investment in properties is
uncertain................................................................... 14
Our board may in its sole discretion determine the amount of our aggregate
debt. ...................................................................... 14
The per-Unit offering prices have been established arbitrarily by us and
may not reflect the true value of the Units. ............................... 15
We may be unable to make distributions. ..................................... 15
We will face competition in the hotel industry. ............................. 15
Investors may wait up to one year before receiving their Units or a refund
of their money if the minimum offering is not achieved. .................... 15
There would be significant adverse consequences of our failure to qualify as
a REIT. .................................................................... 16
Our real estate investments will be relatively illiquid. .................... 16
We have no restriction on changes in our investment and financing policies... 16
There will be dilution of shareholder's interests upon conversion of the
Series B convertible preferred shares. ..................................... 16
The Series B convertible preferred shares will have a liquidation preference
before any distribution of liquidation proceeds on the common shares. ...... 17
Our shareholders' interests may be diluted in various ways. ................. 17
Our articles and bylaws contain antitakeover provisions and ownership
limits. .................................................................... 18
We may become subject to environmental liabilities. ......................... 18
We may incur significant costs complying with the Americans with
Disabilities Act and similar laws. ......................................... 19
We make forward-looking statements in this prospectus which may prove to
be inaccurate. ............................................................. 19
USE OF PROCEEDS ............................................................... 20
COMPENSATION .................................................................. 22
Acquisition Phase ........................................................... 22
Operational Phase ........................................................... 22
Disposition Phase ........................................................... 23
All Phases .................................................................. 23
CONFLICTS OF INTERESTS ........................................................ 25
General ..................................................................... 25
Conflicts with respect to fees paid by us to Apple Suites Advisors and
Apple Suites Realty ........................................................ 25
Policies to Address Conflicts ............................................... 26
Transactions with Affiliates and Related Parties ............................ 26
Competition Between Us and Mr. Knight ....................................... 27
Competition for Management Services ......................................... 28
INVESTMENT OBJECTIVES AND POLICIES ............................................ 29
Investments in Real Estate or Interests in Real Estate ...................... 29
Borrowing Policies .......................................................... 29
Reserves .................................................................... 30
Sale Policies ............................................................... 31
Changes in Objectives and Policies .......................................... 31
ii
DISTRIBUTIONS POLICY .................................................. 33
BUSINESS .............................................................. 34
General ............................................................. 34
Business Strategies ................................................. 34
Leases .............................................................. 34
Upper-End, Extended-Stay Hotels ..................................... 35
Other Real Estate Investments ....................................... 35
Legal Proceedings ................................................... 35
Regulation .......................................................... 36
General ............................................................ 36
Americans With Disabilities Act .................................... 36
Environmental Matters ............................................... 36
Insurance ........................................................... 37
Available Information ............................................... 38
MANAGEMENT ............................................................ 39
Classification of the Board ......................................... 40
Committees of the Board ............................................. 40
Director Compensation ............................................... 41
Indemnification and Insurance ....................................... 41
Officer Compensation ................................................ 41
Stock Incentive Plans ............................................... 41
The Incentive Plan .................................................. 41
Directors' Plan ..................................................... 43
Stock Option Grants ................................................. 44
APPLE SUITES ADVISORS, INC., APPLE SUITES REALTY GROUP,
INC. AND AFFILIATES ................................................. 45
General ............................................................. 45
The Advisory Agreement .............................................. 45
Apple Suites Realty Group, Inc. ..................................... 48
Prior Performance of Programs Sponsored by Glade M. Knight .......... 48
Prior REITs - Cornerstone and Apple Residential ..................... 49
Additional Information on Cornerstone and Apple Suites Acquisitions . 49
Prior REITs - Apple Suites .......................................... 50
Prior Partnerships .................................................. 50
Publicly-Offered Partnerships ....................................... 50
Privately-Offered Partnerships ...................................... 50
Additional Information on Prior Programs ............................ 52
PRINCIPAL AND MANAGEMENT SHAREHOLDERS ................................. 53
FEDERAL INCOME TAX CONSIDERATIONS ..................................... 55
General ............................................................. 55
REIT Qualification .................................................. 56
Sources of Gross Income ............................................ 56
75% Gross Income Test .............................................. 57
95% Gross Income Test .............................................. 59
Failing the 75% or 95% Tests; Reasonable Cause ..................... 59
iii
Character of Assets Owned ................................................ 59
Annual Distributions to Shareholders ..................................... 60
Taxation as a REIT ........................................................ 61
Failure to Qualify as a REIT .............................................. 62
Taxation of Shareholders .................................................. 62
Backup Withholding ........................................................ 63
Taxation of Tax Exempt Entities ........................................... 64
Taxation of Foreign Investors ............................................. 65
State and Local Taxes ..................................................... 65
ERISA CONSIDERATIONS ........................................................ 66
CAPITALIZATION .............................................................. 68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................................... 69
Overview .................................................................. 69
Series B Convertible Preferred Shares ..................................... 69
PLAN OF DISTRIBUTION ........................................................ 71
DESCRIPTION OF CAPITAL STOCK ................................................ 76
Common Shares ............................................................. 76
Dividend and Distribution Rights .......................................... 76
Voting Rights ............................................................. 76
Series A Preferred Shares ................................................. 77
Series B Convertible Preferred Shares ..................................... 77
Preferred Shares .......................................................... 78
Restrictions on Transfer .................................................. 78
Facilities for Transferring Common Shares ................................. 80
SUMMARY OF ORGANIZATIONAL DOCUMENTS ......................................... 81
Board of Directors ........................................................ 81
Responsibility of Board of Directors, Apple Suites Advisors, Inc., Officers
and Employees ............................................................ 82
Issuance of Securities .................................................... 83
Redemption and Restrictions on Transfer ................................... 83
Amendment ................................................................. 83
Shareholder Liability ..................................................... 84
SALES LITERATURE ............................................................ 84
REPORTS TO SHAREHOLDERS ..................................................... 84
LEGAL MATTERS ............................................................... 85
EXPERTS ..................................................................... 85
EXPERIENCE OF PRIOR PROGRAMS ................................................ 85
iv
SUMMARY
The following information is a summary about this offering and may not
contain all of the detailed information that is important to you. Accordingly,
this summary should be read together with the information contained in this
prospectus.
APPLE HOSPITALITY TWO, INC.
We will focus on purchasing and owning upper-end, extended-stay hotel
properties located in selected metropolitan areas. Our hotel properties will
offer upscale, high-quality, residential style lodging with a comprehensive
package of guest services and amenities for extended-stay business and leisure
travelers. We will have no limitation as to the brand of franchise or license
with which our hotels will be associated. However, we own no properties at this
time.
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,
2001. 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.
Because we are prohibited under federal tax laws from operating our
extended-stay hotel properties directly, we will enter into leases for each of
our hotel properties. All our hotel properties will be leased to Apple
Hospitality Management, Inc., a wholly owned, taxable REIT subsidiary. Apple
Hospitality Management has no significant assets.
We are located at 306 East Main Street, Richmond, Virginia and our
telephone number is (804) 643-1761.
APPLE SUITES ADVISORS, INC. AND APPLE SUITES REALTY GROUP, INC.
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.
Glade M. Knight, who is our president and chairman of the board, owns all
of the common shares of Apple Suites Advisors and Apple Suites Realty.
1
The following chart illustrates the relationships among Apple Hospitality
Two, Inc., Apple Hospitality Management, Apple Suites Advisors, and Apple Suites
Realty.
SHAREHOLDERS
|
|
Apple Hospitality Two, Inc.
| | |
| | |
| | |
| | |
| | |
| | Acquisition/ |
Advisory | | Disposition | 100%
Agreement | | Agreement | Subsidiary
| | |
Apple Suites Apple Suites Apple Hospitality
Advisors, Inc.* Realty Group, Inc.* Management, Inc.
- - -----------
* Wholly owned by Glade M. Knight, chairman and president of Apple Hospitality
Two, Inc.
2
RISK FACTORS
WE URGE YOU TO CONSIDER CAREFULLY THE MATTERS DISCUSSED UNDER "RISK
FACTORS" BEGINNING ON PAGE 9 BEFORE YOU DECIDE TO PURCHASE OUR UNITS. AN
INVESTMENT IN OUR SECURITIES INVOLVES A NUMBER OF RISKS INCLUDING:
o There will be no public trading market for the common shares and the Series
A preferred shares for an indefinite period of time, if ever. Therefore,
the Units will be highly illiquid and difficult to trade.
o We will pay a fee of 2% of the purchase or sale price of each hotel to
Apple Suites Realty Group, Inc. and an annual fee ranging from 0.1% to
0.25% of total equity proceeds received to Apple Suites Advisors, Inc.
Glade M. Knight, our chairman and president, is the sole shareholder of
Apple Suites Realty Group, Inc. and Apple Suites Advisors, Inc.
o There are conflicts of interest between us and our chairman and president,
Glade M. Knight, because he is the sole shareholder of companies with which
we will enter into contracts for services for day-to-day operations and for
the purchase or sale of real estate.
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 Series B
convertible preferred shares.
o We have no restrictions on changes in our investment and financing
policies. Further, our board may, in its sole discretion, determine the
amount of our aggregate debt.
o We will primarily acquire upper-end, 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 Units at $9.50 per Unit until a minimum of 3,157,894.7
Units have been sold. Thereafter, the Units will be offered at $10 per unit
until a maximum of 20,157,894.7 Units have been sold. Purchasers must purchase a
minimum of $5,000 in Units except that certain benefit plans may purchase a
minimum of $2,000 in Units. The Units are being offered through David Lerner
Associates, Inc.
3
If at least 3,157,894.7 Units have not been sold within one year after the
date of this prospectus, we will terminate this offering of Units 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
Hospitality Management will not be permitted to purchase Units in order to reach
the minimum offering of 3,157,894.7 Units.
This offering of Units will continue until all the Units 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 20,157,894.7 Units. 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 Units at one or
more closings. An initial closing will occur after the minimum offering of
3,157,894.7 Units is achieved. Thereafter, additional closings are expected to
occur on a monthly basis as Units are sold during the offering period.
With each purchase of a Unit you will receive one common share and one
Series A preferred share. The Series A preferred shares will have no voting
rights, no conversion rights and no distribution rights. The only right
associated with the Series A preferred shares will be a priority distribution
upon the sale of our assets. The priority would be equal to $10.00 per Series A
preferred share, and no more, before any distributions are made to the holders
of any other shares. The Series A preferred shares will not be separately
tradable from the common shares to which they relate.
USE OF PROCEEDS
The proceeds of the offering will be used
o to pay expenses and fees of selling the Units;
o to invest in properties;
o to pay expenses and fees associated with acquiring properties; and
o to establish a working capital reserve.
On February 28, 2001, we obtained a line of credit in a principal amount of
up to $300,000 to fund our start-up costs. The lender is Apple Suites, Inc.
Glade M. Knight, our president and chairman of the board, is also the president
and chairman of the board of Apple Suites, Inc. This line of credit bears
interest at 8 1/2%. Interest and the principal balance are due in full upon
written demand by Apple Suites, Inc. any time after ninety days from the first
advance made to us. 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.
4
CONFLICTS OF INTEREST
We may be subject to conflicts of interest arising from our relationship
with Apple Suites Advisors, Apple Suites Realty and Glade M. Knight, our
chairman and president, as they are not restricted from engaging for their own
account in business activities of the type conducted by us. There may be
conflicts with respect to commissions we pay to Apple Suites Realty because its
compensation will increase in proportion to the number of properties purchased
and sold by us and the properties' purchase and sale prices. There may be
conflicts with respect to the asset management fee we pay to Apple Suites
Advisors since its compensation is a percentage of total proceeds received from
time to time by us from the sales of our Units.
We have obtained a $300,000 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.
In addition, we may purchase properties from entities affiliated with Mr.
Knight. We will issue Series B convertible preferred shares to Mr. Knight on or
before the closing of the minimum offering in exchange for $0.10 per share.
Under limited circumstances these shares may be converted into Units thereby
resulting in dilution of the shareholders' interest in us. The Series B
convertible preferred shares are convertible into Units if (i) substantially all
of our assets, stock or business is transferred, whether through exchange,
merger, consolidation, lease, share exchange or otherwise or (2) the advisory
agreement with Apple Suites Advisors is terminated or not renewed.
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 and Apple Suites Realty.
LIQUIDITY
Before this offering there has been no public market for the Units and
initially we do not expect a market to develop for the common shares or the
Series A preferred shares. Prospective shareholders should view the Units as
illiquid and must be prepared to hold their investment for an indefinite length
of time.
We do not plan to cause the common shares nor the Series A preferred 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
5
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 to five 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 five years from the initial closing.
INVESTMENT AND DISTRIBUTION POLICY
We intend to maximize shareholder value by acquiring upper-end,
extended-stay hotel properties for long-term ownership. We intend to acquire fee
ownership of our hotel properties. We will seek opportunities, through the
direct ownership of hotels, that provide acceptable investment returns and
growth in cash distributions to our shareholders. As a REIT we are required to
make dividend distributions to our shareholders. We intend to make quarterly
distributions commencing after the first full quarter following the closing of
the minimum offering of 3,157,894.7 Units. We will depreciate our fixed assets
on a straight-line basis over their expected useful lives.
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 Units 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. To the extent that any interim borrowings are not paid with proceeds
from the sale of Units we will need to incur permanent debt secured by our
properties.
After the initial closing of Units, 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
6
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 that 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 upper-end, 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
upper-end, extended-stay hotel properties in the future as proceeds from the
sale of Units are received and provide us with economies of scale from the
outset.
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 our modified
funds from operations (as defined below) to the amount raised in this offering.
This ratio is referred to as the "return ratio." Modified 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 $30,000,000 in Units is sold, the
annual asset management fee would be:
o $30,000 if the return ratio is 6% or less,
7
o $45,000 if the return ratio is more than 6% but no more than 8%, or
o $75,000 if the return ratio is more than 8%.
Assuming the maximum offering amount of $200,000,000 in Units is sold, the
annual asset management fee would be:
o $200,000 if the return ratio is 6% or less,
o $300,000 if the return ratio is more than 6% but no more than 8%, or
o $500,000 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, 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 certain costs
incurred on our behalf 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 properties of the type
described in this paragraph and, therefore, do not expect to incur any
additional fees.
8
RISK FACTORS
An investment in Units involves a number of risks. You should carefully
consider the following information describing the material risks inherent in
investing in Units, together with the other information in this prospectus,
before making a decision to purchase our Units.
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.
THERE WILL NEVER BE A PUBLIC MARKET FOR OUR SERIES A PREFERRED SHARES AND
INVESTORS WILL NOT BE ABLE TO SEPARATELY DISPOSE OF THEIR SERIES A PREFERRED
SHARES WITHOUT DISPOSING OF THE COMMON SHARES TO WHICH THE SERIES A PREFERRED
SHARES RELATE.
Prospective shareholders should view the Series A preferred shares as
illiquid and must be prepared to hold those shares for as long as they hold the
common shares to which each Series A preferred share relates. No public market
for our Series A preferred shares will exist separate from any public market
that may exist for our common shares. Each Series A preferred shares will not
trade separately from each common share to which it relates. Our Series A
preferred shares will never trade separately from our common shares nor ever be
listed on any securities exchange or quoted on any system or in any established
market. Shareholders will be unable to resell their Series A preferred shares
without selling the common shares to which they relate.
THE BOARD OF DIRECTORS MAY DECIDE IN ITS SOLE DISCRETION TO DISSOLVE US.
Currently, we expect that within approximately three to five years from the
initial closing of the minimum offering of 3,157,894.7 Units 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 five-year period mentioned
above.
9
If the shareholders were to approve that we liquidate all of our assets,
the Series A preferred shares would have a priority distribution followed by a
priority distribution to the Series B convertible preferred shares. In the event
that the liquidation of our assets resulted in proceeds that exceeded the
distribution rights of the Series A preferred shares and Series B convertible
preferred shares, the remaining proceeds would be distributed between the common
shares and the Series B convertible preferred shares, on an as converted basis.
THE COMPENSATION TO APPLE SUITES ADVISORS AND APPLE SUITES REALTY IS
PAYABLE BEFORE DISTRIBUTIONS AND WILL REDUCE INVESTORS' RETURN.
We will pay a fee of 2% of the purchase or sale price of each hotel to
Apple Suites Realty Group and an annual fee ranging from 0.1% to 0.25% of total
equity proceeds received to Apple Suites Advisors. 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 AND APPLE SUITES REALTY.
Apple Suites Advisors and Apple Suites Realty will receive substantial
compensation from us in exchange for various services they have agreed to render
to us. This compensation has been established without the benefits of
arms-length negotiation. Apple Suites Advisors will supervise and arrange for
the day-to-day management of our operations and will assist us in maintaining a
continuing and suitable property investment program. Apple Suites Realty will
act as a real estate broker in connection with our purchase and sales of
properties.
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 Units, 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
10
Suites Advisors will receive an asset management fee that may range from $30,000
to $500,000 per year. The asset management fee will be based upon the ratio of
our modified 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 certain of 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 Glade M. Knight and us arise
because he is the sole shareholder, sole director and sole officer of Apple
Suites Advisors and Apple Suites Realty. These companies will enter into
contracts with us to lease our properties or provide us with asset management
and property acquisition and disposition services. Mr. Knight will not receive a
salary from us. His compensation will be received from Apple Suites Advisors and
Apple Suites Realty.
In addition, Glade M. Knight is and will be a principal in other real
estate investment transactions or programs which may compete with us.
Currently, Mr. Knight is the chairman of the board and president of Apple
Suites, Inc. and Cornerstone Realty Income Trust, Inc., which are real estate
investment trusts. Mr. Knight has economic interests in these other programs by
virtue of his positions in those companies. Mr. Knight receives compensation
from and is a shareholder in both Cornerstone Realty Income Trust, Inc. and
Apple Suites, Inc.
We have obtained a $300,000 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.
THERE ARE CONFLICTS OF INTEREST WITH OUR ADVISOR AND BROKER.
We will pay Apple Suites Realty an acquisition fee in connection with each
acquisition of a property, and a disposition fee in connection with property
dispositions. As a consequence, Apple Suites Realty may have an incentive to
recommend the purchase or disposition of a property in order to receive a fee.
Apple Suites Advisors will receive a fee, which is a percentage of the total
consideration we receive from sale of Units, and, therefore, it could have an
incentive to close the sales of shares as rapidly as possible. In addition, we
will have no separate employees from Apple Suites Advisors and Apple Realty and
because we will have no ownership interest in these entities we will not
exercise control over them.
11
OUR MANAGEMENT WILL SPEND TIME ON OTHER ACTIVITIES.
The officers and directors of Apple Suites Advisors and Apple Suites Realty
also serve as officers and directors of entities that engage in the brokerage,
sale, operation or management of real estate. These entities are Cornerstone
Realty Income Trust, Inc. and Apple Suites, Inc. Both of these entities share
similar investment objectives and policies. Apple Suites, Inc. may compete for
properties against us. The officers and directors of Apple Suites Advisors and
Apple Suites Realty may disproportionately allocate their time and resources
between these other entities and us. The organizational documents do not specify
a minimum standard of time and attention that Apple Suites Advisors, Apple
Suites Realty and Mr. Knight are required to devote to us.
APPLE SUITES ADVISORS MAY TERMINATE THE ADVISORY AGREEMENT.
Our management advisor, Apple Suites Advisors, may terminate the Advisory
Agreement entered into with us upon 60-days written notice. Apple Suites
Advisors will provide us with supervisory and day-to-day management services and
will assist us in maintaining a continuing and suitable property investment
program. If Apple Suites Advisors were to terminate the Advisory Agreement we
would need to find another advisor to provide us with these services or hire
employees to provide these services directly to us. There can be no assurance
that we would be able to find another advisor or hire employees to provide us
these services or that we could enter into an advisory agreement on terms as
favorable to us if a new advisor were found.
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.
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. This offering is a
"blind pool" and, therefore, investors will have to rely upon the ability of Mr.
Knight and his affiliates with respect to his ability to invest in and manage a
portfolio of unspecified properties. 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 that 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 upper-end,
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
12
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 HOSPITALITY 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 Hospitality Management, our wholly-owned subsidiary, who will manage the
properties. Our revenues and our ability to make distributions to our
shareholders will depend solely upon the ability of Apple Hospitality
Management, our wholly-owned subsidiary, to make rent payments under its leases.
Apple Hospitality Management has no significant assets. Any failure by Apple
Hospitality Management to make rent payments would adversely affect our ability
to make distributions to our shareholders.
THERE ARE CONFLICTS OF INTEREST WITH OUR LESSEE.
We will lease our extended-stay hotel properties to Apple Hospitality
Management, our wholly-owned subsidiary. We may be less willing to enforce
provisions of the lease contract against Apple Hospitality 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
Hospitality 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. 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.
THERE MAY BE OPERATIONAL LIMITATIONS ASSOCIATED WITH FRANCHISE AGREEMENTS
AFFECTING OUR PROPERTIES.
Apple Hospitality Management, our wholly-owned taxable REIT subsidiary,
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 franchiser 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 Hospitality 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 Hospitality Management, as franchisees, to
incur significant expenses or capital expenditures. Action or inaction on our
part or by Apple Hospitality 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.
13
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.
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
$30,000,000. 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
3,157,894.7 Units, 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 Units sold will be
reduced as a result of allocating our expenses among the smaller number of
shares. While we cannot say with certainty how many properties we would purchase
if we do not sell more than the minimum offering, we would hope to purchase a
minimum of two properties. We are not limited in the number or the size of any
properties we may purchase. Neither are we limited in the percentage of the
proceeds we may invest on any single property.
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.
OUR BOARD MAY IN ITS SOLE DISCRETION DETERMINE THE AMOUNT OF OUR AGGREGATE
DEBT.
Subject to the limitations in our bylaws on the permitted maximum amount of
debt, there is no limitation on the number of mortgages or deeds of trust that
may be placed against any particular property. Our bylaws will prohibit us from
incurring debt if the debt would result in our total debt exceeding 100% of the
value of our
14
assets at cost. The bylaws also will prohibit us from allowing total borrowing
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.
THE PER-UNIT OFFERING PRICES HAVE BEEN ESTABLISHED ARBITRARILY BY US AND
MAY NOT REFLECT THE TRUE VALUE OF THE UNITS.
If we were to list the Units on a national securities exchange, the Unit
price might drop below our shareholder's original investment. Neither
prospective investors nor shareholders should assume that the per-Unit prices
reflect the intrinsic or realizable value of the Units or otherwise reflect our
value, earnings or other objective measures of worth. The increase in the
per-Unit offering price from $9.50 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.
WE WILL FACE COMPETITION IN THE HOTEL INDUSTRY.
The upper-end, extended-stay hotel industry is highly competitive. This
competition could reduce occupancy levels and rental revenues at our properties,
which would adversely affect our operations. We expect to face competition from
many sources. We will face competition from other hotels both in the immediate
vicinity and the geographic market where our hotels will be located.
Over-building in the hotel industry will increase the number of rooms available
and may decrease occupancy and room rates. In addition, increases in operating
costs due to inflation may not be offset by increased room rates. We will also
face competition from nationally recognized hotel brands with which we will not
be associated.
We will also face competition for investment opportunities. These
competitors may be other real estate investment trusts, national hotel chains
and other entities that may have substantially greater financial resources than
we do. We will also face competition for investors from other hotel real estate
investment trusts and real estate entities.
INVESTORS MAY WAIT UP TO ONE YEAR BEFORE RECEIVING THEIR UNITS OR A REFUND
OF THEIR MONEY IF THE MINIMUM OFFERING IS NOT ACHIEVED.
Until the minimum offering of 3,157,894.7 Units is achieved, investors will
not receive their Units. If at least 3,157,894.7 Units have not been sold within
one year after the date of this prospectus, we will terminate this offering of
Units. If the
15
minimum offering is sold within one year, investors will receive their Units
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.
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. Further, our board may in its sole discretion determine the amount of
our aggregate debt.
THERE WILL BE DILUTION OF SHAREHOLDER'S INTERESTS UPON CONVERSION OF THE
SERIES B CONVERTIBLE PREFERRED SHARES.
Glade M. Knight, who is our director, chairman of the board and president,
and others will hold Series B convertible preferred shares which are convertible
into Units, as described under "Principal and Management Shareholders." The
Series B convertible preferred shares are convertible into Units upon the
occurrence of either of the following events: (1) substantially all of our
assets, stock or business is transferred, whether through exchange, merger,
consolidation, lease, share exchange
16
or otherwise, or (2) the Advisory Agreement with Apple Suites Advisors is
terminated or not renewed. The number of Units into which the Series B
convertible preferred shares are convertible depends on the gross proceeds of
the offering. The conversion ratio is one-to-one for gross proceeds of $50
million (5,157,894.7 Units). The conversion ratio increases to 5.3-to-one for
gross proceeds of $200 million. The conversion of Series B convertible preferred
shares into Units will result in dilution of the shareholders' interests.
o Assuming 5,157,894.7 Units offered by this prospectus were sold, and all
of the Series B convertible preferred shares were converted into Units,
the holders of the Series B convertible preferred shares would own
240,000 Units or approximately 4.65% of the total number of Units 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
10,157,894.7 Units. Assuming 10,157,894.7 Units were sold, and all of the
Series B convertible preferred shares were converted into Units, the
holders of the Series B convertible preferred shares would own 480,000
Units or approximately 4.73% of the total number of Units then
outstanding in exchange for an aggregate payment of $24,000.
o Assuming all Units offered by this prospectus were sold, and all of the
authorized Series B convertible preferred shares were converted into
Units, the holders of the Series B convertible preferred shares would own
1,272,000 Units or approximately 6.31% of the total number of Units
outstanding in exchange for an aggregate payment of $24,000.
THE SERIES B CONVERTIBLE PREFERRED SHARES WILL HAVE A LIQUIDATION
PREFERENCE BEFORE ANY DISTRIBUTION OF LIQUIDATION PROCEEDS ON THE COMMON SHARES.
Glade M. Knight, who is our director, chairman of the board and president,
and others will hold Series B convertible preferred shares which have a
liquidation preference upon our liquidation, as described under "Principal and
Management Shareholders." Upon our liquidation, the holders of the Series B
convertible preferred shares are entitled to a priority liquidation payment
before any distribution of liquidation proceeds to the holders of the common
shares. However, priority liquidation payments to the holders of the Series B
convertible preferred shares are junior to the holders of the Series A preferred
shares distribution rights. The holders of the Series B convertible preferred
shares are entitled to a liquidation payment of $10 per number of common shares
each Series B convertible preferred share would be convertible into according to
the formula described under "Principal and Management Shareholders."
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 and, therefore, additional Series A
preferred 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
17
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 adopted two stock incentive plans for the benefit of our directors
and a limited number of our employees and employees of Apple Suites Advisors and
Apple Suites Realty. The effect of the exercise of those options could be to
dilute the value of the shareholders' investments to the extent of any
difference between the exercise price of an option and the value of the shares
purchased at the time of the exercise of the option.
In addition, we expressly reserve the right to implement a dividend
reinvestment plan involving the issuance of additional shares by us, at an issue
price determined by the board of directors.
OUR ARTICLES AND BYLAWS CONTAIN ANTITAKEOVER PROVISIONS AND OWNERSHIP
LIMITS.
OWNERSHIP LIMITS. Our bylaws contain restrictions on stock ownership that
may discourage third parties from making acquisition proposals. These same
antitakeover provisions may also impede our shareholders' ability to change our
management.
In order to maintain our qualification as a REIT, no more than 50% in value
of our outstanding shares of capital stock may be owned, directly or indirectly,
by five or fewer individuals or entities. As a result, our bylaws prohibit
ownership, either directly or indirectly, of more than 9.8% of the outstanding
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 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. These preferred shares would be in addition to the
Series A preferred 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.
18
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.
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.
19
USE OF PROCEEDS
We intend to invest the net proceeds of this offering in equity ownership
interests in upper-end, 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
Units, 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 February 28, 2001, we obtained a line of credit in a principal amount of
up to $300,000 to fund our start-up costs. The lender is Apple Suites, Inc.
Glade M. Knight, our president and chairman of the board, is also the president
and chairman of the board of Apple Suites, Inc. This line of credit bears
interest at 8 1/2%. Interest and the principal balance are due in full upon
written demand by Apple Suites, Inc. any time after ninety days from the first
advance made to us. 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
3,157,894.7 Units is completed, that 86.0% 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
20
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 20,157,894.7 Units.
The following table reflects the intended application of the proceeds from
the sale of the Units.
MINIMUM OFFERING MAXIMUM OFFERING
----------------------------- ------------------------------
% OF % OF
GROSS GROSS
AMOUNT PROCEEDS AMOUNT PROCEEDS
-------------- ------------ --------------- ------------
Gross Proceeds (1) ........................ $30,000,000 100.00% $200,000,000 100.00%
Less
Offering Expenses (2) ..................... 450,000 1.50% 1,000,000 0.50%
Selling Commissions (3) ................... 2,250,000 7.50% 15,000,000 7.50%
Marketing Expense Allowance (3) ........... 750,000 2.50% 5,000,000 2.50%
----------- ------ ------------ ------
Net Proceeds after Offering Costs ......... $26,550,000 88.50% $179,000,000 89.50%
Less Acquisition Fees and
Expenses (4) ............................. 600,000 2.00% 4,000,000 2.00%
----------- ------ ------------ ------
Proceeds Available for Investment
and Working Capital ...................... $25,950,000 86.50% $173,000,000 87.50%
Less Working Capital Reserve (5) .......... 150,000 0.50% 1,000,000 0.50%
----------- ------ ------------ ------
Net Amount Available for
Investment in Properties (6) ............. $25,800,000 86.00% $172,000,000 87.00%
=========== ====== ============ ======
- - ----------
(1) The Units 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 certain other expenses
and fees which will be incurred on our behalf 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 upper-end, extended-stay hotel
properties located in selected metropolitan areas of the United States.
21
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. As sole
shareholder of Apple Suites Advisors and Apple Suites Realty, Mr. Knight will
receive dividend income from Apple Suites Advisors and Apple Suites Realty. Mr.
Knight will receive no compensation directly from us, except that as described
in various places throughout this prospectus (including, without limitation,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Series B Convertible Preferred Shares"), the issuance to Mr. Knight
of his Series B convertible preferred shares will result in us recognizing
compensation expense for accounting purposes when certain conditions have been
satisfied. Consistent with the accounting treatment, the Series B convertible
preferred shares will comprise an economic benefit to Mr. Knight measured by the
difference between the purchase price for the Series B convertible preferred
shares and the value of Units into which they are converted.
We will pay David Lerner Associates, Inc. selling commissions equal to 7.5%
of the purchase price of the Units and a marketing expense allowance equal to
2.5% of the purchase price of the Units. If the minimum offering of $30,000,000
is sold, the selling commissions would be $2,250,000 and the marketing expense
allowance would be $750,000. If the maximum offering of $200,000,000 is sold,
the selling commissions would be $15,000,000 and the marketing expense allowance
would be $5,000,000. David Lerner Associates, Inc. is not related to nor an
affiliate of either Apple Suites Advisors or Apple Suites Realty.
PERSON RECEIVING
COMPENSATION (1) TYPE OF COMPENSATION AMOUNT OF COMPENSATION (2)
- - --------------------- -------------------------- -----------------------------
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. (3)
OPERATIONAL PHASE
Apple Suites Asset management fee for Annual fee payable
Advisors, Inc managing our day-to-day quarterly based upon a ratio
operations of our modified funds from
operations to the amount
raised in this offering
ranging from 0.1% to 0.25%
of the amount raised in this
offering -- a maximum of
$75,000 per year if the
minimum offering is sold; a
maximum of $500,000 per
year if the maximum
offering is sold. (4)
22
Apple Suites
Advisors, Inc. and Reimbursement for certain Amount is indeterminate
Apple Suites costs and expenses
Realty Group, incurred on our behalf, as
Inc. described in Note (5)
DISPOSITION PHASE
Apple Suites Realty Real estate commission Up to 2% of the gross sales
Group, Inc. for selling our properties prices of the properties sold
by us. (6)
ALL PHASES
Apple Suites Payment for certain Amount is indeterminate
Advisors, Inc. and services and property
Apple Suites provided to us (7)
Realty Group,
Inc.
- - ----------
(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
Units. The percentage used to calculate the asset management fee is based on
the "return ratio." The return ratio is the ratio of our modified 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
23
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 $30,000,000 is sold, the annual
asset management fee would be between $30,000 and $75,000. Assuming the
maximum offering of $200,000,000 is sold, the annual asset management fee
would be between $200,000 and $500,000.
(5) Apple Suites Advisors and Apple Suites Realty will be reimbursed for
certain direct costs incurred on our behalf 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, expenses relating to
shareholder communications, costs of appraisals, non-refundable option
payments on property not acquired, title insurance, and all other fees,
costs and expenses directly attributable to the acquisition and ownership
of our properties. Operating expenses reimbursable to Apple Suites Advisors
and Apple Suites Realty are subject to the overall limitation on operating
expenses discussed under "Apple Suites Advisors and Affiliates -- The
Advisory Agreement," but the amount of reimbursement is not otherwise
limited.
(6) Under the Property Acquisition/Disposition Agreement described in note (3),
Apple Suites Realty also will be entitled to a fee from us in connection
with our sale of each property equal to 2% of the gross sales price of the
property if, and only if, the sales price exceeds the sum of (1) our cost
basis in the property (consisting of the original purchase price plus any
and all capitalized costs and expenditures connected with the property)
plus (2) 10% of the cost basis. For purposes of this calculation, our cost
basis will not be reduced by depreciation.
(7) Apple Suites Advisors and Apple Suites Realty may provide other services or
property to us, and will be entitled under certain conditions to
compensation or payment for those services or property. Those conditions,
which are summarized under "Conflicts of Interest -- Transactions with
Affiliates and Related Parties," include the requirement that each
transaction be approved by the affirmative vote of a majority of the
independent directors. Currently, there are no arrangements or proposed
arrangements between us, on the one hand, and these two entities, on the
other hand, for the provision of other services or property to us or the
payment of compensation or reimbursement. If any other arrangements arise
in the future, the terms of the arrangements, including the compensation or
reimbursement payable, will be subject to the restrictions in our bylaws.
The compensation, reimbursement or payment could take the form of cash or
property, including Units.
24
CONFLICTS OF INTERESTS
GENERAL
We may be subject to various conflicts of interest arising from our
relationship with Apple Suites Advisors, Apple Suites Realty and Glade M.
Knight, our chairman of the board. Mr. Knight is the sole shareholder of Apple
Suites Advisors and Apple Suites Realty.
Apple Suites Advisors and Apple Suites Realty 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 and Apple Suites Realty.
Apple Suites Advisors, Apple Suites Realty 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 and Apple Suites Realty will assist us in
acquisition, organization, servicing, management and disposition of investments.
At this time, Apple Suites Advisors and Apple Suites Realty do not provide
services exclusively to us, but perform similar services for Apple Suites, Inc.,
a Virginia corporation and real estate investment trust. Apple Suites Advisors
and Apple Suites Realty may perform similar services to other parties, both
affiliated and unaffiliated, in the future.
Although we do not currently anticipate entering into joint ventures with
other entities, including Apple Suites Advisors or Apple Suites Realty, we may
do so in order to obtain an interest in hotel properties. These joint ventures
may have divergent interests or goals which may be inconsistent with our goals.
In addition, we may be represented by the same legal counsel that represents
Apple Suites Advisors or Apple Suites Realty. To the extent a conflict arises
regarding legal representation, Apple Suites Advisors and Apple Suites Realty
will obtain separate independent counsel.
CONFLICTS WITH RESPECT TO FEES PAID BY US TO APPLE SUITES ADVISORS AND APPLE
SUITES REALTY
The receipt of various fees from us by Apple Suites Advisors and Apple
Suites Realty may result in potential conflicts of interest for persons,
particularly Mr. Knight who participate in decision making on behalf of both us
and these other entities.
CONFLICTS WITH RESPECT TO COMMISSIONS. For example, because Apple Suites
Realty will receive a 2% commission upon each purchase by us of a property, and
a commission of 2% upon each sale by us of a property. 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 Units. Accordingly, it has an incentive to see
that sales of Units 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.
25
POLICIES TO ADDRESS CONFLICTS
The board of directors, Apple Suites Advisors and Apple Suites Realty 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 or Apple Suites
Realty 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 and Apple Suites Realty as well
as the specific policies and procedures designed to ameliorate potential
conflicts of interest. Apple Suites Advisors and Apple Suites Realty 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 and
Apple Suites Realty 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 and Apple Suites Realty or an
affiliate of any of these entities. An affiliate of a company generally means a
person who controls the company, who owns 10% or more of the voting stock of the
company, or who is an officer or director of the company. Generally, our
independent directors may perform no other services for us, except as directors.
However, any director who performs legal services for us or Apple Suites
Advisors, Apple Suites Realty or an affiliate will 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 or Apple Suites Realty 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 or Apple Suites Realty 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,
26
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 $300,000 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, Apple Suites Advisors and Apple Suites Realty shall notify us of any
suitable investment opportunity in light of our focus on purchasing and owning
upper-end, extended-stay hotel properties before notifying or offering it to any
other affiliated entity. We have no contractual rights with Mr. Knight, such as
a right of first refusal, that obligates him to sell any property to us. In
addition, we may purchase properties from entities affiliated with Mr. Knight.
The competing activities of Apple Suites Advisors, Apple Suites Realty and
Mr. Knight may involve conflicts of interest. For example, Mr. Knight is
interested in the continuing success of previously formed ventures because he
has fiduciary responsibilities to investors in those ventures, he may be
personally liable on obligations of those ventures and he has equity and
incentive interests in those ventures. Those ventures are Cornerstone Realty
Income Trust, Inc. and Apple Suites, Inc. Apple Suites, Inc. has similar
investment objectives as we do and, in addition, may compete against us for
properties. 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 and Apple Suites Realty. 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 and
Apple Suites Realty.
We will issue to Mr. Knight Series B convertible preferred shares on or
before the closing of the minimum offering. Each Series B convertible preferred
share will be issued in exchange for $0.10 per share. Under limited
circumstances these shares
27
may be converted into Units thereby resulting in dilution of the shareholders'
interest in us. There are no dividends payable on the Series B convertible
shares. For a description of the Series B convertible shares see "Principal and
Management Shareholders" and "Description of Capital Stock."
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. These entities include Cornerstone Realty Income Trust, Inc. and
Apple Suites, Inc. Accordingly, Mr. Knight may have conflicts of interest in
allocating management time and services between us and those entities. None of
the organizational documents of Apple Hospitality Inc., Cornerstone Realty
Income Trust, Inc. nor Apple Suites, Inc. specify a minimum standard of time
and attention that Apple Suites Advisors, Apple Suites Realty or Mr. Knight are
required to provide to each of those entities.
28
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 upper-end, extended-stay hotel properties
for long-term ownership. We intend to acquire fee ownership of our hotel
properties. 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 upper-end, 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. We will only enter into joint ventures to the extent that such
ventures are consistent with our goal of acquiring upper-end, extended-stay
hotel properties which we believe will provide acceptable investment returns.
Equity investments may be subject to existing mortgage financing and other
indebtedness which have priority over our equity interests. We do not anticipate
investing in the securities of other issuers for the purpose of exercising
control.
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
We intend to purchase our properties on an "all-cash" basis or initially
use limited interim borrowings in order to purchase properties. We will endeavor
to repay any interim borrowings with proceeds from the sale of Units 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. To the extent that any interim
borrowings are not paid with proceeds from the sale of Units we will need to
incur permanent debt secured by our properties.
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, properties may be
financed or refinanced if the board of directors deems it in the best interests
of
29
shareholders because, for example, indebtedness can be incurred on favorable
terms and the incurring of indebtedness is expected to improve the shareholders'
after-tax cash return on invested capital.
Loans we obtain may be evidenced by promissory notes secured by mortgages
on our properties. As a general policy, we would seek to obtain mortgages
securing indebtedness which encumber only the particular property to which the
indebtedness relates, but recourse on these loans may include all of our assets.
If recourse on any loan incurred by us to acquire or refinance any particular
property includes all of our assets, the equity in other properties could be
reduced or eliminated through foreclosure on that loan.
Subject to the approval of the board of directors, we may borrow from Apple
Suites Advisors or Apple Suites Realty or establish a line of credit with a bank
or other lender. Those entities are under no obligation to make any loans,
however. After the initial closing of $30,000,000, 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 $30,000,000, 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 Units
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 Units.
We do not anticipate making loans to other persons or entities.
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
30
allocate to our working capital reserve not less than 0.5% of the proceeds of
the offering. As long as we own any properties, we will retain as working
capital reserves an amount equal to at least 0.5% of the proceeds of the
offering, subject to review and re-evaluation by the board of directors. If
reserves and any other available income become insufficient to cover our
operating expenses and liabilities, it may be necessary to obtain additional
funds by borrowing, refinancing properties or liquidating our investment in one
or more properties.
SALE POLICIES
We are under no obligation to sell our investment properties, and currently
anticipate that we will hold our investment properties for a minimum of three
years. 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 to five 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 five-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.
31
In general, the articles of incorporation and the bylaws can be amended
only with the affirmative vote of a majority of the outstanding common shares,
except that the bylaws may be amended by the board of directors if necessary to
comply with the real estate investment trust provisions of the Internal Revenue
Code or with other applicable laws, regulations or requirements of any state
securities regulator. The bylaws can also be amended by the board of directors
to:
o correct any ambiguity in the bylaws or resolve inconsistencies between
the bylaws and the Articles;
o make changes that are not materially adverse to the rights of
shareholders; or
o allow us to take any action or fulfill any obligation which we are
legally obligated or permitted to take.
Within the express restrictions and prohibitions of the bylaws, the
articles of incorporation and applicable law, however, the board of directors
has significant discretion to modify our investment objectives and policies, as
stated in this prospectus. We have no present intention to modify any of our
investment objectives and policies, and it is anticipated that any modification
would occur only if business and economic factors affecting us made our stated
investment objectives and policies unworkable or imprudent. By way of
illustration only, the board of directors could elect to acquire residential
apartment communities, or to acquire one or more commercial properties in
addition to extended-stay hotel properties.
Thus, while this prospectus accurately and fully discloses our current
investment objectives and policies, prospective shareholders must be aware that
the board of directors, acting consistently with our organizational documents,
applicable law and their fiduciary obligations, may elect to modify or expand
our objectives and policies from time to time. Any action by the board of
directors would be based upon the perceived best interests of our company and
the shareholders.
32
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.
33
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, 2001. We plan to purchase and own
upper-end, 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 upper-end, extended-stay hotel
properties for long-term ownership by purchasing properties in fee simple. We
will seek associations with distinctive brands in the upper-end, extended-stay
hotel market. However, we do not anticipate affiliating ourselves with only one
brand of franchise or license. 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 directly, we will lease each of our hotel
properties to our wholly-owned, taxable REIT subsidiary, Apple Hospitality
Management, or another lessee for their management. We anticipate that
substantially all of our hotel properties will be leased to Apple Hospitality
Management, a Virginia corporation that will qualify as a taxable REIT
subsidiary.
With the enactment of the REIT Modernization Act, which is effective
January 1, 2001, we can own up to 100% of the stock of a taxable REIT
subsidiary. The REIT Modernization Act permits us to lease the hotels that we
own to Apple Hospitality Management, rather than requiring us to lease our
hotels to a separate, unaffiliated entity. The hotels that we lease to Apple
Hospitality Management will still have to be managed by an unaffiliated third
party. Any net profit from the leases held by Apple Hospitality Management,
after payment of any applicable corporate tax, will be available for
distribution to us.
LEASES
We expect that our leases with Apple Hospitality Management will be
long-term leases. We anticipate that each lease will provide for an initial term
of ten (10) years. We would anticipate that we will have identified and secured
an unaffiliated manager and licensor at or prior to entering into a lease
agreement with Apple Hospitality Management. We anticipate that each lease will
provide that rents will be based on a base amount and a percentage of gross
income. We anticipate that Apple Hospitality Management will pay (1) fixed
monthly base rent, (2) on a monthly basis, the excess of "participating rent"
over base rent, with participating rent based on percentages of room revenue,
food and beverage revenue and telephone and other revenue at each property, and
(3) other amounts, including interest accrued on any late payments or charges.
Base rent may increase annually
34
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 Apple Hospitality Management 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.
UPPER-END, EXTENDED-STAY HOTELS
The upper-end, extended-stay hotel industry offers upscale, high-quality,
residential-style lodging with a comprehensive package of guest services and
amenities, for extended-stay business and leisure travelers. These properties
are designed to meet the needs of the business and leisure traveler whose stay
is typically more than one or two nights. The upper-end, extended-stay hotels
are 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.
It is anticipated that these properties will provide their guests with
spacious residential-style quarters with separate living and sleeping areas
large enough for work, study, entertaining or relaxation. Typically, the
properties feature a fully equipped kitchen and worksite with telephone(s)
featuring data ports and voice mail. Often the facility features an executive
center with fax machine and photocopier in addition to an exercise center,
swimming pool and other recreational facilities.
OTHER REAL ESTATE INVESTMENTS
Although we anticipate that our focus will be on upper-end, 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.
35
REGULATION
GENERAL Our properties may be subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities such as
swimming pools, activity centers and other common areas. We intend to acquire
the necessary permits and approvals under present laws, ordinances and
regulations to operate our business.
AMERICANS WITH DISABILITIES ACT Our properties will need to comply with
Title III of the Americans with Disabilities Act of 1990 (the "ADA") to the
extent they are "public accommodations" and/or "commercial facilities" under the
ADA. Compliance with ADA requirements could require removal of structural
barriers to handicapped access in public areas of the properties where removal
is readily achievable.
ENVIRONMENTAL MATTERS
Under federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and remediate hazardous or toxic substances or petroleum
product releases at a property. In addition, the owner or operator may be held
liable to a government entity or third party for property damage and
investigation and remediation costs incurred by parties in connection with the
contamination. These laws typically impose cleanup responsibility and liability
without regard to whether the owner or operator knew of, or caused the presence
of, the contaminants. The costs of investigation, remediation or removal of
substances may be substantial, and the presence of these substances, or the
failure to properly remediate these substances, may adversely affect the owner's
ability to sell or rent the real estate or to borrow using the real estate as
collateral.
In addition, some environmental laws create a lien on the contaminated site
in favor of the government for damages and costs incurred in connection with the
contamination. Individuals who arrange for the disposal or treatment of
hazardous or toxic substances may be held liable for the costs of investigation,
remediation or removal of hazardous or toxic substances at or from the disposal
or treatment facility regardless of whether the facility is owned or operated by
the person. Finally, the owner of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site.
Federal, state and local laws, ordinances and regulations also govern the
removal, encapsulation or disturbance of asbestos-containing materials ("ACMs")
when the materials are in poor condition or in the event of the remodeling,
renovation or demolition of a building. These laws may impose liability for the
release of ACMs and may provide for third parties to seek recovery from owners
or operators of real estate for personal injury associated with ACMs. In
connection with the ownership and operation of its properties, we may be
potentially liable for costs in connection with ACMs or other hazardous or toxic
substances.
Prior to acquisition, all of our properties will have been the subject of
environmental assessments, which are intended to reveal information regarding,
and
36
to evaluate the environmental condition of, the surveyed properties and
surrounding properties. These assessments will generally include:
-- a historical review,
-- a public records review,
-- a preliminary site investigation of the site and surrounding
properties,
-- examining for the presence of asbestos,
-- examining for equipment containing polychlorinated biphenyls,
-- examining for underground storage tanks, and
-- the preparation of a written report.
These assessments generally will not include soil sampling or subsurface
investigations.
Nevertheless, it is possible that these assessments will not reveal all
environmental liabilities or that there are unknown material environmental
liabilities. Moreover, we cannot guarantee that
-- future laws, ordinances or regulations will not require any material
expenditures by or impose any material liabilities in connection with
environmental conditions by or on us or our properties,
-- the environmental condition of a property we purchase will not be
adversely affected by residents and occupants of the property, by the
condition of properties in the vicinity, such as the presence of
underground storage tanks, or by unrelated third parties, or
-- 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.
37
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 Units. 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.
38
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 3,157,894.7 Units. All
of the directors set forth in the following table, other than Mr. Knight, will
be independent directors.
NAME AGE POSITION
- ----------------------------- --- -----------------------------------
Glade M. Knight ............ 56 Chairman, Chief Executive Officer,
President and Secretary
Lisa B. Kern ............... 40 Director*
Bruce H. Matson ............ 43 Director*
Michael S. Waters .......... 45 Director*
Robert M. Wily ............. 51 Director*
- - ----------
* To be elected at initial closing.
GLADE M. KNIGHT. Mr. Knight is our chairman of the board, chief executive
officer and President. He is also the chief executive officer and sole
shareholder of Apple Suites Advisors and Apple Suites Realty.
Mr. Knight founded and serves as chairman of the board and president of
Apple Suites, 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 Suites, Inc., which began operations in 1999, acquires, owns and
operates extended-stay hotels in selected metropolitan areas.
Mr. Knight is chairman of the board of trustees of Southern Virginia
College in Buena Vista, Virginia. Mr. Knight is also a member of the advisory
board to the Graduate School of Real Estate and Urban Land Development at
Virginia Commonwealth University. He has served on a National Advisory Council
for Brigham Young University and is a founding member of and active lecturer for
the university's Entrepreneurial Department of the Graduate School of Business
Management.
LISA B. KERN. Ms. Kern is a portfolio manager and vice president of
Davenport & Co., LLC, an investment banking firm, in Richmond, Virginia.
Previously, Ms. Kern was a Vice president with Crestar Bank's Trust and
Investment Management Group from 1989 to 1996. Ms. Kern is also a director of
Apple Suites, Inc.
39
BRUCE H. MATSON. Mr. Matson is a vice president and director of the law
firm of LeClair Ryan, a Professional Corporation, in Richmond, Virginia. He has
been with LeClair Ryan since 1994. Mr. Matson has practiced law since 1983. He
is also a director of Apple Suites, 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. He is
also a director of Apple Suites, Inc.
ROBERT M. WILY. Mr. Wily is the Director of Client Services of the Center
for Claims Resolution. Prior to that position he served as the Deputy Chief,
Article III Judges Division, of the Administrative Office of the U.S. Courts
from 1999 to 2000. 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. He is also a director of Apple Suites, Inc.
CLASSIFICATION OF THE BOARD
The board is divided into three classes. The terms of the first, second and
third classes expire in 2001, 2002, and 2003, 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 2003.
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.
40
DIRECTOR COMPENSATION
We will pay to each director who is not an affiliate of Apple Suites
Advisors an annual fee of $5,000 plus $500 for each meeting of the full board of
directors attended by each director in person ($100 if any are attended by
telephonic means). There will be no additional compensation for serving on a
committee or attending a committee meeting. We will, however, reimburse all
directors for their travel and other out-of-pocket expenses incurred in
connection with attending any meeting of the board of directors or any
committee, and for carrying on the business of our company, including
reimbursement for expenses for any on-site review of properties presented for
acquisition or of new markets. Directors who are affiliates of Apple Suites
Advisors receive no compensation from us for their service as directors. These
directors, however, are remunerated indirectly by their relationship to Apple
Suites Advisors and its affiliated companies and are reimbursed by us for their
expenses in attending meetings of the board of directors or a committee and in
carrying on our business.
INDEMNIFICATION AND INSURANCE
We intend to obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (1) the directors and officers from
any claim arising out of an alleged wrongful act by the directors and officers
in their respective capacities as directors and officers of our company, and (2)
us to the extent that we have indemnified the directors and officers for loss.
OFFICER COMPENSATION
Our officers are not paid salaries by us. Mr. Knight is currently our sole
executive officer. In addition, he is the sole shareholder of Apple Suites
Advisors and Apple Suites Realty which are entitled to fees for services
rendered by them to us. Mr. Knight will not receive any compensation from Apple
Suites Advisors and Apple Suites Realty but will receive dividend income due to
his ownership of those entities. See "Compensation" for a description of the
fees payable to Apple Suites Advisors and Apple Suites Realty.
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 Units which may occur during
the five-year period beginning April 1, 2001, and ending March 31, 2006. The
term "Initial Offering" means the offering of Units made pursuant to this
prospectus.
The aggregate number of Units 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
41
referred to herein as "Apple Hospitality Companies"). Of the directors,
initially Mr. Knight will be a participant in the Incentive Plan. Incentive
awards may be in the form of stock options or restricted stock. Under the
Incentive Plan, the number of Shares reserved for issuance is equal to an
aggregate of (1) 35,000 Units, plus (2) 4.625% of the number of Units sold in
the Initial Offering in excess of the minimum offering, plus (3) 4.4% of the
number of the Units sold in the Offering above the Initial Offering. If an
option is canceled, terminates or lapses unexercised, any unissued Units
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 Hospitality 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 Units 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 Hospitality 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 Units 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 Hospitality 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 Units 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.
42
Options granted under the Incentive Plan are non-qualified stock options.
Non-qualified stock options are options that are not intended to qualify for
favorable incentive stock option tax treatment under the Internal Revenue Code.
Restricted Stock
Restricted stock issued pursuant to the Incentive Plan is subject to the
following general restrictions: (1) none of those shares may be sold,
transferred, pledged, or otherwise encumbered or disposed of until the
restrictions on those shares shall have lapsed or been removed under the
provisions of the Incentive Plan, and (2) if a holder of restricted stock ceases
to be employed by us or one of the Apple Hospitality 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 Units 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 Hospitality
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 3,157,894.7
Units.
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
Hospitality 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,
43
without limitation, the authority to prescribe the form of the agreement
embodying awards of stock options under the Plan, to construe the Plan, to
determine all questions arising under the Plan, and to adopt and amend rules and
regulations for the administration of the Plan as it may deem desirable. Any
decision of the board of directors in the administration of the Directors' Plan
will be final and conclusive. The board of directors may act only by a majority
of its members in office, except members thereof may authorize any one or more
of their number, or any officer, to execute and deliver documents on behalf of
the board of directors.
The Directors' Plan provides for the following automatic option awards:
(1) As of the initial closing of the Units, each eligible director will
receive an option to purchase 5,500 Units plus 0.0125% of the number of
Units in excess of the minimum offering sold by the initial closing.
(2) As of each June 1 during the years 2001 through 2005 (inclusive),
each eligible director shall automatically receive an option to purchase
0.02% of the number of Units 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 Units.
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 Units 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
Units 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.
44
APPLE SUITES ADVISORS, INC.,
APPLE SUITES REALTY GROUP, INC. AND AFFILIATES
GENERAL
On or before the initial closing of the minimum offering of $30,000,000, 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.
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.
Apple Suites Advisors and Apple Suites Realty will be staffed in a manner
at all times sufficient to fully serve us. We will not obtain, and neither will
Apple Suites Advisors nor Apple Suites Realty obtain, "key-man" life insurance
on the life of any officer. In the event a key person ceases to serve us, Apple
Suites Advisors or Apple Suites Realty the staff of these companies will be
adjusted to serve us.
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
45
raised in this offering. The applicable percentage used to calculate the asset
management fee is based on the ratio of our modified 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%.
Our modified 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.
We believe that modified funds from operations is an appropriate measure to
use in determining the fees to be paid to Apple Suites Advisors. Modified funds
from operations differs from funds from operations as defined by the National
Association of Real Estate Investment Trust's ("NAREIT") October 1999 White
Paper. Funds from operations is defined by NAREIT as net income (computed in
accordance with generally accepted accounting principles), excluding gains on
sales of depreciable property, plus depreciation and amortization of real estate
property used in operations, less preferred dividends and after adjustments for
unconsolidated partnerships and joint ventures. Modified funds from operations
includes the NAREIT definition but allows for add back of non-recurring items
which are not indicative of on-going performance. Modified 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. Modified 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;
46
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
"Company 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. Company Net
Income means, generally, the revenues for any period, less expenses other than
depreciation or similar non-cash items.
Unless the independent directors conclude that a higher level of expenses
is justified based upon unusual and nonrecurring factors which they deem
sufficient, Apple Suites Advisors must reimburse us for the amount of any excess
operating expenses. It must make reimbursement within 120 days from the end of
our fiscal year. Apple Suites Advisors will be entitled to be repaid
reimbursements in succeeding fiscal years to the extent actual operating
expenses are less than the permitted levels. In determining that unusual and
nonrecurring factors are present, the independent directors will be entitled to
consider all relevant factors pertaining to our business and operations, and
will be required to explain their conclusion in written disclosure to the
shareholders. Apple Suites Advisors generally would expect to pay any required
reimbursement out of compensation received from us in the current or prior
years. However, there can be no assurance that it would have the financial
ability to fulfill its reimbursement obligations.
Our bylaws further prohibit the total organizational and offering expenses,
including selling commissions from exceeding 15% of the amount raised in this
offering. Furthermore, the total of all acquisition fees and acquisition
expenses paid by us in connection with the purchase of a property by us shall be
reasonable and shall in no event exceed an amount equal to 6% of the contract
price for the property, unless a majority of the board of directors, including a
majority of the independent directors, not otherwise interested in the
transaction approves the transaction as being commercially competitive, fair and
reasonable to us. For purposes of this limitation, the "contract price for the
property" means the amount actually paid or allocated to the purchase,
development, construction or improvement of the property, exclusive of
acquisition fees and acquisition expenses. Any organizational and offering
expenses or acquisition fees and acquisition expenses incurred by us in excess
of the permitted limits shall be payable by Apple Suites Advisors immediately
upon our demand.
This discussion is only a summary of the material terms 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.
47
APPLE SUITES REALTY GROUP, INC.
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 $3,600,000.
Under the agreement, Apple Suites Realty is also entitled to a real estate
commission equal to 2% of the gross sales prices of our properties, payable by
us in connection with each property sale if, but only if, any property is sold
and the sales price exceeds the sum of (1) our cost basis in the property plus
(2) 10% of the cost basis. The cost basis is the original purchase price plus
any and all capitalized costs and expenditures connected with the property. For
purposes of this calculation, our cost basis will not be reduced by
depreciation. If the sales price of a particular property does not equal the
required amount, no real estate commission is payable, but Apple Suites Realty
is still entitled to payment from us of certain of its costs incurred on our
behalf in marketing the 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 material terms 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 in the last ten years (and, in certain contexts, a
longer period) 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 December
31, 2000, except where a different date is specified. This information should
not be considered to be indicative of our capitalization or operations.
Purchasers of our Units will not have any interest in the entities referred to
in this section or in any of the properties owned by those entities.
48
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 and
South Carolina, and Georgia. Cornerstone currently owns 72 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.
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 December 31, 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, 2000,
Cornerstone owned a total of 72 apartment communities in Texas, North Carolina,
Virginia, Georgia and South Carolina.
ADDITIONAL INFORMATION ON CORNERSTONE AND APPLE SUITES ACQUISITIONS
Part II of our registration statement (which is not a part of this
prospectus) contains a more detailed summary of the 73 property acquisitions by
Cornerstone
49
(excluding properties disposed of) and 13 property acquisitions by Apple Suites
which occurred on or before December 31, 2000. We will provide a copy of the
summary without charge upon request of any investor or prospective investor.
PRIOR REITS - APPLE SUITES
Mr. Knight was responsible for the organization of Apple Suites, Inc.
("Apple Suites"), a real estate investment trust organized to acquire and own
extended-stay hotels in selected metropolitan areas. Mr. Knight is the chairman,
chief executive officer and president of Apple Suites. Between August 1999 and
December 2000, Apple Suites sold approximately $ 85 million in common shares in
a continuous best-effort offering to approximately 3,000 investors. The net
proceeds of the Apple Suites public offering were used to acquire 13
extended-stay hotels in 10 metropolitan areas in the United States. 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 Suites 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.
PRIOR PARTNERSHIPS
Mr. Knight, between 1981 and 1989, organized 40 partnerships for the
purpose of investing in real estate. Interests in 38 of these partnerships, in
which Mr. Knight served as a general partner and all but one of which were
limited partnerships, were sold to investors in privately-offered transactions.
Two of the partnerships were publicly-offered.
PUBLICLY-OFFERED PARTNERSHIPS
Two partnerships sponsored by Mr. Knight were issuers in public offerings
of assignee units of limited partnership interest. One publicly-offered
partnership, Southeastern Income Properties Limited Partnership ("Southeastern
I"), was organized in 1987 and raised $25,000,000 from 2,714 investors.
Southeastern I acquired four apartment complexes comprising 833 apartment units.
The other publicly-offered partnership, Southeastern Income Properties II
Limited Partnership ("Southeastern II"), was also organized in 1987 and raised
$17,883,780 from 1,710 investors. Southeastern II acquired four apartment
complexes comprising 794 apartment units. The aggregate cost of the eight
properties purchased by Southeastern I and Southeastern II, including capital
improvements thereto, was approximately $41,178,606. The affiliates of Mr.
Knight which originally served as the general partners for these two
partnerships transferred management control over these partnerships to a third
party in February 1992 by converting to limited partner status. Thus, those
affiliates of Mr. Knight ceased to serve as the general partners. Thereafter,
those affiliates ceased to hold their limited partnership interests.
PRIVATELY-OFFERED PARTNERSHIPS
The 38 privately-offered partnerships were all organized in the 1980's, and
a majority of them were organized before 1985. All of the privately-offered
partnerships were formed before and had investment objectives dissimilar to
those of Apple Hospitality Two, Inc. The dissimilar nature of the investment
objectives is described below in this section.
50
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. Interests in all but one of the
privately-offered partnerships were offered and sold in the period preceding
1987. One private partnership offered and sold its interests in 1989 (with a
final closing in early 1990). This 1989 partnership acquired and later sold a
single property and did not experience any of the adverse business developments
experienced by certain of the other privately-offered partnerships, as described
below.
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 distributions to shareholders with no, low, or
at most moderate 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.
Mr. Knight no longer holds any interests in any of the partnerships
organized by him.
Causes and Effects of Bankruptcies and Foreclosures. Each of the
partnerships described in the preceding two paragraphs owned a single property,
and the adverse business development affecting the partnership therefore
resulted in the partnership ceasing all cash distributions to investors. In the
opinion of Mr. Knight, 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.
51
Mr. Knight does not expect that the combination of factors applicable to
those 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.
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.
52
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
Beneficial ownership of our Units, and options to purchase our Units, held
by our directors and officers as of the date of this prospectus, are indicated
in the table below. Each person named in the table has sole voting and
investment powers as to the shares or shares those powers with his spouse and
minor children, if any.
NUMBER OF UNITS PERCENT OF AGGREGATE
NAME BENEFICIALLY OWNED OUTSTANDING UNITS OWNED
- ----------------------------- -------------------- -----------------------
Apple Suites Advisors, Inc. 10 100%
Mr. Knight is the sole shareholder of Apple Suites Advisors In addition to
the foregoing, Glade M. Knight, who is our director, chairman of the board and
president, will own 202,500 Series B convertible preferred shares. In addition,
Mr. Stanley J. Olander, Jr. and Ms. Debra A. Jones, business associates of Mr.
Knight, will each own 18,750 Series B convertible preferred shares. The Series B
convertible preferred shares are convertible into Units pursuant to the formula
and on the terms and conditions set forth below. We plan to issue the Series B
convertible preferred shares to Mr. Knight and others on or before the initial
closing of the minimum offering of $30,000,000, in exchange for the payment by
them of $0.10 per Series B convertible preferred share, or an aggregate of
$24,000.
There are no dividends payable on the Series B convertible preferred
shares. Holders of more than two-thirds of the Series B convertible preferred
shares must approve any proposed amendment to the Articles of Incorporation that
would adversely affect the Series B convertible preferred shares.
Upon our liquidation, the holder of the Series B convertible preferred
shares is entitled to a priority liquidation payment before any distribution of
liquidation proceeds to the holders of the common shares. However, the priority
liquidation payment of the holders of the Series B convertible preferred shares
is junior to the holders of the Series A preferred shares distribution rights.
The holder of a Series B convertible preferred share is entitled to a
liquidation payment of $10 per number of common shares each Series B convertible
preferred share would be convertible into according to the formula described
below. In the event that the liquidation of our assets results in proceeds that
exceed the distribution rights of the Series A preferred shares and the Series B
convertible preferred shares, the remaining proceeds will be distributed between
the common shares and the Series B convertible preferred shares, on an as
converted basis.
The Series B convertible preferred shares are convertible into Units upon
and for 180 days following the occurrence of either of the following events: (1)
substantially all of our assets, stock or business is transferred, whether
through 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 and for purposes of
determining the liquidation payment due to each holder of a Series B convertible
preferred share, each Series B convertible preferred
53
share is convertible into a number of Units based upon the gross proceeds raised
through the date of conversion in the offering made by this prospectus according
to the following formula:
GROSS PROCEEDS RAISED NUMBER OF UNITS THROUGH
FROM SALES OF UNITS THROUGH CONVERSION OF ONE SERIES B
DATE OF CONVERSION CONVERTIBLE PREFERRED SHARE
- - ------------------------------- ----------------------------
$50 million ................. 1.0
$100 million ................ 2.0
$150 million ................ 3.5
$200 million ................ 5.3
No additional consideration is due upon the conversion of the Series B
convertible preferred shares. The conversion into Units of the Series B
convertible preferred shares will result in dilution of the shareholders'
interests.
54
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of material federal income tax considerations that
may be relevant to a holder of Units 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 McGuireWoods LLP, special tax counsel to Apple
Hospitality, 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 UNITS 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 UNITS 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, 2001. Based on assumptions
and representations summarized below, McGuireWoods LLP, our legal counsel, is of
the opinion that beginning with our taxable year ended December 31, 2001:
-- 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. McGuireWoods LLP will not monitor our compliance with these
requirements. While we expect to satisfy these tests, and will use our best
efforts to do so, we cannot ensure we will qualify as a REIT for any particular
year, or that the applicable law will not change and adversely affect us and our
shareholders. The following is a summary of the material federal income tax
considerations affecting us as a REIT and our shareholders:
55
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 shares, as well as provisions that
automatically convert shares into nonvoting, non-dividend paying excess shares
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.
56
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.
With the exception for certain rents received from a taxable REIT
subsidiary, "rents from real property" also excludes amounts received from a
person or corporation in which we (or any of our 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. As described below, we expect that
amounts received from Apple Suites Management will satisfy the conditions of the
exception for rents received from a taxable REIT subsidiary with the result that
such amounts will be considered rents from real property. A third exclusion
covers amounts received with
57
respect to real property if we furnish services to the tenants or manage or
operate the property, other than through an "independent contractor" from whom
we do not derive any income. The obligation to operate through an independent
contractor generally does not apply, however, if the services provided by us are
usually or customarily rendered in connection with the rental of space for
occupancy only and are not considered rendered primarily for the convenience of
the tenant. Further, if the value of the non-customary service income with
respect to a property (valued at no less than 150% of our direct cost of
performing the services) is 1% or less of the total income derived from the
property, then all rental income from that property except the non-customary
service income will qualify as rents from real property.
For taxable years beginning after December 31, 2000, a REIT may jointly
elect with a corporation, in which the REIT directly or indirectly owns stock,
to cause the corporation to be treated as a taxable REIT subsidiary. We expect
to make a joint election that would cause Apple Suites Management to be treated
as a taxable REIT subsidiary. In connection with that election, we intend to
lease all our hotels to Apple Suites management.
Amounts received as rent from a taxable REIT subsidiary are not excluded
from rents from real property by reason of the related party rule described
above, if the activities of the taxable REIT subsidiary and the nature of the
properties it leases meet certain requirements. Generally, amounts received by
us from Apple Suites Management with respect to any hotels we own will be
considered rents from real property only if the following conditions are met:
-- each hotel must not be managed or operated by Apple Suites Management,
but rather must be managed or operated by an entity that qualifies for
federal tax purposes as an independent contractor that is actively
engaged in the trade or business of operating lodging facilities for
persons not related to us or Apple Hospitality Management;
-- Apple Suites Management may not directly or indirectly provide to any
person, under a franchise, license or otherwise, rights to any brand
name under which the any hotel facility is operated, except with
respect to an independent contractor in relation to facilities it owns
or leases from us; and
-- no wagering activities may be conducted at or in connection with our
hotels by any person who is engaged in the business of accepting wagers
and who is legally authorized to engage in such business.
We expect that all our hotels will be operated in accordance with these
requirements with the result that amounts received from Apple Suites Management
will be considered rents from real property. Apple Suites Management, as a
taxable REIT subsidiary, will pay regular corporate rates on any income it earns
from the lease of our hotels.
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).
58
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. As described above, we will establish one or
more taxable REIT subsidiaries with whom we will enter into leases for all of
our hotels. The gross income generated by these taxable REIT subsidiaries would
not be included in our gross income, however, we will realize gross income from
these subsidiaries in the form of rents. In addition, any 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
59
property, interests in loans secured by mortgages on real property or by
interests in real property, shares in other REITs and certain options, but
excluding mineral, oil or gas royalty interests. The temporary investment of new
capital in debt instruments also qualifies under this 75% asset test, but only
for the one-year period beginning on the date we receive the new capital.
Second, although the balance of our assets generally may be invested
without restriction, not more than 20% of the value of our total assets may be
represented by the securities of one or more taxable REIT subsidiaries. Also,
with exception for securities includible for purposes of the 75% test as well as
the securities of a taxable REIT subsidiary and qualified REIT subsidiary, we
will not be permitted to own (1) securities of any one issuer that represent
more than 5% of the value of our total assets; (2) more than 10% of the
outstanding voting securities of any single issuer; or (3) more than 10% of the
value of the outstanding securities of any single issuer. As noted, 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). For taxable years beginning
after December 31, 2000, the above described 95% distribution requirements will
be lowered to 90%.
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 (90% for years beginning after
December 31, 2000) 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
60
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
occurring after that declaration.
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.
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 (90% for
years beginning after December 31, 2000).
If we fail to meet the 95% distribution requirement (90 % for years
beginning after December 31, 2000) 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:
-- certain 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;
61
-- if we fail to meet either the 75% or 95% source of income tests, a 100%
tax would be imposed equal to the amount obtained by multiplying (1)
the greater of the amount, if any, by which we failed either the 75%
income test or the 95% income test, times (2) the ratio of our REIT
taxable income to our gross income (excluding capital gain and other
items);
-- items of tax preference, excluding items specifically allocable to our
shareholders, will be subject to the alternative minimum tax;
-- if we fail to distribute with respect to each calendar year at least
the sum of (1) 85% of our REIT ordinary income for the year, (2) 95% of
our REIT capital gain net income for the year, and (3) any
undistributed taxable income from prior years, we would be subject to a
4% excise tax on the excess of the required distribution over the
amounts actually distributed; and
-- under regulations that are to be promulgated, we also may be taxed at
the highest regular corporate tax rate on any built-in gain
attributable to assets we acquire in tax-free corporate transactions,
to the extent the gain is recognized during the first ten years after
we acquire the assets.
FAILURE TO QUALIFY AS A REIT
If we fail to qualify as a REIT and are not successful in seeking relief,
we will be taxed at regular corporate rates on all of our taxable income.
Distributions to our shareholders would not be deductible in computing that
taxable income, and we would no longer be required to make distributions. Any
corporate level taxes generally would reduce the amount of cash available for
distribution to our shareholders and, because our shareholders would continue to
be taxed on any distributions they receive, the net after tax yield to our
shareholders likely would be substantially reduced.
As a result, our failure to qualify as a REIT during any taxable year could
have a material adverse effect upon us and our shareholders. If we lose our REIT
status, unless we are able to obtain relief, we will not be eligible to elect
REIT status again until the fifth taxable year which begins after the taxable
year during which our election was terminated.
TAXATION OF SHAREHOLDERS
In general, distributions will be taxable to shareholders as ordinary
income to the extent of our earnings and profits. Specifically, dividends and
distributions will be treated as follows:
-- Dividends declared during the last quarter of a calendar year and
actually paid during January of the immediately following calendar year
are generally treated as if received by the shareholders on December 31
of the calendar year during which they were declared.
-- 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.
62
-- Distributions we designate as capital gains dividends generally will be
taxed as long-term capital gains to shareholders to the extent that the
distributions do not exceed our actual net capital gain for the taxable
year. Corporate shareholders may be required to treat up to 20% of any
capital gains dividends as ordinary income.
-- If we elect to retain and pay income tax on any net long-term capital
gain, our shareholders would include in their income as long-term
capital gain their proportionate share of net long-term capital gain.
Our shareholders would receive a credit for the shareholder's
proportionate share of the tax paid by us on retained capital gains and
an increase in basis in their shares in an amount equal to the
difference between the undistributed long-term capital gains and the
amount of tax we paid.
-- Any distributions we make, whether characterized as ordinary income or
as capital gains, are not eligible for the dividends received deduction
for corporations.
-- Shareholders are not permitted to deduct our losses or loss
carry-forwards.
We may generate cash in excess of our net earnings. If we distribute cash
to our shareholders in excess of our current and accumulated earnings and
profits, other than as a capital gain dividend, the excess cash will be deemed
to be a return of capital to each shareholder to the extent of the adjusted tax
basis of the shareholder's shares. Distributions in excess of the adjusted tax
basis will be treated as gain from the sale or exchange of the shares. A
shareholder who has received a distribution in excess of our current and
accumulated earnings and profits may, upon the sale of the shares, realize a
higher taxable gain or a smaller loss because the basis of the shares as reduced
will be used for purposes of computing the amount of the gain or loss.
Generally, gain or loss realized by a shareholder upon the sale of 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:
63
-- when a shareholder fails to supply a correct taxpayer identification
number,
-- when the IRS notifies us that the shareholder is subject to the rules
or has furnished an incorrect taxpayer identification number, or
-- in the case of corporations or others within exempt categories, when
they fail to demonstrate that fact when required.
A shareholder that does not provide a correct taxpayer identification
number may also be subject to penalties imposed by the IRS. Any amount withheld
as backup withholding may be credited against the shareholder's federal income
tax liability. We also may be required to withhold a portion of capital gain
distributions made to shareholders who fail to certify their non-foreign status.
The United States Treasury has recently issued final regulations regarding
the withholding and information reporting rules discussed above. In general, the
final regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and clarify
reliance standards. The final regulations are generally effective for payments
made on or after January 1, 2001, subject to transition rules. Prospective
investors should consult their own tax advisors concerning the adoption of the
final regulations and the potential effect on their ownership of Units.
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
64
pension trust owns more than 25% of the value of the REIT or a group of pension
trusts each owning more than 10% of the value of the REIT collectively own more
than 50% of the value of the REIT.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code, respectively, income from an investment our securities will constitute
UBTI unless the organization is able to deduct an amount properly set aside or
placed in reserve for certain purposes so as to offset the unrelated business
taxable income generated by the investment our securities. These prospective
investors should consult their own tax advisors concerning the set aside and
reserve requirements.
TAXATION OF FOREIGN INVESTORS
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders are complex. Prospective Non-U.S. Shareholders should consult with
their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in Units, 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, it is
not clear that subsequent to December 31, 2000, all of the states will have
legislation similar to the federal legislation permitting taxable REIT
subsidiaries. In those states where legislation similar to the federal
legislation regarding taxable REIT subsidiaries is not in force the state tax
treatment will not conform to the federal treatment described above. If we were
to transact business in a state whose tax laws do not conform to the Internal
Revenue Code the rents received from Apple Hospitality Management may be treated
as related party rents with the result that for state income tax purposes we may
not qualify as a REIT. 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.
65
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 Units. 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 Units should also consider whether acquiring or continuing to hold
Units, 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
66
number of independent investors falls below 100 subsequent to the initial public
offering as a result of events beyond the issuer's control. The Regulations
further provide that whether a security is "freely transferable" is a factual
question to be determined on the basis of all relevant facts and circumstances.
The Regulations also provide that when a security is part of an offering in
which the minimum investment is $10,000 or less, the existence of certain
restrictions ordinarily will not, alone or in combination, affect the finding
that the securities are freely transferable.
We believe that the restrictions imposed under our bylaws on the transfer
of shares are limited to the restrictions on transfer generally permitted under
the Regulations, and are not likely to result in the failure of the shares to be
"freely transferable." We also believe that the restrictions that apply to the
shares held by us, or which may be derived from contractual arrangements
requested by David Lerner Associates in connection with shares are unlikely to
result in the failure of the 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 Units offered are securities that
will be registered under the Securities Act and are or will be registered under
the Exchange Act.
Assuming that the Units 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.
67
CAPITALIZATION
Our capitalization as of January 17, 2001, and as adjusted to reflect the
issuance and sale of the Units offered assuming the minimum offering and maximum
offering and after deducting anticipated offering expenses, selling commissions
and the marketing expense allowance is as follows:
AS ADJUSTED
--------------------------------
MINIMUM MAXIMUM
ACTUAL OFFERING OFFERING
-------- -------------- ---------------
Units; no par value; 10 Units issued,
3,157,894.7 and 20,157,894.7 Units issued
as adjusted, respectively ................ $100 $26,550,100 $179,000,100
68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were organized on October 18, 2000 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 February 28, 2001, we obtained a line of credit in a principal amount of
up to $300,000 to fund our start-up costs. The lender is Apple Suites, Inc. This
line of credit bears interest at 8 1/2%. Interest and the principal balance are
due in full upon written demand by Apple Suites, Inc. any time after ninety days
from the first advance made to us. 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. As of the date of this
prospectus, we have no material commitments for capital expenditures.
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.
SERIES B CONVERTIBLE PREFERRED SHARES
Mr. Knight has offered, and each of Debra A. Jones and Stanley J. Olander,
Jr. have agreed to purchase, 18,750 Series B preferred convertible shares in
exchange for the payment to us of $0.10 per Series B preferred convertible
share. Ms. Jones and Mr. Olander have been business associates of Mr. Knight
for approximately 20 years, and they have substantial experience with real
estate investments and real estate investment trusts in particular. Mr. Knight
has made this investment opportunity available to each of them in consideration
of their past service to us, and advice in structuring our company, and to Mr.
Knight in his capacity as the sole director and chief executive officer of
Apple Suites Advisors, Inc. and Apple Suites Realty Group, Inc. It is not
expected that either Ms. Jones or Mr. Olander will devote any additional amount
of time to the affairs of Apple Suites Advisors, Inc. or Apple Suites Realty
Group, Inc. (and thus to our affairs). Mr. Knight will remain the sole director
and chief executive officer of Apple Suites Advisors, Inc. and Apple Suites
Realty Group, Inc., and will be responsible for the actions and performance of
those companies.
Compensation expense related to issuance of 202,500 Series B convertible
preferred shares to Mr. Knight will be recognized at such time when the number
of Units to be issued for conversion of the Series B convertible preferred
shares can be
69
reasonably estimated and the event triggering the conversion of the Series B
convertible preferred shares to Units is probable. The expense will be measured
as the difference between the fair value of the Units for which the Series B
convertible preferred shares can be converted and the amounts paid for the
Series B convertible preferred shares.
The issuance of the Series B convertible preferred shares to Mr. Olander
and Ms. Jones will be accounted for under FASB Statement No. 123, Accounting for
Stock-Based Compensation since these individuals are not our employees. Expense
related to the issuance of the Series B convertible preferred shares will be
determined based on fair value of the Series B convertible preferred shares at
grant date in excess of amounts paid by Mr. Olander and Ms. Jones. Since the
number of Units to which the Series B convertible preferred shares can be
converted is not known at grant date and ultimate convertibility to Units is
only allowed through a defined triggering event, the fair value of the Series B
convertible preferred shares will be remeasured and not recorded as expense
until the likely occurrence of an event triggering the conversion of the Series
B convertible preferred shares to Units.
70
PLAN OF DISTRIBUTION
We are offering to sell the Units using the service of David Lerner
Associates, Inc. as the managing dealer, and other broker-dealers selected by
the managing dealer. The Units are being offered on a "best efforts" basis,
meaning that the managing dealer and other broker-dealers are not obligated to
purchase any Units. No Units will be sold unless at least a minimum of
3,157,894.7 Units 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 Hospitality Management will not be permitted to purchase
Units in order to reach the minimum offering of 3,157,894.7 Units. If the
minimum offering of Units 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 Units
is sold.
The Units are offered at $9.50 per unit until the minimum offering of
$30,000,000 in Units is achieved and the minimum 3,157,894.7 Units have been
sold. Thereafter, the Units will be offered at $10 per share.
The offering of Units is expected to terminate when all Units 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
20,157,894.7 Units. 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 Units 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 Units. It is expected that after the initial closing of the sale of the
minimum offering, purchasers will be sold Units 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 3,157,894.7 Units
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
71
the individual investors their interest. After the initial closing, investors'
funds will be held in an interest-bearing account with David Lerner Associates,
Inc. or other broker-dealers pending each applicable closing. That account will
provide the investor with interest based on a then current money market fund
rate. We and David Lerner Associates, Inc. reserve the right to formulate and
adopt reasonable simplifying conventions in determining each investor's share of
interest earned pending each closing. For example, we and David Lerner
Associates, Inc. may average interest rates on escrowed funds over a given
period of time or treat all investors subscribing during a given period of time
(such as during a particular month or other period) as having subscribed on the
same day during such period. These simplifying conventions would be designed to
avoid costs necessary to compute interest amounts precisely where the costs are
not commensurate with the amount of interest involved. Investors' subscriptions
will be revocable by written notice delivered to the escrow agent at least five
days before the initial closing.
Each investor who desires to purchase Units 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 Units
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 Units.
(c) You represent that you have adequate financial resources, understand
the financial risks of an investment in Units, and understand that there is no
ready ability to sell or otherwise dispose of your investment in Units.
(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
72
Units is 10% or less of your net worth (with the indicated exclusions). This
representation helps us determine that your proposed investment is suitable for
you based on your financial condition.
(e) If you are acting on behalf of 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 Units.
(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 Units 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 Units offered through this prospectus will be purchased
through shareholders' reinvestment of distributions in Units 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 Units, a shareholder will
be able to elect the option by directing, on its subscription agreement, that
cash distributions be reinvested in additional Units. Distributions attributable
to any calendar quarter will then be used to purchase Units 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 Units. 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 Units. 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:
(a) bank accounts, including savings accounts and bank money market
accounts (as bank is defined in Section 3(a)(6) of the Securities Exchange Act
of 1934) (including bank money market accounts managed by the escrow agent and
its affiliates);
73
(b) short-term direct obligations of the United States of America or
obligations the principal of and the interest on which are unconditionally
guaranteed by the United States of America; or
(c) short-term certificates of deposit issued by any bank (as defined in
Section 3(a)(6) of the Securities Exchange Act of 1934) (including the escrow
agent and its affiliates) located in the United States and having net worth of
at least $50,000,000;
or similar highly liquid investments to the extent permitted by applicable laws
and regulations.
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 Units or
$0.7125 per Unit purchased at $9.50 per Unit and $0.75 per Unit purchased at $10
per Unit. We will also pay to David Lerner Associates, Inc. a marketing expense
allowance equal to 2.5% of the purchase price of the Units, as a non-accountable
reimbursement for expenses incurred by it in connection with the offer and sale
of the Units. The marketing expense allowance will equal $0.2375 per Unit
purchased at $9.50 per Unit and $0.25 per Unit purchased at $10 per Unit. The
maximum selling commission payable to David Lerner Associates, Inc. is
$15,000,000. The maximum marketing expense allowance payable to David Lerner
Associates, Inc. is $5,000,000. The selling commissions and marketing expense
allowance are payable to David Lerner Associates, Inc. at the times of the
issuance of Units to purchasers.
The following table reflects the compensation payable to David Lerner
Associates, Inc.
MARKETING
PRICE TO PUBLIC COMMISSIONS EXPENSE ALLOWANCE
----------------- --------------- ------------------
Per Unit Minimum Offering ......... $ 9.50 $ 0.7125 $ 0.2375
Per Unit Maximum Offering ......... $ 10.00 $ 0.75 $ 0.25
Total Minimum Offering ............ $ 30,000,000 $ 2,250,000 $ 750,000
Total Maximum Offering ............ $200,000,000 $15,000,000 $5,000,000
Prospective investors are advised that David Lerner Associates, Inc.,
reserves the right to purchase Units, 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 Units.
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 Units, subject to our approval. David Lerner
Associates, Inc. will pay the compensation owing to the broker-dealers out of
the selling commissions or marketing expense allowance payable to it. Sales by
the broker-dealers will be carried on in accordance with customary securities
distribution procedures. David Lerner Associates, Inc. may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 in connection with
this offering. Purchasers' checks are to be made payable to David Lerner
Associates, Inc. unless the investor elects to use a
74
portion of the proceeds in his or her David Lerner brokerage account. David
Lerner Associates, Inc. will forward to the escrow agent funds representing
subscription payments by noon of the next business day following receipt by
David Lerner Associates, Inc. of the subscription payments.
Purchasers are required to purchase a minimum of $5,000 in Units or $2,000
in Units 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 Units sold in the offering, on the same terms and conditions as
the public. If Apple Suites Advisors and Apple Suites Realty purchase any Units,
they will be permitted to vote on any matters submitted to a vote of holders of
the common shares. Any purchase of Units in this offering by Apple Suites
Advisors and Apple Suites Realty must be for investment, and not for resale or
distribution. The Units described in this paragraph are exclusive of the Units
which may be issued under our stock incentive plans.
There has been no previous market for any of our Units. The initial
offering price for the Units 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.
75
DESCRIPTION OF CAPITAL STOCK
The information set forth below is only a summary of the material terms of
our common shares and Series A preferred shares. You should refer to our
articles of incorporation, and bylaws for a complete description of the common
shares and the Series A preferred shares.
Our authorized capital stock consists of : (i) 200,000,000 common shares,
no par value, (ii) 200,000,000 Series A preferred shares, no par value, (iii)
240,000 Series B convertible preferred shares, no par value and (iv) 15,000,000
additional preferred shares. Each common share and accompanying Series A
preferred share will be fully paid and nonassessable upon issuance and payment
therefor. As of the date of this prospectus, there were 10 common shares and
accompanying Series A preferred share issued and outstanding. All 240,000
authorized Series B convertible preferred 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. Upon liquidation, the rights of the
holders of the common shares will initially arise out of their rights as holders
of the Series A preferred shares. In addition, in the event that the liquidation
of our company results in proceeds that exceed the distribution rights of the
Series A preferred shares and the Series B convertible preferred shares, the
remaining proceeds will be distributed between the holders of the common shares
and the holders of the Series B convertible preferred shares, on an as converted
basis.
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.
76
VOTING RIGHTS
Each outstanding common share entitles the holder to one vote on all
matters submitted to a vote of shareholders. The holders of common shares have
exclusive voting power with respect to the election of directors, except as
otherwise required by law or except as provided with respect to any other class
or series of stock. There is no cumulative voting in the election of directors.
Therefore the holders of a majority of the outstanding common shares can elect
all of the directors then standing for election and the holders of the remaining
shares will not be able to elect any directors.
Our articles state that a majority of common shares outstanding and
entitled to vote on a matter may approve our company to take any of the
following actions:
-- dissolve,
-- amend our charter or articles of incorporation,
-- merge,
-- sell all or substantially all of our assets, or
-- engage in a share exchange or similar transactions;
-- except for amendments to our articles of incorporation relating to the
classification of the board of directors. This matter requires the
approval of at least two-thirds of the shares entitled to vote.
The transfer agent and registrar for the common shares is First Union
National Bank.
SERIES A PREFERRED SHARES
The Series A preferred shares have no voting rights, no distribution rights
and no conversion rights. In addition, the Series A preferred shares are not
separately tradable from the common shares to which they relate. The only right
associated with each Series A preferred share is a priority distribution upon
the sale of our assets. The priority distribution will be equal to $10.00 per
Series A preferred share, and no more, before any distribution will be made to
the holders of any other shares. Upon that distribution the Series A preferred
shares will have no other distribution rights.
SERIES B CONVERTIBLE PREFERRED SHARES
Our authorized capital stock includes 240,000 Series B convertible
preferred shares. There are no dividends payable on the Series B convertible
preferred shares. Holders of more than two-thirds of the Series B convertible
preferred shares must approve any proposed amendment to the Articles of
Incorporation that would adversely affect the Series B convertible preferred
shares.
Upon our liquidation, the holder of the Series B convertible preferred
shares is entitled to a priority liquidation payment. However the priority
liquidation payment of the holders of the Series B convertible preferred shares
is junior to the holders of the Series A preferred shares distribution rights.
The holder of a Series B
77
convertible preferred share is entitled to a liquidation payment of $10 per
number of common shares each Series B convertible preferred share would be
convertible into according to the formula described below. In the event that
the liquidation of our assets results in proceeds that exceed the distribution
rights of the Series A preferred shares and the Series B convertible preferred
shares, the remaining proceeds will be distributed between the common shares and
the Series B convertible preferred shares, on an as converted basis.
The Series B convertible preferred shares are convertible into Units upon
and for 180 days following the occurrence of either of the following events:
(1) substantially all of our assets, stock or business is transferred,
whether through 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 and for purposes of
determining the liquidation payment due to each holder of a Series B convertible
preferred share, each Series B convertible preferred share is convertible into a
number of Units based upon the gross proceeds raised through the date of
conversion in the offering made by this prospectus according to the following
formula:
GROSS PROCEEDS RAISED FROM SALES NUMBER OF UNITS
OF UNITS THROUGH DATE OF THROUGH CONVERSION OF ONE
CONVERSION SERIES B CONVERTIBLE PREFERRED SHARE
- - ---------------------------------- -------------------------------------
$50 million ...................... 1.0
$100 million ..................... 2.0
$150 million ..................... 3.5
$200 million ..................... 5.3
No additional consideration is due upon the conversion of the Series B
convertible preferred shares. The conversion into Units of the Series B
convertible preferred shares will result in dilution of the shareholders'
interests.
PREFERRED SHARES
Our articles of incorporation authorize our issuance of up to 15 million
additional preferred shares. No preferred shares other than the Series A
preferred shares and the Series B convertible preferred shares have been issued.
We believe that the authorization to issue additional 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 additional preferred shares and we do not propose to fix the
78
characteristics of any series of preferred shares in anticipation of issuing
preferred shares. We cannot now predict whether or to what extent, if any,
additional 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.
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.
79
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 Units. 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 Units.
No public market for the Units currently exists. We do not plan to cause
the common shares nor the Series A preferred 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 Units
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 Units as illiquid and must be prepared to hold
their investment for an indefinite length of time.
80
SUMMARY OF ORGANIZATIONAL DOCUMENTS
The following is a summary of the material 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.
81
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 Units 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
82
and our shareholders as fiduciaries and must exercise good faith and integrity
in handling our affairs. As noted above, however, the exculpation and
indemnification provisions in the articles of incorporation and the advisory
agreement represent a material change from the accountability which would be
imposed upon the directors, officers, Apple Suites Advisors and its affiliates
in the absence of the contractual provisions. Thus, the fiduciary duties will be
materially different from the fiduciary duties as they would exist in the
absence of the provisions of the articles of incorporation and the advisory
agreement.
ISSUANCE OF SECURITIES
The board of directors may in its discretion issue additional common
shares, preferred 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 Units are offered by us to
the public, the public offering price of the Units 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
83
laws and regulations or the requirements of any state securities regulator or
similar official. The bylaws can also be amended by the board of directors to:
correct any ambiguity in the bylaws or resolve inconsistencies between the
bylaws and the Articles; make changes that are not materially adverse to the
rights of shareholders; or allow us to take any action or fulfill any obligation
which we are legally obligated or permitted to take. No amendment that would
change any rights with respect to any outstanding common shares, or diminish or
eliminate any voting rights pertaining thereto, may be made unless approved by
the vote of the holders of two-thirds of the outstanding common shares so
affected.
SHAREHOLDER LIABILITY
The holders of our shares shall not be liable personally on account of any
of our obligations.
SALES LITERATURE
We may use sales or marketing literature in connection with the offering of
the Units. 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 Units, 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 Units.
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
84
during the quarter to Apple Suites Advisors and Apple Suites Realty and a
reasonable summary of our activities during the quarter. The shareholders also
have the right under applicable law to obtain other information about us.
We will file a report meeting the requirements of Form 8-K under the
Securities Exchange Act of 1934 if, after the termination of the offering, a
commitment is made involving the use of 10 percent or more of the net proceeds
of the offering and will provide the information contained in the report to the
shareholders at least once each quarter after the termination of this offering.
LEGAL MATTERS
Certain legal matters in connection with the Units will be passed upon for
us by McGuireWoods LLP, Richmond, Virginia.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our balance sheet at
January 17, 2001, 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.
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 31, 2000. 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 Suites, Inc. ("Apple Suites") 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
Suites 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 31, 2000, Glade M. Knight sponsored only
Cornerstone, Apple Residential and Apple Suites, which have investment
objectives similar to ours. Cornerstone, Apple Residential and Apple Suites 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.
85
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.
86
TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds by
Apple Suites, Inc., Cornerstone and Apple Residential Income Trust, Inc. whose
investment objectives are similar to those of the Company and whose offering
closed within three years ending December 31, 2000.
APPLE APPLE
SUITES CORNERSTONE RESIDENTIAL
------------------ ------------------ ------------------
Dollar Amount Offered .......................... $ 300,000,000 $ 424,681,167 $ 316,043,668
Dollar Amount Raised ........................... $ 84,996,699 $ 424,681,167 $ 316,043,668
LESS OFFERING EXPENSES:
Selling Commissions and Discounts ............. 10.00% 0.35% 10.00%
Organizational Expenses ....................... 2.37% 0.00% 1.00%
Other ......................................... 0.00% 0.00% 0.00%
Reserves ....................................... 0.50% 3.00% 0.50%
Percent Available from Investment .............. 87.13% 96.65% 88.50%
ACQUISITION COSTS:
Prepaid items and fees to purchase property. 81.45% 95.57% 86.50%
Cash down payment ............................. 0.00% 0.00% 0.00%
Acquisition fees .............................. 5.68% 1.08% 2.00%
Other ......................................... 0.00% 0.00% 0.00%
Total Acquisition Costs ........................ 87.13% 96.65% 88.50%
Percent Leverage (excluding unsecured debt)..... 47.35% 32.41% 0.00%
Date offering began ............................ August 1999 May 1993 January 1997
Length of offering (in months) ................. 17 66 31
Months to invest amount available for
investment .................................... 17 66 31
87
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, 2000, and (ii) by all other programs during the three years ended
December 31, 2000.
APPLE APPLE
SUITES CORNERSTONE RESIDENTIAL
--------------- ---------------- ----------------
Date offering commenced ....................... AUGUST 1999 MAY 1993 JANUARY 1997
Dollar amount raised .......................... $ 84,996,699 $ 424,681,167 $ 316,043,668
AMOUNTS PAID TO PRIOR PROGRAM SPONSOR FROM
PROCEEDS OF OFFERING:
Acquisition fees .............................
Real Estate commission ....................... $ 2,436,000 $ 4,075,337 $ 4,882,032
Advisory fees ................................ $ 158,153 $ 515,689 $ 1,140,874
Other ........................................ $ -- $ -- $ --
Cash generated from operations before deducting
payments to Prior Program Sponsor ............ $ 7,343,144 $ 242,547,927 $ 21,265,581
AGGREGATE COMPENSATION TO PRIOR PROGRAM
SPONSOR
Management and accounting fees ............... $ -- $ 3,088,348 $ 3,859,448
Reimbursements ............................... $ -- $ 2,717,655 $ --
Leasing fees ................................. $ -- $ -- $ --
Other fees ................................... $ -- $ -- $ --
There have been no fees from property sales or refinancings
88
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for Apple Suites,
Inc., Cornerstone and Apple Residential Income Trust, Inc. of the offerings
closed in the five years ending December 31, 2000. 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.
2000 1999
APPLE APPLE
SUITES CORNERSTONE RESIDENTIAL
----------------- ------------------ -----------------
Capital contributions by year .................. $ 46,631,958 $ 6,108,737 $ 28,591,160
Gross revenue .................................. $ 16,202,929 $ 144,875,214 $ 2,687,117
Operating expenses ............................. $ 2,083,533 $ 54,425,957 $ 426,592
Interest income (expense) ...................... $ (6,611,716) $ (17,125,452) $ (1,245,044)
Depreciation ................................... $ 2,990,381 $ 36,295,408 $ 496,209
Net income (loss) GAAP basis ................... $ 3,469,087 $ 58,144,303 $ 365,465
Taxable income ................................. $ -- $ -- $ --
Cash generated from operations ................. $ 5,512,154 $ 53,726,841 $ 548,015
Less cash distributions to investors ........... $ 4,099,158 $ 40,251,087 $ 169,990
Cash generated after cash distribution ......... $ 1,412,996 $ 13,475,754 $ 378,025
Special items ..................................
Capital contributions, net ..................... $ 46,631,958 $ 6,108,737 $ 28,591,160
Fixed asset additions .......................... $ 11,195,756 $ 77,213,771 $ 26,509,326
Line of credit-change in ....................... $ -- $ -- $ --
Cash generated ................................. $ 2,071,714 $ (12,127,695) $ 581,244
End of period cash ............................. $ 2,653,058 $ 4,140,641 $ 581,344
Tax and distribution data per $1,000
invested ......................................
Federal income tax results .....................
Cornerstone Realty Income Trust, is a ..........
REIT and thus is not taxed at the ..............
corporate level ................................
Cash distributions to investors ................
Source (on GAAP basis) .........................
Investment income .............................. $ 71 $ 46 $ 22
Long-term capital gain ......................... $ -- $ 19 $ --
Return of capital .............................. $ 31 $ 45 $ 11
Source (on Cash basis) .........................
Sales .......................................... $ -- $ -- $ --
Refinancings ................................... $ -- $ -- $ --
Operations ..................................... $ 102 $ 110 $ 33
Other .......................................... $ -- $ -- $ --
APPLE 1998 APPLE
CORNERSTONE RESIDENTIAL CORNERSTONE RESIDENTIAL
------------------ ------------------ ------------------ ----------------
Capital contributions by year .................. $ 9,168,728 $ 32,497,218 $ 38,905,636 $ 142,800,094
Gross revenue .................................. $ 125,041,524 $ 26,243,431 $ 93,637,948 $ 30,764,904
Operating expenses ............................. $ 46,940,388 $ 15,307,051 $ 33,797,439 $ 14,958,699
Interest income (expense) ...................... $ (14,953,613) $ (302,919) $ (12,175,940) $ 900,669
Depreciation ................................... $ 29,310,325 $ 5,893,349 $ 20,741,130 $ 5,788,476
Net income (loss) GAAP basis ................... $ 30,037,102 $ (16,328,050) $ 23,210,642 $ 10,079,908
Taxable income ................................. $ -- $ -- $ -- $ --
Cash generated from operations ................. $ 62,310,895 $ 10,680,641 $ 45,027,655 $ 17,122,276
Less cash distributions to investors ........... $ 42,050,415 $ 19,346,455 $ 38,317,602 $ 13,040,936
Cash generated after cash distribution ......... $ 20,260,480 $ (8,665,814) $ 6,710,053 $ 4,081,340
Special items ..................................
Capital contributions, net ..................... $ 9,168,728 $ 32,497,218 $ 38,905,636 $ 142,800,094
Fixed asset additions .......................... $ 332,558,553 $ 44,755,816 $ 97,863,162 $ 125,017,627
Line of credit-change in ....................... $ (44,392,999) $ -- $ 50,323,852 $ --
Cash generated ................................. $ 13,677,972 $ (21,366,155) $ (1,923,622) $ 15,910,626
End of period cash ............................. $ 16,268,336 $ 18,707,044 $ 2,590,364 $ 40,073,198
Tax and distribution data per $1,000
invested ......................................
Federal income tax results .....................
Cornerstone Realty Income Trust, is a ..........
REIT and thus is not taxed at the ..............
corporate level ................................
Cash distributions to investors ................
Source (on GAAP basis) .........................
Investment income .............................. $ 95 $ 46 $ 82 $ --
Long-term capital gain ......................... $ -- $ -- $ -- $ --
Return of capital .............................. $ 12 $ 21 $ 21 $ 82
Source (on Cash basis) .........................
Sales .......................................... $ -- $ -- $ -- $ --
Refinancings ................................... $ -- $ -- $ -- $ --
Operations ..................................... $ 107 $ 67 $ 103 $ 82
Other .......................................... $ -- $ -- $ -- $ --
1997 APPLE 1997
CORNERSTONE RESIDENTIAL CORNERSTONE
----------------- --------------- -----------------
Capital contributions by year .................. $ 63,485,868 $109,090,359 $ 144,798,035
Gross revenue .................................. $ 71,970,624 $ 12,005,968 $ 40,261,674
Operating expenses ............................. $ 27,339,955 $ 5,993,492 $ 17,198,882
Interest income (expense) ...................... $ (7,230,205) $ (235,708) $ (1,140,667)
Depreciation ................................... $ 15,163,593 $ 1,898,003 $ 8,068,063
Net income (loss) GAAP basis ................... $ 19,225,553 $ 3,499,194 $ (4,169,849)
Taxable income ................................. $ -- $ -- $ --
Cash generated from operations ................. $ 34,973,533 $ 7,075,025 $ 20,162,776
Less cash distributions to investors ........... $ 31,324,870 $ 3,249,098 $ 15,934,901
Cash generated after cash distribution ......... $ 3,648,663 $ 3,825,927 $ 4,227,875
Special items ..................................
Capital contributions, net ..................... $ 63,485,868 $109,090,359 $ 144,798,035
Fixed asset additions .......................... $ 157,859,343 $ 88,753,814 $ 194,519,406
Line of credit-change in ....................... $ 96,166,147 $ -- $ 41,603,000
Cash generated ................................. $ 1,331,335 $ 24,162,472 $ (3,890,496)
End of period cash ............................. $ 4,513,986 $ 24,162,572 $ 3,182,651
Tax and distribution data per $1,000
invested ......................................
Federal income tax results .....................
Cornerstone Realty Income Trust, is a ..........
REIT and thus is not taxed at the ..............
corporate level ................................
Cash distributions to investors ................
Source (on GAAP basis) .........................
Investment income .............................. $ 77 $ -- $ 85
Long-term capital gain ......................... $ -- $ -- $ --
Return of capital .............................. $ 23 $ 60 $ 14
Source (on Cash basis) .........................
Sales .......................................... $ -- $ -- $ --
Refinancings ................................... $ -- $ -- $ --
Operations ..................................... $ 100 $ 60 $ 99
Other .......................................... $ -- $ -- $ --
89
TABLE IV: RESULTS OF COMPLETED PROGRAMS
Table IV shows the results of programs sponsored by Affiliates of Apple
Hospitality Two, Inc. which completed operations in the five years ending
December 31, 2000. All of these programs other than Apple Residential had
investment objectives dissimilar to those of the Company.
TEAL APPLE
PROGRAM NAME WESTFIELD POINT RESIDENTIAL
- - ----------------------------------------- -------------- --------------- --------------
Dollar amount raised .................... $ 1,825,600 3,310,620 316,043,668
Number of properties .................... 1 1 29
Date of closing of offering ............. NOV 1984 DEC 1989 JAN 1997
Date of first sale of property .......... APR 1996 DEC 1997 JULY 1999
Date of final sale of property .......... APR 1996 DEC 1997 JULY 1999
Tax and Distribution data per
$1,000 investment through-
Federal income tax results:
Ordinary income
From Operations ...................... $ 80 $ (4) $ 46
From recapture ....................... $ 1,302 $ -- $ 21
Capital gain ........................... $ -- $ 2,126 $ --
Deferred gain ..........................
Capital ................................ $ -- $ -- $ --
Ordinary ............................... $ -- $ -- $ --
Cash distributions to investors .........
Source (On GAAP basis) .................
Investment income .................... $ 80 $ (4) $ 46
Return of capital .................... $ 233 $ -- $ 21
Source (On cash basis) .................
Sales ................................ $ 233 $ 2,126 $ --
Refinancing .......................... $ -- $ -- $ --
Operations ........................... $ 80 $ (4) $ 67
Other ................................ $ -- $ -- $ --
Receivable on net purchase money
financing .............................. $ -- $ -- $ --
90
TABLE V: SALES OR DISPOSALS OF PROPERTIES
On July 23, 1999, Apple Residential Income Trust, Inc. merged with Cornerstone
Realty Income Trust, Inc. Prior to the merger, Apple Residential owned 29
apartment communities containing 7,503 apartment homes. The aggregate purchase
price was $311 million. In addition, Apple Residential's debt of approximately
$32 million was assumed by Cornerstone.
Sale of 16 Cornerstone apartment communities
SELLING PRICE, NET OF CLOSING COSTS AND GAAP
ADJUSTMENTS
CASH
RECEIVED MORTGAGE PURCHASE MONEY
NET OF BALANCE MORTGAGE TAKEN
DATE DATE OF CLOSING AT TIME BACK BY
PROPERTY ACQUIRED SALE COSTS OF SALE PROGRAM
- - -------------------------- ---------- --------- -------------- ---------- ----------------
Polo Club ................ Jun-93 Mar-00 6,981,271 -- --
The Hollows .............. Jun-93 Mar-00 9,022,300 -- --
County Green ............. Dec-93 Mar-00 6,968,193 -- --
Wimbledon Chase .......... Feb-94 Mar-00 9,642,424 -- --
Chase Mooring ............ Aug-94 Mar-00 9,708,525 -- --
Wind Lake ................ Apr-95 Mar-00 11,719,900 -- --
Magnolia Run ............. Jun-95 Mar-00 7,083,707 -- --
Breckinridge ............. Jun-95 Mar-00 7,087,026 -- --
Bay Watch Pointe ......... Jul-95 Mar-00 5,202,102 -- --
Hanover Landing .......... Aug-95 Mar-00 7,844,760 -- --
Osprey Landing ........... Nov-95 Mar-00 7,117,989 -- --
Sailboat Bay ............. Nov-95 Mar-00 14,033,626 -- --
West Eagle Green ......... Mar-96 Mar-00 6,270,754 -- --
Savannah West ............ Jul-96 Mar-00 12,477,233 -- --
Paces Arbor .............. Mar-97 Mar-00 6,135,943 -- --
Paces Forest ............. Mar-97 Mar-00 7,158,690 -- --
---------- -- --
134,454,443 -- --
COST OF PROPERTIES INCLUDING CLOSING AND SOFT COSTS
EXCESS
TOTAL (DEFICIENCY) OF
ADJUSTMENTS ACQUISITION PROPERTY
RESULTING COST, CAPITAL OPERATING CASH
FROM ORIGINAL IMPROVEMENTS, RECEIPTS OVER
APPLICATION MORTGAGE CLOSING AND CASH
PROPERTY OF GAAP TOTAL FINANCING SOFT COSTS TOTAL EXPENDITURES
- - -------------------------- ------------- -------------- ----------- --------------- -------------- ----------------
Polo Club ................ -- 6,981,271 -- 6,316,249 6,316,249 665,022
The Hollows .............. -- 9,022,300 -- 5,399,048 5,399,048 3,623,252
County Green ............. -- 6,968,193 -- 4,513,698 4,513,698 2,454,495
Wimbledon Chase .......... -- 9,642,424 -- 4,921,443 4,921,443 4,720,981
Chase Mooring ............ -- 9,708,525 -- 6,349,566 6,349,566 3,358,959
Wind Lake ................ -- 11,719,900 -- 10,034,679 10,034,679 1,685,221
Magnolia Run ............. -- 7,083,707 -- 6,062,839 6,062,839 1,020,868
Breckinridge ............. -- 7,087,026 -- 6,482,929 6,482,929 604,097
Bay Watch Pointe ......... -- 5,202,102 -- 4,629,336 4,629,336 572,766
Hanover Landing .......... -- 7,844,760 -- 6,912,569 6,912,569 932,191
Osprey Landing ........... -- 7,117,989 -- 5,187,648 5,187,648 1,930,341
Sailboat Bay ............. -- 14,033,626 -- 13,618,785 13,618,785 414,841
West Eagle Green ......... -- 6,270,754 -- 5,681,319 5,681,319 589,435
Savannah West ............ -- 12,477,233 -- 12,738,393 12,738,393 (261,160)
Paces Arbor .............. -- 6,135,943 -- 5,894,202 5,894,202 241,741
Paces Forest ............. -- 7,158,690 -- 6,781,828 6,781,828 376,862
-- ---------- -- ---------- ---------- ---------
-- 134,454,443 -- 111,524,530 111,524,530 22,929,913
91
APPLE HOSPITALITY, INC.
INDEX TO BALANCE SHEET
JANUARY 17, 2001
PAGE
-----
Report of Independent Auditors ............. F-2
Balance Sheet at January 17, 2001 .......... F-3
Notes to Balance Sheet ..................... F-4
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder of
Apple Hospitality Two, Inc.
We have audited the accompanying balance sheet of Apple Hospitality Two,
Inc. as of January 17, 2001. 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 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 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 Hospitality Two, Inc. at
January 17, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Richmond, Virginia
January 17, 2001
F-2
APPLE HOSPITALITY TWO, INC.
BALANCE SHEET
JANUARY 17, 2001
ASSETS
Cash .............................................................................. $100
====
STOCKHOLDER'S EQUITY
Preferred stock, authorized 15,000,000 shares; none issued and outstanding ........ --
Series A preferred stock, no par value, authorized 200,000,000 shares; issued and
outstanding 10 shares ............................................................ --
Series B preferred 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
====
See accompanying notes to balance sheet.
F-3
APPLE HOSPITALITY TWO, INC.
NOTES TO BALANCE SHEETS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Apple Hospitality Two, 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
in upper-end, extended-stay hotels. Initial capitalization occurred on January
17, 2001, when 10 shares of common stock and Series A preferred stock were
purchased by Apple Suites Advisors, Inc. (see Notes 2 and 3). The Company's
fiscal year end is December 31.
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.
The Company has established Apple Hospitality Management, Inc. as a 100%
owned taxable REIT subsidiary ("TRS"). The TRS will lease all hotel properties
from the Company and be subject to income tax at regular corporate rates on any
income that it would earn.
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).
Stock Based Compensation
As permitted under Statement of Financial Accounting Standards Statement
No. 123 Accounting for Stock Based Compensation, for stock awards issued to
employees, the Company has elected to follow Accounting Principles Board opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations. For awards granted to employees, compensation expense, if any,
is measured as the difference between the award price and market price of the
shares at the date in which both the number of shares and price are known.
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.
F-4
APPLE HOSPITALITY TWO, INC.
NOTES TO BALANCE SHEETS- (CONTINUED)
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.
The minimum offering 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 with First Union National Bank.
With each purchase of one common share the Company will issue one Series A
preferred share. The Series A preferred shares will have no voting rights, no
conversion rights and no distribution rights. The only right associated with the
Series A preferred shares will be a priority distribution upon the sale of the
Company's assets. The priority would be equal to $10.00 per Series A preferred
share, and no more, before any distributions are made to the holders of any
other shares. The Series A preferred shares will not be separately tradable from
the common shares to which they relate.
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 equity proceeds 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.
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
F-5
APPLE HOSPITALITY TWO, INC.
NOTES TO BALANCE SHEETS- (CONTINUED)
4. STOCK INCENTIVE PLANS - (CONTINUED)
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. SERIES B PREFERRED CONVERTIBLE STOCK
The Company has authorized 240,000 shares of Series B preferred convertible
stock. The Company will issue 202,500 Series B preferred convertible shares to
Mr. Glade M. Knight, Chairman and President of the Company. In addition, Mr.
Stanley J. Olander, Jr. and Ms. Debra A. Jones, business associates of Mr.
Knight, will each own 18,750 Series B preferred convertible shares. The Series B
preferred convertible shares are convertible into common shares pursuant to the
formula and on the terms and conditions set forth below. The Company plans to
issue the Series B preferred convertible shares to Mr. Knight and others on or
before the initial closing of the minimum offering of $10,00,000, in exchange
for the payment by them of $0.10 per Series B preferred convertible share, or an
aggregate of $24,000.
There are no dividends payable on the Series B preferred convertible
shares. Holders of more than two-thirds of the Series B preferred convertible
shares must approve any proposed amendment to the Articles of Incorporation that
would adversely affect the Series B preferred convertible shares.
Upon our liquidation, the holder of the Series B preferred convertible
shares is entitled to a priority liquidation payment before any distribution of
liquidation proceeds to the holders of the common shares. However, the priority
liquidation payment of the holders of the Series B preferred convertible shares
is junior to the holders of the Series A preferred shares distribution rights.
The holder of a Series B preferred convertible share is entitled to a
liquidation payment of $10 per number of common shares each Series B preferred
convertible share would be convertible into according to the formula described
below. In the event that the liquidation of the Company's assets results in
proceeds that exceed the distribution rights of the Series A preferred shares
and the Series B preferred convertible shares, the remaining proceeds will be
distributed between the common shares and the Series B preferred convertible
shares, on an as converted basis.
Each holder of outstanding Series B preferred 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 events:
(1) substantially all of the Company's assets, stock or business is
transferred, whether through exchange, merger, consolidation, lease,
share exchange or otherwise, or
F-6
APPLE HOSPITALITY TWO, INC.
NOTES TO BALANCE SHEETS- (CONTINUED)
5. SERIES B PREFERRED CONVERTIBLE STOCK - (CONTINUED)
(2) The Advisory Agreement with ASA is terminated or not renewed.
Upon the occurrence of either conversion event, each Series B preferred
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:
NUMBER OF UNITS THROUGH
GROSS PROCEEDS RAISED FROM CONVERSION OF ONE SERIES B
SALES OF UNITS THROUGH PREFERRED CONVERTIBLE SHARE
DATE OF CONVERSION (THE INITIAL "CONVERSION RATIO")
- - ---------------------------- ---------------------------------
$ 50 million ............... 1.0
$100 million ............... 2.0
$150 million................ 3.5
$200 million ............... 5.3
No additional consideration is due upon the conversion of the Series B
preferred convertible shares.
Compensation expense related to issuance of 202,500 Series B Convertible
Preferred shares to Mr. Knight will be recognized at such time when the number
of common shares to be issued for conversion of the Series B shares can be
reasonably estimated and the event triggering the conversion of the Series B
shares to common shares is probable. The expense will be measured as the
difference between the fair value of the common stock for which the Series B
shares can be converted and the amounts paid for the Series B shares.
The issuance of the Series B Convertible Preferred Shares to Mr. Olander
and Ms. Jones will be accounted for under FASB Statement No. 123, Accounting for
Stock-Based Compensation since these individuals are not employees of the
Company. Expense related to the issuance of the Series B shares will be
determined based on fair value of the Series B shares at grant date in excess of
amounts paid by Mr. Olander and Ms. Jones. Since the number of common shares to
which the Series B shares can be converted is not known at grant date and
ultimate convertibility to common shares is only allowed through a defined
triggering event, the fair value of the Series B shares will be remeasured and
not recorded as expense until the likely occurrence of an event triggering the
conversion of the Series B Convertible Preferred shares to common stock.
F-7
APPENDIX A
SUBSCRIPTION AGREEMENT
To: Apple Hospitality Two, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Hospitality Two, Inc.
("REIT") at a purchase price of and 00/100 Dollars ($ ) per Unit. 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 Hospitality
Two, Inc., of which this Subscription Agreement is a part, and understand that
the shares being acquired will be governed by the terms of such Prospectus and
any amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home,
home furnishings and automobiles) of at least $50,000 ($125,000 in the case of
New Hampshire purchasers) and estimate that (without regard to investment in the
REIT) I (we) will have gross income during the current year of $50,000, or (ii)
a net worth (excluding home, home furnishings and automobiles) of at least
$100,000 ($150,000 in the case of Kentucky and North Carolina purchasers and
$250,000 in the case of New Hampshire purchasers); and, in either event, further
represent that the purchase amount is 10% or less of my (our) net worth as
defined above;
(e) represent (if purchasing in a fiduciary or other representative
capacity) that I (we) have due authority to execute the Subscription Agreement
and to thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer
identification number shown on the signature page of this Subscription Agreement
is true, correct and complete (or I am (we are) waiting for a number to be
issued to me (us)), and (ii) that I am (we are) not subject to backup
withholding either because (a) I am (we are) exempt from backup withholding, or
(b) I (we) have not been notified by the Internal Revenue Service that I am (we
are) subject to backup withholding as a result of a failure to report all
interest or distributions, or (c) the Internal Revenue Service has notified me
(us) that I am (we are) no longer subject to backup withholding; and
(g) it is understood that the REIT shall have the right to accept or reject
this subscription in whole or in part in its sole and absolute discretion. The
REIT will either accept or reject this subscription within four business days
from the receipt of the subscription by the Managing Dealer or Selected Dealer.
To the extent permitted by applicable law, the REIT intends to assert the
foregoing representations as a defense to any claim based on factual assertions
contrary to those set forth above.
(H) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE
THE FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR
RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION,
OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS OPTED OUT OF THE
CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS
ACTION UNTIL: (I) 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.
APPLE HOSPITALITY TWO, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)
----------------------------------------------------
Tax ID Number(s)
------------------------------------------------------------
Account # (If applicable)
2. Name(s) in which shares are to be registered:
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
[ ] As Custodian for
--------------------------------------------------------
[ ] For Estate of
-----------------------------------------------------------
[ ] Other
-------------------------------------------------------------------
4. Address for correspondence
--------------------------------------------------
-----------------------------------------------------------------------------
5. Are you a non-resident alien individual (other than a non-resident alien
who has elected to be taxed as a resident), a foreign corporation, a
foreign partnership, a foreign trust, a foreign estate, or otherwise not
qualified as a United States person? If so, transaction will not be
executed without a completed W-8BEN Form. [ ] Yes [ ] No
6. Amount of Investment $____________ for ________________________ Units
(Investment must be for a minimum of $5,000 in Units or $2,000 in Units for
qualified plans). Make check payable to: David Lerner Associates, Inc. (or as
otherwise instructed). [ ] Liquidate funds from money market [ ] Check
enclosed
7. Instructions for cash distributions [ ] Deposit to money market
[ ] Reinvest in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (H).
9. Signature(s) of Investor(s) (Please sign in same manner in which shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE INVESTOR IS NOT WAIVING ANY RIGHTS
UNDER THE FEDERAL SECURITIES LAWS.
x
---------------------------------------------------------------------------
Signature Date
x
---------------------------------------------------------------------------
Signature Date
10. Broker/Dealer Information:
x
-------------------------------- ------------------------------------------
Registered Representative's Name Second Registered Representative's Name
x
-------------------------------- ------------------------------------------
Broker/Dealer Firm Registered Representative's Office Address
x
-------------------------------- ------------------------------------------
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative
hereby certifies: I have reasonable grounds to believe, based on information
obtained from the investor(s) concerning investment objectives, other
investments, financial situation and needs and any other information known
by me, that investment in the REIT is suitable for such investor(s) in light
of financial position, net worth and other suitability characteristics.
-----------------------------------------------------------------------------
Registered Representative Date
-----------------------------------------------------------------------------
General Securities Principal Date
-----------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Signature page will not be an effective Agreed and accepted by:
agreement until it is signed by a duly authorized agent of Apple Hospitality Two Apple Hospitality Two, Inc.
Inc. By
-------------------------------------------
Date
-----------------------------------------
SUBSCRIPTION AGREEMENT
To: Apple Hospitality Two, 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 Hospitality Two, Inc.
("REIT") at a purchase price of and 00/100 Dollars ($ ) per Unit. 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 Hospitality
Two, Inc., of which this Subscription Agreement is a part, and understand that
the shares being acquired will be governed by the terms of such Prospectus and
any amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home,
home furnishings and automobiles) of at least $50,000 ($125,000 in the case of
New Hampshire purchasers) and estimate that (without regard to investment in the
REIT) I (we) will have gross income during the current year of $50,000, or (ii)
a net worth (excluding home, home furnishings and automobiles) of at least
$100,000 ($150,000 in the case of Kentucky and North Carolina purchasers, and
$250,000 in the case of New Hampshire purchasers); and, in either event, further
represent that the purchase amount is 10% or less of my (our) net worth as
defined above;
(e) represent (if purchasing in a fiduciary or other representative
capacity) that I (we) have due authority to execute the Subscription Agreement
and to thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer
identification number shown on the signature page of this Subscription Agreement
is true, correct and complete (or I am (we are) waiting for a number to be
issued to me (us)), and (ii) that I am (we are) not subject to backup
withholding either because (a) I am (we are) exempt from backup withholding, or
(b) I (we) have not been notified by the Internal Revenue Service that I am (we
are) subject to backup withholding as a result of a failure to report all
interest or distributions, or (c) the Internal Revenue Service has notified me
(us) that I am (we are) no longer subject to backup withholding; and
(g) it is understood that the REIT shall have the right to accept or reject
this subscription in whole or in part in its sole and absolute discretion. The
REIT will either accept or reject this subscription within four business days
from the receipt of the subscription by the Managing Dealer or Selected Dealer.
To the extent permitted by applicable law, the REIT intends to assert the
foregoing representations as a defense to any claim based on factual assertions
contrary to those set forth above.
(h) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE
THE FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR
RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION,
OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS OPTED OUT OF THE
CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS
ACTION UNTIL: (I) 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.
APPLE HOSPITALITY TWO, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)
----------------------------------------------------
Tax ID Number(s)
------------------------------------------------------------
Account # (If applicable)
2. Name(s) in which shares are to be registered:
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
[ ] As Custodian for
--------------------------------------------------------
[ ] For Estate of
-----------------------------------------------------------
[ ] Other
-------------------------------------------------------------------
4. Address for correspondence
--------------------------------------------------
-----------------------------------------------------------------------------
5. Are you a non-resident alien individual (other than a non-resident alien
who has elected to be taxed as a resident), a foreign corporation, a
foreign partnership, a foreign trust, a foreign estate, or otherwise not
qualified as a United States person? If so, transaction will not be
executed without a completed W-8BEN Form. [ ] Yes [ ] No
6. Amount of Investment $____________ for ________________________ Units
(Investment must be for a minimum of $5,000 in Units or $2,000 in Units for
qualified plans). Make check payable to: David Lerner Associates, Inc. (or as
otherwise instructed). [ ] Liquidate funds from money market [ ] Check
enclosed
7. Instructions for cash distributions [ ] Deposit to money market
[ ] Reinvest in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (H).
9. Signature(s) of Investor(s) (Please sign in same manner in which shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, THE INVESTOR IS NOT WAIVING ANY RIGHTS
UNDER THE FEDERAL SECURITIES LAWS.
x
---------------------------------------------------------------------------
Signature Date
x
---------------------------------------------------------------------------
Signature Date
10. Broker/Dealer Information:
x
-------------------------------- ----------------------------------------
Registered Representative's Name Second Registered Representative's Name
x
-------------------------------- ------------------------------------------
Broker/Dealer Firm Registered Representative's Office Address
x
-------------------------------- ------------------------------------------
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative
hereby certifies: I have reasonable grounds to believe, based on information
obtained from the investor(s) concerning investment objectives, other
investments, financial situation and needs and any other information known
by me, that investment in the REIT is suitable for such investor(s) in light
of financial position, net worth and other suitability characteristics.
-----------------------------------------------------------------------------
Registered Representative Date
-----------------------------------------------------------------------------
General Securities Principal Date
-----------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Signature page will not be an effective Agreed and accepted by:
agreement until it is signed by a duly authorized agent of Apple Hospitality Two Apple Hospitality Two, Inc.
Inc. By
-------------------------------------------
Date
-----------------------------------------
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, ANY OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH AN OFFER MAY
NOT LEGALLY BE MADE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION CONTAINED IN THIS PROSPECTUS HAS NOT CHANGED AS OF ANY TIME
AFTER ITS DATE.
-----------------------------------
TABLE OF CONTENTS
PAGE
----
Summary ............................... 1
Risk Factors .......................... 9
Use of Proceeds ....................... 20
Compensation .......................... 22
Conflicts of Interests ................ 25
Investment Objectives and
Policies ........................... 29
Distribution Policy ................... 33
Business .............................. 34
Management ............................ 39
Apple Suites Advisors, Inc., Apple
Suites Realty Group, Inc. and
Affiliates ......................... 45
Principal and Management
Shareholders ....................... 53
Federal Income Tax
Considerations ..................... 55
ERISA Considerations .................. 66
Capitalization ........................ 68
Management's Discussion and
Analysis of Financial Condition
and Results of Operations .......... 69
Plan of Distribution .................. 71
Description of Capital Stock .......... 76
Summary of Organizational
Documents .......................... 81
Sales Literature ...................... 84
Reports to Shareholders ............... 84
Legal Matters ......................... 85
Experts ............................... 85
Experience of Prior Programs .......... 85
Index to Balance Sheet ................ F-1
Subscription Agreement ................ Exhibit A
================================================================================
[APPLE HOSPITALITY LOGO]
APPLE HOSPITALITY TWO, INC.
-----------------------------------
PROSPECTUS
-----------------------------------
DAVID LERNER ASSOCIATES, INC.
AS MANAGING DEALER
APRIL 19, 2001
================================================================================