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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _______
Commission File Number 333-100044
APPLE HOSPITALITY FIVE, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 76-0713476
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
10 South Third Street
Richmond, Virginia 23219
(Address of principal executive offices) (Zip Code)
(804) 344-8121
(Registrant's telephone number, including area code)
Securities registered pursuant Name of each exchange on which registered:
Section 12(b) of the Act:
None None
-------------- --------------
Securities registered pursuant to 12(g) of the Act:
None
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
------ ------
Based on the price at which the common equity was last sold in our on-going best
efforts offering, as of March 14, 2003, the aggregate value of the voting common
equity held by non-affiliates was $89,498,575. The Company does not have any
non-voting common equity.
At March 14, 2003, there were outstanding 8,352,694 common shares, no par value,
of the registrant.
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X
-----
Documents incorporated by reference: Portions of the registrants' definitive
Proxy Statement for its Annual Meeting of Shareholders scheduled to be held May
14, 2003 referenced in Part III.
APPLE HOSPITALITY FIVE, INC.
FORM 10-K
TABLE OF CONTENTS
Page
Part I
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 2
Item 3. Legal Proceedings...................................................................... 2
Item 4. Submission of Matters to a Vote of Security Holders.................................... 3
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.................. 3
Item 6. Selected Financial Data................................................................ 6
Item 7. Management's Discussion and Analysis................................................... 6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 9
Item 8. Financial Statements and Supplementary Data............................................ 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 18
Part III
Item 10. Directors and Executive Officers of the Registrant..................................... 18
Item 11. Executive Compensation................................................................. 18
Item 12. Security Ownership of Certain Beneficial Owners and Management Related Stockholder
Matters................................................................................ 18
Item 13. Certain Relationships and Related Transactions......................................... 18
Item 14. Controls and Procedures................................................................ 19
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 19
Signatures ....................................................................................... 22
Certifications ....................................................................................... 24
-i-
INTRODUCTION
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include the ability of the Company to
implement its acquisition strategy and operating strategy; the Company's ability
to manage planned growth; changes in economic cycles and competition within the
extended-stay hotel industry. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore there can be no assurance
that such statements included in this Annual Report will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the results
or conditions described in such statements or the objectives and plans of the
Company will be achieved. In addition, the Company's qualification as a real
estate investment trust involves the application of highly technical and complex
provisions of the Internal Revenue Code. Readers should carefully review the
Company's financial statements and the notes thereto, as well as the risk
factors described in the Company's filings with the Securities and Exchange
Commission.
PART I
ITEM 1. BUSINESS
General
- -------
Apple Hospitality Five, Inc., a Virginia corporation (the "Company"), was formed
on September 20, 2002, with the first investor closing occurring on January 3,
2003. We plan to acquire upscale extended-stay and limited service hotels
located in select metropolitan areas throughout the United States using proceeds
from our on-going "best efforts" offering of Units. Each Unit is equal to one
common share and one Series A preferred share of the Company. As of December 31,
2002, we had not purchased any hotels. During January 2003, we completed the
minimum raise required under our prospectus and conducted our first investor
closing. The first hotel purchase was made effective January 3, 2003 and is
discussed in the "Subsequent Events" section of Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operation of this Report on
Form 10-K.
We intend to elect to be treated as a real estate investment trust ("REIT") for
federal income tax purposes. The REIT Modernization Act, effective January 1,
2001, permits REIT's to establish taxable businesses to conduct certain
previously disallowed business activities. The Act also reduces the REIT
distribution requirement from 95% to 90% of its taxable income. We have
established a wholly-owned taxable REIT subsidiary which will lease the hotels
we purchase. We intend to use third party managers to manage our properties.
We do not have any employees and are externally advised. As of January 31, 2003,
our advisor is Apple Hospitality Five Advisors, Inc. ("AFA"). All of AFA's
services have been subcontracted to Apple Suites Advisors, Inc. ("ASA"). ASA is
a wholly-owned subsidiary of Apple Hospitality Two, Inc., a hospitality REIT
formed by our President and Chairman of the Board, Glade M. Knight. Apple
Hospitality Two, Inc. has similar investment objectives to ours, and may compete
with us in certain markets. Its Board of Directors is the same as ours. We also
have an agreement with Apple Suites Realty Group ("ASRG") to provide us with
brokerage services for each of our properties for a fee equal to 2% of the gross
purchase price of the hotels. ASRG is owned by Glade M. Knight, our Chairman of
the Board and Chief Executive Officer.
Growth Strategies
- -----------------
Our primary business objective is to maximize shareholder value by achieving
long-term growth in cash distributions to its shareholders. We intend to pursue
this objective by acquiring a fee simple interest in upper-end, extended-stay
hotel properties and other limited-service hotels for long-term ownership. We
seek to maximize current and long-term net income and the value of its 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 and other limited-service hotel properties
located in selected metropolitan areas throughout the United States. However,
future investment activities will not be limited to any geographic area or
product type or to a specified percentage of assets.
Financing
- ---------
On November 21, 2002, we obtained an unsecured credit line in a principal amount
up to $300,000 to fund start-up costs. The lender is Wachovia Bank, N.A. The
line of credit bears interest at the bank's prime rate and interest is payable
monthly. We borrowed a total of $218,143 as of December 31, 2002 and Glade M.
Knight, our President and Chairman of the Board, guaranteed repayment of the
line of credit. Mr. Knight does not receive any consideration in exchange for
providing this guarantee. We repaid this debt in January 2003 with proceeds from
the sale of Units.
Competition
- -----------
We believe that the hotel industry is highly competitive. Each of our
prospective hotels is located in a developed area that includes other hotels and
competes for guests primarily with other extended-stay hotels in its immediate
vicinity and secondarily with other hotels in its geographic market. An increase
in the number of competitive hotels in a particular area could have a material
adverse effect on the occupancy, average daily rate ("ADR") and revenue per
available room ("REVPAR") of our hotels in that area. We believe that brand
recognition, location, price, and quality (of both the hotel and the services
provided) are the principal competitive factors affecting our hotels.
ITEM 2. PROPERTIES
At December 31, 2002, the Company did not own any properties.
ITEM 3. LEGAL PROCEEDINGS
We are not presently subject to any material litigation nor, to our knowledge,
is any litigation threatened against us or any of our properties.
2
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On-going Offering
- -----------------
We are currently conducting an on-going offering. We registered our Units (each
unit consists of one common share and one Series A preferred share) on
Registration Statement Form S-11 (File No. 333-77055) filed December 3, 2002. We
began our best-efforts offering (the "Offering") of our Units, on the same day
the Registration Statement was declared effective by the Securities and Exchange
Commission. The managing underwriter is David Lerner Associates, Inc. The
Offering is continuing as of the date of filing this Report on Form 10-K. All of
the Units are being sold for our account. There were no Units outstanding under
the Offering as of December 31, 2002.
Common Shares
- -------------
There is currently no established public market in which our common shares are
traded. On December 31, 2002, there was one shareholder of all 10 Units
outstanding.
On March 14, 2003, there were 3,875 beneficial shareholders of our common
shares. No distributions were made to the shareholders during 2002. The timing
and amounts of distributions to shareholders are within the discretion of our
board of directors. Future distributions will depend on the Company's results of
operations, cash flow from operations, economic conditions and other factors,
such as working capital, cash requirements to fund investing and financing
activities, capital expenditure requirements, including improvements to and
expansions of properties and the acquisition of additional properties, as well
as the distribution requirements under federal income tax provisions for
qualification as a REIT.
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 the Company's assets. The priority distribution ("Priority
Distribution") will be equal to $11.00 per Series A preferred share, and will be
paid before any distribution will be made to the holders of any other shares.
Upon the Priority Distribution the Series A preferred shares will have no other
distribution rights.
Series B Convertible Preferred Shares
- -------------------------------------
We currently have 240,000 Series B convertible preferred shares issued and
outstanding all owned by Glade M. Knight, the Company's Chairman and Chief
Financial Officer. 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 liquidation, each holder of the Series B convertible preferred
shares is entitled to a priority liquidation payment. However the priority
liquidation payment of the holder of the Series B convertible preferred shares
3
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 $11 per number of common shares into which each Series B
convertible preferred share would convert. 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) the transfer of substantially
all of the Company's assets, stock or business, whether through exchange,
merger, consolidation, lease, share exchange or otherwise, or (2) the Advisory
Agreement between the Company and Apple Hospitality Five Advisors, Inc. dated
January 2, 2003 (the "Advisory Agreement") is terminated or expires without
renewal. Mr. Knight, as the chief executive officer of each party to the
Advisory Agreement, can influence or control its termination or non-renewal.
Accordingly, Mr. Knight can influence or control both the conversion of the
Series B convertible preferred shares issued to him and the resulting dilution
of other shareholders. 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.
Preferred Shares
- ----------------
Our articles of incorporation authorize 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 (discussed below) have been
issued. We believe that the authorization to issue additional preferred shares
benefits 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 allows 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
characteristics of any series of preferred shares in anticipation of issuing
preferred shares other than the Series A preferred shares and Series B
convertible preferred shares discussed below. 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.
4
The following tables set forth information concerning the Offering and
the use of proceeds from the Offering as of December 31, 2002:
Units Registered:
- -----------------
4,761,905 Units $10.50 per Unit $ 49,999,999
40,909,091 Units $11 per Unit $ 450,000,001
Totals: 45,670,996 Units $ 500,000,000
Units Sold:
- -----------
-- Units $10.50 per Unit --
-- Units $11 per Unit --
Totals: -- Units --
Expenses of Issuance and Distribution of Units
1. Underwriting discounts and commission --
2. Expenses of underwriters --
3. Direct or indirect payments to directors or officers of the Company or --
their associates, to ten percent shareholders, or to affiliates of the
Company
4. Fees and expenses of third parties --
Total Expenses of Issuance and Distribution of Common Shares --
Net Proceeds to the Company --
1. Purchase of real estate (including repayment of indebtedness incurred --
to purchase real estate)
2. Interest on indebtedness --
3. Working capital
4. Fees to the following (all affiliates of officers of the Company): --
a. Apple Suites Advisors, Inc. --
b. Apple Suites Realty Group, Inc. --
5. Fees and expenses of third parties:
a. Legal --
b. Accounting --
6. Other --
Total of Application of Net Proceeds to the Company --
5
ITEM 6. SELECTED FINANCIAL DATA
For the period
September 20, 2002,
(initial capitalization)
through
December 31, 2002
-----------------
REVENUES:
Suite revenue --
----------
Total revenues --
----------
EXPENSES:
Taxes, insurance and other $ 2,525
General and administrative 2,343
Interest 282
Total expenses 5,150
----------
Net income $ (5,150)
==========
PER SHARE:
Loss per common share $ (515)
Distributions per common share --
At December 31, At September 20, 2002
2002 (initial capitalization)
---- ------------------------
BALANCE SHEET DATA
Cash and cash equivalents $ 3,033 $24,110
Total assets 564,774 24,110
Notes payable - unsecured 218,143 --
Shareholders' equity 18,960 24,110
Units outstanding 10 10
The selected financial data should be read in conjunction with the financial
statements and related notes of the Company included under Item 8 of this
Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Results of Operation
- --------------------
We were organized and initially capitalized on September 20, 2002. During the
period from September 20, 2002 to December 31, 2002, we owned no properties, had
no revenue and were engaged in initial capital-raising activities. During this
6
period, we incurred miscellaneous start-up costs and interest expense under our
unsecured line of credit. We commenced operations in January 2003 upon the
purchase of our first hotel property. Information on our first hotel purchase is
discussed below in further detail under the "Subsequent Events" section of Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation of this Report on Form 10-K.
Liquidity and Capital Resources
- -------------------------------
The proceeds of the Offering, 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.
We obtained an unsecured line of credit in a principal amount of up to $300,000
to fund our start-up costs. The lender is Wachovia Bank, N.A. The line of credit
bears interest at the bank's prime rate. Interest is payable monthly. We
borrowed a total of $218,143 as of December 31, 2002 against the line of credit.
Glade M. Knight, our President and Chairman of the Board, guaranteed repayment
of the line of credit. Mr. Knight does not receive any consideration in exchange
for providing this guarantee. We repaid this debt in January 2003 with proceeds
from the sale of Units.
We anticipate that our cash flow and the proceeds of our Offering 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. As of December 31, 2002, we had no material commitments for capital
expenditures.
We intend to establish a working capital reserve of at least 0.5% of the
proceeds from our offering. This reserve, in combination with income from our
properties and short term investments, is anticipated to satisfy our liquidity
requirements.
Critical Accounting Policies
- ----------------------------
The following contains a discussion of what we believe to be critical accounting
policies. These items should be read to gain a further understanding of the
principles used to prepare our financial statements. These principals include
application of judgment; therefore, changes in judgments may have a significant
impact on our reported results of operations and financial condition.
Related Party Transactions
- --------------------------
We have significant transactions with related parties. These transactions cannot
be construed to be arms length and the results of our operations may be
different if these transactions were conducted with non-related parties.
We have contracted with Apple Suites Realty Group, Inc., a Virginia corporation
("ASRG") to provide brokerage services for the acquisition and disposition of
our real estate assets. In accordance with the contract, ASRG is paid a fee of
2% of the gross purchase price of any acquisitions or gross sale price of any
dispositions of real estate investments, subject to certain conditions.
We also contracted with Apple Hospitality Five Advisors, Inc. ("AFA") to advise
and provide day-to-day management services for us and due-diligence services on
acquisitions. In accordance with the contract, we pay AFA a fee equal to .1% to
..25% of total equity contributions received by us in addition to certain
reimbursable expenses. AFA will also hold a three-year contract for the monthly
7
maintenance and support of accounting software. All of AFA's services have been
subcontracted to Apple Suites Advisors, Inc. as of January 31, 2002, a wholly
owned subsidiary of Apple Hospitality Two, Inc.
As of December 31, 2002, AFA, ASRG and ASA were 100% owned by Mr. Knight. As of
January 31, 2003, the outstanding shares of ASA owned by Mr. Glade M. Knight
were purchased by Apple Hospitality Two, Inc. and ASA is now a wholly-owned
subsidiary of Apple Hospitality Two, Inc. AFA and ASRG may purchase in the
"best efforts" offering up to 2.5% of the total number of our shares sold in the
"best efforts" offering, once the minimum offering is completed.
We issued 240,000 Series B convertible preferred shares to Mr. Knight. The
Series B convertible preferred shares were issued in exchange for payment of
$0.10 per Series B convertible preferred share, or an aggregate of $24,000.
There is no dividend payable on the Series B preferred convertible shares. On
liquidation, the holder of the Series B preferred convertible shares will be
entitled to a liquidation payment of $11 per share before any distributions of
liquidation proceeds to holders of the common shares. However, the priority
liquidation payment of the holder of the Series B preferred convertible shares
is junior to the holders of the Series A preferred shares distribution rights.
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 share, the remaining proceeds will be distributed between
the common shares and the Series B convertible preferred shares on an as
converted basis.
Each holder of outstanding Series B preferred convertible shares has the right
to convert any of such shares into common shares upon and for 180 days following
the occurrence of any of the following conversion events:
(1) substantially all of our assets, stock or business, is transferred
as a going concern, whether through exchange, merger, consolidation, lease,
share exchange or otherwise, other than a sale of assets in liquidation,
dissolution or winding up of our business; or
(2) our common shares are listed on any securities exchange or
quotation system or in any established market ("Conversion Event").
Upon the occurrence of any conversion event, each of the Series B preferred
convertible shares may be converted into a maximum of 2,907,415 common shares,
based upon the gross proceeds raised through the date of conversion in this $500
million offering made by our prospectus. In addition, upon conversion of the
Series B convertible preferred shares into common shares, the Series A preferred
shares will terminate and the priority distribution in liquidation associated
with the Series A preferred shares will disappear. If we terminate or fail to
renew the Advisory Agreement with AFA, the Series B convertible preferred shares
will be entitled to dividend distributions and voting rights on an as converted
basis. In this event, the liquidation preference of the Series A preferred
shares will continue.
No additional consideration is due upon the conversion of the Series B preferred
convertible shares. Upon the probable occurrence of a conversion event, we will
record expense for the difference between the fair value of our common stock and
issue price of the Series B preferred convertible shares.
Compensation expense related to issuance of 240,000 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.
8
Subsequent Events
- -----------------
Effective January 3, 2003, we acquired Marriott Residence Inn Houston-Westchase,
which contains 120 suites and was in operation when acquired. The hotel offers
one and two room suites with the amenities generally offered by upscale
extended-stay hotels. The gross purchase price for the hotel was $14,300,000.
Effective February 26, 2003, we acquired three hotels that operate as part of
the franchise system for Homewood Suites(R) by Hilton. The combined gross
purchase price for these hotels was $32.2 million. The properties are located in
Colorado Springs, CO; Baton Rouge, LA and Albuquerque, NM and contain a combined
total of 393 suites. Each hotel was in operation at the time of purchase and
offers one and two room suites with the amenities generally offered by upscale
extended-stay hotels.
The purchase price for all of the hotels was funded by our ongoing offering of
Units. We have leased these hotels to Apple Hospitality Five Management, Inc.
(as lessee) or its subsidiaries under master hotel lease agreements. We also
used the proceeds of our ongoing offering to pay 2% of the gross purchase price
for these hotels, which equals $644,000, as a commission to Apple Suites Realty
Group, Inc. This entity is owned by Glade M. Knight, who is one of our directors
and our Chief Executive Officer.
We are raising equity through a "best efforts" offering of shares by David
Lerner and Associates, Inc. (the "Managing Dealer"). We achieved the minimum
offering of 4,761,905 Units at a price of $10.50 per Unit as of January 3, 2003.
As of March 14, 2003, we had sold 8,352,684 Units with net proceeds totaling
$80,548,718. We are continuing the offering at $11.00 per Unit in accordance
with the prospectus for our offering.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not engage in transactions in derivative financial instruments or
derivative commodity instruments. As of December 31, 2002, our financial
instruments were not exposed to significant market risk due to interest rate
risk, foreign currency exchange risk, commodity price risk or equity price risk.
The Company was exposed to changes in the prime lending rate as interest on its
line of credit is variable rate based on the prime lending rate. This debt was
repaid in its entirety in January 2003. The Company will be exposed to changes
in short term money market rates as it invests the proceeds from sale of Units
pending use in acquisitions.
9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
The Board of Directors and Shareholders
Apple Hospitality Five, Inc.
We have audited the accompanying consolidated balance sheets of Apple
Hospitality Five, Inc. (the "Company") as of December 31, 2002 and September 20,
2002 (initial capitalization), and the related consolidated statements of
income, shareholders' equity, and cash flows for the period from September 20,
2002 (initial capitalization) through December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Apple Hospitality
Five, Inc. at December 31, 2002 and September 20, 2002 (initial capitalization),
and the consolidated results of its operations and its cash flows for the period
from September 20, 2002 (initial capitalization) through December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Richmond, Virginia
March 11, 2003
10
APPLE HOSPITALITY FIVE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 September 20, 2002
----------------- ------------------
ASSETS
Cash and cash equivalents $ 3,033 $ 24,110
Prepaid offering costs 504,733 --
Deferred acquisition costs 57,008 --
--------- --------
Total Assets $ 564,774 $ 24,110
========= ========
LIABILITIES and SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable- unsecured 218,143 --
Accounts payable and accrued expenses 327,389 --
Interest payable 282 --
--------- --------
Total Liabilities $ 545,814 --
SHAREHOLDERS' EQUITY
Class B convertible stock, no par value, authorized 240,000 24,000 24,000
shares; issued and outstanding 240,000 shares
Common stock, no par value, authorized 200,000,000 shares; ten 110 110
shares issued and outstanding
Retained loss (5,150) --
--------- --------
Total Shareholders' Equity $ 18,960 $ 24,110
--------- --------
Total Liabilities and Shareholders' Equity $ 564,774 $ 24,110
========= ========
See accompanying notes to consolidated financial statements.
11
APPLE HOSPITALITY FIVE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the period
September 20, 2002,
(initial capitalization)
through
December 31, 2002
-----------------
REVENUES:
Suite revenue --
-----------
Total revenues --
-----------
EXPENSES:
Taxes, insurance and other $ 2,525
General and administrative 2,343
Interest 282
-----------
Total expenses 5,150
-------
Net loss before income taxes (5,150)
Income taxes --
-----------
Net loss $ (5,150)
===========
Loss per common share $ (515)
===========
See accompanying notes to consolidated financial statements.
12
APPLE HOSPITALITY FIVE, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Class B Convertible Stock
------------ ------------------------- Total
Number Number Shareholders'
of Shares Amount of Shares Amount Retained Loss Equity
- ---------------------------------------------------------------------------------------------------------------------------
Initial capitalization at
September 20, 2002 10 $ 110 -- -- -- $ 110
Net proceeds from the sale of
preferred shares -- -- 240,000 $24,000 -- 24,000
Net loss -- -- -- -- (5,150) (5,150)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 10 $ 110 240,000 $24,000 $ (5,150) $ 18,960
===========================================================================================================================
See accompanying notes to consolidated financial statements.
13
APPLE HOSPITALITY FIVE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS:
For the period
September 20, 2002,
(initial capitalization)
through
December 31, 2002
-----------------
Cash flow from operating activities:
Net income $ (5,150)
Changes in operating assets and liabilities
Interest payable 282
---------
Net cash used in operating activities (4,868)
Cash flow from investing activities:
Cash paid for potential acquisitions (2,617)
---------
Net cash used in investing activities (2,617)
Cash flow from financing activities:
Cash paid for offering costs (231,735)
Proceeds from draws on lines of credit 218,143
---------
Net cash used in financing activities (13,592)
---------
Decrease in cash and cash equivalents (21,077)
Cash and cash equivalents, beginning of period 24,110
---------
Cash and cash equivalents, end of period $ 3,033
=========
See accompanying notes to consolidated financial statements.
14
Notes to Consolidated Financial Statements
Note 1
General Information and Summary of Significant Accounting Policies
Organization
Apple Hospitality Five, Inc., together with its subsidiaries, (the "Company"),
is a Virginia corporation, formed on September 20, 2002, with the first investor
closing under its ongoing offering commencing on January 3, 2003. The
accompanying consolidated financial statements include the accounts of the
Company along with its subsidiaries. All significant intercompany transactions
and balances have been eliminated.
We intend to elect to be treated as a real estate investment trust ("REIT") for
federal income tax purposes. The REIT Modernization Act, effective January 1,
2001, permits REIT's to establish taxable businesses to conduct certain
previously disallowed business activities. The Act also reduces the REIT
distribution requirement from 95% to 90% of its taxable income.
Our primary business objective is to maximize shareholder value by achieving
long-term growth in cash distributions to its shareholders. We intend to pursue
this objective by acquiring a fee simple interest in upper-end, extended-stay
hotel properties and other limited-service hotels for long-term ownership. We
seek to maximize current and long-term net income and the value of its 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 and other limited-service hotel properties
located in selected metropolitan areas throughout the United States. However,
future investment activities will not be limited to any geographic area or
product type or to a specified percentage of assets.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of
three months or less. The fair market value of cash and cash equivalents
approximate their carrying value. Cash equivalents are placed with high credit
quality institutions and the balances may at times exceed federal depository
insurance limits.
Prepaid Offering Costs
During 2002, the Company incurred $504,733 in costs related to its
"best-efforts" offering of common shares. The first closing of common shares
occurred on January 3, 2003 with the sale of 4,761,905 shares with net proceeds
totaling $44,999,999.
Deferred Acquisition Costs
The Company incurred costs during 2002, related to the potential acquisition of
one extended-stay hotel located in Houston, Texas that operates as part of the
Residence Inn(R) by Marriott(R) franchise. The acquisition was completed in
January 2003. The deferred acquisition costs of $57,008, incurred during 2002,
will be applied to land and building costs as of the January acquisition date.
15
Earnings Per Common Share
Basic earnings per common share is computed based upon the weighted average
number of shares outstanding during the year. Diluted earnings per share is
calculated after giving effect to all potential common shares that were dilutive
and outstanding for the year. Series B preferred convertible shares are not
included in earnings per common share calculations until such time it becomes
probable that such shares can be converted to common shares (see Note 4).
Weighted Average Common Shares outstanding during the period September 20, 2002
(inception) through December 31, 2002 was ten.
Federal Income Taxes
The Company intends to elect to be operated as, and will annually elect to be
taxed as, a real estate investment trust under the Internal Revenue Code of
1986, as amended (the "Code"). Generally, a real estate investment trust which
complies with the provisions of the Code and distributes at least 90% of its
taxable income to its shareholders does not pay federal income taxes on its
distributed income. For 2002, the Company is a taxable entity under the Internal
Revenue Code. No tax benefit has been recorded as its realization is not
probable.
Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
Note 2
Notes Payable
On November 21, 2002, we obtained an unsecured credit line in a principal amount
up to $300,000 to fund start-up costs. The lender is Wachovia Bank, N.A. The
line of credit bears interest at the bank's prime rate and interest is payable
monthly. We borrowed a total of $218,143 as of December 31, 2002 and Glade M.
Knight, our president and Chairman of the Board, guaranteed repayment of the
line of credit. Mr. Knight does not receive any consideration in exchange for
providing this guarantee. We repaid this debt in January 2003 with proceeds from
the sale of Units.
Note 3
Shareholders' Equity
We are currently conducting an on-going offering. We registered our Units (each
unit consists of one common share and one Series A preferred share) on
Registration Statement Form S-11 (File No. 333-77055) filed December 3, 2002.
The Company began its best-efforts offering (the "Offering") of its Units, no
par value on January 3, 2003, the same day the Registration Statement was
declared effective by the Securities and Exchange Commission. The managing
underwriter is David Lerner Associates, Inc. The Offering is continuing as of
the date of filing this Report on Form 10-K. All of the Units are being sold for
our account. There were no Units outstanding under the Offering as of December
31, 2002.
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 the company's assets. The priority distribution will be equal to
$11.00 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.
16
The Company currently has 240,000 Series B convertible preferred shares issued
and outstanding. 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 holder 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 $11 per number of common shares into which each Series B
convertible preferred share would convert. 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) the transfer of substantially
all of its assets, stock or business, whether through exchange, merger,
consolidation, lease, share exchange or otherwise, or (2) the Advisory Agreement
with Apple Hospitality Five Advisors, Inc. is terminated or expires without
renewal. Mr. Knight, as the chief executive officer of each party to the
advisory agreement, can influence or control its termination or non-renewal.
Accordingly, Mr. Knight can influence or control both the conversion of the
Series B convertible preferred shares issued to him and the resulting dilution
of other shareholders.
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 the conversion in
the current $500 million public offering of the Company's common shares made by
the Company's prospectus and according to the following formula:
Number of Units Through
Number of Common Shares
Gross Proceeds Raised from Sales through Conversion of
of Units through Date of Conversion One Series B Convertible Preferred Share
----------------------------------- ----------------------------------------
$ 50 million........................... 0.92321
$100 million........................... 1.83239
$150 million........................... 3.19885
$200 million........................... 4.83721
$250 million........................... 6.11068
$300 million........................... 7.29150
$350 million........................... 8.49719
$400 million........................... 9.70287
$450 million........................... 10.90855
$500 million........................... 12.11423
No additional consideration is due upon the conversion of the Series B
convertible preferred shares.
Compensation expense related to issuance of 240,000 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 convertible
preferred shares can be reasonably estimated and the event triggering the
conversion of the Series B convertible preferred 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 convertible preferred shares can be
converted and the amounts paid for the Series B convertible preferred shares.
Note 4
Related Parties
The Company has contracted with Apple Suites Realty Group, Inc. ("ASRG") to
provide brokerage services for the acquisition and disposition of real estate
assets for the Company. In accordance with the contract, ASRG is to be paid a
fee of 2% of the purchase price of any acquisitions or sale price of any
dispositions of real estate investments, subject to certain conditions. During
2002, ASRG did not earn income from the Company under the agreement.
Effective January 3, 2003, the Company contracted with Apple Hospitality Five
Advisors, Inc. ("AFA") to advise and provide the Company with day-to-day
management services and due-diligence services on acquisitions. On the same
date, AFA entered into a subcontract and assignment agreement with ASA assigning
all of its rights, responsibilities and duties under its agreement with the
Company. In accordance with the contract and the subcontract and assignment
agreement, the Company will pay ASA a fee equal to .1% to .25% of total equity
contributions received by the Company in addition to certain reimbursable
expenses. During 2002, neither AFA nor ASA earned income under this agreement.
ASRG and AFA are 100% owned by Mr. Knight. ASRG and AFA may purchase up to 2.5%
of the total number of shares of the Company sold in the "best efforts"
offering.
Mr. Knight also serves as the Chairman and Chief Executive Officer of
Cornerstone Realty Income Trust, Inc., an apartment REIT, and Apple Hospitality
Two, Inc., a hospitality REIT.
Note 5
Subsequent Events
During the first three months of 2003, the Managing Dealer sold 8,352,684 Units,
representing net proceeds of $80,548,718.
17
Effective January 3, 2003, we acquired Marriott Residence Inn Houston-Westchase,
which contains 120 suites and was in operation when acquired. The hotel offers
one and two room suites with the amenities generally offered by upscale
extended-stay hotels. The gross purchase price for the hotel was $14,300,000.
Effective February 26, 2003, we acquired three hotels that operate as part of
the franchise system for Homewood Suites(R) by Hilton. The combined gross
purchase price for these hotels was $32.2 million. The properties are located in
Colorado Springs, CO; Baton Rouge, LA and Albuquerque, NM and contain a combined
total of 393 suites. Each hotel was in operation at the time of purchase and
offers one and two room suites with the amenities generally offered by upscale
extended-stay hotels.
The purchase price for all of the hotels was funded by our ongoing offering of
Units. We have leased these hotels to Apple Hospitality Five Management, Inc.
(as lessee) or its subsidiaries under master hotel lease agreements. We also
used the proceeds of our ongoing offering to pay 2% of the gross purchase price
for these hotels, which equals $644,000, as a commission to Apple Suites Realty
Group, Inc. This entity is owned by Glade M. Knight, who is one of our directors
and our Chief Executive Officer.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
See below under Item 13.
ITEM 11. EXECUTIVE COMPENSATION:
See below under Item 13.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS:
See below under Item 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G (3) of Form 10-K, the information
called for by Items 10, 11, 12, and 13 of Part III is incorporated by reference
to the registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders scheduled to be held May 14, 2003.
18
ITEM 14. CONTROLS AND PROCEDURES
Based on their most recent review, which was completed within 90 days of the
filing of this report, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is accumulated and communicated to the
Company's management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure and are effective to ensure that such information is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect those
controls subsequent to the date of their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1. Financial Statements of Apple Hospitality Five,
Inc.
Independent Auditors' Report
Ernst & Young LLP
Consolidated Balance Sheet for the period September 20, 2002
(initial capitalization) through December 31, 2002
Consolidated Statement of Operations
For the period September 20, 2002 (initial capitalization)
through December 31, 2002
Consolidated Statement of Shareholders' Equity
For the period September 20, 2002 (initial capitalization)
through December 31, 2002
Consolidated Statements of Cash Flows
For the period September 20, 2002 (initial capitalization)
through December 31, 2002
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All financial statement schedules have
been omitted because they are not
applicable or not required or because the
required information is included elsewhere
in the financial statements or notes
thereto.
3. Exhibits
19
Incorporated herein by reference are the
exhibits listed under "Exhibits Index" to
Form 10-K Report.
(b) The following reports on Form 8-K were filed by the
registrant during the last quarter covered by this report:
None.
(c) Exhibits:
3.1 Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-11 (SEC
File No. 333-100044) filed September 24, 2003)
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement
on Form S-11 (SEC File No. 333-100044) filed
September 24, 2002)
10.1 Property Acquisition/Disposition Agreement by and
between Apple Hospitality Five, Inc. and Apple
Suites Realty Group, Inc. dated January 2, 2003
(incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K (SEC File No.
333-100044) filed January 17, 2003)
10.2 Advisory Agreement by and between Apple Hospitality
Five, Inc. and Apple Hospitality Five Advisors,
Inc. dated January 2, 2003 (incorporated by
reference to Exhibit 10.3 to the Company's Current
Report on Form 8-K (SEC File No. 333-100044) filed
January 17, 2003)
10.3 Subcontract and Assignment Agreement by and between
Apple Suites Advisors, Inc. and Apple Hospitality
Five Advisors, Inc. dated January 2, 2003
(incorporated by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K (SEC File No.
333-100044) filed January 17, 2003)
10.4 Apple Hospitality Five, Inc. 2003 Non-Employee
Directors Stock Option Plan effective January 2,
2003 (incorporated by reference to Exhibit 10.7 to
the Company's Current Report on Form 8-K (SEC
File No. 333-100044) filed January 17, 2003)**
10.5 Apple Hospitality Five, Inc. 2003 Incentive Plan
Effective January 2, 2003 (incorporated by
reference to Exhibit 10.6 to the Company's Current
Report on Form 8-K (SEC File No. 333-100044) filed
January 17, 2003)**
99.1 Certification of the Company's Chief Executive
Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
20
99.2 Certification of the Company's Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Action of 2002*
*Filed herewith
**Compensatory plan or arrangement
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Apple Hospitality Five, Inc.
By: /s/ Glade M. Knight Date: March 27, 2003
-------------------
Glade M. Knight,
Chairman of the Board,
Chief Executive Officer,
and President
By: /s/ David S. McKenney Dated: March 27, 2003
---------------------
David S. McKenney,
Senior Vice President
Chief Financial Officer
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the date indicated.
Signature Capacities
--------- ----------
/s/ Glade M. Knight Director, Chief Executive Officer,
- ------------------------------------ and President
Glade M. Knight
/s/ Lisa B. Kern Director
- ------------------------------------
Lisa B. Kern
/s/ Bruce H. Matson Director
- ------------------------------------
Bruce H. Matson
/s/ Michael S. Waters Director
- ------------------------------------
Michael S. Waters
/s/ Robert M. Wily Director
- ------------------------------------
Robert M. Wily
22
NUMBER EXHIBIT INDEX
- ------
DESCRIPTION OF DOCUMENTS
3.1 Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-11
(SEC File No. 333-100044) filed September 24, 2003)
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-11 (SEC File No.
333-100044) filed September 24, 2002)
10.1 Property Acquisition/Disposition Agreement by and between Apple
Hospitality Five, Inc. and Apple Suites Realty Group, Inc. dated
January 2, 2003 (incorporated by reference to Exhibit 10.5 to the
Company's Current Report filed on Form 8-K (SEC File No. 333-100044)
on January 17, 2003)
10.2 Advisory Agreement by and between Apple Hospitality Five, Inc. and
Apple Hospitality Five Advisors, Inc. dated January 2, 2003
(incorporated by reference to Exhibit 10.3 to the Company's Current
Report filed on Form 8-K (SEC File No. 333-100044) on January 17,
2003)
10.3 Subcontract and Assignment Agreement by and between Apple Suites
Advisors, Inc. and Apple Hospitality Five Advisors, Inc. dated
January 2, 2003 (incorporated by reference to Exhibit 10.4 to the
Company's Current Report filed on Form 8-K (SEC File No. 333-100044)
on January 17, 2003)
10.4 Apple Hospitality Five, Inc. 2003 Non-Employee Directors Stock Option
Plan effective January 2, 2003 (incorporated by reference to Exhibit
10.7 to the Company's Current Report filed on Form 8-K (SEC File No.
333-100044) on January 17, 2003) **
10.5 Apple Hospitality Five, Inc. 2003 Incentive Plan Effective January 2,
2003 (incorporated by reference to Exhibit 10.6 to the Company's
Current Report filed on Form 8-K (SEC File No. 333-100044) on January
17, 2003) **
99.1 Certification of the Company's Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
99.2 Certification of the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Action of 2002.*
*Filed herewith
**Compensatory plan or arrangement
23
CERTIFICATIONS
I, Glade M. Knight, certify that:
1. I have reviewed this annual report on Form 10-K of Apple Hospitality
Five, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 27, 2003 /s/ Glade M. Knight
-------------------
Glade M. Knight
Chief Executive Officer
Apple Hospitality Five, Inc.
24
I, David S. McKenney, certify that:
1. I have reviewed this annual report on Form 10-K of Apple Hospitality
Five, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 27, 2003 /s/ David S. McKenney
---------------------
David S. McKenney
Chief Financial Officer
Apple Hospitality Five, Inc.
25