AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 1999
REGISTRATION NO. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
APPLE SUITES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
VIRGINIA (804) 643-1761 54-1933472
(State or other jurisdiction of (Address, including zip code, and telephone number, (I.R.S. Employer
incorporation or organization) including area code, of Registrant's Principal Executive Offices) Identification No.)
</TABLE>
---------------
GLADE M. KNIGHT
CHAIRMAN OF THE BOARD OF DIRECTORS
APPLE SUITES, INC.
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(804)643-1761
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
---------------
Copies to:
LESLIE A. GRANDIS, ESQ.
MCGUIRE, WOODS, BATTLE & BOOTHE LLP
ONE JAMES CENTER
901 EAST CARY STREET
RICHMOND, VIRGINIA 23219
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time
following the effective date of this Registration Statement. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If the delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Shares, no par value ......... 1,666,666.67 $ 9.00 $ 15,000,000 $ 4,170
Common Shares, no par value ......... 28,500,000.00 $ 10.00 $285,000,000 $79,230
====================================================================================================================================
</TABLE>
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 26, 1999
PROSPECTUS
APPLE SUITES, INC.
COMMON SHARES
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. We will focus
on corporate apartments and extended-stay hotel properties located primarily in
selected southeastern and southwestern metropolitan areas.
However, we own no properties at this time.
This is an initial public offering of up to 30,166,666.67 common shares of
Apple Suites, Inc. If a minimum of 1,666,666.67 common shares are not sold
within one year after the date of this prospectus, we will terminate this
offering of common shares and all money received will be refunded to investors
with interest.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 8 OF THIS
PROSPECTUS. THIS OFFERING INVOLVES CERTAIN RISKS AND INVESTMENT CONSIDERATIONS
INCLUDING:
o There will be no public trading market for the common shares for an
indefinite period of time, if ever. Investors may be unable to resell their
common shares or may be able to resell their common shares only at a
substantial discount from the purchase price.
o We will pay substantial compensation to third parties for advisory,
acquisition and disposition, and other services. This compensation has been
established without the benefit of arms-length negotiation.
================================================================================
<TABLE>
<CAPTION>
Proceeds to
Price to Apple Suites,
Public Commissions Inc.
<S> <C> <C> <C>
Per Share(1) ............. $ 9.00 $ .675 $ 8.325
Minimum Offering ......... $ 15,000,000 $ 1,125,000 $ 13,875,000
Maximum Offering ......... $300,000,000 $22,500,000 $277,500,000
</TABLE>
================================================================================
(1) Once the minimum offering of $15,000,000 is achieved, the per share offering
price will rise to $10 and the selling commission per share will become
$0.75.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------
DAVID LERNER ASSOCIATES, INC.
477 JERICHO TURNPIKE, SYOSSET, NEW YORK 11791
THE DATE OF THIS PROSPECTUS IS APRIL 26, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SUMMARY ........................................................................... 5
Apple Suites, Inc ................................................................ 5
The Advisor and Affiliates ....................................................... 5
Risk Factors ..................................................................... 5
The Offering ..................................................................... 5
Estimated use of Proceeds ........................................................ 6
Investment Objectives and Policies; Liquidity .................................... 6
Distributions Policy ............................................................. 6
Capital Stock .................................................................... 7
Compensation ..................................................................... 7
RISK FACTORS ...................................................................... 8
Absence of Public Trading Market ................................................. 8
Compensation to the Advisor and Affiliates is Payable Before Distributions and
Will Reduce Investors' Return .................................................. 8
Acquisition, Advisory and Other Fees and Expenses Will Reduce Return ............. 9
Conflicts of Interest ............................................................ 9
Investment in a Single Industry .................................................. 9
Dependence on Lessees Because We Are a Reit ...................................... 10
Lack of Control over Management and Operations of Our Properties ................. 10
Operational Limitations Associated with Franchise Agreements ..................... 10
Lack of Operating History; No Assurance of Success ............................... 10
Size of Offering -- Possible Lack of Diversification and Lower Return ............ 11
Delay in Investment in Real Property ............................................. 11
No Specified Properties .......................................................... 11
Arbitrary Share Offering Prices .................................................. 11
Operating Risks .................................................................. 11
Competition ...................................................................... 11
Adverse Consequences of Failure to Qualify as a Reit ............................. 11
Market Illiquidity ............................................................... 12
No Restriction on Changes in Investment and Financing Policies ................... 12
Potential Dilution of Shareholders' Interests .................................... 12
Certain Anti-takeover Provisions; Ownership Limits ............................... 13
Possible Environmental Liabilities ............................................... 13
Costs of Compliance with Americans with Disabilities Act and Similar Laws ........ 13
Year 2000 ........................................................................ 13
Risks Associated with Forward-Looking Statements Included in this Prospectus ..... 14
ESTIMATED USE OF PROCEEDS ......................................................... 15
COMPENSATION ...................................................................... 17
CONFLICTS OF INTERESTS ............................................................ 19
General .......................................................................... 19
Transactions with Affiliates and Related Parties ................................. 19
Competition between Us and Affiliates ............................................ 20
Competition for Management Services .............................................. 20
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES ....................................... 21
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Policies ................................................ 21
Borrowing Policies ................................................. 21
Reserves ........................................................... 22
Sale Policies ...................................................... 22
Changes in Objectives and Policies ................................. 22
DISTRIBUTIONS POLICY ................................................ 24
BUSINESS ............................................................ 25
General ............................................................ 25
Business Strategies ................................................ 25
Description of Leases .............................................. 25
Term ............................................................... 25
Base Rent; Participating Rent ...................................... 25
Homewood Suites .................................................... 26
Other Real Estate Investments ...................................... 26
Legal Proceedings .................................................. 26
Regulation ......................................................... 26
General ............................................................ 26
Americans With Disabilities Act .................................... 26
Environmental Matters .............................................. 27
Insurance .......................................................... 28
Available Information .............................................. 28
MANAGEMENT .......................................................... 29
Classification of the Board ........................................ 29
Committees of the Board ............................................ 30
Director Compensation .............................................. 30
Indemnification and Insurance ...................................... 30
Officer Compensation ............................................... 30
Stock Incentive Plan ............................................... 30
The Incentive Plan ................................................. 31
Directors' Plan .................................................... 32
Stock Option Grants ................................................ 33
THE ADVISOR AND AFFILIATES .......................................... 34
General ............................................................ 34
The Advisory Agreement ............................................. 34
Apple Suites Realty Group, Inc ..................................... 35
Prior Performance of Programs Sponsored by Glade M. Knight ......... 36
PRINCIPAL AND MANAGEMENT SHAREHOLDERS ............................... 37
FEDERAL INCOME TAX CONSIDERATIONS ................................... 38
General ............................................................ 38
REIT Qualification ................................................. 38
Sources of Gross Income ............................................ 39
75% Gross Income Test .............................................. 39
95% Gross Income Test .............................................. 40
Failing the 75% or 95% Tests; Reasonable Cause ..................... 40
Character of Assets Owned .......................................... 41
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Annual Distributions to Shareholders ................................. 41
Taxation as a Reit ................................................... 42
Failure to Qualify as a Reit ......................................... 43
Taxation of Shareholders ............................................. 43
Backup Withholding ................................................... 44
Taxation of Tax Exempt Entities ...................................... 44
Taxation of Foreign Investors ........................................ 45
State and Local Taxes ................................................ 46
ERISA CONSIDERATIONS .................................................. 46
CAPITALIZATION ........................................................ 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................................ 49
Overview .............................................................. 49
PLAN OF DISTRIBUTION .................................................. 50
DESCRIPTION OF CAPITAL STOCK .......................................... 53
Dividend and Distribution Rights ..................................... 53
Voting Rights ........................................................ 53
Preferred Stock ...................................................... 54
Restrictions on Transfer ............................................. 54
Facilities for Transferring Common Shares............................. 55
Warrants ............................................................. 56
SUMMARY OF ORGANIZATIONAL DOCUMENTS ................................... 57
Board of Directors ................................................... 57
Responsibility of Board of Directors, Advisor, Officers and Employees 57
Issuance of Securities ............................................... 58
Redemption and Restrictions on Transfer .............................. 59
Amendment ............................................................ 59
Shareholder Liability ................................................ 59
SALES LITERATURE ...................................................... 60
REPORTS TO SHAREHOLDERS ............................................... 60
LEGAL MATTERS ......................................................... 60
EXPERTS ............................................................... 60
INDEX TO FINANCIAL STATEMENTS ......................................... F-1
</TABLE>
iv
<PAGE>
SUMMARY
The following information supplements, and should be read in conjunction
with, the information contained in this prospectus.
APPLE SUITES, INC.
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. As a real
estate investment trust, we will generally not be subject to federal income tax.
We will, however, be subject to a number of organizational and operational
requirements and limitations.
We will focus on corporate apartments and extended-stay hotel properties
located primarily in selected southeastern and southwestern metropolitan areas.
However, we own no properties at this time.
We are located at 306 East Main Street, Richmond, Virginia and our
telephone number is (804) 643-1761.
THE ADVISOR AND AFFILIATES
Apple Suites Advisors, Inc. will provide us with the day-to-day management
of our company. Apple Suites Advisors, Inc. does not have any significant
assets. Apple Suites Realty Group, Inc. will provide us with property
acquisition and disposition services. Apple Suites Realty Group, Inc. has no
significant assets.
Because we are precluded under federal tax laws from operating our
corporate apartments and extended-stay hotel properties, we will enter into
leases for each of our hotel properties. We anticipate that substantially all
our hotel properties will be leased to Apple Suites Management, Inc. Apple
Suites Management, Inc. has no significant assets.
All of the common shares of the Apple Suites Advisors, Inc., Apple Suites
Realty Group, Inc. and Apple Suites Management, Inc. are owned by Glade M.
Knight, who is our president and Chairman of the Board.
To avoid confusion with Apple Suites, Inc., we will refer in this
prospectus to Apple Suites Advisors, Inc. as the Advisor and to Apple Suites
Realty Group, Inc. as the Broker.
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES INVOLVES A NUMBER OF RISKS. WE URGE YOU TO
CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE
8 BEFORE YOU DECIDE TO PURCHASE OUR COMMON SHARES.
THE OFFERING
We are offering common shares at $9 per common share until a minimum of
1,666,666.67 common shares ($15,000,000) have been sold. Thereafter, the common
shares will be offered at $10 per common share. The common shares are being
offered through David Lerner Associates, Inc.
If at least $15,000,000 of common shares have not been sold within one year
after the date of this prospectus, we will terminate this offering of common
shares and all moneys received will be refunded to investors with interest.
This offering of common shares will continue until all the common shares
offered under this prospectus have been sold or until one year from the date of
this prospectus, unless we terminate the offering at an earlier date or extend
the offering for up to an additional year. In some states,
5
<PAGE>
extension of the offering may not be allowed or may be allowed only upon certain
conditions. An initial closing will occur after the minimum offering of
$15,000,000 is achieved. Thereafter, closings will occur from time to time
during the offering period.
ESTIMATED USE OF PROCEEDS. The proceeds of the offering will be used (i)
to pay expenses and fees of selling the common shares; (ii) to invest in
properties; (iii) to pay expenses and fees associated with acquiring
properties; and (iv) to establish a working capital reserve. See "Estimated Use
of Proceeds."
On April 20, 1999, we obtained a line of credit in a principal amount of up
to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all accrued interest are due in
full on October 20, 1999. Glade M. Knight, our president and Chairman of the
Board, has guaranteed repayment of the loan. We expect to repay this debt with
proceeds from the sale of common shares.
INVESTMENT OBJECTIVES AND POLICIES; LIQUIDITY. Prior to this offering there
has been no public market for the common shares, and initially such a market is
not expected to develop. We do not plan to cause the common shares to be listed
on any securities exchange or quoted on any system or in any established market
either immediately or at any definite time in the future. While we, acting
through our Board of Directors, may cause the common shares to be so listed or
quoted if the Board of Directors determines such action to be prudent, there can
be no assurance that such an event will ever occur. Prospective shareholders
should view the common shares as illiquid and must be prepared to hold their
investment for an indefinite length of time. Currently, we expect that within
approximately three (3) years from the initial closing, we will use our best
efforts either (i) to cause the common shares to be listed on a national
securities exchange or quoted on the NASDAQ National Market System or (ii) to
dispose of substantially all of our properties in a manner which will permit
distributions to shareholders of cash or marketable securities. Either course of
action will be conditioned on the Board of Directors determining such 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 or other securities then being actively traded. However, we
are under no obligation to take any of the foregoing actions, and any such
action, if taken, might be taken after the referenced three-year period. See
"Risk Factors -- Absence of Public Trading Market."
We intend to purchase our properties either on an all-cash basis or using
limited interim borrowings. We will endeavor to repay any interim borrowing with
proceeds from the sale of common shares and thereafter to hold our properties on
an unleveraged basis. However, for the purpose of flexibility in operations, we
have the right, subject to the approval of the Board of Directors, to borrow.
See "Policies with Respect to Certain Activities -Borrowing Policies."
The investment return to shareholders from us will likely be less than
could be obtained by a shareholder's direct acquisition and ownership of the
same properties because (i) we will pay, partly to affiliates of certain members
of the Board of Directors, substantial "front-end" fees (that is, fees paid
directly from funds received from sales of the common shares) to sell the shares
and acquire properties, which will reduce the net proceeds available for
investment in properties; and (ii) we will likely pay, principally to the
Advisor and the Broker substantial advisory and related compensation, which will
reduce funds available for distribution to shareholders.
DISTRIBUTIONS POLICY
We intend to make distributions in accordance with federal income tax rules
applicable to real estate investment trusts. We intend to pay regular quarterly
distributions to our shareholders.
6
<PAGE>
CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 common shares, no par
value, 240,000 Class B Convertible shares, no par value, and 15,000,000 shares
of preferred stock, no par value. As of the date of this prospectus, there were
10 common shares of our company issued and outstanding. See "Principal and
Management Shareholders."
COMPENSATION
We do not pay our officers salaries. Our officers are also officers of the
Advisor and the Broker which are entitled to receive fees for services rendered
by them to us. Our officers are, in essence, compensated by those entities. The
compensation and reimbursements payable to the Advisor and the Broker are listed
below. See "Compensation." Except as indicated, the maximum dollar amount of
such compensation and reimbursements is not now determinable.
o The Advisor is entitled to receive an annual asset management fee, based upon
the ratio of "Funds from Operations" to "Total Contributions" (this ratio is
called the "Return Ratio") of between 0.1% and 0.25% of Total Contributions.
The percentage used to determine the asset management fee will be 0.1% if the
Return Ratio for the preceding calendar quarter is 6% or less, 0.15% if the
Return Ratio for the preceding calendar quarter is more than 6% but not more
than 8%, and 0.25% if the Return Ratio for the preceding calendar quarter is
more than 8%. ("Funds from Operations" is defined as net income (computed in
accordance with generally accepted accounting principles) excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation of
real property, and after adjustments for significant non-recurring items and
unconsolidated partnerships and joint ventures, if any. "Total Contributions"
is defined as the gross proceeds from the sale of the common shares.) See
"The Advisor and Affiliates -- The Advisory Agreement."
o Assuming the minimum offering amount of $15,000,000 is sold, the annual asset
management fee would be between $15,000 and $37,500. Assuming the maximum
offering amount of $300,000,000 is sold, the annual asset management fee
would be between $300,000 and $750,000. We believe that "Funds from
Operations" is an appropriate measure to use in determining the fees to be
paid to the Advisor because it ties compensation to an indicator of
performance, namely an industry-recognized measure of funds available from
operations. "Funds from Operations" is not the same as cash generated from
operating activities in accordance with generally accepted accounting
principles, and, therefore, should not be considered as an alternative to net
income as an indication of the company's performance or to cash flows as a
measure of liquidity.
o The Broker will serve as the real estate broker in connection with our
purchases and sales of properties, and will receive fees from us of up to 2%
of the gross purchase price of each property and up to 2% of the gross sale
prices. If the person from whom we purchase or to whom we sell a property
pays any fee to the Broker that amount will decrease the amount of our
obligation to the Broker. The Broker will not be entitled to any disposition
fee in connection with a sale of a property by us to any affiliate of the
Broker, but will be reimbursed for its costs in marketing such property. See
"Compensation."
o The Advisor and the Broker will be entitled to reimbursement for actual costs
incurred by them in connection with the operation of our Company.
o Under certain circumstances we may request that the Advisor and the Broker
provide other services or property to us under certain conditions in exchange
for fees. Those circumstances generally include the requirement that the
transaction be approved by the affirmative vote of a majority of the
"Independent Directors," who are those directors who are not affiliated with
either the Advisor or the Broker. We currently have no plans to request the
material services or property of the type described in this paragraph.
7
<PAGE>
RISK FACTORS
An investment in our common shares involves various risks. You should
carefully consider the following information, in conjunction with the other
information contained in this prospectus, before making a decision to purchase
our common shares.
ABSENCE OF PUBLIC TRADING MARKET
Prior to this offering, there has been no public market for our common
shares, and initially we do not expect such 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 so listed or quoted if the Board of Directors determines
such action to be prudent, there can be no assurance that such an event will
ever occur. Prospective shareholders should view the common shares as illiquid
and must be prepared to hold their shares for an indefinite length of time.
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 purchase of common shares should be considered a long-term investment.
Currently, we expect that within approximately three (3) years from the
initial closing of the $15,000,000 minimum offering, we will use our best
efforts either (i) to cause our common shares to be listed on a national
securities exchange or quoted on the NASDAQ National Market System or (ii) to
dispose of substantially all of our properties in a manner which will permit
distributions to our shareholders of cash or marketable securities. Either type
of action will be conditioned on the Board of Directors determining such an
action to be prudent and in the best interests of our shareholders, and would be
intended to provide shareholders with liquidity either by initiating the
development of a market for our common shares or by disposing of properties and
distributing to our shareholders cash or other securities then being actively
traded. However, we are under no obligation to take any of the foregoing
actions, and any such action, if taken, might be taken after the three-year
period mentioned above.
The feasibility of causing our common shares to be listed or quoted will
depend upon many factors, many of which are not presently determinable or are
not within our control. These factors would include general economic and market
conditions, our satisfaction of the legal listing or quotation requirements in
effect at such time, our economic performance during the interim period, and our
financial condition at the time listing or quotation is considered. In addition,
the size of our company (in terms of its total assets and the diversification of
its property portfolio), which will reflect the number of shares sold in this
offering, will bear upon the feasibility of listing or quoting our shares for
trading. In general, a smaller company size may make it less feasible for us to
cause the listing or quotation of our common shares.
The feasibility of disposing of our properties will also depend on many
factors, many of which are not presently determinable or are not within our
control. General economic and market conditions will affect the demand, if any,
for our properties and the prices which might be offered for them. Adverse
developments affecting the market value of our properties after acquisition of a
property by us may materially affect its market value. Even if some properties
are attractive to prospective purchasers, we may determine that it is imprudent
to dispose of only a portion of our portfolio. Conversely, the larger we are,
the less likely it is that we will be able to dispose of substantially all of
our properties within a relatively short period of time. If we receive
marketable securities or other property, rather than cash, for the sale of our
properties, we and any subsequent holders of such property will bear a risk of
decrease in the value of such property.
COMPENSATION TO THE ADVISOR AND AFFILIATES IS PAYABLE BEFORE DISTRIBUTIONS AND
WILL REDUCE INVESTORS' RETURN
The Advisor and the Broker will receive substantial compensation from us in
exchange for various services they have agreed to render to us. See
"Compensation." This compensation has been established without the benefits of
arms-length negotiation, and the payment of such compensation from proceeds of
the offering and property revenues will reduce the amount of proceeds available
for investment in
8
<PAGE>
properties, or the cash available for distribution, and will therefore tend to
reduce the return on our shareholders' investments. In addition, the
compensation is generally payable regardless of our profitability, and is
generally payable prior to, and without regard to whether we have sufficient
cash for distributions.
ACQUISITION, ADVISORY AND OTHER FEES AND EXPENSES WILL REDUCE RETURN
The investment return to our shareholders likely will be less than could be
obtained by a shareholder's direct acquisition and ownership of the same
properties because (i) we will pay, principally to affiliates of certain members
of the Board of Directors, substantial "front-end" fees and expenses to sell the
common shares, and acquire properties, which will reduce the net proceeds
available for investment in properties; and (ii) we will pay, principally to the
Advisor and the Broker substantial advisory and related compensation, which will
reduce cash available for distribution to shareholders. Thus, for example, if
only 86.5% of the gross proceeds of the offering are available for investment in
properties revenues may be reduced by 13.5% compared to revenues in the absence
of such front-end fees.
CONFLICTS OF INTEREST
The Advisor and the Broker will be subject to various conflicts of interest
in their dealings with us. See "Conflicts of Interest." Generally, such
conflicts of interest arise because certain of our directors and officers (i)
are also principals in other companies which will enter into contracts with us
(principally for asset management and acquisition and disposition services), and
(ii) are, and will in the future be, principals in other real estate investment
transactions or programs which may compete with us. Other possible transactions
involving conflicts of interest include our acquisition of properties or
borrowings from the Advisor or an affiliate (which is permitted under the
conditions summarized in "Investment Objectives and Policies Investment Criteria
and -- Borrowing Policies").
We will pay the Broker an acquisition fee in connection with each
acquisition of a property, and a disposition fee in connection with certain
property dispositions. As a consequence, the Broker may have an incentive to
recommend the purchase or disposition of a property, in order to receive a fee,
rather than based upon our best interests. The Advisor will receive a fee which
is a percentage of the total consideration we receive from sale of common shares
and therefore it could have an incentive to close the sales of shares as rapidly
as possible.
As discussed under "Conflicts of Interest," we have implemented certain
policies and procedures designed to eliminate or ameliorate the effects of
potential conflicts of interest. For example, our business and affairs,
including, without limitation, all of the relationships between us, on the one
hand, and the Advisor and the Broker on the other hand, are under the
supervision and control of our Board of Directors, a majority of whom is not
affiliated with either entity. In evaluating the significance of a majority of
the Board of Directors being unaffiliated, prospective shareholders should bear
in mind that Mr. Knight may have an influence on the Board of Directors
disproportionate in relation to his voting power, since he is involved with our
management and our properties on a daily basis. In general, if a person with
responsibilities to both us and to an entity either contracting with or
competing against us were to resolve a potential conflict of interest against
our interest, our operations could be adversely affected. However, in light of
the policies and procedures implemented to ameliorate the effects of potential
conflicts of interest, we do not believe that the potential conflicts of
interest will have a material adverse effect upon our ability to realize our
investment objectives, although there can be no assurance to this effect.
INVESTMENT IN A SINGLE INDUSTRY
Our current strategy is to acquire interests primarily in corporate
apartment and extended-stay hotel properties. As a result, we are subject to the
risks inherent in investing in a single industry. A downturn in the corporate
apartment and extended-stay hotel industry may have more pronounced effects on
the amount of cash available to us for distribution than if we had diversified
our investments.
9
<PAGE>
DEPENDENCE ON LESSEES BECAUSE WE ARE A REIT
Due to certain federal income tax restrictions, we cannot directly operate
our corporate apartment and extended-stay hotel properties. Therefore, we intend
to lease our corporate apartment and extended-stay hotel properties to lessees
who will manage the properties. Our revenues and our ability to make
distributions to our shareholders will depend solely upon the ability of our
lessees to make rent payments under their leases. Generally, we will receive
from our lessees, under our leases, both a base rent and a percentage of gross
sales above a certain minimum level. As a result, we will participate in the
economic operations of our properties only through our share of gross revenue.
Any failure by our lessees to make their rent payments would adversely affect
our ability to make distributions to our shareholders.
Our lessees will be affected by factors beyond their control such as
changes in general economic conditions, the level of demand for corporate
apartment and extended-stay hotel facilities and the related services of our
properties, competition in the lodging and hospitality industry, the ability of
our lessees to maintain and increase gross revenues at our properties, and other
factors relating to the operations of our properties.
Although failure on the part of our lessees to materially comply with the
terms of a lease (including failure to pay rent when due) will give us the
non-exclusive 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 corporate apartment
and extended-stay hotel properties directly. In addition, it is possible that we
would be unable to enforce the payment obligations under the leases following
any termination. There can be no assurance that we would be able to find another
lessee or that, if another lessee were found, we would be able to enter into a
new lease on terms as favorable to us.
LACK OF CONTROL OVER MANAGEMENT AND OPERATIONS OF OUR PROPERTIES
In order to maintain our real estate investment trust status, we may not
operate our properties. We will be dependent on the ability of our lessees to
operate and manage our properties. As a result, we will be unable to directly
implement strategic business decisions with respect to the determination of
corporate and extended-stay hotel rates, food and beverage operations and
certain similar matters.
OPERATIONAL LIMITATIONS ASSOCIATED WITH FRANCHISE AGREEMENTS
Our lessees will operate a substantial number of our properties pursuant to
franchise or license agreements with nationally recognized hotel brands. These
franchise agreements may contain specific standards for, and restrictions and
limitations on, the operation and maintenance of our properties in order to
maintain uniformity within the franchisor system. Those limitations may conflict
with our philosophy of creating specific business plans tailored to each
property and to each market.
Such standards are subject to change over time, in some cases at the
direction of the franchisor, and may restrict our lessees' ability, as
franchisee, to make improvements or modifications to a property without the
consent of the franchisor. In addition, compliance with such standards could
require our lessees, as franchisees, to incur significant expenses or capital
expenditures. Action or inaction on our part or by our lessees could result in a
breach of such standards or other terms and conditions of the franchise
agreements and could result in the loss or cancellation of a franchise license.
In connection with terminating or changing the franchise affiliation of a
property, we may be required to incur significant expenses or capital
expenditures. Moreover, the loss of a franchise license could have a material
adverse effect upon the operations or the underlying value of the property
covered by the franchise because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor.
LACK OF OPERATING HISTORY; NO ASSURANCE OF SUCCESS
We do not have an operating history. There is no assurance that we will
operate successfully or achieve our objectives.
10
<PAGE>
SIZE OF OFFERING -- POSSIBLE LACK OF DIVERSIFICATION AND LOWER RETURN
We initially will be funded with contributions of not less than
$15,000,000. Our profitability could be affected by the number of common shares
sold. In the event we receive only the minimum offering of $15,000,000, 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 those common shares sold will be reduced
as a result of allocating our expenses among the smaller number of shares.
DELAY IN INVESTMENT IN REAL PROPERTY
We may experience delays in finding suitable properties to acquire. Pending
investment of the proceeds of this offering in real estate, and to the extent
such proceeds are not invested in real estate as described herein, the proceeds
may be invested in certain permitted temporary investments. See "Investment
Objectives and Policies -- General." The rate of return on those investments has
fluctuated in recent years and may be different from the return obtainable from
real property.
NO SPECIFIED PROPERTIES
The specific properties in which the proceeds of this offering are to be
invested have not been identified as of the date of this prospectus. A
prospective shareholder will, therefore, have no information as to the
identification or location of specific properties to be purchased by us, or as
to the financing terms (if any) or other relevant economic and financial data
affecting those 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.
ARBITRARY SHARE OFFERING PRICES
The per-share offering prices ($9 until the minimum offering of $15,000,000
is achieved and thereafter $10) have been established arbitrarily by us. Neither
prospective investors nor shareholders should assume that the per-share prices
reflect the intrinsic or realizable value of the common shares or otherwise
reflects our value, earnings or other objective measures of worth. The increase
in the per-share offering price from $9 to $10 once the minimum offering is
achieved is also not based upon or reflective of any objective indicia of
increased company or share value.
OPERATING RISKS
Our properties are subject to all operating risks common to corporate
apartment and extended-stay hotel properties, such as the risk of increased
unemployment in markets where our properties are located. The occurrence of any
or all of these risks might adversely affect occupancy or rental rates. In
addition, increases in operating costs due to inflation and other factors may
not necessarily be offset by increased rents. These properties will also be
subject to the risk that tenants will be unable or unwilling to pay rent
increases. The local markets may limit the extent to which rents may be
increased to meet increased operating expenses without decreasing occupancy
rates. If our properties do not generate sufficient revenue to meet operating
expenses, including debt service and capital expenditures, our cash flow and our
ability to make distributions to shareholders may be adversely affected.
COMPETITION
Our properties compete directly with other corporate apartment and
extended-stay hotel properties and other short-term rental properties in markets
in which our properties are located. We generally compete on the basis of
location, quality and rates. Such competition could reduce our occupancy levels
and rental revenues, which could adversely affect our operations.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Qualification as a real estate investment trust, or REIT, involves the
application of highly technical and complex Internal Revenue Code provisions for
which there are limited judicial or administrative interpretations.
Qualification is also subject to various factual matters and circumstances not
entirely
11
<PAGE>
within our control. For example, in order to qualify as a REIT, at least 95% of
our gross income in any year must be derived from qualifying sources and we must
make distributions to our shareholders annually aggregating at least 95% of our
taxable income, excluding net capital gains. New legislation, regulations,
administrative interpretations or court decisions could change the tax laws with
respect to qualification as a REIT or the federal income tax consequences of
such qualification.
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 such 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 certain investments in order
to pay the applicable tax.
MARKET ILLIQUIDITY
Real estate investments are relatively illiquid. Such 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.
NO RESTRICTION ON CHANGES IN 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. A change in these
policies could adversely affect our financial condition or results of operations
and could adversely affect the market price of our securities. See "Policies
with Respect to Certain Activities."
POTENTIAL DILUTION OF SHAREHOLDERS' INTERESTS
Glade M. Knight, who is a Director, Chairman of the Board and President,
and others will hold certain Class B Convertible shares which are convertible
into common shares, as described under "Principal and Management Shareholders."
The conversion by them of such Class B Convertible shares into common shares
will result in dilution of the shareholders' interests. Assuming all common
shares offered by this prospectus are sold, and all of the authorized Class B
Convertible shares are converted into common shares, the holders of the Class B
Convertible shares would own approximately 5.98% of the total number of common
shares outstanding.
The Board of Directors is authorized, without shareholder approval, to
cause the Company to issue additional common shares or to raise capital through
the issuance of preferred stock, options, warrants and other rights, on such
terms and for such consideration as the Board of Directors in its sole
discretion may determine. See "Summary of Organizational Documents -- Issuance
of Securities." Any such issuance could result in dilution of the equity of the
shareholders. Without limiting the generality of the foregoing, 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 the Advisors or
the Broker 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 such shares shall be deemed their value.
We have adopted two stock incentive plans for the benefit of our directors
and certain of our employees and of the Advisors and the Broker. See "Management
- -- Stock Incentive Plans." The effect of the exercise of such 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.
12
<PAGE>
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.
CERTAIN ANTITAKEOVER PROVISIONS; OWNERSHIP LIMITS
OWNERSHIP LIMITS. Our bylaws contain restrictions on stock ownership which
may discourage third parties from making acquisition proposals. These same
antitakeover provisions may also impede our shareholders' ability to change our
management.
In order to maintain our qualification as a REIT, no more than 50% in value
of our outstanding shares of capital stock may be owned, directly or indirectly,
by five or fewer individuals or entities. As a result, our bylaws prohibit
ownership, either directly or indirectly, of more than 9.8% of the common shares
by any shareholder. Our board may waive this ownership limitation on a
case-by-case basis. As a result, without our board's approval, no person may
acquire more than 9.8% of our outstanding common shares, thereby limiting a
third-party's ability to acquire control of us. See "Description of Capital
Stock" and "Federal Income Tax Considerations."
PREFERRED STOCK. Our articles of incorporation authorize the Board to issue
up to 15,000,000 shares of preferred stock and to establish the preference and
rights of any such shares. See "Description of Capital Stock." Thus, our board
could create a new class of preferred stock with voting or other rights senior
to any existing class of stock. These rights could delay or prevent a change in
control even if such a change were in our shareholders' best interest.
POSSIBLE ENVIRONMENTAL LIABILITIES
LIABILITY FOR HAZARDOUS SUBSTANCES. Various federal, state and local
environmental laws impose responsibilities on an owner or operator of real
estate and subject such persons to potential liabilities. Typical provisions of
such 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 such substances.
-- Potential liability under common law claims by third parties based on
damages and costs of environmental contaminants.
The costs of investigation, remediation or removal of hazardous substances
may be substantial. In addition, the presence of hazardous substances on one of
our properties, or the failure to properly remediate a contaminated property,
could adversely affect our ability to sell or rent the property or to borrow
using the property as collateral.
COSTS OF COMPLIANCE WITH 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 any such 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.
YEAR 2000
Many of the world's computer systems currently record years in a two-digit
format. Those computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to disruptions in our operations (commonly
referred to as the "Year 2000" issue). Although we are currently examining
13
<PAGE>
our systems for Year 2000 compliance, we cannot guarantee that all of our
systems will be Year 2000 compliant or that other companies on which we rely
will be timely converted. As a result, our operations could be adversely
affected.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This prospectus contains certain forward-looking statements within the
meaning of federal securities laws which are intended to be covered by the safe
harbors created thereby. 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 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 such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved.
14
<PAGE>
ESTIMATED USE OF PROCEEDS
We intend to invest the net proceeds of this offering in equity ownership
interests in corporate apartment and extended-stay hotel properties located
primarily in selected southeastern and southwestern metropolitan areas of the
United States. Pending such investment and to the extent the proceeds are not
invested in real estate as described herein, the proceeds may be invested in
certain permitted types of temporary investments. All proceeds of this offering
received by us must be invested or committed for investment in properties or
allocated to working capital reserves or used by us for other proper purposes
within the later of two years after commencement of the offering or one year
after termination of the offering; any proceeds not invested or committed for
investment or allocated to working capital reserves or used by us for other
proper purposes by the end of such time period shall be returned to investors
within 30 days after the expiration of such period, but we may elect to return
such proceeds earlier if, and to the extent, 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 herein.
As described under "The Advisor and Affiliates," our bylaws prohibit our
total "Organizational and Offering Expenses" from exceeding 15% of Total
Contributions. "Organizational and Offering Expenses" means, generally, all
expenses incurred in organizing us and offering and selling the common shares,
including selling commissions and fees, legal fees and accounting fees, and
federal, state and other regulatory filing fees. The bylaws also prohibit the
total of all "Acquisition Fees" (defined generally as all fees and commissions
paid by any party in connection with our purchase of real property) and
"Acquisition Expenses" (defined generally as all expenses related to the
selection or acquisition of properties by us) paid in connection with an
acquisition of a property from exceeding 6% of the contract price for the
property (unless such excess is approved by the Board of Directors, as described
therein). Any Organizational and Offering Expenses or Acquisition Fees and
Acquisition Expenses incurred by us in excess of the permitted limits shall be
payable by the Advisor to us immediately upon our demand.
On April 20, 1999, we obtained a line of credit in a principal amount of up
to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all accrued interest are due in
full on October 20, 1999. Glade M. Knight, our president and Chairman of the
Board, has guaranteed repayment of the loan. We expect to repay this debt with
proceeds from the sale of common shares.
As indicated below, we expect, that once the minimum offering of
$15,000,000 is completed, that 87.0% of the gross offering proceeds will be
available for investment in properties and 0.5% will be allocated to our working
capital reserve. However, subject generally to the limitation in our bylaws on
permitted Organization and Offering Expenses, and Acquisition Fees and
Acquisition Expenses, the percentage of gross offering proceeds available for
investment could be less.
As discussed under "Compensation," the Advisor and the Broker will be
entitled to reimbursement for expenses incurred by them on our behalf as well
as, among other fees, a real estate commission equal to 2% of the proceeds of
the offering used to pay each property's gross purchase price (which does not
include amounts budgeted for repairs and improvements), which constitutes an
"Acquisition Fee."
15
<PAGE>
The following table reflects the intended application of the proceeds from
the sale of the common shares.
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
----------------------------- ------------------------------
% OF % OF
GROSS GROSS
AMOUNT PROCEEDS AMOUNT PROCEEDS
-------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Gross Proceeds (1) ............................. $15,000,000 100.00% $300,000,000 100.00%
Less
Offering Expenses (2) ......................... 450,000 3.00% 1,500,000 0.50%
Selling Commissions (3) ....................... 1,125,000 7.50% 22,500,000 7.50%
Marketing Expense Allowance (3) ............... 375,000 2.50% 7,500,000 2.50%
----------- ------ ------------ ------
Net Proceeds after Offering Costs .............. $13,050,000 87.00% $268,500,000 89.50%
Less Acquisition Fees and Expenses (4) ......... 300,000 2.00% 6,000,000 2.00%
----------- ------ ------------ ------
Proceeds Available for Investment and
Working Capital ............................... $12,750,000 85.00% $262,500,000 87.50%
Less Working Capital Reserve (5) ............... 75,000 0.50% 1,500,000 0.50%
----------- ------ ------------ ------
Net Amount Available for Investment in
Properties (6) ................................ $12,675,000 84.50% $261,000,000 87.00%
=========== ====== ============ ======
</TABLE>
- ----------
(1) The Shares are being offered on a "best-efforts" basis.
(2) These amounts reflect our estimate of offering expenses, exclusive of the
selling commissions and the marketing expense allowance payable to David
Lerner Associates, Inc. If the offering expenses are greater than the
amounts indicated, the amount of proceeds available for investment will
decrease, and if these expenses are less, the amount available for
investment will increase.
(3) Payable to David Lerner Associates, Inc.
(4) These amounts include a real estate commission payable to the Broker in an
amount equal to 2% of the proceeds of the offering used to pay the purchase
price of each property acquired (which does not include amounts budgeted for
repairs and improvements) plus our estimates of other expenses and fees
which will be incurred in connection with property acquisitions.
(5) Until used, amounts in our working capital reserve, together with any other
proceeds not invested in properties or used for other company purposes, will
be invested in certain permitted temporary investments such as U.S.
Government securities or similar highly liquid instruments. See "Investment
Objectives and Policies -- General."
(6) We expect the investment properties to be corporate apartments and
extended-stay hotel properties located primarily in selected southeastern
and southwestern metropolitan areas of the United States. See "Investment
Objectives and Policies."
16
<PAGE>
COMPENSATION
The table below describes the compensation and reimbursement which we will
pay to the Advisor and the Broker. Since these entities are entitled to certain
fees for services rendered by them to us, we do not pay salaries to our officers
who are also officers of the Advisor and the Broker.
We will pay David Lerner Associates, Inc. selling commissions equal to 7.5%
of the purchase price of the common shares and a marketing expense allowance
equal to 2.5% of the purchase price of the common shares. If the minimum
offering of $15,000,000 is sold, the selling commissions would be $1,125,000 and
the marketing expense allowance would be $375,000. If the maximum offering of
$300,000,000 is sold, the selling commissions would be $22,500,000 and the
marketing expense allowance would be $7,500,000. David Lerner Associates, Inc.
and the Advisor are not related and are not affiliates.
See "Plan of Distribution."
<TABLE>
<CAPTION>
PERSON RECEIVING
COMPENSATION (1) TYPE OF COMPENSATION AMOUNT OF COMPENSATION (2)
- ----------------------------- ----------------------------------------- ------------------------------------------
<S> <C> <C>
ACQUISITION PHASE
Apple Suites Realty Group, Real estate commission for acquiring 2% of the proceeds of the offering used
Inc. our properties to pay the purchase prices of the
properties purchased by us. (3)
OPERATIONAL PHASE
Apple Suites Advisors, Inc Asset management fee for managing Annual fee based upon a ratio of Funds From
our day-to-day operations Operations to Total Contributions ranging
from 0.1% of Total Contributions to 0.25% of
Total Contributions (payable quarterly) -- a
maximum of $37,500 per year if the minimum
offering is sold; a maximum of $750,000 per
year if the maximum offering is sold. (4)
Apple Suites Advisors, Inc. Reimbursement for costs and Amount is indeterminate
and Apple Suites Realty expenses incurred on our behalf, as
Group, Inc. described in Note (5)
DISPOSITION PHASE
Apple Suites Realty Group, Real estate commission for selling Up to 2% of the gross sales prices of the
Inc. our properties properties sold by us. (6)
ALL PHASES
Apple Suites Advisors, Inc. Payment for services and property Amount is indeterminate
and Apple Suites Realty (7)
Group, Inc.
</TABLE>
- ----------
(1) As discussed in this section and under "Conflicts of Interest," the Advisor
and the Broker 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 such 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 (including these notes), the
specific amounts of compensation or reimbursement payable to the Advisor and
the Broker 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, the Broker has
agreed to serve as the real estate broker in connection with both our
purchases and sales of properties. In exchange for these services, the
Broker will be entitled to a fee from us of 2% of the gross purchase price
(which does not include amounts budgeted for repairs and improvements) of
each property purchased by us. If the person from whom we purchase or to
whom we sell a property pays any fee to the Broker that amount will decrease
the amount of our obligation to the Broker. See "The Advisor and Affiliates"
-- the Broker.
17
<PAGE>
(4) "Total Contributions" means the gross offering proceeds which have been
received from time to time from the sale of the common shares. Under a
Advisory Agreement with the Advisor we are obligated to pay an asset
management fee which is a percentage of Total Contributions. The applicable
percentage used to calculate the asset management fee is based on the ratio
of Funds from Operations to Total Contributions (such ratio being referred
to as the "Return Ratio") for the preceding calendar quarter. The per annum
asset management fee is initially equal to the following with respect to
each calendar quarter: 0.1% of Total Contributions if the Return Ratio for
the preceding calendar quarter is 6% or less; 0.15% of Total Contributions
if the Return Ratio for the preceding calendar quarter is more than 6% but
not more than 8%; and 0.25% of Total Contributions if the Return Ratio for
the preceding calendar quarter is above 8%. Assuming the minimum offering
($15,000,000) is sold, the annual asset management fee would be between
$15,000 and $37,500. Assuming the maximum offering ($300,000,000) is sold,
the annual asset management fee would be between $300,000 and $750,000. See
"The Advisor and Affiliates."
(5) The Advisor and the Broker will be reimbursed for all direct costs of
acquiring and operating our properties and of goods and materials used for
or by us and obtained from entities that are not affiliated with the
Advisor. These costs and expenses include, but are not limited to, legal
fees and expenses, travel and communication expenses, expenses relating to
shareholder communications, costs of appraisals, non-refundable option
payments on property not acquired, accounting fees and expenses, title
insurance, and all other fees, costs and expenses directly attributable to
the acquisition and ownership of our properties. Operating expenses
reimbursable to the Advisor and the Broker are subject to the overall
limitation on operating expenses discussed under "The Advisor 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),
the Broker 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 such cost basis. For purposes of such calculation, our cost basis will
not be reduced by depreciation. See "The Advisor and Affiliates -the Broker.
(7) The Advisor and the Broker may provide other services or property to us
under certain conditions, and will be entitled to compensation or payment
therefor. The 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 therefor. If any other
arrangements arise in the future, the terms of the arrangements, including
the compensation or reimbursement payable thereunder, will be subject to the
restrictions in our bylaws. The compensation, reimbursement or payment could
take the form of cash or property, including common shares.
18
<PAGE>
CONFLICTS OF INTERESTS
GENERAL
We may be subject to various conflicts of interest arising from our
relationship with the Advisor and the Broker and with certain directors. The
Advisor and the Broker and the directors are not restricted from engaging for
their own account in business activities of the type conducted by us, and
occasions may arise when our interests conflict with those of one or more of the
directors, the Advisor and the Broker. The Advisor and the Broker and the
directors are accountable to us and our shareholders as fiduciaries, and
consequently must exercise good faith and integrity in handling our affairs.
The Advisor and the Broker will assist us in the acquisition, organization,
servicing, management and disposition of investments. At this time, the Advisor
will provide services exclusively to us, but it may perform similar services for
other parties, both affiliated and unaffiliated, in the future.
The receipt of various fees from us by the Advisor and the Broker may
result in potential conflicts of interest for persons who participate in
decision making on behalf of both us and these other entities. For example,
because the Broker 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 if certain
conditions are met, its compensation will increase in proportion to the number
of properties purchased and sold by us and the properties' purchase and sale
prices. The Advisor asset management fee is a percentage of total contributions
(that is, total proceeds received from time to time by us from the sales of its
Shares). Accordingly, it has an incentive to see that sales of common shares are
closed as quickly as possible by us.
The Advisor and the Broker 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 such action or decision.
In addition, the presence on the Board of Directors of independent directors is
intended to ameliorate or eliminate the potential impact of conflicts of
interest for persons who participate in decision making on behalf of both us and
the Advisor or the Broker.
The Board of Directors, the Advisor and the Broker will also be subject to
the various conflicts of interest described below. As described below, certain
policies and procedures will be implemented to eliminate or ameliorate the
effect of potential conflicts of interest. By way of illustration, the bylaws
place certain limitations on the terms of contracts between us and the Advisor
or the Broker designed to ensure that such contracts are not less favorable to
us than would be available from an unaffiliated party. However, certain
potential conflicts of interest (such as the potential conflict of interest
experienced by an individual who has executive or management responsibilities
with respect to multiple entities) are not easily susceptible to resolution.
Prospective shareholders are entitled to rely on the general fiduciary duties of
the directors, the Advisor and the Broker as well as the specific policies and
procedures designed to eliminate or ameliorate potential conflicts of interest
described below. the Advisor and the Broker 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 the Advisor and the Broker on the other hand,
will provide substantial protection for the interests of the shareholders. Thus,
the Advisor and the Broker do not believe that the potential conflicts of
interests described herein 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
eight members, five of whom are independent directors and three of whom are not
independent directors. At all times on and after initial closing, a majority of
the Board of Directors must be independent directors. The directors who are not
independent directors are affiliated with the Advisor or the Broker. Under our
bylaws, any transaction (whether a sale or acquisition of assets, any borrowing
or lending, any agreement for the provision of property or services, or
otherwise) between us, on the one hand, and the Advisor and the Broker on the
other hand (excluding only the entering into, and the initial term under, the
Advisory Agreement and the Property Acquisition/Disposition Agreement, each of
which agreement is described in this prospectus) is
19
<PAGE>
permitted only if such transaction has been approved by the affirmative vote of
a majority in number of all of the independent directors. In addition, under the
bylaws, any such transaction must meet certain conditions, including that the
transaction be in all respects fair and reasonable to our shareholders. If any
such 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 such excess exists.
Examples of substantial justification might include, without limitation, an
extended holding period or capital improvements by the seller which would
support a higher purchase price.
The Advisor and the Broker 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. See "Compensation." The Board
of Directors will have oversight responsibility with respect to any such
relationships and will attempt to ensure that they are structured to be no less
favorable to us than our relationships with the unrelated persons or entities
and are consistent with our objectives and policies.
COMPETITION BETWEEN US AND AFFILIATES
Affiliates of the Advisor and the Broker may form additional REITs, limited
partnerships and other entities to engage in activities similar to ours,
although the Advisor and the Broker have no present intention of organizing any
additional REITs. However, until such time as more than 95% of the proceeds of
this offering are invested, the Advisor and the Broker shall present to us any
suitable investment opportunity before offering it to any other affiliated
entity. The competing activities of the Advisor and the Broker may involve
certain conflicts of interest. For example, affiliates of the Advisor and the
Broker are interested in the continuing success of previously formed ventures
because they have fiduciary responsibilities to investors in those ventures,
they may be personally liable on certain obligations of those ventures and they
have equity and incentive interests in those ventures. Conflicts of interest
would also exist if properties acquired by us compete with properties owned or
managed by affiliates of the Advisor and the Broker. Conflicts of interest may
also arise in the future if we sell, finance or refinance properties at the same
time as ventures developed by affiliates the Advisor and the Broker.
COMPETITION FOR MANAGEMENT SERVICES
Certain officers and directors of the Advisor and the Broker are also
officers or directors of one or more entities affiliated with the Advisor and
the Broker which engage in the brokerage, sale, operation, or management of real
estate. Affiliates of the Advisor and the Broker presently are acting as general
partners in a number of limited partnerships engaged in real estate investments.
Accordingly, certain members of our Board of Directors and the officers and
directors of the Advisor and the Broker may have conflicts of interest in
allocating management time and services between us and other entities.
20
<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of our current policies with respect to
investments, financing and certain 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 or that our value will not decrease.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. Our primary
business objective is to maximize shareholder value by maintaining long-term
growth in cash available for distribution to our shareholders. We intend to
pursue this objective by acquiring corporate apartment and extended-stay hotel
properties for long-term ownership and to lease these properties to hotel
operating companies for their management, and thereby seek to maximize current
and long-term net income and the value of our assets. Our policy is to acquire
and develop assets where we believe opportunities exist for acceptable
investment returns.
We expect to pursue our investment objectives primarily through the direct
ownership of corporate apartment and extended-stay hotel properties primarily
located in our target markets. However, future investment activities will not be
limited to any geographic area or product type or to a specified percentage of
our assets.
Although we are not currently doing so, we may also participate with other
entities in property ownership, through joint ventures or other types of common
ownership. Equity investments may be subject to existing mortgage financing and
other indebtedness which have priority over our equity interests.
PERIODIC REVIEW OF ASSETS. We reserve the right to dispose of any property
if we determine the disposition of such property is in our best interests and
the best interests of our shareholders.
BORROWING POLICIES
To maximize our potential cash flow and minimize our risk, we intend to
purchase our properties either on an "all-cash" or unleveraged basis, or using
limited interim borrowings. We will endeavor to repay any interim borrowings
with proceeds from the sale of common shares and thereafter to hold our
properties on an unleveraged basis. However, for the purpose of flexibility in
operations, we will have the right, subject to the approval of the Board of
Directors, to borrow.
One purpose of borrowing could be to permit our acquisition of additional
properties through the "leveraging" of shareholders' equity contributions.
Alternatively, we might find it necessary to borrow to permit the payment of
operating deficits at properties we already own. Furthermore, although not
anticipated, properties may be financed or refinanced if the Board of Directors
deems it in the best interests of shareholders because, for example,
indebtedness can be incurred on favorable terms and the incurring of
indebtedness is expected to improve the shareholders' after-tax cash return on
invested capital. See "Sale Policies" below.
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 such 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 the
Advisor or the Broker or establish a line of credit with a bank or other lender.
Those entities are under no obligation to make any such loans, however. After
the initial closing of $15,000,000, any loans made by them must be approved by a
majority of the independent directors as being fair, competitive and
commercially reasonable and no less favorable to us than loans between
unaffiliated lenders and borrowers under the same circumstances.
21
<PAGE>
After the initial closing of $15,000,000, our bylaws will prohibit us from
incurring debt (secured or unsecured) if such debt would result in aggregate
debt exceeding 100% of "Net Assets" (defined generally to mean assets at cost),
before subtracting liabilities, unless the excess borrowing is approved by a
majority of the independent directors and disclosed to the shareholders as
required by the bylaws. The bylaws also will prohibit us from allowing aggregate
borrowings to exceed 50% of our "Adjusted Net Asset Value" (defined generally to
mean assets at fair market value), before subtracting liabilities subject to the
same exception. In addition, the bylaws will provide that the aggregate
borrowings must be reasonable in relation to our Net Assets and must be reviewed
quarterly by the Directors. Subject to the foregoing limitations on the
permitted maximum amount of debt, there is no limitation on the number of
mortgages or deeds of trust which may be placed against any particular property.
RESERVES
A portion of the proceeds of this offering will be reserved to meet working
capital needs and contingencies associated with our operations. We will
initially allocate to our working capital reserve not less than 0.5% of the
proceeds of the offering. As long as we own any properties, we will retain as
working capital reserves an amount equal to at least 0.5% of the proceeds of the
offering, subject to review and re-evaluation by the Board of Directors. If such
reserves and any other available income become insufficient to cover our
operating expenses and liabilities, it may be necessary to obtain additional
funds by borrowing, refinancing properties or liquidating our investment in one
or more properties.
SALE POLICIES
We are under no obligation to sell our investment properties, and currently
anticipate that we will hold our investment properties for an indefinite length
of time. However, a sale of one or more properties may occur at any time if the
Advisor deems it advisable for us based upon current economic considerations,
and the Board of Directors concurs with such decision. In deciding whether to
sell a property, the Advisor will also take into consideration such factors 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 such property.
Currently, we expect that within approximately three (3) years from the
initial closing, we will use our best efforts either (i) to cause the common
shares to be listed on a national securities exchange or quoted on the NASDAQ
National Market System or (ii) to dispose of substantially all of our properties
in a manner which will permit distributions to our shareholders of cash or
marketable securities. The taking of either type of action would be conditioned
on the Board of Directors determining such 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 or
other securities then being actively traded. However, we are under no obligation
to take any of the foregoing actions, and any such action, if taken, might be
taken after the referenced three-year period.
CHANGES IN OBJECTIVES AND POLICIES
Subject to the limitations in the articles of incorporation, the bylaws and
the Virginia Stock Corporation Act, the powers of our company will be exercised
by or under the authority of, and the business and affairs of our company will
be controlled by, the Board of Directors. The Board of Directors also has the
right and power to establish policies concerning investments and the right,
power and obligation to monitor the procedures, investment operations and
performance of our company.
In general, the articles of incorporation and the bylaws can be amended
only with the affirmative vote of a majority of the outstanding common shares,
except that the bylaws may be amended by the Board of Directors if necessary to
comply with the REIT provisions of the Internal Revenue Code or with other
applicable laws and regulations. The bylaws contain certain restrictions on our
activities and prohibit us from engaging in certain activities.
22
<PAGE>
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 such
investment objectives and policies, and it is anticipated that any such
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 corporate apartment and 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
such objectives and policies from time to time. Any such action by the Board of
Directors would be based upon the perceived best interests of our company and
the shareholders.
23
<PAGE>
DISTRIBUTIONS POLICY
In accordance with applicable REIT requirements, we will make distributions
in accordance with the Internal Revenue Code.
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, and
-- capital expenditures.
We anticipate distributions will exceed net income determined in accordance
with generally accepted accounting principles due to non-cash expenses,
primarily depreciation and amortization.
Distributions to the extent of our current and accumulated earnings and
profits for federal income tax purposes generally will be taxable to
shareholders as ordinary dividend income, ordinary gain or capital gain.
Distributions in excess of such earnings and profits generally will be treated
as a non-taxable deduction of the shareholder's basis in the common shares to
the extent thereof (which may have the effect of deferring taxation until such
shareholder's sale of the common shares), and thereafter as taxable gain.
24
<PAGE>
BUSINESS
GENERAL
We are a Richmond, Virginia-based real estate investment trust focused on
corporate apartment and extended-stay hotel properties located primarily in
selected southeastern and southwestern metropolitan areas. We currently own no
properties.
BUSINESS STRATEGIES
Our primary business objective is to maximize shareholder value by
maintaining long-term growth in funds from operations for distributions to our
shareholders. To achieve this objective, we will focus on maximizing the
internal growth of our portfolio through the acquisition of properties that have
strong cash flow growth potential and are located in our target markets. We
intend to pursue this objective by acquiring corporate apartment and
extended-stay hotel properties for long-term ownership and to lease these
properties to hotel operating companies for their management, and thereby seek
to maximize current and long-term net income and the value of our assets.
Because we are prohibited under the federal tax laws from operating our
corporate apartments and extended stay hotel properties, we will enter into
leases for each of our hotel properties. We anticipate that substantially all of
our extended-stay hotel properties will be leased to Apple Suites Management,
Inc.
Apple Suites Management, Inc. is a Virginia corporation, the principal
shareholder and chief executive officer of which is Glade M. Knight. It is
anticipated that Apple Suites Management, Inc. will enter into franchise
agreements with Promus Hotels, Inc. with respect to certain extended-stay hotel
properties.
DESCRIPTION OF LEASES
We plan to enter into a lease for each of our hotel properties. We
anticipate that substantially all of our properties will be leased to and
operated by Apple Suites Management, Inc. on the following anticipated terms and
conditions.
TERM. We anticipate that each lease of an applicable property will provide
for an initial term of years commencing on the date on which the property is
acquired. We anticipate that each lease will provide the lessee with renewal
options, provided that (a) the lessee will not have the right to a renewal if
there shall have occurred a change in the tax law that would permit us to
operate the hotel properties directly and (b) the rent for each renewal term
will be adjusted to reflect the then fair market rental value of the property.
If we are unable to agree upon the then fair market rental value of a property,
the lease will terminate upon the expiration of the then current term and Apple
Suites Management, Inc. will thereupon have a right of first refusal to lease
the property from us on such terms as we may have agreed upon with a third-party
lessee.
BASE RENT; PARTICIPATING RENT. We anticipate that each lease will require
the lessee to pay (i) fixed monthly base rent, (ii) on a monthly basis, the
excess of "participating rent" over base rent, with participating rent based on
certain percentages of room revenue, food and beverage revenue and telephone and
other revenue at each property, and (iii) certain other amounts, including
interest accrued on any late payments or charges. Base rent and participating
rent may increase annually by a percentage equal to the percentage increase in
the consumer price index compared to the prior year. Base rent will be payable
monthly in advance. Participating rent may be payable in arrears based on a
monthly schedule adjusted to reflect the seasonal variations in the property's
revenue.
In addition to rent, the leases may require the lessee to pay many of the
following items: liability insurance; real estate and personal property taxes
and assessments; casualty insurance, including loss of income insurance; and all
costs and expenses and all utility and other charges incurred in the operation
of the properties. The leases may also provide for rent reductions and
abatements in the event of damage or destruction or a partial taking of any
property.
25
<PAGE>
HOMEWOOD SUITES(Reg. TM)
Consistent with our strategy to invest in corporate apartments and
extended-stay hotel properties, we plan to purchase a number of Homewood
Suites(Reg. TM) properties in selected southeastern and southwestern
metropolitan areas. There are currently more than 70 Homewood Suites(Reg. TM)
properties in the United States.
Homewood Suites(Reg. TM) offers upscale, all-suites, high-quality,
residential-style lodging with a comprehensive package of guest services and
amenities, for extended-stay business and leisure travelers. Homewood
Suites(Reg. TM) properties are designed to meet the needs of the business and
leisure traveler whose stay is typically five nights or more. Homewood
Suites(Reg. TM) was designed for people working on field assignments, relocating
to a new community, attending seminars and conventions, participating in
corporate training programs, taking an extended vacation or attending a family
event.
Homewood Suites(Reg. TM) properties consist of suites built around a
central hospitality center or lodge. Homewood Suites(Reg. TM) provides spacious
residential-style quarters with separate living and sleeping areas large enough
for work, study, entertaining or relaxation. Each suite features a fully
equipped kitchen and worksite with two telephones featuring data ports and voice
mail. Each lodge or hospitality center features a complete executive center with
fax machine and photocopier in addition to an exercise center, swimming pool and
other recreational facilities.
Homewood Suites(Reg. TM) is a service mark owned by Promus Hotels, Inc.
Promus Hotels, Inc., its subsidiaries or affiliates own the following trademarks
and service marks: Doubletree(Reg. TM), Doubletree Guest Suites(Reg. TM),
Embassy Suites(Reg. TM), Club Hotel by Doubletree(Reg. TM), Hampton Inn(Reg.
TM), Hampton Inn & Suites(Reg. TM), Embassy Vacation Resort(Reg. TM) and Hampton
Vacation Resort/SM/. Promus Hotels, Inc., its subsidiaries or affiliates serve
guests in more than 1,275 hotels and more than 186,000 rooms and suites.
OTHER REAL ESTATE INVESTMENTS.
Although we anticipate that our focus will be on corporate apartments and
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 corporate apartments and extended-stay hotel
properties. The purchase of any property will, of course, be based upon the
perceived best interests of the company and the 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 and are located in our target markets.
LEGAL PROCEEDINGS
We are not presently subject to any material litigation. To our knowledge,
there is no material litigation threatened against us. We may occasionally be
subjected to routine litigation arising in the ordinary course of business,
which is expected to be covered by liability insurance and none of which is
expected to have a material adverse effect on our business, financial condition,
results of operations or cash flows.
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 believe we will have
the necessary permits and approvals under present laws, ordinances and
regulations to operate our business in the manner described herein.
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 certain public areas of the properties where
such removal is readily achievable.
26
<PAGE>
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 such property and may be held liable to a government entity
or third party for property damage, investigation and remediation costs incurred
by such parties in connection with such 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 such substances may be substantial, and
the presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such real
estate or to borrow using such 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 such hazardous or toxic substances at or from the
disposal or treatment facility regardless of whether such facility is owned or
operated by such 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 such materials are in poor condition or in the event of the remodeling,
renovation or demolition of a building. These laws may impose liability for the
release of ACMs and may provide for third parties to seek recovery from owners
or operators of real estate for personal injury associated with ACMs. In
connection with the ownership and operation of its properties, we may be
potentially liable for costs in connection with ACMs or other hazardous or toxic
substances.
Prior to acquisition, all of our properties will have been the subject of
environmental assessments, which are intended to reveal information regarding,
and to evaluate the environmental condition of, the surveyed properties and
surrounding properties. These assessments will generally include:
-- a historical review,
-- a public records review,
-- a preliminary site investigation of the site and surrounding
properties,
-- screening for the presence of asbestos,
-- screening for equipment containing polychlorinated biphenyls,
-- screening 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.
27
<PAGE>
We believe 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 such property
and would continue to be obligated on any mortgage indebtedness or other
obligations related to the property. We could be adversely affected by any such
loss.
AVAILABLE INFORMATION
We have filed a registration statement, of which this prospectus is a part,
on Form S-11 with the Securities and Exchange Commission (the "Commission")
relating to this offering of common shares. This prospectus does not contain all
of the information in the registration statement and the exhibits and financial
statements included with the registration statement. If we describe the contents
of any contract or other document in this prospectus, the description may not
necessarily be a complete description. You should refer to the copy of the
document filed as an exhibit to the registration statement or incorporated by
reference for a complete description. You can obtain copies of the registration
statement and the exhibits for a fee from the Commission at its principal office
in Washington, D.C.
We 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.
28
<PAGE>
MANAGEMENT
We are managed by our Board of Directors, elected annually 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. As of the date of
this prospectus, the following table sets forth the names and ages of our
executive officers and directors and the positions held by each individual.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ------ -----------------------------------
<S> <C> <C>
Glade M. Knight ............ 55 Chairman, Chief Executive Officer,
President and Secretary
Lisa B. Kern ............... 38 Director
Bruce H. Matson ............ 41 Director
Michael S. Waters .......... 44 Director
Robert M. Wily ............. 49 Director
</TABLE>
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 the Advisor and the Broker and Apple Suites Management, Inc.
Mr. Knight founded and serves as Chairman of the Board and President of
Apple Residential Income Trust, Inc. and Cornerstone Realty Income Trust, Inc.,
which are real estate investment trusts. Cornerstone Realty Income Trust, Inc.,
a publicly traded company, acquires, owns and operates apartment complexes in
the mid-Atlantic and southeastern regions of the United States. Apple
Residential Income Trust, Inc., an SEC registrant, acquires, owns and operates
apartment complexes in Texas.
Mr. Knight is Chairman of the Board of Trustees of Southern Virginia
College in Buena Vista, Virginia. Mr. Knight is also a member of the advisory
board to the Graduate School of Real Estate and Urban Land Development at
Virginia Commonwealth University. He has served on a National Advisory Council
for Brigham Young University and is a founding member of and active lecturer
for the university's Entrepreneurial Department of the Graduate School of
Business Management.
LISA B. KERN. Ms. Kern is a portfolio manager and Vice President of
Davenport & Co., LLC, an investment banking firm, in Richmond, Virginia.
Previously, Ms. Kern was a Vice President with Crestar Bank's Trust and
Investment Management Group from 1989 to 1996. Ms. Kern is also a director of
Apple Residential Income Trust, Inc.
BRUCE H. MATSON. Mr. Matson is a Vice President and director of the law
firm of LeClair Ryan, a Professional Corporation, in Richmond, Virginia. Mr.
Matson has practiced law since 1983. He is also a director of Apple Residential
Income Trust, Inc.
MICHAEL S. WATERS. Mr. Waters is President and co-founder of Partnership
Marketing, Inc. From 1995 through 1998, Mr. Waters served as Vice President and
general manager of GT Foods, a division of GoodTimes Home Video. Prior to that
time he served as Vice President and general manager for George Weston Ltd.
ROBERT M. WILY. Mr. Wily is the Deputy Chief, Article III Judges Division,
of the Administrative Office of the U.S. Courts. He has served as the Clerk of
Court for both the United States Bankruptcy Court for the Eastern District of
Virginia and the District of Utah. Prior to those positions, Mr. Wily was in
the private practice of law.
CLASSIFICATION OF THE BOARD
The Board is divided into three classes. The terms of the first, second and
third classes expire in 2000, 2001, and 2002, respectively. Directors of each
class are elected for three year terms upon the expiration of the current class'
term. The staggered terms for directors may affect our shareholders' ability to
effect a change in control even if a change in control were in our shareholders'
best interest.
29
<PAGE>
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 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 Compensation Committee recommends compensation for our executive
officers to the Board and administers our Stock Option Plan (the "Stock Option
Plan").
DIRECTOR COMPENSATION
We will pay to each director who is not an affiliate of the Advisor an
annual fee of $5,000 plus $500 for each meeting of the full Board of Directors
attended by such person 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 the Advisor receive no compensation
from us for their service as directors. These directors, however, are
remunerated indirectly by their relationship to the Advisor 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 the business of our
company.
INDEMNIFICATION AND INSURANCE
See "Summary of Organizational Documents -- Responsibility of Board of
Directors, Advisor, Officers and Employees" for a description of the nature of
our obligation to indemnify our directors and officers and certain others in
certain situations.
We intend to obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (i) 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
(ii) us to the extent that we have indemnified the directors and officers for
such loss.
OFFICER COMPENSATION
Our officers are not paid salaries by us. Our officers are officers of the
Advisor and the Broker which are entitled to certain fees for services rendered
by them to us. Thus, our officers are, in essence, compensated by the Advisor
and the Broker. See "Compensation" for a description of the fees payable to the
Advisor and the Broker.
STOCK INCENTIVE PLANS
We plan to adopt two stock incentive plans which are described below. For
purposes of the description below, the term "Offering" means the Initial
Offering plus all additional offerings and sales of common shares which may
occur during the five-year period beginning May 1, 1999 and ending April 30,
2004. The term "Initial Offering" means the offering of common shares made
pursuant to this prospectus.
The aggregate number of common shares reserved for issuance under the two
stock incentive plans is (1) 80,000 shares, plus (2) 6.425% of the number of
shares sold in the Initial Offering in excess of the minimum offering, plus (3)
6.2% of the number of shares sold in the Offering above the Initial Offering.
30
<PAGE>
THE INCENTIVE PLAN
Under one plan (the "Incentive Plan"), incentive awards may be granted to
certain employees (including officers and directors who are employees) of the
Company, or of the Advisor or the Broker (the latter two companies being
sometimes referred to herein as the "Apple Suites Companies"). Of the Directors
of the Company, initially Mr. Knight will be a participant in the Incentive
Plan. Such incentive awards may be in the form of stock options or restricted
stock (as described below). Under the Incentive Plan, the number of Shares
reserved for issuance is equal to an aggregate of (1) 35,000 common shares, plus
(2) 4.625% of the number of Shares sold in the Initial Offering in excess of the
minimum offering, plus (3) 4.4% of the number of the shares sold in the Offering
above the Initial Offering. If an option is canceled, terminates or lapses
unexercised, any unissued common shares allocable to such option may be
subjected again to an incentive award. The purpose of the Incentive Plan is to
attract and retain the services of experienced and qualified employees who are
acting on behalf of us, either directly or through the Apple Suites Companies,
in a way that enhances the identification of such 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 (including our organizational documents referred to herein),
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 (i) when to grant incentive awards, (ii) which eligible
employees will receive incentive awards, (iii) whether the award will be an
option or restricted stock, and the number of common shares to be allocated to
each incentive award. The Committee may impose conditions on the exercise of
options and upon the transfer of restricted stock received under the Plan, and
may impose such other restrictions and requirements as it may deem appropriate.
Stock Options
An option granted under the Incentive Plan will not be transferrable by the
option holder except by will or by the laws of descent and distribution, and
will be exercisable only at such times as may be specified by the Committee.
During the lifetime of the option holder the option may be exercised only while
the option holder is in our employ or in the employ of one of the Apple Suites
Companies, or within 60 days after termination of employment. In the event the
termination is due to death or disability, the option will be exercisable for a
180-day period thereafter.
The exercise price of the options will be not less than 100% of the fair
market value of the common shares as of the date of grant of the option.
The Committee has discretion to take such actions as it deems appropriate
with respect to outstanding options in the event of a sale of substantially all
of the stock or assets of our company, a merger of the Apple Suites Companies in
which an option holder is employed, or the occurrence of similar events.
Adjustments will be made in the terms of options and the number of common shares
which may be issued under the Incentive Plan in the event of a future stock
dividend, stock split or similar pro rata change in the number of outstanding
shares or the future creation or issuance to shareholders generally of rights,
options or warrants for the purchase of common shares.
Options granted under the Incentive Plan are non-qualified stock options,
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: (i) none of such shares may be sold,
transferred, pledged, or otherwise encumbered or disposed of until the
restrictions on such shares shall have lapsed or been removed under the
provisions of the Incentive Plan, and (ii) if a holder of restricted stock
ceases to be employed by us or one of the Apple Suites Companies, he will
forfeit any shares of restricted stock on which the restrictions have not lapsed
or been otherwise removed.
31
<PAGE>
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
such shares shall lapse. Such terms and conditions may include, without
limitation, the lapsing of such 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 such
restrictions.
Amendment of the Incentive Plan and Incentive Awards
The Board of Directors may amend the Incentive Plan in such respects as it
deems advisable; provided that our shareholders must approve any amendment that
would (i) materially increase the benefits accruing to participants under the
Incentive Plan, (ii) materially increase the number of common shares that may be
issued under the Incentive Plan, or (iii) 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 employees of our company or the Apple Suites Companies
(the "Directors' Plan"). Under the Directors' Plan, the number of shares
reserved for issuance is equal to 45,000 shares plus 1.8% of the number of
Shares sold in the Offering in excess of the minimum offering of $15,000,000.
A Director is eligible to receive an option under the Directors' Plan if
the Director is not otherwise an employee of our or any Apple Suites Company or
any subsidiary of our company and was not an employee of any of such 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 certain powers vested in it by the terms of
the Plan, including, without limitation, the authority (within the limitations
described therein) 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 common shares, each eligible director
will receive an option to purchase 5,500 shares plus 0.0125% of the number of
shares in excess of the minimum offering sold by the initial closing.
(2) As of each June 1 during the years 2001 through 2005 (inclusive), each
eligible Director shall automatically receive an option to purchase 0.02% of the
number of common shares issued and outstanding on that date.
(3) As of the election as a Director of any new person who qualifies as an
eligible Director, such eligible Director will automatically receive an option
to purchase 5,000 Shares.
The purpose of the Directors' Plan is to enhance the identification of the
participating Directors' interests with those of the shareholders.
The exercise price for each option granted under the Directors' Plan will
be 100% of the fair market value on the date of grant; no consideration will be
paid to us for the granting of the option. Options granted under the Directors'
Plan will have a term of 10 years and will be fully exercisable six months
32
<PAGE>
after the date of grant. If an optionee ceases to serve as a Director of the
Company prior to the expiration of the six-month period following the date of
grant, the option will terminate on the date of such termination of service as a
Director. If an optionee ceases to serve as a Director of the Company 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 company's common shares of equivalent value.
The Board of Directors may suspend or discontinue the Directors' Plan or
revise or amend the Plan in any respect; provided, however, that without
approval of the shareholders no revision or amendment may increase the number of
common shares subject to the Plan or materially increase the benefits accruing
under the Plan. In addition, the Directors' Plan may not be amended more than
once every six months other than to comply with changes in the Internal Revenue
Code or ERISA.
STOCK OPTION GRANTS
As of the date of this prospectus, there have been no grants under the
Incentive Plan or the Directors' Plan.
33
<PAGE>
THE ADVISOR AND AFFILIATES
GENERAL
On or before the initial closing of the minimum offering of $15,000,00, we
will enter into an Advisory Agreement with Apple Suites Advisors, Inc. (the
"Advisor") 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 their direction, supervise our
day-to-day operations. The Advisor 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 the Advisor and also its sole officer (serving as its chairman,
Chief Executive Officer, President and Secretary).
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 (or in a similar capacity) with such specified entity.
Affiliates of the Advisor include the Broker 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 the Advisor upon 60 days' written notice. Under the
Advisory Agreement, the Advisor undertakes to use its best efforts (i) to
supervise and arrange for the day-to-day management of our operations and (ii)
to assist us in maintaining a continuing and suitable property investment
program consistent with our investment policies and objectives. Under the
Advisory Agreement, generally, the Advisor is not required to, and will not,
advise us on investments in securities, i.e., the temporary investment of
offering proceeds pending investment of such proceeds in real property. It is
expected that we will generally make our own decisions with respect to such
temporary securities investments.
Pursuant to the Advisory Agreement, the Advisor will be entitled to an
annual asset management fee. The asset management fee is payable quarterly in
arrears. The amount of the asset management fee is a percentage of total
contributions. The applicable percentage used to calculate the asset management
fee is based on the ratio of funds from operations to total contributions (such
ratio being referred to as the "Return Ratio") for the preceding calendar
quarter. The per annum asset management fee is initially equal to the following
with respect to each calendar quarter: 0.1% of total contributions if the Return
Ratio for the preceding calendar quarter is 6% or less; 0.15% of total
contributions if the Return Ratio for the preceding calendar quarter is more
than 6% but not more than 8%; and 0.25% of total contributions if the Return
Ratio for the preceding calendar quarter is above 8%. See "Compensation." the
Advisor will also receive reimbursement for certain direct expenses and
allocable overhead incurred in connection with its provision of services to us.
The bylaws require the independent directors to monitor the Advisor's
performance under the Advisory Agreement and to determine at least annually that
the amount of compensation we pay to the Advisor is reasonable, based on such
factors as they deem appropriate, including: the amount of the asset management
fee in relation to the size, composition and profitability of our investments;
the success of the Advisor in selecting opportunities that meet our investment
objectives; the rates charged by other investment advisors performing comparable
services; the amount of additional revenues realized by it for other services
performed for us; the quality and extent of service and advice furnished by it;
the performance of our investments and the quality of our investments in
relation to any investments generated by it for its own account.
Our bylaws generally prohibit our operating expenses (generally defined as
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) from exceeding in
any year the greater of 2% of our total "Average Invested Assets" (generally
defined as the
34
<PAGE>
monthly average of the aggregate book value of Company assets invested in real
estate, before deducting depreciation) or 25% of our "Net Income" (generally
defined as the revenues for any period, less expenses other than depreciation or
similar non-cash items) for such year. Unless the independent directors conclude
that a higher level of expenses is justified based upon unusual and nonrecurring
factors which they deem sufficient, the Advisor must reimburse us for the amount
of any such excess. It must make such reimbursement within 120 days from the end
of our fiscal year. The Advisor will be entitled to be repaid such
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. The Advisor 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 total contributions.
Furthermore, the total of all acquisition fees and acquisition expenses paid by
us in connection with the purchase of a property by us shall be reasonable and
shall in no event exceed an amount equal to 6% of the contract price for the
property, unless a majority of the Board of Directors (including a majority of
the independent directors) not otherwise interested in the transaction approves
the transaction as being commercially competitive, fair and reasonable to us.
For purposes of the foregoing 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 the Advisor immediately upon our demand.
The foregoing is only a summary of the Advisory Agreement. A copy of the
form of such agreement has been filed as an exhibit to the registration
statement of which this prospectus is a part; reference is made to the agreement
for a complete statement of its provisions.
APPLE SUITES REALTY GROUP, INC.
Apple Suites Realty Group, Inc. (the "Broker") is a Virginia corporation
which was organized on March 11, 1999. The Broker will be engaged in the
business of management of real property and the solution of financial and
marketing problems related to investments in real property.
We will enter into a Property Acquisition/Disposition Agreement with the
Broker under which the Broker has agreed to act as a real estate broker in
connection with our purchases and sales of properties. Under such agreement, the
Broker 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 the Broker cannot exceed $6,000,000. Under such
agreements, the Broker 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 such property is sold and 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 such cost basis. For purposes of
such 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 the Broker is still entitled to payment from
us of its "direct costs" incurred in marketing such property where "direct
costs" refers to a reasonable allocation of all costs, including salaries of
personnel, overhead and utilities, allocable to services in marketing such
property. The fees and expenses payable by us to the Broker upon sale of a
property will also be payable if we sell our shares, merge with another entity,
or undertake a similar transaction, the purpose or effect of which is, in
essence, to dispose of some or all of our properties. In any case other than an
actual sale of properties, we and the Broker will in good faith agree upon an
allocation of purchase price to each property which is disposed of for the
purpose of calculating any fees and expenses payable to the Broker. If the
person from whom we purchase or to whom we sell a property pays any fee to the
Broker such
35
<PAGE>
amount will decrease the amount of our obligation to the Broker. 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.
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, and reference is made to the agreement for a complete description of its
provisions.
Subject to the conditions applicable generally to transactions between us
and affiliates of the Advisor (see "Conflicts of Interest -- Transactions with
Affiliates and Related Parties"), the Broker or an affiliate may render services
to us in connection with our financings or refinancings, and would be entitled
to compensation for such services. As of the date of this prospectus, there are
no specific agreements for any such services.
Glade M. Knight is the sole shareholder and Director of the Broker as well
as its sole officer, serving as Chairman, Chief Executive Officer, President and
Secretary.
PRIOR PERFORMANCE OF PROGRAMS SPONSORED BY GLADE M. KNIGHT
The following paragraphs contain information on certain prior programs
sponsored by Glade M. Knight to invest in real estate. The information set forth
is current as of April 20, 1999. This information should not be considered to be
indicative of our capitalization or operations. Purchasers of the common shares
will not have any interest in the entities referred to in this section or in any
of the properties owned by such entities.
Mr. Knight was principally responsible for the organization of Cornerstone
Realty Income Trust, Inc. ("Cornerstone"), a real estate investment trust
organized to acquire and own apartment complexes in the mid-Atlantic and
southeastern regions of the country. Between December 1992 and October 1996,
Cornerstone sold approximately $300 million in common shares to approximately
12,000 investors. Cornerstone currently has approximately 20,000 investors. The
net proceeds of the Cornerstone public offering were used to acquire 58
apartment communities in Virginia, North and South Carolina, and Georgia. The
Advisor 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 fee, the Advisor will
also provide copies of the exhibits to the Report on Form 10-K.
Mr. Knight was principally responsible for the organization of Apple
Residential Income Trust, Inc. ("Apple"), a real estate investment trust
organized to acquire and own apartment complexes in the regions of the country.
Between January 1997 and February 1999, Apple sold approximately $300 million in
common shares to approximately 11,000 investors. The net proceeds of the Apple
public offering were used to acquire 26 apartment communities in Texas. The
Advisor will, upon request of any investor or prospective investor, provide at
no cost a copy of the most recent Report on Form 10-K filed by Apple with the
Securities and Exchange Commission. For a reasonable fee, the Advisor will also
provide copies of the exhibits to the Report on Form 10-K.
On March 30, 1999, Cornerstone and Apple announced that they had entered
into a definitive merger agreement. The merger is subject to the approval of
Cornerstone's and Apple's shareholders, as well as other customary closing
conditions.
Part II of our Registration Statement (which is not a part of this
prospectus) contains a more detailed summary of the 58 property acquisitions by
Cornerstone and the 26 property acquisitions by Apple. the Advisor will provide
a copy of such summary without charge upon request of any investor or
prospective investor.
36
<PAGE>
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
Beneficial ownership of our common shares, and options to purchase our
common shares (exercisable currently or within 60 days), 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 such shares or shares such powers with his spouse and minor children, if any.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF AGGREGATE
NAME BENEFICIALLY OWNED OUTSTANDING SHARES OWNED
- ------------------------------------- -------------------- -------------------------
<S> <C> <C>
Apple Suites Advisors, Inc. ......... 10 100%
</TABLE>
In addition to the foregoing, Glade M. Knight, who is a Director, Chairman
of the Board and President of our company, will own 202,500 "Class B Convertible
shares" for himself and for the benefit of others. In addition, two other
individuals will each own 18,750 Class B Convertible Shares. The Class B
Convertible shares are convertible into common shares pursuant to the formula
and on the terms and conditions set forth below. The Class B Convertible shares
will be issued by the Company to Mr. Knight and others on or before the initial
closing of the minimum offering of $15,000,000, in exchange for the payment by
them of $0.10 per Class B Convertible share, or an aggregate of $24,000.
There are no dividends payable on the Class B Convertible shares. Upon our
liquidation, the holder of the Class B Convertible shares is entitled to a
liquidation payment of $0.10 per Class B Convertible share before any
distribution of liquidation proceeds to the holders of the common shares.
Holders of more than two-thirds of the Class B Convertible shares must approve
any proposed amendment to the Articles of incorporation that would adversely
affect the Class B Convertible shares. The Class B Convertible shares are
convertible into common shares upon and for 180 days following the occurrence of
either of the following events: (1) substantially all of our assets, stock or
business is sold or otherwise transferred, whether through sale, exchange,
merger, consolidation, lease, share exchange or otherwise, or (2) the Advisory
Agreement with the Advisor is terminated or not renewed (the events described in
this clause (2), a "Self-Administration Conversion"). Upon the occurrence of
either triggering event, each Class B Convertible share is convertible into a
number of common shares based upon the gross proceeds raised through the date of
conversion in the offering made by this prospectus according to the following
formula:
<TABLE>
<CAPTION>
GROSS PROCEEDS RAISED FROM SALES NUMBER OF COMMON SHARES
OF COMMON SHARES THROUGH DATE OF THROUGH CONVERSION OF ONE
CONVERSION CLASS B CONVERTIBLE SHARE
- ---------------------------------- --------------------------
<S> <C>
$50 million..................... 1.0
$100 million.................... 2.0
$150 million.................... 3.5
$200 million.................... 5.3
$250 million.................... 6.7
$300 million.................... 8.0
</TABLE>
No additional consideration is due upon the conversion of the Class B
Convertible Shares. The conversion into common shares of the Class B Convertible
Shares will result in dilution of the shareholders' interests.
37
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of material federal income tax considerations that
may be relevant to a holder of common shares is based on current law and is not
intended as tax advice. The 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 such
changes.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
EACH PROSPECTIVE PURCHASER OF COMMON SHARES IS ADVISED TO CONSULT WITH HIS OR
HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON SHARES IN AN ENTITY ELECTING TO BE
TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
We will elect to be treated as a REIT for federal income tax purposes
commencing with our taxable year ended December 31, 1999. Based on assumptions
and representations summarized below, McGuire, Woods, Battle & Boothe LLP, our
legal counsel, is of the opinion that beginning with our taxable year ended
December 31, 1999:
-- we are organized and operate in conformity with the requirements
for qualification and taxation as a REIT under the Code, and
-- our proposed method of operations described in this prospectus will
enable us to satisfy the requirements for qualification as a REIT.
The rules governing REITs are highly technical and require ongoing
compliance with a variety of tests that depend, among other things, on future
operating results. McGuire, Woods, Battle & Boothe LLP will not monitor our
compliance with these requirements. While we expect to satisfy these tests, and
will use our best efforts to do so, we cannot ensure we will qualify as a REIT
for any particular year, or that the applicable law will not change and
adversely affect us and our shareholders. See "-- Failure to Qualify as a REIT."
The following is a summary of the material federal income tax considerations
affecting us as a REIT and our shareholders:
REIT QUALIFICATION
In order to maintain our REIT qualification, we must meet the following
criteria:
-- We must be organized as an entity that would, if we did not maintain
our REIT status, be taxable as a regular corporation.
-- We must be managed by one or more directors.
-- Our taxable year must be the calendar year.
-- Our beneficial ownership must be evidenced by transferable shares.
38
<PAGE>
-- 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 certain 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 Articles provide
restrictions on transfers of our common shares, as well as provisions that
automatically convert shares of stock into nonvoting, non-dividend paying Excess
Stock to the extent that the ownership otherwise might jeopardize our REIT
status.
To monitor our compliance with the share ownership requirements, we are
required to and 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 (i.e., the persons required to include
in gross income the REIT dividends). 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 certain other information.
We currently satisfy, and expect to continue to satisfy, each of the
requirements discussed above. We also currently satisfy, and expect to continue
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 any such
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 such items of the REIT.
75% GROSS INCOME TEST. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to us
are:
-- rents from real property;
-- interest on loans secured by real property;
-- gain from the sale of real property or loans secured by real property
(excluding gain from the sale of property held primarily for sale to
customers in the ordinary course of the Company's trade or business,
referred to below as "dealer property");
-- income from the operation and gain from the sale of certain 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
certain dealer property held by us for at least four years.
39
<PAGE>
We expect that substantially all of our operating gross income will be
considered rent from real property. Rent from real property is qualifying income
for purposes of the gross income tests only if certain conditions are satisfied.
Rent from real property includes charges for services customarily rendered to
tenants, and rent attributable to personal property leased together with the
real property so long as the personal property rent is less than 15% of the
total rent. We do not expect to earn material amounts in these categories. Rent
from real property generally does not include rent based on the income or
profits derived from the property. We do not intend to lease property and
receive rentals based on the tenant's net income or profit. However, rent based
on a percentage of gross income is permitted as rent from real property and we
will have leases where rent is based on a percentage of gross income.
Also excluded from "rents from real property" is rent received from a
person or corporation in which we (or any of its 10% or greater owners) directly
or indirectly through the constructive ownership rules contained in Section 318
of the Code, owns a 10% or greater interest ("Related Party Tenant Rent"). A
third exclusion covers amounts received with respect to real property if we
furnish services to the tenants or manage or operate the property, other than
through an "independent contractor" from whom we do not derive any income. The
obligation to operate through an independent contractor generally does not
apply, however, if the services provided by us are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
considered rendered primarily for the convenience of the tenant (applying
standards that govern in evaluating whether rent from real property would be
unrelated business taxable income when received by a tax exempt owner of the
property). 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 such services) is 1% or less of the total income derived from the
property, then all rental income from that property except the non-customary
service income will qualify as "rents from real property."
Upon the ultimate sale of any of our properties, any gains realized also
are expected to constitute qualifying income, as gain from the sale of real
property (not involving a prohibited transaction).
95% GROSS INCOME TEST. In addition to earning 75% of its gross income from
the sources listed above, at least an additional 20% of our gross income for
each taxable year must come either from those sources, or from dividends,
interest or gains from the sale or other disposition of stock or other
securities that do not constitute dealer property. This test permits a REIT to
earn a significant portion of its income from traditional "passive" investment
sources that are not necessarily real estate related. The term "interest" (under
both the 75% and 95% tests) does not include amounts that are based on the
income or profits of any person, unless the computation is based only on a fixed
percentage of receipts or sales.
FAILING THE 75% OR 95% TESTS; REASONABLE CAUSE. As a result of the 75% and
95% tests, REITs generally are not permitted to earn more than 5% of their gross
income from active sources (such as brokerage commissions or other fees for
services rendered). We may receive certain types of such income. This type of
income will not qualify for the 75% test or 95% test but is not expected to be
significant and such income, together with other non-qualifying income
(including related party tenant rent), is expected to be at all times less than
5% of our annual gross income. While we do not anticipate we will earn
substantial amounts of non-qualifying income, if non-qualifying income exceeds
5% of our gross income, we could lose our status as a REIT. We may in the future
establish subsidiaries in which we will hold less than 10% of the voting stock.
The gross income generated by these subsidiaries would not be included in our
gross income. However, dividends from such 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.
40
<PAGE>
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
such year, multiplied by a fraction intended to reflect our profitability. See
"-- Taxation as a REIT."
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 (including receivables) and government securities. For
this purpose, "real estate assets" include interests in real property, interests
in loans secured by mortgages on real property or by certain interests in real
property, shares in other REITs and certain options, but excluding mineral, oil
or gas royalty interests. The temporary investment of new capital in debt
instruments also qualifies under this 75% asset test, but only for the one-year
period beginning on the date we receive the new capital.
Second, although the balance of our assets generally may be invested
without restriction, we will not be permitted to own (1) securities of any one
non-governmental issuer that represent more than 5% of the value of our total
assets or (2) more than 10% of the outstanding voting securities of any single
issuer. A REIT, however, may own 100% of the stock of a qualified REIT
subsidiary, in which case the assets, liabilities and items of income, deduction
and credit of the subsidiary are treated as those of the REIT. In evaluating a
REIT's assets, if the REIT invests in a partnership, it is deemed to own its
proportionate share of the assets of the partnership. We currently comply with,
and expect to continue 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 (capital gain is not required to be distributed). 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
such income, minus (2) limited categories of "excess noncash income" (including,
cancellation of indebtedness and original issue discount income).
REIT Taxable Income is defined to be the taxable income of the REIT,
computed as if it were an ordinary corporation, with certain modifications. For
example, the deduction for dividends paid is allowed, but neither net income
from foreclosure property, nor net income from prohibited transactions, is
included. In addition, the REIT may carry over, but not carry back, a net
operating loss for 20 years following the year in which it was incurred.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with dividends paid after the end of the taxable year if the
dividends fall within one of the following categories:
-- Dividends paid in January that were declared during the last calendar
quarter of the prior year and were payable to shareholders of record on a
date during the last calendar quarter of that prior year are treated as
paid in the prior year for ourselves and our shareholders.
-- Dividends declared before the due date of our tax return for the taxable
year (including extensions) also will be treated as paid in the prior
year for ourselves if they are paid (1) within 12 months of the end of
such taxable year and (2) no later than our next regular distribution
payment.
Dividends that are paid after the close of a taxable year that do not
qualify under the rule governing payments made in January (described above) will
be taxable to the shareholders in the year paid, even though we may take them
into account for a prior year. A nondeductible excise tax equal to 4% will be
imposed on the 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 the Company's "ordinary income" plus (b) 95% of the
Company's capital gain net income plus (c) any undistributed income from prior
periods.
Dividends that are paid after the close of a taxable year that do not
qualify under the rule governing payments made in January described above will
be taxable to our shareholders in the year paid, even though we may be able to
take them into account for a prior year. We will incur a nondeductible excise
41
<PAGE>
tax equal to 4% will for each calendar year to the extent that dividends
declared and distributed or deemed distributed before December 31 are less than
the sum of (a) 85% of our "ordinary income" plus (b) 95% of our capital gain net
income plus (Copyright) any undistributed income from prior periods.
We will be taxed at regular corporate rates to the extent we retain any
portion of our taxable income. It is possible that we may not have sufficient
cash or other liquid assets to meet the distribution requirement. This could
arise because of competing demands for our funds, or because of timing
differences between tax reporting and cash receipts and disbursements. Although
we do not anticipate any difficulty in meeting this requirement, no assurance
can be given that necessary funds will be available. In the event this occurs,
we may arrange for short-term, or possibly long-term, borrowings to permit the
payment of required dividends and meet the 95% distribution requirement.
If we fail to meet the 95% distribution requirement because of an
adjustment to our taxable income by the IRS, we may be able to retroactively
cure the failure by paying a "deficiency dividend," as well as applicable
interest and penalties, within a specified period.
TAXATION AS A REIT
As a REIT, we generally will not be subject to corporate income tax to the
extent we currently distribute our REIT taxable income to our shareholders. This
treatment effectively eliminates the "double taxation" (i.e., taxation at both
the corporate and shareholder levels) 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 such class is entitled to such preference. We do not
anticipate we will pay any such preferential dividends. Because Excess Stock
will represent a separate class of outstanding shares, the fact that those
shares will not be entitled to dividends should not adversely affect our ability
to deduct dividend payments.
Even as a REIT, we will be subject to tax in the following circumstances:
-- any income or gain from foreclosure property will be taxed at the
highest corporate rate (currently 35%);
-- a confiscatory tax of 100% applies to any net income from prohibited
transactions, which are, in general, certain sales or other dispositions
of property held primarily for sale to customers in the ordinary course
of business;
-- if we fail to meet either the 75% or 95% source of income tests
previously described, but still qualify for REIT status under the
reasonable cause exception to those 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 certain 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 such year, (2) 95% of our
REIT capital gain net income for such year, and (3) any undistributed
taxable income from prior years, we would be subject to a 4% excise tax
on the excess of such 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 such
assets.
42
<PAGE>
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 the company and our shareholders. If we lose
our REIT status, unless we are able to obtain relief, we will not be eligible to
elect REIT status again until the fifth taxable year which begins after the
taxable year during which our election was terminated.
TAXATION OF SHAREHOLDERS
In general, distributions will be taxable to shareholders as ordinary
income to the extent of our earnings and profits. Specifically, dividends and
distributions will be treated as follows:
-- Dividends declared during the last quarter of a calendar year and
actually paid during January of the immediately following calendar year
are generally treated as if received by the shareholders on December 31
of the calendar year during which they were declared.
-- Distributions paid to shareholders will not constitute passive activity
income, and as a result generally cannot be offset by losses from passive
activities of a shareholder who is subject to the passive activity rules.
-- Distributions we designate as capital gains dividends generally will be
taxed as long term capital gains to shareholders to the extent that the
distributions do not exceed our actual net capital gain for the taxable
year. Corporate shareholders may be required to treat up to 20% of any
such 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 such net long-term capital gain. Our
shareholders would receive a credit for such shareholder's proportionate
share of the tax paid by us on such 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.
Future regulations may require that the shareholders take into account, for
purposes of computing their individual alternative minimum tax liability,
certain of our tax preference items.
We may generate cash in excess of our net earnings. If we distribute cash
to our shareholders in excess of our current and accumulated earnings and
profits, other than as a capital gain dividend, the excess cash will be deemed
to be a return of capital to each shareholder to the extent of the adjusted tax
basis of the shareholder's shares. Distributions in excess of the adjusted tax
basis will be treated as gain from the sale or exchange of the shares. A
shareholder who has received a distribution in excess of our current and
accumulated earnings and profits may, upon the sale of the shares, realize a
higher taxable gain or a smaller loss because the basis of the shares as reduced
will be used for purposes of computing the amount of the gain or loss.
Generally, gain or loss realized by a shareholder upon the sale of common
shares will be reportable as capital gain or loss. If a shareholder receives a
long-term capital gain dividend and has held the shares for six months or less,
any loss incurred on the sale or exchange of the shares is treated as a
long-term capital loss to the extent of the corresponding long-term capital gain
dividend received.
43
<PAGE>
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 the
Company's tax preference items.
BACKUP WITHHOLDING
We will report to our shareholders and the IRS the amount of dividends paid
during each calendar year and the amount of tax withheld, if any. If a
shareholder is subject to backup withholding, we will be required to deduct and
withhold from any dividends payable to that shareholder a tax of 31%. These
rules may apply in the following circumstances:
-- when a shareholder fails to supply a correct taxpayer identification
number,
-- when the IRS notifies us that the shareholder is subject to the rules or
has furnished an incorrect taxpayer identification number, or
-- in the case of corporations or others within certain 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 (the
"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 1,2000, subject to
certain transition rules. Prospective investors should consult their own tax
advisors concerning the adoption of the Final Regulations and the potential
effect on their ownership of common shares or Preferred Stock.
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 ("qualified
trusts") 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
under "-- REIT Qualification --," generally, any stock held by a qualified trust
will be treated as held directly by its beneficiaries in proportion to their
actuarial interests in such trust and will not be treated as held by such trust.
A qualified trust owning more than 10% of a REIT may be required to treat a
percentage of dividends from the REIT as UBTI. The percentage is determined by
dividing the REIT's gross income, less direct expenses related thereto, derived
from an unrelated trade or business for the year (determined as if the REIT were
a qualified trust) by the gross income of the REIT for the year in which the
dividends are paid. However, if this percentage is less than 5%, dividends are
not treated as UBTI. These UBTI rules apply only if the REIT qualifies as a REIT
because of the change in the 50% test discussed above and if the trust is
"predominantly held" by qualified trusts. A REIT is predominantly held by
qualified trusts if at least one pension trust owns more than 25% of the value
of the REIT or a group of pension trusts each owning more than 10% of the value
of the REIT collectively own more than 50% of the value of the REIT. The Company
does not currently meet either of these requirements.
44
<PAGE>
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 (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws with regard to an
investment in common shares or Preferred Stock, including any reporting
requirements, as well as the tax treatment of such an investment under the laws
of their home country.
Dividends that are not attributable to gain from our sales or exchanges of
United States real property interests and not designated us as capital gain
dividends will be treated as dividends of ordinary income to the extent that
they are made out of our current or accumulated earnings and profits. Such
dividends ordinarily will be subject to a withholding tax equal to 30% of the
gross amount of the dividend unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the common shares
or Preferred Stock is treated as effectively connected with the Non-U.S.
Shareholder's conduct of a United States trade or business, the Non-U.S.
Shareholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. shareholders are taxed with respect to such dividends (and may
also be subject to the 30% branch profits tax in the case of a shareholder that
is a foreign corporation).
For withholding tax purposes, we are currently required to treat all
distributions as if made out of current and accumulated earnings and profits.
Therefore we withhold at the rate of 30%, or a reduced treaty rate if
applicable, on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Shareholder unless (1)
the Non-U.S. Shareholder files on IRS Form 1001 claiming that a lower treaty
rate applies or (2) the Non-U.S. Shareholder files an IRS Form 4224 with the
Company claiming that the dividend is effectively connected income.
Under the Final Regulations, generally effective for distributions on or
after January 1, 2000, we would not be required to withhold at the 30% rate on
distributions we reasonably estimate to be in excess of our current and
accumulated earnings and profits. Dividends in excess of our current and
accumulated earnings and profits will not be taxable to a shareholder to the
extent they do not exceed the adjusted basis of the shareholder's shares.
Instead, they will reduce the adjusted basis of such shares. To the extent that
such dividends exceed the adjusted basis of a Non-U.S. Shareholder's shares,
they will give rise to tax liability if the Non-U.S. Shareholder would otherwise
be subject to tax on any gain from the sale or disposition of his shares, as
described below. If it cannot be determined at the time a dividend is paid
whether or not such dividend will be in excess of current and accumulated
earnings and profits, the dividends will be subject to withholding.
We do not intend to make quarterly estimates of that portion of dividends
that are in excess of earnings and profits, and, as a result, all dividends will
be subject to such withholding. However, the Non-U.S. Shareholder may seek a
refund of such amounts from the IRS.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from our sales or exchanges of United States real property
interests will be taxed to a Non-U.S. Shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
those dividends are taxed to a Non-U.S. Shareholder as if such gain were
effectively connected with a United States business. Non-U.S. Shareholders would
thus be taxed at the normal capital gain rates applicable to U.S. shareholders,
subject to applicable alternative minimum tax and a special alternative
45
<PAGE>
minimum tax in the case of nonresident alien individuals. Also, dividends
subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a
corporate Non-U.S. Shareholder not entitled to treaty exemption. We are required
by the Code and applicable Treasury Regulations to withhold 35% of any dividend
that we could designate as a capital gain dividend. This amount is creditable
against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of shares generally
will not be taxed under FIRPTA if we are a "domestically controlled REIT,"
defined generally as a REIT in which at all times during a specified testing
period, less than 50% in value of the shares was held directly or indirectly by
foreign persons. We believe we are a "domestically controlled REIT," and
therefore the sale of shares is not subject to taxation under FIRPTA. Because
the common shares are publicly traded, however, no assurance can be given that
we will remain a "domestically controlled REIT." However, gain not subject to
FIRPTA will be taxable to a Non-U.S. Shareholder if:
-- investment in the common shares or Preferred Stock is effectively
connected with the Non-U.S. Shareholder's United States trade or
business, in which case the Non-U.S. Shareholder will be subject to the
same treatment as U.S. shareholders with respect to such gain (and may
also be subject to the 30% branch profits tax in the case of a corporate
Non-U.S. Shareholder), or
-- the Non-U.S. Shareholder is a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States, in which case the nonresident
alien individual will be subject to a 30% withholding tax on the
individual's capital gains.
If we were not a domestically controlled REIT, whether or not a Non-U.S.
Shareholder's sale of common shares or Preferred Stock would be subject to tax
under FIRPTA would depend on whether or not the common shares or Preferred Stock
were regularly traded on an established securities market (such as the NYSE) and
on the size of selling Non-U.S. Shareholder's interest in our securities. If the
gain on the sale of shares were to be subject to taxation under FIRPTA, the
Non-U.S. Shareholder will be subject to the same treatment as U.S. shareholders
with respect to such gain and the purchaser of such common shares or Preferred
Stock may be required to withhold 10% of the gross purchase price. Any FIRPTA
taxation would be subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals.
STATE AND LOCAL TAXES
We may be subject to state or local taxation in various state or local
jurisdictions, including those in which we transact business. In addition, our
shareholders may also be subject to state or local taxation. Consequently,
prospective shareholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in our securities.
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 such
Plan's assets in common shares. In particular, the fiduciary should consider:
-- whether the investment satisfies the diversification requirements of
Section 404(a)(1)(c) of ERISA,
-- whether the investment is in accordance with the documents and
instruments governing the Plan as required by Section 404(a)(1)(D) of
ERISA,
-- whether the investment is for the exclusive purpose of providing benefits
to participants in the Plan and their beneficiaries, or defraying
reasonable administrative expenses of the Plan, and
-- whether the investment is prudent under ERISA.
46
<PAGE>
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. Such persons are referred to as "parties in interest" in ERISA and as
"disqualified persons" in the Code. Thus, a fiduciary of a Plan considering an
investment in common shares should also consider whether acquiring or continuing
to hold common shares, either directly or indirectly, might constitute a
prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the
"Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under these Regulations, if a Plan acquires an equity interest that is
neither a "publicly offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, as amended, then
for purposes of fiduciary and prohibited transaction provisions under ERISA and
the Code, the assets of the Plan would include both the equity interest and an
undivided interest in each of the entity's underlying assets, unless an
exemption applies.
The Regulations define a publicly-offered security as a security that is:
-- "widely held"
-- "freely transferable," and
-- either part of a class of securities registered under the Exchange Act,
or sold pursuant to an effective registration statement under the
Securities Act, provided the securities are registered under the Exchange
Act within 120 days after the end of the fiscal year of the issuer during
which the offering occurred.
The Regulations provide that a security is "widely held" only if it is part
of a class of securities that is owned by 100 or more investors independent of
the issuer and of one another. However, a security will not fail to be "widely
held" if the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. The
Regulations further provide that whether a security is "freely transferable" is
a factual question to be determined on the basis of all relevant facts and
circumstances. The Regulations also provide that when a security is part of an
offering in which the minimum investment is $10,000 or less, the existence of
certain restrictions ordinarily will not, along or in combination, affect the
finding that such securities are freely transferable.
We believe that the restrictions imposed under our bylaws on the transfer
common shares are limited to the restrictions on transfer generally permitted
under the Regulations, and are not likely to result in the failure of the common
shares to be "freely transferable." We also believe that the restrictions that
apply to the common shares held by us, or which may be derived from contractual
arrangements requested by David Lerner Associates in connection with common
shares are unlikely to result in the failure of the common shares to be "freely
transferable." Nonetheless, no assurance can be given that the DOL and/or the
U.S. Treasury Department could not reach a contrary conclusion. Finally, the
common shares offered are securities that will be registered under the
Securities Act and are or will be registered under the Exchange Act.
Assuming that the common shares satisfy the definition of publicly-offered
securities, described above, the underlying assets will not be deemed to be
"plan assets" of any Plan that invests in the securities offered hereby.
Notwithstanding the above, the Regulations provide that even if a security
offered hereunder were not a publicly-traded security, investment by a Plan
herein 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. It is expected that 75 percent of the common shares are
expected to be held, at all times, by investors other than benefit plan
investors. The term "benefit plan investors" generally includes the plans
described above.
47
<PAGE>
CAPITALIZATION
The capitalization of the Company as of March 31, 1999, and as adjusted to
reflect the issuance and sale of the common shares offered hereby assuming the
minimum offering and maximum offering is set forth in the table below. The
following table does not reflect offering and organizational costs and other
anticipated uses of proceeds, as described under "Estimated Use of Proceeds."
<TABLE>
<CAPTION>
AS ADJUSTED
--------------------------------
MINIMUM MAXIMUM
ACTUAL OFFERING OFFERING
-------- -------------- ---------------
<S> <C> <C> <C>
Common Shares; no par value; 10 shares issued,
1,666,666.67 and 30,166,666.67 shares issued as
adjusted, respectively ........................ $100 $15,000,100 $300,000,100
</TABLE>
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were organized on March 5, 1999 and have no operations to date. In
addition, we currently own no properties. We intend to qualify as a REIT under
the Internal Revenue Code. In order to maintain our qualification as a REIT, we
will be obligated to distribute annually at least 95% of our taxable income to
our shareholders.
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, although we intend to purchase properties on an all-cash
basis or using short-term interim debt, we reserve the right to borrow funds if
we deem it prudent. See "Policies with Respect to Certain Activities --
Borrowing Policies."
On April 20, 1999, we obtained a line of credit in a principal amount of up
to $1 million to fund our start-up costs. The lender is First Union National
Bank. This line of credit bears interest at LIBOR plus 1.50%. Interest is
payable monthly and the principal balance and all accrued interest are due in
full on October 20, 1999. Glade M. Knight, our president and Chairman of the
Board, has guaranteed repayment of the loan. We expect to repay this debt with
proceeds from the sale of common shares.
We anticipate that our cash flow will be adequate to cover our operating
expenses and to permit us to meet our anticipated liquidity requirements,
including distribution requirements. Inflation may increase our operating costs,
including our costs on bank borrowings, if any.
We intend to establish a working capital reserve of at least 0.5% of the
proceeds from this offering. This reserve, in combination with income from our
properties and short term investments, is anticipated to satisfy our liquidity
requirements.
49
<PAGE>
PLAN OF DISTRIBUTION
The Company is offering to sell the common shares using the service of
David Lerner Associates, Inc. as the managing dealer, and other broker-dealers
selected by the managing dealer ("Selected Dealers"). The common shares are
being offered on a "best efforts" basis, meaning that the managing dealer and
Selected Dealers are not obligated to purchase any common shares. No common
shares will be sold unless at least the minimum offering of $15,000,000 in
shares has been sold no later than one year after the date of this prospectus.
If the minimum offering of shares is not sold by that date, the offering will
terminate and all funds deposited by investors into the escrow account will be
promptly refunded in full, together with each investor's share of any interest
earned thereon (less withholding of taxes in respect to payment of interest, if
applicable). First Union National Bank will act as escrow agent for the escrow
account until the minimum offering of shares is sold.
The common shares are offered at $9 per share until the minimum offering of
$15,000,000 in shares is achieved. Thereafter, the common shares will be offered
at $10 per share.
The offering of common shares is expected to terminate when all shares
offered hereby have been sold or one year from the date hereof, unless extended
by us for up to an additional year. In some states, extension of the offering
may not be allowed, or may be allowed only upon certain conditions.
Purchasers will be sold common shares at one or more closings. Following
the sale of the minimum offering, additional closings will be held from time to
time during the offering period as orders are received. The final closing will
be held shortly after the termination of the offering period or, if earlier,
upon the sale of all the common shares. It is expected that after the closing of
the sale of the minimum offering, purchasers will be sold common shares no later
than the last day of the calendar month following the month in which their
orders are received. Funds received during the offering but after the initial
disbursement of funds may 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 such 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 a Selected Dealer.
We intend to hold investors' funds in escrow until the minimum offering of
$15,000,000 is achieved and the initial closing has occurred. Thereafter,
investors' funds will not be held in escrow pending each applicable closing. We
intend to cause to be paid from the escrow account in connection with the
minimum offering of $15,000,000 each investor's share of net interest on
escrowed funds, whether or not the investor's subscription for shares is
accepted. We reserve the right to adopt reasonable simplifying conventions or
assumptions in determining each investor's share of such net interest.
Investors' subscriptions will be revocable by written notice delivered to the
escrow agent at least five days before the initial closing. Subject to the
foregoing, an investor's subscription funds may remain in escrow for an
indefinite period of time.
It is expected that shareholders will be able to elect to reinvest any
distributions from us in additional common shares available in this offering,
for as long as this offering continues. This option is referred to herein 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 such reinvestment, as well as the right
to modify or terminate such Additional Share Option at any time. We estimate
that approximately 500,000 Shares ($5,000,000 at $10 per share) offered through
this prospectus will be purchased through shareholders' reinvestment of
distributions in common shares pursuant to the Additional Share Option described
in this paragraph, but the number of shares which will be so purchased cannot be
determined at this time.
Subject to the Additional Share Option being available through the
broker-dealer which initially sells a shareholder his common shares, a
shareholder will be able to elect the option by directing, on his Subscription
Agreement, that cash distributions be reinvested in additional shares.
Distributions
50
<PAGE>
attributable to any calendar quarter will then be used to purchase common shares
in this offering. As described under "Federal Income Tax Consequences -Federal
Income Taxation of the Shareholders," a shareholder who elects the Additional
Share Option will be taxed as if he had received his distributions which are
used to purchase additional shares. A shareholder may elect to terminate his
participation in the Additional Share Option at any time by written notice sent
it or to the broker-dealer through which the Shareholder initially purchased
shares. The notice will be effective with respect to distributions attributable
to any calendar quarter if it is sent at least 10 days before the end of such
calendar quarter.
Funds not invested in real properties may be invested by us in United
States Government securities, certificates of deposit of banks located in the
United States having a net worth of at least $50,000,000, bank repurchase
agreements covering the securities of the United States Government or United
States governmental agencies issued by banks located in the United States having
a new worth of at least $50,000,000, bankers' acceptances, prime commercial
paper or similar highly liquid investments (such as money market funds selected
by the Company) or evidences of indebtedness.
We will pay to David Lerner Associates, Inc. selling commissions on all
sales made in an amount equal to 7.5% of the purchase price of the Shares
($0.675 per share purchased at $9 per share and $0.75 per share purchased at $10
per share). We will also pay to David Lerner Associates, Inc. a marketing
expense allowance equal to 2.5% of the purchase price of the shares, as a
non-accountable reimbursement for expenses incurred by it in connection with the
offer and sale of the common shares. The marketing expense allowance will equal
$0.225 per share purchased at $9 per share and $0.25 per share purchased at $10
per share. The selling commissions and marketing expense allowance are payable
to David Lerner Associates, Inc. at the times of the issuance of common shares
to purchasers.
Prospective investors are advised that David Lerner Associates, Inc.,
reserves the right to purchase common shares, on the same terms applicable
generally to sales pursuant to this prospectus, for its own account, at any time
and in any amounts, to the extent not prohibited by relevant law.
The Agency Agreement among us, the Advisor and the Broker and David Lerner
Associates, Inc. permits David Lerner Associates, Inc. to use the services of
other broker-dealers in offering and selling the common shares, subject to our
approval. David Lerner Associates, Inc. will pay the compensation owing to such
broker-dealers out of the selling commissions or marketing expense allowance
payable to it. Sales by such broker-dealers would 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 in
connection with this offering. Purchasers' checks are to be made payable to
"First Union National Bank, Escrow Agent" or as otherwise directed by David
Lerner Associates, Inc.
Purchasers are required to purchase a minimum of $5,000 in common shares
($2,000 in common shares for Qualified Plans). the Advisor and the Broker may
purchase in this offering up to 2.5% of the total number of shares sold in the
offering, on the same terms and conditions as the public. If the Advisor and the
Broker purchase any common shares, they will be permitted to vote on any matters
submitted to a vote of holders of the common shares. Any purchase of shares in
this offering by the Advisor and the Broker must be for investment, and not for
resale or distribution. The shares described in this paragraph are exclusive of
the shares which may be issued under our stock incentive plans.
See "Management -- Stock Incentive Plans."
There has been no previous market for any of our common shares. The initial
offering price for the common shares is arbitrary and was determined on the
basis of the proposed capitalization of our company, market conditions and other
relevant factors.
We, the Advisor and the Broker have agreed to indemnify David Lerner
Associates, Inc. and other broker-dealers against certain liabilities, including
liabilities under the Securities Act. No indemnification is provided for willful
misfeasance, bad faith, gross negligence or reckless disregard of duties under
the Securities Act by any of such persons.
The company has agreed to sell to David Lerner Associates, Inc. for an
aggregate of $100, warrants (the "Warrants") to purchase 10% of the shares sold
up to 3,000,000 common shares at an exercise price of $16.50 per common share
(165% of the public offering price per common share). The Warrants may
51
<PAGE>
not be sold, transferred, assigned or hypothecated for one year from the date of
their issuance, except to the officers and employees of David Lerner Associates,
Inc. and are exercisable at any time and from time to time, in whole or in part,
during the five-year period commencing on the date of the final closing after
the termination of this offering (the "Warrant Exercise Term"). During the
Warrant Exercise Term, the holders of the Warrants are given, at nominal cost,
the opportunity to profit from a rise in the market price of the common shares.
To the extent that the Warrants are exercised, dilution to the interests of the
shareholders will occur. Further, the terms upon which we may be able to obtain
additional equity capital may be adversely affected since the holders of the
Warrants can be expected to exercise them at a time when we would, in all
likelihood, be able to obtain any needed capital on terms more favorable to us
than those provided in the Warrants. Any profit realized by David Lerner
Associates on the sale of the Warrants may be deemed additional underwriting
compensation. We have agreed, at the request of the holders of a majority of the
Warrants, at our expense, to register the Warrants under the Securities Act on
one occasion during the Warrant Exercise Term and to include the Warrants in any
appropriate registration statement which is filed by us during the seven years
following the date of this prospectus.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The information set forth below is only a summary of our terms of our
common shares. You should refer to our articles of incorporation (the
"Articles"), and bylaws for a complete description of the common shares.
Our authorized capital stock consists of 200,000,000 common shares, no par
value, 240,000 Class B Convertible shares, no par value and 15,000,000 shares of
preferred stock, no par value. Each common share will be fully paid and
nonassessable upon issuance and payment therefor. As of the date of this
prospectus, there were 10 common shares issued and outstanding. All 240,000
authorized Class B Convertible shares will be held by Glade M. Knight and two
other individuals. See "Principal and Management Shareholders."
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 such dividend is subject to the following restrictions:
-- the dividend rights of the common shares may be subordinate to any other
shares or new series of stock our Board may authorize in the future, and
-- the amount the dividend is limited by law.
If we liquidate our assets or dissolve entirely, the holders of the common
shares will share, on a pro rata basis, in the assets we are legally allowed to
distribute. We must pay all of our known debts and liabilities or have made
adequate provision for payment of these debts and liabilities before holders of
common shares can share in our assets.
Holders of common shares do not have the right to convert or redeem their
shares. In addition, they do not have rights to a sinking fund or to subscribe
for any of our securities.
VOTING RIGHTS
Each outstanding common share entitles the holder to one vote on all
matters submitted to a vote of shareholders. The holders of common shares have
exclusive voting power with respect to the election of directors, except as
otherwise required by law or except as provided with respect to any other class
or series of stock. There is no cumulative voting in the election of directors.
Therefore the holders of a majority of the outstanding common shares can elect
all of the directors then standing for election and the holders of the remaining
shares will not be able to elect any directors.
Our Articles state that a majority of common shares outstanding and
entitled to vote on a matter may approve our company to take any of the
following actions:
-- dissolve,
-- amend our charter or articles of incorporation,
-- merge,
-- sell all or substantially all of our assets, or
-- engage in 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.
53
<PAGE>
PREFERRED STOCK
Our Articles of Incorporation authorize our issuance of up to 15 million
shares of preferred stock. No shares of preferred stock have been issued.
We believe that the authorization to issue shares of preferred stock
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 stock available for issuance in the future gives us the
ability to respond to future developments and allow preferred stock to be issued
without the expense and delay of a special shareholders' meeting.
At present, we have no specific financing or acquisition plans involving
the issuance of preferred stock and we do not propose to fix the characteristics
of any series of shares of preferred stock in anticipation of issuing preferred
stock. We cannot now predict whether or to what extent, if any, preferred stock
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 stock. Unless otherwise required by applicable law
or regulation, the preferred stock 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
stock 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 shares of preferred stock could
be given rights that are superior to certain 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 of our company.
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% (the "Ownership Limit") of the aggregate value of all of our
outstanding common shares. The Board may exempt a proposed transferee from the
Ownership Limit. In connection therewith, 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 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. The foregoing 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 that would result in a person
owning shares of capital stock in excess of the Ownership Limit will result in
the shares subject to such purported transfer being automatically exchanged for
an equal number of shares of Excess Stock. Under our bylaws, Excess Stock will
be deemed to have been transferred to us as trustee of a separate trust (the
"Trust") for the exclusive benefit of the person or persons to whom the interest
in the Trust can ultimately be transferred.
54
<PAGE>
Excess Stock is not transferable, but the interest in the Trust
representing the Excess Stock may be transferable. A holder of an interest in
the Trust representing Excess Stock may transfer such interest if the proposed
transferee could hold our stock without triggering the Excess Stock provisions.
The transfer must also be made at a price not to exceed the price paid by the
purported transferee or, if no consideration was paid, the Market Price measured
on the date of the original attempted transfer. If these conditions are met, any
Excess Stock involved will automatically be exchanged for the common shares or
preferred stock to which the Excess Stock is attributable.
We may also purchase Excess Stock at a price equal to the lesser of:
-- the price paid for the shares of capital stock by the intended transferee
or, if no consideration was paid, the Market Price of the shares of
capital stock resulting in Excess Stock, measured on the date of the
transfer, or
-- the Market Price of the shares of capital stock resulting in Excess Stock
measured on the date on which we elect to purchase the Excess Stock.
"Market Price" means the average daily closing price of a share if listed
on a national securities exchange or quoted on NASDAQ National Market. If the
shares are not then traded on any exchange or quotation system, Market Price
will be the mean between the average closing bid prices and the average closing
asked prices. In each case, Market Price is measured during the 30-calendar day
period ending on the business day prior to the measurement date. If there have
been no sales or published bid and asked quotations with respect to such shares
during this 30-day period, the Market Price will be as determined in good faith
by our Board.
From and after the intended transfer to the purported transferee of the
shares of Excess Stock, the purported transferee will cease to be entitled to
distributions, except upon liquidation, voting rights and other benefits with
respect to the Excess Stock. The purported transferee will retain the right to
payment of the purchase price for the applicable shares of underlying capital
stock. Any dividend or distribution paid to a purported transferee on Excess
Stock prior to our discovery that the shares have been transferred in violation
of our bylaws must be repaid upon demand.
If the foregoing transfer restrictions are determined to be void or invalid
by virtue of any legal decision, statute, rule or regulation, then the intended
transferee of any Excess Stock may be deemed, at our option, to have acted as an
agent on our behalf in acquiring the Excess Stock and to hold the Excess Stock
on our behalf. All certificates representing shares of capital stock will bear a
legend referring to the restrictions described above.
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 Code applicable to a REIT, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of shares
of capital stock might receive a premium for their shares over the
then-prevailing market price or which these holders might believe to be
otherwise in their best interest.
FACILITIES FOR TRANSFERRING COMMON SHARES
David Lerner Associates may, but is not obligated to, assist shareholders
who desire to transfer their common shares. In the event David Lerner Associates
provides assistance, it will be entitled to receive compensation as specified by
it. Any assistance offered by David Lerner Associates may be terminated or
modified at any time without notice, and any fee charged for transfer assistance
may be modified or terminated at any time and without notice. David Lerner
Associates currently has no plans for rendering the type of assistance referred
to in this paragraph. This assistance, if offered, would likely consist of
informally matching isolated potential buyers and sellers, and would not
represent the creation of any "market" for the common shares.
55
<PAGE>
No public market for the common shares currently exists. We do not plan to
cause the common shares to be listed on any securities exchange or quoted on any
system or in any established market either immediately or at any definite time
in the future. While we may cause the common shares to be listed or quoted if
our board of directors determines that action to be prudent, there can be no
assurance that such an event will ever occur. Prospective shareholders should
view the common shares as illiquid and must be prepared to hold their investment
for an indefinite length of time.
WARRANTS
We have agreed to sell to David Lerner Associates, Inc. for an aggregate of
$100, warrants (the "Warrants") to purchase 10% of the shares sold in this
offering, up to 3,000,000 common shares at an exercise price of $16.50 per
common share (165% of the public offering price per common share). The Warrants
may not be sold, transferred, assigned or hypothecated for one year from the
date of this prospectus, except to the officers and employees of David Lerner
Associates, Inc. and are exercisable at any time and from time to time, in whole
or in part, during the five-year period commencing on the date of the final
closing after the termination of this offering (the "Warrant Exercise Term").
During the Warrant Exercise Term, the holders of the Warrants are given, at
nominal cost, the opportunity to profit from a rise in the market price of the
common shares. To the extent that the Warrants are exercised, dilution to the
interests of the shareholders will occur. We have agreed, at the request of the
holders of a majority of the Warrants, at our expense, to register the Warrants
under the Securities Act on one occasion during the Warrant Exercise Term and to
include the Warrants in any appropriate registration statement which is filed by
us during the seven years following the date of this prospectus.
56
<PAGE>
SUMMARY OF ORGANIZATIONAL DOCUMENTS
The following is a summary of the principal provisions of our articles of
incorporation and bylaws, some of which may be described or referred to
elsewhere in this prospectus. Neither this summary nor such 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 such
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 (i) for cause by the vote or written consent of
all directors other than the director whose removal is being considered, or (ii)
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. See
"Management." 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 certain of its powers to
an executive committee, which must be 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 such requirement shall not be applicable for 60 days.
RESPONSIBILITY OF BOARD OF DIRECTORS, ADVISOR, 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 such 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 the Advisor 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 the affairs of our company.
The articles of incorporation and the Advisory Agreement, respectively, provide
that we shall indemnify any present or former director, officer, employee or
agent and the Advisor against any expense or liability in an action brought
against such person if the directors (excluding the indemnified party) determine
in good faith that the director, officer, employee or agent or the Advisor 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 the best interests of the company or 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,
57
<PAGE>
including attorneys' fees, arising from or out of a violation of federal or
state securities laws associated with the public offering of the common shares
unless (i) there has been a successful adjudication on the merits of each count
involving alleged securities law violations as to the particular indemnitee, or
(ii) such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee, or (iii) a court of
competent jurisdiction approves a settlement of the claims against a particular
indemnitee. To the extent that the foregoing indemnification provisions purport
to include indemnification for liabilities arising under the Securities Act, in
the opinion of the Securities and Exchange Commission, such indemnification is
contrary to public policy and therefore unenforceable.
In the absence of the special exculpation and indemnification provisions in
the articles of incorporation, the directors and officers would have greater
accountability to us under Virginia statutory law. In the absence of a special
provision in the articles of incorporation, a director or officer of a Virginia
corporation would have financial liability for misconduct equal to the greater
of $100,000 or the amount of cash compensation received by the director or
officer from the corporation during the twelve preceding months. Virginia law
permits, but does not require, a corporation to indemnify a director if the
director conducted himself in good faith and believed that his conduct was in
the best interests (or in certain cases at least not opposed to the best
interests) of the corporation. As noted above, the articles of incorporation
require indemnification under the circumstances indicated, and therefore provide
rights more favorable to the directors and officers than would be afforded by
Virginia law alone.
Although no Virginia court has passed upon the nature of the accountability
owed by an entity like the Advisor to an entity like us, it is almost certain
that the exculpation and indemnification provisions benefiting the Advisor under
the Advisory Agreement are more beneficial to the Advisor than would be the
result in the absence of such provisions. Since the Advisor has a contractual
relationship with us, in the absence of special exculpation and indemnification
provisions in the Advisory Agreement, a court would likely hold that the Advisor
is liable for ordinary negligence and ordinary misconduct, in addition to the
more egregious misconduct for which the Advisor is liable under the Advisory
Agreement.
The exculpation and indemnification provisions in the articles of
incorporation and the Advisory Agreement have been adopted to help induce the
beneficiaries of such provisions to agree to serve on behalf of our company or
the Advisor by providing a degree of protection from liability for alleged
mistakes in making decisions and taking actions. Such 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, the
Advisor or its affiliates than he or it would otherwise have had in the absence
of such provisions. Conversely, the presence of such provisions may have the
effect of conferring greater discretion upon the directors, the Advisor 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, the Advisor and the
directors and officers are accountable to us and our shareholders as fiduciaries
and must exercise good faith and integrity in handling our affairs. As noted
above, however, the exculpation and indemnification provisions in the articles
of incorporation and the Advisory Agreement represent a material change from the
accountability which would be imposed upon the directors, officers, the Advisor
and its affiliates in the absence of such contractual provisions. Thus, such
fiduciary duties will be materially different from such fiduciary duties as they
would exist in the absence of the provisions of the articles of incorporation
and the Advisory Agreement.
ISSUANCE OF SECURITIES
The Board of Directors may in its discretion issue additional common shares
or other equity or debt securities, including options, warrants, and other
rights, on such terms and for such consideration as it may deem advisable. See
"Risk Factors -- Potential Dilution of Shareholders' Interests." Without
limiting the generality of the foregoing, 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 the Advisor and the Broker in lieu of cash payments
58
<PAGE>
required under the Advisory Agreement or other contract or obligation. The Board
of Directors, in its sole discretion, may determine the value of any shares or
other equity or debt securities issued in consideration of property or services
provided, or to be provided, to us, except that while shares are offered by us
to the public, the public offering price of such common shares shall be deemed
their value.
We have adopted two stock incentive plans for the benefit of our directors
and certain employees and for the benefit of certain employees of the Advisor
and the Broker. See "Management -- Stock Incentive Plans."
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 Excess
Shares. See "Description of Capital Stock -- Repurchase of Shares and
Restrictions on Transfer."
AMENDMENT
The articles of incorporation and the bylaws generally 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 in limited circumstances. The Board of Directors may, without shareholder
approval, amend the articles of incorporation to create series of preferred
stock and define the terms of such series. The Board of Directors may, without
shareholder approval, amend the bylaws (1) to bring the bylaws into conformity
with the REIT provisions of the Code or other law or regulation, or the
requirements of any state securities administrator, (2) to correct any ambiguity
in the bylaws or resolve any inconsistency between the bylaws and the articles
of incorporation, (3) to make any change in the bylaws not materially adverse to
the interests of the shareholders, or (4) to permit us to take any action or
fulfill any obligation which we are legally permitted or obligated to take or
fulfill.
SHAREHOLDER LIABILITY
The holders of our shares shall not be liable personally on account of any
obligation of our company.
59
<PAGE>
SALES LITERATURE
We may use certain sales or marketing literature in connection with the
offering of the common shares. Sales or marketing materials which may be used
include a sales brochure highlighting our company. The literature may also
include a brochure describing the Advisor and the Broker and affiliates and a
"tombstone" advertisement, mailer and introductory letter. We may, from time to
time, also utilize brochures describing completed or proposed property
acquisitions, summaries of our company or of the offering of the common shares,
and discussions of REIT investments generally.
The offering is, however, made only by means of this prospectus. Except as
described herein, 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 such
literature does not conflict with any of the information contained in this
prospectus, the material does not purport to be complete, and should not be
considered as a part of this prospectus or the registration statement of which
this prospectus is a part, as incorporated in this prospectus or the
registration statement by reference, or as forming the basis of the offering of
the common shares described herein.
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 the Advisor and the Broker
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. Such quarterly reports will include
unaudited financial statements prepared in accordance with generally accepted
accounting principles, a statement of fees paid during the quarter to the
Advisor and the Broker 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
Exchange Act 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 such report to the shareholders at
least once each quarter after the termination of this offering.
LEGAL MATTERS
Certain legal matters in connection with the common shares will be passed
upon for us by McGuire, Woods, Battle and Boothe LLP, Richmond, Virginia.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our balance sheet at
March 26, 1999, as set forth in their report. We've included our balance sheet
in the prospectus and in the registration statement in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors ........... F-2
Balance Sheet at March 26, 1999 .......... F-3
Notes to Balance Sheet ................... F-4
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholder of
Apple Suites, Inc.
We have audited the accompanying balance sheet of Apple Suites, Inc. as of March
26, 1999. This balance sheet is the responsibility of the Company's management.
Our responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Apple Suites, Inc. at March 26,
1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Richmond, Virginia
April 21, 1999
F-2
<PAGE>
Apple Suites, Inc.
Balance Sheet
March 26, 1999
Assets
Cash $ 100
==============
Stockholder's equity
Preferred stock,
authorized 15,000,000 shares; none
issued and outstanding -
Class B convertible stock, no par value,
authorized 240,000 shares; none
issued and outstanding -
Common stock, no par value
authorized 200,000,000 shares;
issued and outstanding 10 shares $ 100
--------------
$ 100
==============
See accompanying notes to balance sheet.
F-3
<PAGE>
Apple Suites, Inc.
Notes to Balance Sheet
1. Summary of Significant Accounting Policies
Organization
Apple Suites, Inc. (the "Company") is a Virginia corporation that intends to
qualify as a real estate investment trust ("REIT") for federal income tax
purposes. The Company, which has no operating history, was formed to invest
primarily in extended stay hotels in the southeastern and southwestern United
States. Initial capitalization occurred on March 5, 1999, when 10 shares of
common stock were purchased by Apple Suites Advisors, Inc. (see Note 3).
Significant Accounting Policies
Income Taxes
The Company intends to make an election to be treated, and expects to qualify,
as a REIT under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company will be allowed a deduction for the amount of dividends paid to its
shareholders, thereby subjecting the distributed net income of the Company to
taxation only at the shareholder level. The Company's continued qualification as
a REIT will depend on its compliance with numerous requirements, including
requirements as to the nature of its income and distribution of dividends.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Start Up costs
Start up costs incurred other than offering costs will be expensed upon the
successful completion of the minimum offering (see Note 3).
F-4
<PAGE>
Apple Suites, Inc.
Notes to Balance Sheet (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.
A minimum offering of 1,666,666 shares ($15,000,000) must be sold within one
year from the beginning of this offering or the offering will terminate and
investors' subscription payments, with interest, will be refunded to investors.
Pending sale of such minimum offering amount, investors' subscription payments
will be placed in an escrow account.
3. Related Parties
The Company has negotiated, but not signed, a Property Acquisition and
Disposition Agreement with Apple Suites Realty Group, Inc. ("ASRG"), to acquire
and dispose of real estate assets for the Company. A fee of 2% of the purchase
price or sale price in addition to certain reimbursable expenses will be payable
for these services.
The Company has negotiated, but not signed, an Advisory Agreement with Apple
Suites Advisors, Inc. ("ASA") to provide management of the Company and its
assets. An annual fee ranging from .1% to .25% of total contributions received
by the Company in addition to certain reimbursable expenses will be payable for
these services.
ASRG and ASA are 100% owned by Glade M. Knight, Chairman and President of the
Company. ASRG and ASA may purchase in the " best efforts" offering up to 2.5% of
the total number of shares sold in the offering.
Affiliates of the Company have incurred certain organization and offering costs
on behalf of the Company. Upon successful completion of the minimum offering
(see Note 2), the Company will reimburse the affiliates for these organizational
and offering costs. The Company is not responsible for these costs in the event
that the offering is not successfully completed.
On April 20, 1999, the Company obtained a line of credit in a principal amount
of up to $1 million to fund certain offering costs. The loan bears interest at
LIBOR plus 1.50%. Interest is payable monthly and the principal balance and all
accrued interest are due in full on October 20, 1999. Glade M. Knight has
guaranteed repayment of the loan.
F-5
<PAGE>
Apple Suites, Inc.
Notes to Balance Sheet (continued)
4. Stock Incentive Plans
The Company intends to adopt two stock incentive plans (the "Incentive Plan" and
"Directors' Plan") to provide incentives to attract and retain directors,
officers and key employees. The plans provide for the grant of options to
purchase a specified number of shares of common stock ("Options") or grants of
restricted shares of common stock ("Restricted Stock") to selected employees and
directors of the Company and certain affiliates. Following consummation of the
offering, a Compensation Committee ("Committee") will be established to
implement and administer the plans. The Committee will be responsible for
granting Options and shares of Restricted Stock and for establishing the
exercise price of Options and the terms and conditions of Restricted Stock.
5. Class B Convertible Stock
The Company has authorized 240,000 shares of Class B Convertible Stock. The
Company will issue 202,500 Class B Convertible Shares to Glade M. Knight,
Chairman and President of the Company, and a combined 37,500 Class B Convertible
Shares to two other individuals. The Class B Convertible Shares will be issued
by the Company on or before the initial closing of the minimum offering of
$15,000,000, in exchange for payment of $.10 per Class B Convertible Share, or
an aggregate of $24,000. There will be no dividends payable on the Class B
Convertible Shares. On liquidation of the Company, the holders of the Class B
Convertible Shares will be entitled to a liquidation payment of $.10 per share
before any distribution of liquidation proceeds to holders of the Common Shares.
Holders of more than two-thirds of the Class B Convertible Shares must approve
any proposed amendment to the Articles of Incorporation that would adversely
affect the Class B Convertible Shares or create a new class of stock senior to,
or on a parity with, the Class B Convertible Shares. The Class B Convertible
Shares may not be redeemed by the Company.
Each holder of outstanding Class B Convertible Shares shall have the right to
convert any of such shares into Common Shares of the Company upon and for 180
days following the occurrence of either of the following conversion events:
(1) the sale or transfer of substantially all of the Company's assets, stock or
business, whether through sale, exchange, merger, consolidation, lease,
share exchange or otherwise, or
F-6
<PAGE>
Apple Suites, Inc.
Notes to Balance Sheet (continued)
5. Class B Convertible Stock (continued)
(2) the termination or expiration without renewal of the Advisory Agreement
with ASA, and if the Company ceases to use ASRG to provide substantially
all of its property acquisition and disposition services.
Upon the occurrence of either conversion event, each Class B Convertible Share
may be converted into a number of Common Shares based upon the gross proceeds
raised through the date of conversion in the public offering or offerings of the
Company's Common Shares made by the Company's prospectus according to the
following formula:
Number of Common Shares
Gross Proceeds Raised From through Conversion of One
Sales of Common Shares through Class B Convertible Share
Date of Conversion (the initial "Conversion Ratio")
------------------ --------------------------------
$ 50 million 1.0
$100 million 2.0
$150 million 3.5
$200 million 5.3
$250 million 6.7
$300 million 8.0
No additional consideration is due upon the conversion of the Class B
Convertible Shares. Upon the probable occurrence of a conversion event, the
Company will record expense for the difference between the market value of the
Company's Common Stock and issue price of the Class B Convertible Shares.
6. Warrants
The Company has agreed to sell to the Managing Dealer for an aggregate of $100,
warrants (the "Warrants") to purchase 10% of the shares sold in this offering,
up to 3,000,000 common shares at an exercise price of $16.50 per common share
(165% of the public offering price per common share). The Warrants may not be
sold, transferred, assigned or hypothecated for one year from the date of the
"best-efforts" offering prospectus, except to the officers and employees of the
Managing Dealer and are exercisable at any time and from time to time, in whole
or in part, during the five-year
F-7
<PAGE>
Apple Suites, Inc.
Notes to Balance Sheet (continued)
6. Warrants (continued)
period commencing on the date of the final closing after the termination of the
offering (the "Warrant Exercise Term"). At the Company's expense, the Company
intends to register the Warrants under the Securities Act on one occasion during
the Warrant Exercise Term and to include the Warrants in any appropriate
registration statement which is filed by the Company during the seven years
following the date of the "best efforts" offering prospectus.
7. Year 2000 (Unaudited)
Many of the computer systems currently in use record years in a two-digit
format. Those computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to disruptions in operations (commonly referred
to as the "Year 2000" issue). Although the Company is currently examining the
systems it will employ for Year 2000 compliance, we cannot guarantee that all
Company systems will be Year 2000 compliant or that other companies on which the
Company may rely will be timely converted. As a result, the Company's operations
could be adversely affected by this issue.
F-8
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are estimates of the expenses to be incurred in connection
with the issuance and distribution of the securities to be registered:
<TABLE>
<S> <C>
SEC registration fee ...................... $ 83,400
NASD filing fee ........................... 30,500
Printing and engraving fees ............... 300,000
Legal fees and expenses ................... 350,000
Accounting fees and expenses .............. 100,000
Blue Sky fees and expense ................. 45,000
Transfer Agent and Registrar fees ......... 10,000
Registrant travel expense ................. 30,000
Marketing Expense Allowance ............... 7,500,000
Contingency ............................... 551,100
----------
Total .............................................. $9,000,000
==========
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES.
On March 5, 1999, the Registrant sold 10 Common Shares to Apple Suites
Advisors, Inc. ("ASA") for $100 cash.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
On March 5, 1999, the Registrant sold 10 Common Shares to ASA for $100
cash, in a transaction that was exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2) thereof.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company will obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (i) the directors and officers of the
Company from any claim arising out of an alleged wrongful act by the directors
and officers of the Company in their respective capacities as directors and
officers of the Company, and (ii) the Company to the extent that the Company has
indemnified the directors and officers for such loss.
The Virginia Stock Corporation Act (the "Virginia Act") permits, and the
Registrant's Articles of Incorporation and Bylaws require, indemnification of
the Registrant's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933. Under Section 13.1-697 of
the Virginia Act, a Virginia corporation generally is authorized to indemnify
its directors in civil or criminal actions if they acted in good faith and
believed their conduct to be in the best interests of the corporation and, in
the case of criminal actions, had no reasonable cause to believe that the
conduct was unlawful. The Registrant's Articles of Incorporation and Bylaws
require indemnification of officers and directors with respect to any action
except in the case of willful misconduct, bad faith, reckless disregard of
duties or violations of the criminal law. In addition, the Registrant may carry
insurance on behalf of directors, officers, employees or agents that may cover
liabilities under the Securities Act of 1933. The Registrant's Articles of
Incorporation, as permitted by the Virginia Act, eliminate the damages that may
be assessed against a director or officer of the Registrant in a shareholder or
derivative proceeding. This limit on liability will not apply in the event of
willful misconduct or a knowing violation of the criminal law or of federal or
state securities laws. Reference also is made to the indemnification provisions
set forth in the form of Agency Agreement filed as Exhibit 1 hereto.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
None of the proceeds will be credited to an account other than the
appropriate capital share account.
II-1
<PAGE>
ITEM 35. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(a) Financial Statements. See Index to Financial Statements in this
Prospectus for the financial statements which are included in this
Registration Statement.
(b) Financial Statement Schedules:
All financial statement schedules have been omitted because they are not
applicable.
(c) Exhibits. Except as expressly noted otherwise, the Exhibits are filed
herewith.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- --------------------------------------------------------------------------------------------
<S> <C>
1 Form of Agency Agreement between the Registrant and David Lerner Associates, Inc. with
form of Selected Dealer Agreement attached as Exhibit A thereto.
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3 Form of Amended and Restated Bylaws of the Registrant.
4.1 Credit Agreement between the Registrant and First Union National Bank.
4.2 Promissory Note to First Union National Bank.
4.3 Guaranty of Glade M. Knight.
5 Form of Opinion of McGuire, Woods, Battle & Boothe LLP as to the
legality of the securities being registered.
8 Form of Opinion of McGuire, Woods, Battle & Boothe LLP as to certain tax matters.
10.1 Form of Advisory Agreement between the Registrant and Apple Suites Advisors, Inc.
10.2 Form of Property Acquisition/Disposition Agreement between the Registrant and Apple
Suites Realty Group, Inc.
10.3 Form of Apple Suites, Inc. 1999 Incentive Plan.
10.4 Form of Apple Suites, Inc. 1999 Non-Employee Directors Stock Option Plan.
23.1 Consent of McGuire, Woods, Battle & Boothe LLP (included in Exhibits 5 and 8).
23.2 Consent of Ernst & Young LLP.
</TABLE>
II-2
<PAGE>
ITEM 36. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) That all post-effective amendments will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendments are filed.
(d) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The Registrant undertakes to send to each Shareholder at least on an annual
basis a detailed statement of any transactions with the Advisor or its
Affiliates, and of fees, commissions, compensation and other benefits paid or
accrued to the Advisor or its Affiliates for the fiscal year completed, showing
the amount paid or accrued to each recipient and the services performed.
The Registrant undertakes to provide to the Shareholders the financial
statements required by Form 10-K for the first full fiscal year of operations of
the Registrant.
The Registrant undertakes to file during the offering period a sticker
supplement pursuant to Rule 424(c) under the Act describing each property not
identified in the Prospectus at such time as there arises a reasonable
probability of investment in such property by the Registrant and to consolidate
all such stickers into a post-effective amendment filed at least once every
three months with the information contained in such amendment provided
simultaneously to the existing Shareholders. Each sticker supplement will also
disclose all compensation and fees received by the Advisor or its Affiliates in
connection with any such investment. The post-effective amendment shall include
audited financial statements meeting the requirements of Rule 3-14 of Regulation
S-X only for properties acquired during the distribution period.
The Registrant undertakes to file, after the end of the offering period, a
current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X, to reflect each
commitment not previously disclosed in the Prospectus or a supplement thereto
involving the use of 10% or more (on a cumulative basis) of the net proceeds of
the offering and to provide the information contained in such report to the
Shareholders at least once each quarter after the end of the offering period.
II-3
<PAGE>
Offers and sales of the interests may continue after the filing of a
post-effective amendment containing information previously disclosed in sticker
supplements to the prospectus, as long as the information disclosed in a current
sticker supplement accompanying the prospectus is as complete as the information
contained in the most recently filed post-effective amendment.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers, directors and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commis- sion
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than for expenses incurred in a
successful defense) is asserted by such officer, director or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
TABLE VI: ACQUISITIONS OF PROPERTIES BY CORNERSTONE AND APPLE
The following is a summary of rental property owned by Cornerstone at
December 31, 1998. All properties are residential communities and are owned on a
mortgage-free basis. Cornerstone has not disposed of any properties since
inception.
<TABLE>
<CAPTION>
INITIAL AVERAGE
ACQUISITION TOTAL DATE NUMBER SQUARE FT.
DESCRIPTION COST INVESTMENT* ACQUIRED OF UNITS OF UNITS
- ----------------------------------- ------------- ------------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
NORTH CAROLINA
Raleigh/Durham, North Carolina
The Hollows .................... $ 4,200,000 $ 6,173,553 June 1993 176 903
The Trestles ................... 10,350,000 11,498,537 December 1994 280 776
The Landing .................... 8,345,000 10,055,764 May 1996 200 960
Highland Hills ................. 12,100,000 14,421,444 September 1996 264 1,000
Parkside at Woodlake ........... 14,663,886 15,119,409 September 1996 266 865
Deerfield ...................... 10,675,000 11,218,179 November 1996 204 888
Paces Arbor .................... 5,588,219 5,970,315 March 1997 101 899
Paces Forest ................... 6,473,481 6,958,627 March 1997 117 883
Clarion Crossing ............... 10,600,000 11,076,591 September 1997 228 769
St. Regis ...................... 9,800,000 10,135,730 October 1997 180 840
Remington Place ................ 7,900,000 8,457,508 October 1997 136 1,098
The Timbers .................... 8,100,000 8,352,596 June 1998 176 745
Charlotte, North Carolina
Hanover Landing ................ 5,725,000 7,449,266 August 1995 192 832
Sailboat Bay ................... 9,100,000 13,464,303 November 1995 358 906
Bridgetown Bay ................. 5,025,000 5,845,929 April 1996 120 867
Meadow Creek ................... 11,100,000 12,504,352 May 1996 250 860
Beacon Hill .................... 13,579,203 14,695,613 May 1996 349 734
Summerwalk ..................... 5,660,000 7,538,671 May 1996 160 963
Paces Glen ..................... 7,425,000 8,129,400 July 1996 172 907
Heatherwood .................... 17,630,457 23,397,697 ** 476 1,186
Charleston Place ............... 9,475,000 10,210,482 May 1997 214 806
Stone Point .................... 9,700,000 10,176,529 January 1998 192 848
Winston-Salem, North Carolina
Mill Creek ..................... 8,550,000 9,584,482 September 1995 220 897
Glen Eagles .................... 7,300,000 9,033,017 October 1995 166 952
Wilmington, North Carolina
Wimbledon Chase ................ 3,300,000 5,674,978 February 1994 192 818
Chase Mooring .................. 3,594,000 5,764,709 August 1994 224 867
Osprey Landing ................. 4,375,000 7,248,041 November 1995 176 981
Other North Carolina
Wind Lake ...................... 8,760,000 11,085,542 April 1995 299 727
The Meadows .................... 6,200,000 7,442,434 January 1996 176 1,068
Signature Place ................ 5,462,948 7,258,310 August 1996 171 1,037
Pinnacle Ridge ................. 5,731,150 6,048,013 April 1998 168 885
GEORGIA
Atlanta, Georgia
Ashley Run ..................... 18,000,000 19,482,278 April 1997 348 1,150
Carlyle Club ................... 11,580,000 12,854,800 April 1997 243 1,089
Dunwoody Springs ............... 15,200,000 18,224,312 July 1997 350 948
Stone Brooke ................... 7,850,000 8,711,137 October 1997 188 937
Spring Lake .................... 9,000,000 9,363,025 August 1998 188 1,009
Other Georgia
West Eagle Greens .............. 4,020,000 6,344,127 March 1996 165 796
Savannah West .................. 9,843,620 13,289,356 July 1996 450 877
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
INITIAL AVERAGE
ACQUISITION TOTAL DATE NUMBER SQUARE FT.
DESCRIPTION COST INVESTMENT* ACQUIRED OF UNITS OF UNITS
- ---------------------------------- --------------- --------------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
VIRGINIA
Richmond, Virginia
Ashley Park ................... 12,205,000 13,147,418 March 1996 272 765
Trolley Square ................ 10,242,575 13,262,283 *** 325 589
Hampton Glen .................. 11,599,931 12,746,609 August 1996 232 788
The Gables .................... 11,500,000 11,804,432 July 1998 224 700
Virginia Beach, Virginia
Mayflower Seaside ............. 7,634,144 10,191,359 October 1993 263 698
Harbour Club .................. 5,250,000 6,246,147 May 1994 214 813
Bay Watch Pointe .............. 3,372,525 4,996,481 July 1995 160 911
Tradewinds .................... 10,200,000 11,078,865 November 1995 284 930
Arbor Trace ................... 5,000,000 6,022,029 March 1996 148 850
Other Virginia
County Green .................. 3,800,000 5,299,670 December 1993 180 1,000
Trophy Chase .................. 3,710,000 6,729,365 April 1996 185 803
Greenbrier .................... 11,099,525 12,491,834 October 1996 258 251
SOUTH CAROLINA
Greenville, South Carolina
Polo Club ..................... 4,300,000 7,505,936 June 1993 365 807
Breckinridge .................. 5,600,000 7,062,749 June 1995 236 726
Magnolia Run .................. 5,500,000 6,909,344 June 1995 212 993
Columbia, South Carolina
Stone Ridge ................... 3,325,000 5,814,292 December 1993 191 1,047
The Arbors at Windsor Lake .... 10,875,000 11,519,973 January 1997 228 966
Other South Carolina
Westchase ..................... 11,000,000 12,811,352 January 1997 352 806
Hampton Pointe ................ 12,225,000 14,273,203 March 1998 304 1,035
Cape Landing .................. 17,100,000 17,265,961 October 1998 288 933
========== ========== =============== === =====
$497,520,664 $587,438,358
------------ ------------
</TABLE>
- ----------
* Includes real estate commissions, closing costs, and improvements
capitalized since the date of acquisition.
** Heatherwood Apartments is comprised of Heatherwood and Italian Village/Villa
Marina Apartments acquired in September 1996 and August 1997, respectively,
at a cost of $10,205,457 and $7,425,000. They are adjoining properties and
are operated as one apartment community.
*** Trolley Square Apartments is comprised of Trolley Square East and Trolley
Square West Apartments acquired in June 1996 and December 1996,
respectively, at a cost of $6,000,000 and $4,242,575. They are adjacent
properties and are operated as one apartment community.
II-6
<PAGE>
The following is a summary of rental property owned by Apple at December
31, 1998. All properties are residential communities. Apple has not disposed of
any properties since inception.
<TABLE>
<CAPTION>
INITIAL AVERAGE
ACQUISITION TOTAL DATE NUMBER SQUARE FT.
DESCRIPTION COST INVESTMENT* ACQUIRED** ENCUMBRANCES OF UNITS OF UNITS
- --------------------------------- --------------- --------------- --------------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Brookfield ...................... $ 5,458,485 $ 6,583,990 January 1997 -- 232 714
Eagle Crest ..................... 15,650,000 17,862,629 January 1997 -- 484 887
Aspen Hills ..................... 5,690,560 7,502,434 January 1997 -- 240 671
Mill Crossing ................... 4,544,121 5,458,746 February 1997 -- 184 691
Polo Run ........................ 6,858,974 8,061,726 March 1997 -- 224 854
Wildwood ........................ 3,963,519 4,684,813 March 1997 -- 120 755
Toscana ......................... 5,854,531 6,792,187 March 1997 -- 192 601
The Arbors on Forest Ridge . 7,748,907 8,632,706 April 1997 -- 210 804
Pace's Cove ..................... 9,277,355 9,833,200 June 1997 -- 328 670
Remington at Las Colinas ........ 13,100,000 15,295,457 August 1997 -- 362 957
Copper Crossing ................. 9,275,000 10,965,314 November 1997 -- 400 739
Main Park ....................... 8,000,000 8,650,550 February 1998 -- 192 939
Timberglen ...................... 12,000,000 13,126,845 February 1998 -- 304 728
Silverbrook ..................... 18,210,000 20,144,422 May 1998 $ 3,047,994 642 791
Summer Tree ..................... 5,700,000 6,415,878 June 1998 -- 232 575
Park Village .................... 7,000,000 7,477,425 July 1998 -- 238 647
Cottonwood Crossing ............. 5,700,000 6,147,288 July 1998 -- 200 751
Devonshire ...................... 5,205,000 6,699,709 July 1998 3,627,425 144 876
Pace's Point .................... 11,405,000 12,869,988 July 1998 7,679,619 300 762
Emerald Oaks .................... 10,930,000 11,768,594 July 1998 6,635,025 250 850
Newport ......................... 6,330,000 6,741,792 July 1998 3,020,775 200 741
Estrada Oaks .................... 9,350,000 9,867,652 July 1998 -- 248 771
Burney Oaks ..................... 9,300,000 9,679,771 October 1998 -- 240 794
Cutter's Point .................. 8,100,000 8,690,442 October 1998 -- 196 1,010
The Courts on Pear Ridge ........ 11,500,000 11,806,367 November 1998 242 774
============ ============ =============== === =====
$216,151,452 $241,759,925 $24,010,838
------------ ------------ -----------
</TABLE>
- ----------
* Includes real estate commissions, closing costs, and improvements capitalized
since the date of acquisition.
** Date listed is the date which the property was first acquired. The subsequent
acquisition of adjacent properties has been combined in the other categories.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Richmond, Commonwealth of Virginia, on April 26,
1999.
APPLE SUITES, INC.
By: /s/ Glade M. Knight
------------------------------------
Glade M. Knight
President, and as President, the
Registrant's Principal Executive
Officer, Principal Financial Officer
and Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES DATE
- --------------------------- --------------------------------------- ---------------
<S> <C> <C>
/s/ Glade M. Knight Director and President, and As April 26, 1999
- -------------------------
President, the Registrant's Principal
Glade M. Knight
Executive Officer, Principal Financial
Officer and Principal Accounting
Officer
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- --------------------------------------------------------------------------------------------
<S> <C>
1 Form of Agency Agreement between the Registrant and David Lerner Associates, Inc. with
form of Selected Dealer Agreement attached as Exhibit A thereto.
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3 Form of Amended and Restated Bylaws of the Registrant.
4.1 Credit Agreement between the Registrant and First Union National Bank.
4.2 Promissory Note to First Union National Bank.
4.3 Guaranty of Glade M. Knight.
5 Form of Opinion of McGuire, Woods, Battle & Boothe LLP as to the
legality of the securities being registered.
8 Form of Opinion of McGuire, Woods, Battle & Boothe LLP as to certain tax matters.
10.1 Form of Advisory Agreement between the Registrant and Apple Suites Advisors, Inc.
10.2 Form of Property Acquisition/Disposition Agreement between the Registrant and Apple
Suites Realty Group, Inc.
10.3 Form of Apple Suites, Inc. 1999 Incentive Plan.
10.4 Form of Apple Suites, Inc. 1999 Non-Employee Directors Stock Option Plan.
23.1 Consent of McGuire, Woods, Battle & Boothe LLP (included in Exhibits 5 and 8).
23.2 Consent of Ernst & Young LLP.
</TABLE>
EXHIBIT 1
30,166,666.67 SHARES
APPLE SUITES, INC.
COMMON STOCK
AGENCY AGREEMENT
____ __, 1999
David Lerner Associates, Inc.
477 Jericho Turnpike
Syosset, New York 11791
Dear Sirs:
Apple Suites, Inc., a Virginia corporation (the "Company"), is a
corporation that will elect to qualify as a real estate investment trust
pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended ( the "Code"). Subject to the terms and conditions stated herein, the
Company proposes to engage David Lerner Associates, Inc. as its managing dealer
(the "Agent") to solicit offers to buy and obtain purchasers for shares of
common stock, no par value, of the Company as offered by the Prospectus which is
part of the Form S-11 Registration Statement under the Securities Act of 1933
(File No. 333-_______) as filed with the Securities and Exchange Commission on
__________ , 1999. The term "Shares" refers to the shares of common stock, no
par value, of the Company registered pursuant to the Registration Statement
referred to in the preceding sentence. This will confirm our agreement
respecting your engagement as the exclusive agent to solicit offers to buy and
obtain purchasers for the Shares on a "best efforts" basis.
1. Representations and Warranties. The Company represents and warrants to,
and agrees with, the Agent that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-11 (File No. 333-______),
and as a part thereof a preliminary prospectus, both as amended by such
amendments thereto as may have been required to the date hereof, with respect to
the registration of the Shares under the Securities Act of 1933, as amended (the
"Act"); any preliminary prospectus included in such registration statement or
filed with the Commission pursuant to Rule 424 of the Commission under the Act
is hereinafter called a "Preliminary Prospectus"; the registration statement, as
amended at the time it becomes effective under the Act, and the prospectus filed
as a part thereof or mailed for filing pursuant to Rule 424(b) of the Act are
hereinafter called the "Registration Statement" and "Prospectus," respectively;
except that (A) if the Company files a post-effective amendment to the
registration statement, then the term "Registration Statement" shall refer to
the registration statement as amended by such post-effective amendment thereto
and the term "Prospectus" shall refer to the amended prospectus then on file
with the Commission, and (B) if the prospectus, including any sticker supplement
thereto not theretofore consolidated into a post-effective amendment, filed by
the Company pursuant to either Rule 424(b) or (c) of the rules and regulations
of the Commission under the Act (the "Regulations"), shall differ from the
prospectus on file at the time the Registration Statement or any post-effective
amendment thereto shall have become effective, the term "Prospectus" shall refer
to the prospectus, including any such sticker supplement, filed pursuant to
either Rule 424(b) or (c), as the case may be, from and after the date on which
it shall have been filed. The Company will not at any time after the
Registration Statement initially becomes effective file any amendment to the
Registration Statement or any amendment or supplement to the Prospectus to which
you shall object in writing or which shall be disapproved by your counsel;
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the Regulations, and did not contain any untrue
statement of a material fact required to be
1
<PAGE>
stated therein or necessary to make the statements therein not misleading;
provided, however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with information
furnished to the Company by you, and relating to you, expressly for use therein;
(c) The Registration Statement and the Prospectus, when effective or
filed with the Commission, as the case may be, conformed or will conform, in all
material respects to the requirements of the Act and the rules and regulations
of the Commission thereunder and did not and will not as of the applicable
effective date as to the Registration Statement and any amendment thereto and as
of the applicable filing date as to the Prospectus and any amendment or
supplement thereto contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that this representation
and warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished to the Company by you, and
relating to you, expressly for use therein;
(d) There are no contracts or other documents that are required to be
filed as exhibits to the Registration Statement which have not been so filed;
(e) The Company and each of its subsidiaries has been duly
incorporated or organized, is validly existing, and if a corporation is in good
standing, under the laws of Virginia, with power and authority (corporate or
other) to own its properties and conduct its business as described in the
Prospectus, and has been duly qualified as a foreign entity for the transaction
of business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership of property or the
conduct of business, except such jurisdictions, if any, in which the failure to
be so qualified will not have a material adverse effect on the respective
company;
(f) The Company and each of its subsidiaries possesses all material
licenses, permits, authorizations, consents and orders required for the
contemplated method of operation of its business as described in the Prospectus;
(g) The Company has an authorized capitalization as set forth in the
Prospectus; all of the issued shares of capital stock of the Company have been
duly and validly authorized and issued, are fully paid and nonassessable and
conform to the description of the capital stock of the Company contained in the
Prospectus; there are no preemptive or other rights to subscribe for or to
purchase any shares of capital stock of the Company; except as described in the
Prospectus, there are no warrants or options to purchase any shares of capital
stock of the Company; and neither the filing of the Registration Statement nor
the offering or sale of the Shares as contemplated by this Agreement gives rise
to any rights for or relating to the registration of any shares of the capital
stock of the Company;
(h) The Shares to be issued and sold by the Company pursuant to this
Agreement have been duly and validly authorized and, when issued and delivered
against payment therefor as provided herein, will be duly and validly issued and
fully paid and nonassessable and will conform to the description of the Shares
contained in the Prospectus;
(i) The Company has the corporate power to enter into this Agreement,
and the issue and sale of the Shares by the Company and the performance of such
Agreement and the consummation by the Company of the transactions herein
contemplated will not result in a breach or violation of any terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company, is subject, nor
will such action result in any violation of the provisions of the Articles of
Incorporation or Bylaws of the Company, or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or any of its properties; and no consent, approval, authorization,
order, registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this Agreement,
except such consents, approvals, authorizations, registrations or qualifications
as may be required under the Act and under state securities or Blue Sky laws in
connection with the distribution of the Shares by the Agent;
(j) This Agreement has been duly authorized, executed and delivered by
the Company, and constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent that
enforceability may be limited by bankruptcy, insolvency or other laws affecting
the enforcement of creditors' rights
2
<PAGE>
generally or by general principles of equity, and except to the extent that the
enforceability of the indemnity and contribution provisions contained in this
Agreement may be limited under applicable laws;
3
<PAGE>
(k) The Advisory Agreement has been duly authorized, executed and
delivered by the parties thereto and constitutes or will constitute a valid and
binding agreement of the parties thereto enforceable in accordance with its
terms, except to the extent that enforceability may be limited by bankruptcy,
insolvency or other laws affecting the enforcement of creditors' rights
generally or by general principles of equity;
(l) Ernst & Young LLP, which has certified the financial statements of
the Company, constitutes an independent public accountant as required by the Act
and the rules and regulations of the Commission thereunder;
(m) The financial statements of the Company, together with related
notes, as set forth in the Registration Statement and the Prospectus, presently
fairly the financial position of the Company at the indicated date;
(n) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor any of its
subsidiaries has experienced any material adverse change or any development
involving a prospective material adverse change in the general affairs,
management, financial position, properties or results of operations of the
Company, or any of its subsidiaries, otherwise than as set forth in the
Prospectus; and neither the Company nor any of its subsidiaries have entered
into any material transactions other than as described in the Prospectus; and
the capitalization, indebtedness, properties, material liabilities and business
of the Company and its subsidiaries conform to the descriptions thereof
contained in the Prospectus;
(o) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property of
the Company or any of its subsidiaries is the subject, other than as set forth
or contemplated in the Prospectus, which, individually or in the aggregate,
would have a material adverse effect on the financial position, stockholders'
equity or results of operations of the Company or any of its subsidiaries and,
to the best of their knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened or contemplated by
others;
(p) The Company is not and will not be an "investment company," or
under the control of an investment company as defined in the Investment Company
Act of 1940, as amended; and
(q) The Company is organized in conformity with the requirements for
qualification as a real estate investment trust under Sections 856 through 860
of the Code and the rules and regulations thereunder. The contemplated method of
operation of the Company's business as described in the Prospectus will allow
the Company to satisfy the operational requirements for qualification as a real
estate investment trust under such Sections and such rules and regulations.
2. Offering and Sale of Shares -- Closing Dates
(a) On the basis of the representations, warranties and covenants
herein contained, but subject to the terms and conditions herein set forth, the
Agent is hereby appointed the selling agent of the Company during the term
herein specified (the "Offering Period") for the purpose of finding subscribers
for the Shares for the account and risk of the Company through a public
offering. Your agency hereunder, which is subject to the conditions of Section 6
hereof, shall continue as long as Shares are being offered through the
Commission filing 333-________ and any amendments thereto. However, your agency
may be terminated by the Company if you cease to be a member in good standing of
the NASD or if you become subject to an order or other action of or by the
Securities and Exchange Commission or other securities authority substantially
restricting or impairing your ability to offer and sell the Shares under this
Agreement, or if there is a material default by you under this Agreement which
is not promptly cured. Subject to the performance by the Company of all of its
obligations to be performed hereunder, and to the completeness and accuracy of
all the representations and warranties contained herein, the Agent hereby
accepts such agency and agrees on the terms and conditions herein set forth to
use its best efforts during the Offering Period to find subscribers for the
Shares at the current public offering price (each subscriber being required to
invest at least $5,000, or $2,000 in the case of a Qualified Plan, as defined in
the Prospectus). The time for each issuance of and payment for Shares is herein
referred to as a "Closing Date."
4
<PAGE>
(b) If less than all the Shares shall have been subscribed and paid
for at the initial Closing Date (the "Initial Closing Date"), then, at periodic
intervals to be mutually agreed upon by you and the Company during the Offering
Period, there shall be subsequent closings for the payment to the Company of the
purchase price of additional Shares sold by you ("Subsequent Closing Date(s)")
as described in Section 2(c).
(c) Subsequent closing(s) will take place at such time(s), date(s) and
place(s) as determined by the Company, with the concurrence of the Agent. Shares
will be issued to subscribers and compensation will be paid to the Agent at each
Closing Date.
(d) As compensation for your services under this Agreement, you will
be paid, on each Closing Date, a commission equal to 7.5% of the public offering
price for each Share subscribed and paid for at each Closing Date which was sold
by you or a Selected Dealer engaged by you. In addition, you will be paid, on
each Closing Date, a non-accountable Marketing Expense Allowance equal to 2.5%
of the public offering price for each Share subscribed and paid for on the
applicable Closing Date which was sold by you or a Selected Dealer engaged by
you.
(e) Subscriptions for Shares may be solicited by certain dealers
selected by you (the "Selected Dealers") and sales by Selected Dealers shall be
made under a Selected Dealer Agreement in substantially the form attached as
Exhibit A, which sets forth the terms and conditions, including compensation, of
the other dealers participating. Each such Selected Dealer shall be a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD").
Subscribers' checks are to be made payable to the Agent. Selected Dealers must
transmit all such checks directly to the Agent by noon of the next business day
after receipt.
(f) Neither you, the Company, the Agent, nor any Selected Dealer
participating in the offering of the Shares shall, directly or indirectly, pay
or award any finder's fees, commissions or other compensation to any person
engaged by a potential investor for investment advice as an inducement to such
adviser to advise the purchase of Shares; provided, however, that normal sales
commissions payable to a registered broker-dealer or other properly licensed
person for selling Shares shall not be prohibited hereby.
3. Covenants of the Company
The Company agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective and will notify you immediately and confirm in
writing (i) when the Registration Statement and any amendments thereto shall
have become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to the
Prospectus or for additional information, (iii) of the happening of any event
which makes untrue any statement of a material fact made in the Registration
Statement or the Prospectus, or which requires the making of a change in the
Registration Statement or the Prospectus, in order to make any material
statement therein not misleading; and (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or of
the initiation of any proceedings for that purpose, or of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
institution of any proceedings for such purpose; and the Company will make every
reasonable effort to prevent the issuance by the Commission or any governmental
agency pursuant to the securities laws of any jurisdiction of any stop order
and, if such stop order shall at any time be issued, to obtain the lifting
thereof at the earliest possible moment;
(b) It will, promptly from time to time take such actions as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales of Shares therein in such
jurisdictions for so long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith neither the Company, the
Advisor nor the Broker shall be required to qualify as a foreign corporation or
to file a general consent to service of process in any jurisdiction;
5
<PAGE>
(c) The Company will deliver to you, as soon as available, a copy of
the Registration Statement as originally filed and each amendment thereto
(including exhibits);
(d) The Company will deliver promptly to you, as soon as the
Registration Statement becomes effective and thereafter from time to time during
the period when the Prospectus is required to be delivered under the Act, such
number of copies of the Prospectus (as amended or supplemented), as you may
reasonably request; and the Company consents to the use of the Prospectus and
any amendments or supplements thereto by you and by any Selected Dealers for the
purposes contemplated by the Act and this Agreement;
(e) During the period when the Prospectus is required to be delivered
under the Act, the Company will comply, so far as it is able and at the
Company's expense, with all requirements imposed upon it by the Act, as now and
as hereafter amended, so far as necessary to permit the continuation of sales of
the Shares during such period in accordance with the provisions of this
Agreement and of the Prospectus;
(f) If any event relating to or affecting the Company shall occur as a
result of which it is necessary, in the opinion of your counsel, to amend or
supplement the Prospectus in order to make the Prospectus not misleading in the
light of the circumstances existing at the time it is delivered to a subscriber,
the Company will forthwith prepare and furnish to you, without expense to you, a
reasonable number of copies of an amendment or amendments of, or a supplement or
supplements to, the Prospectus (in form and substance reasonably satisfactory to
your counsel) which will amend or supplement the Prospectus so that, as amended
or supplemented, it will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances existing at the time the Prospectus is
delivered to a subscriber, not misleading. For the purposes of this subsection,
the Company will furnish such information with respect to the Company and any
Company properties as you may from time to time reasonably request;
(g) The Company will furnish to its Shareholders as soon as
practicable after the end of each fiscal year an annual report (including a
balance sheet and statements of income and cash flows of the Company certified
by independent public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement), summary
financial information of the Company for such quarter in reasonable detail;
(h) During a period of five years from the effective date of the
Registration Statement, the Company will furnish to you copies of all reports or
other communications (financial or other) furnished to securityholders, and
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Company is listed;
and (ii) such additional information concerning the business and financial
condition of the Company as you may from time to time reasonably request;
(i) The Company, will not, at any time before or after the
Registration Statement becomes effective, file any amendment to the Registration
Statement or any amendment or supplement to the Prospectus to which you shall
reasonably object in writing or which shall be reasonably disapproved by your
counsel promptly after notice thereof; will deliver to you, from time to time,
all supplemental sales materials (whether designated solely for broker-dealer
use or otherwise) proposed to be used or delivered by the Company in connection
with the offering of Shares, prior to the use or delivery to third parties of
such material, and it will not use or deliver any such material to which you
shall object or which shall be disapproved by your counsel; and
(j) Subsequent to the date of this Agreement and through each Closing
Date, except as described, contemplated or permitted in the Registration
Statement, the Company will not take any action (or refrain from taking any
action) that will result in the Company incurring any material liability or
obligation, direct or contingent, or enter into any material transaction not in
the ordinary course of business, and there will not be any material change in
the capital stock, long-term debt, notes payable or short-term borrowings of the
Company or any issuance of options, warrants or rights to purchase capital stock
of the Company, or any declaration or payment or commitment to pay or
anticipated payment of any dividend or other distribution on the capital stock
of the Company, except as contemplated
6
<PAGE>
in the Prospectus, which has resulted in or reasonably could be expected to
result in a material adverse change in the business or financial position of the
Company, taken as a whole.
4. Expenses. The Company covenants and agrees with you that, except as
otherwise agreed by you and the Company, the Company will pay the following: (i)
the fees, disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to you and the Selected
Dealers; (ii) the cost of printing or producing this Agreement, any Blue Sky
Surveys, all sales material and any other documents in connection with the
offering, purchase, sale and delivery of the Shares; (iii) the cost of preparing
stock certificates, if any; (iv) the costs or expenses of any depositary, escrow
agent, transfer agent or registrar; (v) all travel, lodging and other expenses
incurred by the Company for advertising, publicity and selling materials used in
connection therewith; and (vi) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section. It is understood, however, that you will pay all
of your own costs and expenses, including the fees of your counsel and any
advertising expenses incurred by you in making offers and sales of the Shares.
Also, notwithstanding the foregoing, we understand that you have agreed to pay
the filing and examination fees of the Securities and Exchange Commission, the
National Association of Securities Dealers, Inc. and the various states, but the
Company will reimburse you such amounts following the Initial Closing Date.
5. Covenants of Agent. Insofar as the distribution of the offering is
within your control and not the Company's, you agree that the distribution of
the offering will comply with the terms of the Prospectus, the Act, the
Securities Exchange Act of 1934 and the securities laws (including applicable
suitability standards, if any) of all jurisdictions in which you offer the
Shares or whose laws are applicable to your offering of the Shares, and all
rules promulgated under such Acts and laws, and all applicable rules of the
NASD. You agree to provide, from time to time as requested by the Company,
written certificates of compliance by you with the terms of this Agreement.
6. Conditions to Closing. Your obligations hereunder shall be subject, in
your discretion, to the condition that all representations and warranties and
other statements of the Company herein are, at and as of the date hereof, and
each Closing Date, true and correct, and the condition that the Company shall
have performed all of its obligations hereunder theretofore to be performed, and
the following additional conditions:
(a) If required by law, the Prospectus shall have been filed with the
Commission pursuant to Rule 424(b) under the Act within the applicable time
period prescribed for such filing by the rules and regulations under the Act and
in accordance with Section 1(a) of this Agreement; no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction;
(b) (i) The Company shall not have sustained since the date of the
latest audited financial statement included in the Prospectus, any loss or
interference with its business, fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus there shall not have been any change in
the capital stock or long-term debt of the Company as a whole or any change, or
any development involving a prospective change, in or affecting the general
affairs, management, financial position, shareholders' equity or results of
operation of the Company otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is in your reasonable judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being issued at such Closing Date on the terms and in the manner
contemplated by the Prospectus;
(c) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or the American Stock Exchange; (ii) a
general moratorium on commercial banking activities in New York declared by
either Federal or New York State Authorities; (iii) the engagement by the United
States in hostilities which have resulted in the declaration of a national
7
<PAGE>
emergency or war if the effect of any such event specified in this clause in
your reasonable judgment makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares being issued at such Closing
Date on the terms and in the manner contemplated in the Prospectus; or (iv) such
a material adverse change in general economic, political, financial or
international conditions affecting financial markets in the United States having
a material adverse impact on trading prices of securities in general, as, in
your reasonable judgment makes it inadvisable to proceed with the sale of the
Shares through you; and
8
<PAGE>
(d) If requested by you, the Company shall have furnished or caused to
be furnished to you at such Closing Date certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and warranties of
the Company, herein at and as of such Closing Date and as to the performance by
the Company of all of its obligations hereunder to be performed at or prior to
such Closing Date.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless you and each Selected Dealer against any losses, claims, damages
or liabilities, joint or several, to which you and such Selected Dealer may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, any Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto (including any sales
literature furnished to you by any of them), or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
arise out of or are based upon any misrepresentation or breach of warranty or
any alleged misrepresentation or breach of warranty set forth in Section 1 of
this Agreement, or arise out of or are based upon the failure of the Company to
comply with Sections 1 or 3 of this Agreement; and will reimburse you and each
Selected Dealer for any legal or other expenses reasonably incurred by you and
such Selected Dealer in connection with investigating or defending any such
action or claim; provided, however, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement or Prospectus or
any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by you or any Selected Dealer, relating to
you or such Selected Dealer, expressly for use therein; and provided further
that as to any Preliminary Prospectus, this agreement to indemnify and hold
harmless shall not inure to the benefit of you or any Selected Dealer if such
person failed to give or send a copy of the Prospectus, as the same may be
amended or supplemented, to an investor within the time required by the Act and
Regulations, and the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact in such
Preliminary Prospectus was corrected in the Prospectus or any supplement or
amendment thereto.
(b) You and each Selected Dealer will indemnify and hold harmless the
Company (which term shall be deemed to include its subsidiaries) against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of a failure by you or a
Selected Dealer to comply with any covenants contained in Section 5 of or
elsewhere in this Agreement or a Selected Dealer Agreement, or arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with information furnished to the Company by you or such Selected
Dealer relating to you or such Selected Dealer expressly for use therein; and
will reimburse the Company for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such action or claim.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses,
9
<PAGE>
in each case subsequently incurred by such indemnified party, in connection with
the defense thereof, other than reasonable costs of investigation.
(d) If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and you or a Selected
Dealer on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of Company, on the one hand and you or a Selected Dealer on the other in
connection with the statements or omissions which resulted in such losses,
claims, and damages or liabilities (or actions in respect thereof), as well as
any other relevant equitable considerations. The relative benefits received by
the Company, on the one hand and you or a Selected Dealer on the other shall be
deemed to be in the same proportion as the total proceeds from the offering
received by the Company bear to the total compensation received by you or such
Selected Dealer. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, on the one hand or you or a Selected Dealer
on the other, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and you agree that it would not be just and equitable if contributions pursuant
to this subsection (d) were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. No person guilty of fraudulent misrepresentation (within the meaning
of Section ll(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(e) The obligations of the Company under this Section 7 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls you and
any Selected Dealer within the meaning of the Act; and the obligations of you or
any Selected Dealer under this Section 7 shall be in addition to any liability
which you and the respective Selected Dealers may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of the
Company, the Advisor and the Broker (including any person who, with his consent,
is named in the Registration Statement as proposed to become a director of the
Company) and to each person, if any, who controls the Company within the meaning
of the Act.
8. Survival. The respective indemnities, agreements, representations,
warranties and other statements of the Company and you, as set forth in this
Agreement or made by you or on your behalf pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation (or any
statement as to the results thereof) made by you or on behalf of you or any
controlling person of you or the Company, or any officer or director or
controlling person of the Company, and shall survive each Closing Date.
9. Effective Date of This Agreement. This Agreement shall become effective
(the "Effective Date") upon the date of your acceptance hereof, as set forth
below.
10. Notices. All statements, requests, notices and agreements hereunder
shall be in writing, and if to you shall be sufficient in all respects if
delivered by hand or sent by registered or certified mail, or by reputable
overnight courier service, to you in care of David Lerner Associates, Inc., at
477 Jericho Turnpike, Syosset, New York 11791, Attention: Daniel E. Chafetz.,
and if to the Company shall be sufficient in all respects if delivered by hand
or sent by registered or certified mail, or by reputable overnight courier
service, to the address of the Company as set forth in the Registration
Statement, Attention: Glade M. Knight.
10
<PAGE>
11. Binding Effect. This Agreement shall be binding upon, and inure solely
to the benefit of you and the Company (including its subsidiaries) and to the
extent provided in Sections 7 and 8 hereof, the officers and directors of the
Company (including its subsidiaries) and each person who controls the Company
(including its subsidiaries) or you, and their respective heirs, executors,
administrators, and successors under or by virtue of this agreement.
12. Governing Law. This Agreement shall be construed in accordance with the
laws of the Commonwealth of Virginia.
13. Counterparts. This Agreement may be executed by any one or more of the
parties in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us four counterparts hereof, and upon the acceptance hereof by you,
this letter and such acceptance hereof shall constitute a binding agreement
among you and the Company.
Very truly yours,
APPLE SUITES, INC
By:__________________________________
Title:_______________________________
Accepted as of the ____ day of ________, 1999.
DAVID LERNER ASSOCIATES, INC., AS
MANAGING DEALER
By:__________________________________
Title: ______________________________
11
<PAGE>
Exhibit A
APPLE SUITES, INC.
Common Shares
SELECTED DEALER AGREEMENT
_______________, 199_
Gentlemen:
We have agreed to use our best efforts to sell up to 30,166,666.67 common
shares (the "Shares") in Apple Suites, Inc., a Virginia corporation (the
"Company"), as described in the enclosed prospectus (the "Prospectus"). The
Shares are being offered by David Lerner Associates, Inc., as Sales Agent for
the Company ("DLA"), pursuant to an agency agreement (the "Agency Agreement")
among us and the Company. We have been advised by the Company that the
registration statement relating to the Shares (and including the Prospectus)
(the "Registration Statement") filed by the Company under the Securities Act of
1933, as amended (the "Act"), has become effective with the Securities and
Exchange Commission.
We are hereby inviting you, subject to the other terms and conditions set
forth below and in the Prospectus, to solicit subscriptions for the Shares. You
confirm that you are a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") and that you are currently registered as a
dealer under the Securities Exchange Act of 1934, as amended (the "1934 Act").
You hereby agree to comply with the provisions of Rule 2810 of the Rules of Fair
Practice of the NASD. In addition, you hereby agree to comply with the
provisions of Rules 2420, 2730, 2740 and 2750 of the Rules of Fair Practice of
the NASD to the extent such sections are applicable to your activities in
connection with this offering.
1. You agree to offer the Shares at a purchase price of $10.00 per Share.
Upon the admission of subscribers to the Company, you shall be paid a commission
equal to $___ (____%) per Share for each Share purchased by an Investor provided
by you. Commissions will be payable to you only with respect to transactions
that are lawful in the jurisdiction wherein they occur.
2. Subscriptions may be taken by you from your customers in accordance with
the procedures described in the Prospectus. Each subscription solicited by you
shall be promptly forwarded by you, in accordance with the requirements of SEC
Rule 15c2-4, together with a check payable to "___________________________," for
the full purchase price of the Shares subscribed for, to: David Lerner
Associates, Inc., 477 Jericho Turnpike, Syosset, New York 11791. Such forwarding
shall take place by noon of the next business day after receipt by you from your
customer of such subscription and payment. Notwithstanding the foregoing, any
subscribers' checks not properly completed as described above shall be promptly
returned to such subscribers not later than the next business day following
receipt by you of such checks. With respect to each subscription solicited by
you, you shall obtain and furnish to the Company in the case of United States
residents, (i) the subscriber's name, address, taxpayer identification number,
the number of Shares to be acquired by each subscriber, (ii) the certification
as to non-foreign status as required by Temp. Treas. Reg. ss. 1.1445-2T(b), and
(iii) Form W-9.
1
<PAGE>
All acceptable subscriptions solicited by you will be strictly subject
to acceptance thereof by the Company, which has reserved the right to refuse to
accept in whole or in part any subscription and related payment and to refuse to
accept as a purchaser any person for any reason whatsoever. Subscriptions
delivered to the Company will be accepted or rejected within 30 days of their
receipt; provided, however that the Company may at any time reject in whole or
in part any subscription in its sole and absolute discretion if the total
offering for the Company is oversubscribed, or if the Company would be
prohibited from accepting such subscription by any Blue Sky or other applicable
securities law or regulation. If the Company rejects a subscription in whole or
in part, it will arrange for the Sales Agent to return to such subscriber within
____ days after rejection of the subscription by the Company, any payment made
by him applicable to the portion of the subscription which has been rejected.
3. Neither you nor any other person is authorized to give any information
or make any representations in connection with the sale of any of the Shares
other than those contained in the Prospectus or in the supplemental sales
material authorized for use in connection with this offering, as described
below. No dealer is authorized to act as agent for us when offering any of the
Shares to the public or otherwise, it being understood that you and each other
Selected Dealer are independent contractors with us. Nothing herein contained
shall constitute you or any other Selected Dealer an association or partner with
us.
4. We understand that the Company will provide you with such number of
copies of the enclosed Prospectus and such number of copies of amendments and
supplements thereto as you may reasonably request. We also understand that the
Company may provide you with certain supplemental sales literature for Shares in
the Company. You agree that such material shall not be used in connection with
the solicitation of subscribers for Shares unless accompanied or preceded by the
Prospectus as then currently in effect and as it may be amended or supplemented
in the future. You agree that neither you nor any person under your control will
deliver or show to any prospective subscriber for Shares any supplementary sales
material other than the Prospectus (including, inter alia, transmittal letters,
underwriting memoranda, summary descriptions, graphics, supplemental exhibits,
media advertising, charts, pictures, written scripts or outlines), except as
supplied by the Company and described under the caption "SALES LITERATURE" in
the Prospectus, or otherwise specifically described in written advice from the
Company authorizing the type and manner of use. The delivery or showing of any
such other supplementary sales materials to prospective subscribers is expressly
prohibited except to the extent specified in such written advice.
5. You agree that neither you nor any person under your control shall
directly or indirectly pay or award any finder's fees, commissions or other
compensation to any person engaged by a potential investor for investment advice
as an inducement to such advisor to advise the purchase of Shares; provided,
however, that this provision shall not prohibit the normal sales commission
payable to any registered broker-dealer or other properly licensed person for
selling Shares. In addition, you agree not to receive any rebates or give-ups or
participate in any reciprocal business arrangements which would violate any
restriction on the Company contained in the Prospectus.
6. You represent that neither you nor any of your directors, officers,
partners or "persons associated with" you (as defined in the By-laws of the
NASD), nor, to your knowledge, any related person (as defined by the NASD in its
Interpretation with respect to Review of Corporate Financing) have participated
or intend to participate in any transaction or dealing as to which documents or
information are required to be filed with the NASD pursuant to such
Interpretation.
7. This Agreement shall terminate simultaneously with the termination of
the Agency Agreement, but may be terminated by us prior thereto at any time by
written or telegraphic notice. Upon termination, rights and obligations
hereunder shall cease, except rights and obligations accrued or unsatisfied at
the date of termination.
8. You agree that in selling Shares of the Company you will comply with the
applicable provisions of the Act, the 1934 Act, the applicable rules and
regulations of the Securities and Exchange Commission thereunder, the laws of
the jurisdictions in which the Shares are offered and sold and the applicable
rules and regulations of the NASD. We shall have full authority to take such
action as we may deem advisable in respect to all matters pertaining to the
offering.
2
<PAGE>
We shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us in this Agreement. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph shall
not constitute, a waiver by you of compliance with any provision of the Act, the
1934 Act, or the rules and regulations thereunder.
9. Upon application to us, we will inform you as to the states and other
jurisdictions of the United States in which we believe the Shares have been
qualified for the sale under, or are exempt from the requirements of, the
respective securities laws of such jurisdictions, but we assume no
responsibility or obligation as to your right to sell the Shares in any
jurisdiction. You covenant and agree that you will not effect sales in any
jurisdiction where the Shares are not qualified or exempt from qualification.
You further agree to provide us, promptly upon our request, with geographic
distribution information, setting forth (a) the number of Shares sold, (b) the
number of transactions done, (c) the jurisdictions where sold, and (d) the types
of purchasers.
10. You confirm that you are familiar with Securities Act Release No. 4968
and Rule 15c2-8 under the 1934 Act, relating to the distribution of preliminary
and final prospectuses, and that you have complied and will continue to comply
therewith.
11. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless DLA and each Selected
Dealer against any losses, claims, damages or liabilities, joint or several, to
which they may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, any Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto (including
any sales literature furnished to you by the Company), or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or arise out of or are based upon any misrepresentation or breach of
warranty or any alleged misrepresentation or breach of warranty set forth in
Section 1 of the Agency Agreement, or arise out of or are based upon the failure
of the Company to comply with Sections 1 or 3 of the Agency Agreement; and will
reimburse DLA and each Selected Dealer for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such action or claim; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement or Prospectus
or any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by DLA or any Selected Dealer, relating to
them, expressly for use therein; and provided further that as to any Preliminary
Prospectus, this agreement to indemnify and hold harmless shall not inure to the
benefit of DLA or any Selected Dealer if such person failed to give or send a
copy of the Prospectus, as the same may be amended or supplemented, to an
investor within the time required by the Act and Regulations, and the untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact in such Preliminary Prospectus was corrected
in the Prospectus or any supplement or amendment thereto.
(b) DLA and each Selected Dealer will indemnify and hold harmless the
Company (which term shall be deemed to include its subsidiaries) against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of a failure by DLA or a
Selected Dealer to comply with any covenants contained in Section 8 of or
elsewhere in this Agreement, or arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement in reliance upon and in conformity with
information furnished to the
3
<PAGE>
Company by you or such Selected Dealer relating to you or such Selected Dealer
expressly for use therein; and will reimburse the Company for any legal or other
expenses reasonably incurred by any of them in connection with investigating or
defending any such action or claim.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation.
(d) If the indemnification provided for in this Section is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and DLA or a Selected Dealer on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c) above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of Company on the one hand
and DLA or a Selected Dealer on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and DLA or a Selected Dealer on the other shall be deemed to be in the same
proportion as the total proceeds from the offering received by the Company bear
to the total compensation received by DLA or such Selected Dealer. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or DLA or a Selected Dealer on the other, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and we agree that it would not
be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section ll(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The obligations of the Company under this Section shall be in addition
to any liability which the Company may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls DLA and any
Selected Dealer within the meaning of the Act; and the obligations of DLA or any
Selected Dealer under this Section shall be in addition to any liability which
DLA and the respective Selected Dealers may otherwise have and shall extend,
upon the same terms and conditions, to each officer and director of the Company,
the Advisor and the Broker (including any person who, with his consent, is named
in the Registration Statement as about to become a
4
<PAGE>
director of the Company) and to each person, if any, who controls the Company
(including its subsidiaries) within the meaning of the Act.
12. This Agreement shall be subject to and interpreted consistently with
the Agency Agreement. All representations, warranties, and covenants and
agreements made by you herein shall inure to the benefit of David Lerner
Associates, Inc. and the Company (including its subsidiaries).
Any notice from us to you shall be deemed to have been duly given if mailed
or telegraphed to you at your address as specified below.
Please confirm your agreement hereby by signing and returning to us at 477
Jericho Turnpike Syosset, New York 11791, Attn: Daniel E. Chafetz, an original
of this letter.
5
<PAGE>
Upon receipt thereof, this letter and such signed copy will evidence the
agreement among us.
Very truly yours,
DAVID LERNER ASSOCIATES, INC.
By: ________________________
Title: _____________________
READ AND AGREED TO:
____________________________
By: _______________________
Title: ____________________
Address: ___________________
____________________________
6
EXHIBIT 3.1
APPLE SUITES, INC.
ARTICLES OF INCORPORATION
ARTICLE I
NAME
The name of the corporation (the "Corporation") is Apple Suites, Inc.
ARTICLE II
PURPOSE
The Corporation is organized for the purpose of operating as a "real estate
investment trust," as defined in the Internal Revenue Code of 1986, as the same
may be amended from time to time (the "Code"), and to acquire, own, operate,
manage, lease, finance, refinance, dispose of and otherwise deal with real
property (and personal property incidental thereto), and shall have the power to
conduct all lawful activities incidental or related thereto, and to engage in
any lawful business.
ARTICLE III
AUTHORIZED SHARES
3.1 Number and Designation.
(a) The Corporation shall have authority to issue 200,000,000 Common
Shares, no par value.
(b) The Corporation shall have authority to issue 240,000 Class B
Convertible Shares, no par value.
(c) The Corporation shall have authority to issue 15,000,000 Preferred
Shares, no par value. Notwithstanding anything to the contrary in these Articles
of Incorporation, the
<PAGE>
Board of Directors, by adoption of an amendment of these Articles of
Incorporation, may fix in whole or in part the preferences, limitations and
relative rights, within the limits set forth in the Virginia Stock Corporation
Act, of any series within the Preferred Shares before the issuance of any shares
of that series.
3.2 Preemptive Rights. No holder of outstanding shares shall have any
preemptive right with respect to (i) any shares of the Corporation of any class,
whether now or hereafter authorized, (ii) any warrants, rights or options to
purchase any such shares, or (iii) any obligations convertible into any such
shares or into warrants, rights or options to purchase any such shares.
3.3 Debt Securities. The Board of Directors may, in its discretion,
authorize and issue any notes, bonds, debentures or other obligations of the
Corporation, including any obligations maturing more than one year after the
date of issuance thereof, whether or not secured by assignment, pledge or
mortgage of any property of the Corporation, on such terms and at such prices as
the Board of Directors in its sole discretion may in good faith determine.
ARTICLE IV
COMMON SHARES
4.1 Voting Rights. The holders of the outstanding Common Shares shall, to
the exclusion of the holders of any other class of shares of the Corporation,
have the sole power to vote for the election of directors and for all other
purposes without limitation, except (i) as otherwise provided in the Articles of
Amendment establishing any series of preferred shares, or (ii) as may be
required by law.
4.2 Distributions. The Board of Directors shall have the authority to
declare dividends from funds available for such purposes under the Virginia
Stock Corporation Act and
2
<PAGE>
shall declare such dividends to the extent necessary to ensure the Corporation's
qualification as a real estate investment trust under the Code. Subject to the
rights of the holders of shares, if any, ranking senior to the Common Shares as
to dividends or rights in liquidation, dissolution or winding up of the affairs
of the Corporation, the holders of outstanding Common Shares shall be entitled
to receive, if, when and as declared by the Board of Directors, dividends and
distributions of the net assets of the Corporation upon the liquidation,
dissolution or winding up of the affairs of the Corporation.
ARTICLE V
REGISTERED OFFICE AND REGISTERED AGENT
The address of the registered office of the Corporation, which is located
in the City of Richmond, Virginia, is c/o McGuire, Woods, Battle & Boothe LLP,
One James Center, 901 East Cary Street, Richmond, Virginia 23219. The initial
registered agent of the Corporation is Leslie A. Grandis, Esq., whose business
office is identical with the registered office and who is a resident of Virginia
and a member of the Virginia State Bar.
ARTICLE VI
LIMIT ON LIABILITY AND INDEMNIFICATION
6.1 Limit on Liability. In every instance in which the Virginia Stock
Corporation Act, as it exists on the date hereof or may hereafter be amended,
permits the limitation or elimination of liability of directors or officers of a
corporation to the corporation or its shareholders, the directors and officers
of the Corporation shall not be liable to the Corporation or its shareholders.
6.2 Mandatory Indemnification. The Corporation shall indemnify any
individual who is, was or is threatened to be made a party to a civil, criminal,
administrative, investigative or
3
<PAGE>
other proceeding (including a proceeding by or in the right of the Corporation
or by or on behalf of its shareholders) because such individual is or was a
director or officer of the Corporation or of any legal entity controlled by the
Corporation, or is or was a fiduciary of any employee benefit plan established
at the direction of the Corporation, against all liabilities and reasonable
expenses incurred by him on account of the proceeding, provided that the
directors of the Corporation (excluding the indemnified party) determine in good
faith that his course of conduct which caused the loss or liability was in the
best interests of the Corporation, and provided further that such liabilities
and expenses were not incurred because of his willful misconduct, bad faith,
reckless disregard of duties or knowing violation of the criminal law. Before
any indemnification is paid, a determination shall be made that indemnification
is permissible in the circumstances because the person seeking indemnification
is eligible for indemnification and has met the standard of conduct set forth
above. Such determination shall be made in the manner provided by Virginia law
for determining that indemnification of a director is permissible, provided,
however, that if a majority of the directors of the Corporation has changed
after the date of the alleged conduct giving rise to a claim for
indemnification, the determination that indemnification is permissible shall, at
the option of the person claiming indemnification, be made by special legal
counsel agreed upon by the Board of Directors and such person. Unless a
determination has been made that indemnification is not permissible, the
Corporation shall make advances and reimbursement for expenses incurred by any
person named above upon receipt of an undertaking from him to repay the same if
it is ultimately determined that such individual is not entitled to
indemnification. The Corporation is authorized to contract in advance to
indemnify any of the persons named above to the extent it is required to
indemnify them pursuant to the provisions of this Section 6.2.
4
<PAGE>
Notwithstanding the above, indemnification will not be allowed for any
liability imposed by judgment, and costs associated therewith, including
attorneys' fees, arising from or out of a violation of federal or state
securities laws associated with the public offering of the Common Shares unless
(i) there has been a successful adjudication on the merits of each count
involving alleged securities law violations as to the particular indemnitee, or
(ii) such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee, or (iii) a court of
competent jurisdiction approves a settlement of the claims against a particular
indemnitee.
6.3 Miscellaneous. The rights of each person or entity entitled to
indemnification under this Article shall inure to the benefit of such person's
or entity's heirs, executors, administrators, successors or assigns.
Indemnification pursuant to this Article shall not be exclusive of any other
right of indemnification to which any person or entity may be entitled,
including indemnification pursuant to a valid contract, indemnification by legal
entities other than the Corporation, and indemnification under policies of
insurance purchased and maintained by the Corporation or others. However, no
person or entity shall be entitled to indemnification by the Corporation to the
extent such person or entity is indemnified by another, including an insurer.
6.4 Amendments. No amendment, modification or repeal of this Article shall
diminish the rights provided hereunder to any person or entity arising from
conduct or events occurring before the adoption of such amendment, modification
or repeal.
ARTICLE VII
BOARD OF DIRECTORS
The number of directors of the Corporation shall be fixed in the bylaws.
The number of directors shall be divided into three groups with each group
containing one third of the total, as
5
<PAGE>
nearly equal in number as possible. The terms of the directors in the first
group shall expire at the first annual meeting of shareholders. The terms of the
directors in the second group shall expire at the second annual meeting of
shareholders and the terms of directors in the third group shall expire at the
third annual meeting of shareholders. At each annual meeting of shareholders,
one group of directors shall be elected for a term of three years to succeed
those whose terms expire.
ARTICLE VIII
AMENDMENT OF ARTICLES; SHAREHOLDER VOTE ON CERTAIN MATTERS
8.1 Amendment of Articles. These Articles (other than Article VII) may be
amended at any time, and from time to time, upon the vote of the holders of a
majority of the issued and outstanding Common Shares of the Corporation. Article
VII of these Articles may be amended at any time, and from time to time, upon
the vote of the holders of more than two-thirds of the issued and outstanding
Common Shares of the Corporation.
8.2 Votes on Certain Matters. The Corporation's shareholders, by vote of
the holders of a majority of the issued and outstanding Common Shares of the
Corporation, may vote to approve a plan of merger, share exchange or
dissolution, or to sell, lease, exchange, or otherwise dispose of all, or
substantially all, of the Corporation's property otherwise than in the usual and
regular course of business.
ARTICLE IX
CLASS B CONVERTIBLE SHARES
There are hereby designated Two Hundred Forty Thousand (240,000) Class B
Convertible Shares, no par value (the "Class B Convertible Shares"). The Class B
Convertible Shares shall have the following preferences, limitations and
relative rights:
6
<PAGE>
9.1 Dividends.
The holders of the outstanding Class B Convertible Shares shall not be
entitled to receive dividends on such Class B Convertible Shares.
9.2 Voting Rights.
(a) Except for the voting rights expressly conferred by this Article
IX, and except to the extent provided by law, the holders of the outstanding
Class B Convertible Shares shall not be entitled (i) to vote on any matter, or
(ii) to receive notice of, or to participate in, any meeting of shareholders of
the Corporation at which they are not entitled to vote.
(b) The affirmative vote of the holders of more than two-thirds of the
outstanding Class B Convertible Shares shall be required for (i) the adoption of
any amendment, alteration or repeal of any provision of the Articles of
Incorporation of the Corporation that adversely changes the preferences,
limitations or relative rights of the Class B Convertible Shares or the holders
thereof (it being understood that an increase in the number of directors of the
Corporation is not such an adverse change), or (ii) the authorization of, or the
increase in the authorized number of shares of, any class of stock ranking
senior to or on a parity with the Class B Convertible Shares as to rights in
liquidation.
(c) Whenever the holders of Class B Convertible Shares are entitled to
vote as a separate voting group on any matter pursuant to the provisions of
paragraph (b) of this Section 9.2, the vote required to approve such matter
shall be the affirmative vote of more than two-thirds of all the votes entitled
to be cast by that voting group, with each share having one vote.
9.3 Redemption.
The Corporation may not redeem all or any portion of the outstanding
Class B Convertible Shares.
9.4 Liquidation.
7
<PAGE>
In the event of the liquidation, dissolution or winding up of the
affairs of the Corporation, the holders of the outstanding Class B Convertible
Shares shall be entitled to be paid in cash out of the net assets of the
Corporation, including its capital, a liquidation payment of $0.10 per share,
and no more, before any distribution or payment shall be made to the holders of
any shares of the Corporation ranking junior to the Class B Convertible Shares
as to rights in liquidation but, after payment of the amounts to which they are
respectively entitled to the holders of the outstanding Class B Convertible
Shares and the other shares, if any, ranking senior to or on a parity with the
Class B Convertible Shares as to rights in liquidation, the balance of such
assets, if any, shall be paid to the holders of the shares of the Corporation
ranking junior to the Class B Convertible Shares as to rights in liquidation,
according to their respective rights. For the purposes of the preceding
sentence, neither the consolidation of the Corporation with nor the merger of
the Corporation into any other corporation, nor the sale, lease or other
disposition of all or substantially all of the Corporation's properties and
assets shall, without further corporate action, be deemed a liquidation,
dissolution or winding up of the affairs of the Corporation. If the net assets
of the Corporation are insufficient to pay to the holders of the Class B
Convertible Shares the full amounts to which they are respectively entitled, the
entire net assets of the Corporation remaining shall be distributed ratably to
the holders of the Class B Convertible Shares and the holders of other preferred
shares, if any, ranking on a parity with the Class B Convertible Shares as to
rights in liquidation in proportion to the full amounts to which they are
respectively entitled.
9.5 Conversion.
(a) Each holder of outstanding Class B Convertible Shares shall have
the right to convert any of such shares into Common Shares of the Corporation
upon and for 180 days following the occurrence of either of the following
events: (1) the sale or transfer of substantially
8
<PAGE>
all of the Corporation's assets, stock or business, whether through sale,
exchange, merger, consolidation, lease, share exchange or otherwise, or (2) the
termination or expiration without renewal of the Advisory Agreement with the
Advisor, and if the Corporation ceases to use the Property Broker to provide
substantially all of its property acquisition and disposition services. Upon the
occurrence of either such event, each Class B Convertible Share may be converted
into a number of Common Shares based upon the gross proceeds raised through the
date of conversion in the public offering or offerings of the Corporation's
Common Shares made by the Corporation's Prospectus according to the following
formula:
<TABLE>
<CAPTION>
Number of Common Shares through
Gross Proceeds Raised From Sales of Conversion of One Class B Convertible Share
Common Shares through Date of Conversion (the initial "Conversion Ratio")
- ---------------------------------------- -------------------------------------------
<S> <C> <C>
$ 50 million 1.0
$100 million 2.0
$150 million 3.5
$200 million 5.3
$250 million 6.7
$300 million 8.0
</TABLE>
(b) Each holder of outstanding Class B Convertible Shares may exercise
the conversion right provided in paragraph (a) above as to all or any portion of
the shares he holds by delivering to the Corporation during regular business
hours, at the principal office of the Corporation or at such other place as may
be designated in writing by the Corporation, the certificate or certificates for
the shares to be converted, duly endorsed or assigned in blank or endorsed or
assigned to the Corporation (if required by it), or if such shares are not
evidenced by a certificate or certificates, a written notice of election,
accompanied in either such case by written notice stating that the holder elects
to convert such shares and stating the name or names (with address and
applicable social security or other tax identification number) in which the
9
<PAGE>
Common Shares are to be issued. Conversion shall be deemed to have been effected
on the date (the "Conversion Date") when such delivery is made. As promptly as
practicable thereafter, the Corporation shall issue and deliver to or upon the
written order of such holder, at such office or other place designated by the
Corporation, a certificate or certificates for the number of Common Shares to
which he is entitled (or shall cause such Common Shares to be duly issued as
required herein, if the Common Shares are uncertificated). The person in whose
name the Common Shares are to be issued shall be deemed to have become a
shareholder of record on the Conversion Date, unless the transfer books of the
Corporation are closed on that date, in which event he shall be deemed to have
become a shareholder of record on the next succeeding date on which the transfer
books are open; but the Conversion Ratio shall be that in effect on the
Conversion Date. The Corporation may issue fractional Common Shares upon
conversion of Class B Convertible Shares.
(c) The issuance of Common Shares on conversion of outstanding Class B
Convertible Shares shall be made by the Corporation without charge for expenses
or for any tax in respect of the issuance of such Common Shares, but the
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of Common Shares in any
name other than that of the holder of record on the books of the Corporation of
the outstanding Class B Convertible Shares converted, and the Corporation shall
not be required to issue or deliver any certificate for Common Shares unless and
until the person requesting the issuance thereof shall have paid to the
Corporation the amount of such tax or shall have established to the satisfaction
of the Corporation that such tax has been paid.
(d) The term "Fair Market Value" of one Common Share, as used in this
Section 9.5 shall, if the Common Shares are traded in the over-the-counter
market, be deemed to be the mean between the bid and asked prices on the date
the value is required to be determined,
10
<PAGE>
as reported by NASDAQ or any similar service, and if the Common Shares are
listed and traded on a national stock exchange, be deemed to be the closing
price of the Common Shares for such day derived from the New York Stock Exchange
Composite Tape or any similar service; provided, however, that if the Common
Shares are not traded on that date, then the Fair Market Value shall be
determined, in the manner hereinabove set forth, on the most recent preceding
business day on which the Common Shares were traded; provided further, however,
that if the Fair Market Value of the Common Shares cannot be determined in
accordance with the foregoing provisions (for example, if the Common Shares are
not traded), the Fair Market Value of the Common Shares shall be determined in
good faith by the Corporation's Board of Directors. The term "Conversion Ratio,"
as used herein, shall mean, as of any date, the number of Common Shares into
which each Class B Convertible Share is convertible on that date. The initial
Conversion Ratio shall be as set forth in Section 9.5(a), but shall be adjusted
as described below.
(e) The Conversion Ratio shall be subject to the following
adjustments.
(i) If the Corporation shall (y) pay a dividend on its
outstanding Common Shares in Common Shares or subdivide or otherwise split
its outstanding Common Shares, or (z) combine its outstanding Common Shares
into a smaller number of shares, the Conversion Ratio shall be adjusted so
that the holder of any Class B Convertible Shares surrendered for
conversion after such event shall be entitled to receive the same aggregate
number of Common Shares that he would have been entitled to receive had
such shares been converted immediately prior to any such event and such
event had then occurred.
(ii) If the Corporation shall issue rights, warrants or options
to all holders of its Common Shares entitling them to subscribe for or
purchase Common Shares at a price per share which is less than the Current
Market Value per share (as
11
<PAGE>
hereinafter defined) on the record date mentioned below, the Conversion
Ratio shall be adjusted to an amount determined by multiplying the
Conversion Ratio in effect immediately prior to the issuance of such
rights, warrants or options by a fraction, (y) the numerator of which shall
be the number of Common Shares outstanding at the close of business on the
date of issuance of such rights, warrants or options plus the number of
additional Common Shares offered for subscription pursuant to such rights,
warrants or options and (z) the denominator of which shall be the number of
Common Shares outstanding at the close of business on the date of issuance
of such rights, warrants or options plus the number of Common Shares which
the aggregate exercise price of all such rights, warrants or options would
purchase at such Current Market Value. Such adjustment shall be
retroactively effective to the time immediately after the record date for
the determination of the shareholders entitled to receive such rights,
warrants or options. For the purposes of this Section 9.5(e), the "Current
Market Value" per Common Share on any date shall be deemed to be the
average of the Fair Market Value of one Common Share (as defined in Section
9.5(d)) on each of the 20 consecutive trading days commencing 40 trading
days before such date (a trading day being a day on which securities are
traded in the over-the-counter market or, if the Common Shares are then
listed on any national stock exchange, on such exchange), and if the Common
Shares are not then traded, the Fair Market Value of one Common Share (as
determined under Section 9.5(d)) as of the date in question.
(iii) If the Corporation shall make a distribution to all holders
of its Common Shares of evidences of its indebtedness or assets (excluding
dividends paid in cash out of funds available for dividends in accordance
with applicable law), or rights, warrants or options to subscribe for or
purchase securities of the Corporation (other than
12
<PAGE>
those referred to in subparagraph (ii) of this Section 9.5(e)), the
Conversion Ratio immediately prior to such distribution shall be adjusted
to an amount determined by multiplying such Conversion Ratio by a fraction,
(y) the numerator of which shall be the Current Market Value of one Common
Share (as defined in subparagraph (ii) of this Section 9.5(e)), and (z) the
denominator of which shall be the Current Market Value of one Common Share
on the next full business day after the record date fixed for the
determination of the shareholders entitled to such distribution less the
fair value (as conclusively determined in good faith by the Board of
Directors of the Corporation) at the time of such distribution of that
portion of the evidences of indebtedness, assets, or the rights, warrants
or options, distributed which is applicable to one Common Share. Such
adjustment shall be retroactively effective to a time immediately after
such record date.
(f) Notwithstanding any of the foregoing provisions of this Section
9.5, no adjustment of the Conversion Ratio shall be made (i) if the Corporation
shall issue Common Shares or rights, warrants or options to purchase Common
Shares pursuant to one or more stock purchase plans, stock option plans, stock
purchase contracts, incentive compensation plans, or other remuneration plans
for employees (including officers) or directors of the Corporation or its
Subsidiaries adopted or approved as required by law at any time or, (ii) in
respect of any right granted by the Corporation to all holders of its Common
Shares to purchase Common Shares at a discount from their Current Market Value
by the reinvestment of dividends paid on its Common Shares.
(g) If any Class B Convertible Shares are converted into Common Shares
after the record date for the happening of any of the events described in
subparagraphs (i), (ii) or (iii) of Section 9.5(e) but before the happening of
such event, the Corporation may defer, until the happening of such event,
issuing to the holder of Class B Convertible Shares so converted the
13
<PAGE>
Common Shares which he is entitled to receive because of the adjustments
required pursuant to any such subparagraph.
(h) Whenever there is a required adjustment to the Conversion Ratio,
such adjustment shall be made to the Conversion Ratio applicable to each step in
the formula set forth in Section 9.5(a) so that the adjustment given effect at
the time of conversion is applied to the Conversion Ratio applicable to the
amount of gross proceeds raised through the date of conversion. Anything in this
Section 9.5 to the contrary notwithstanding, no adjustment to the Conversion
Ratio shall be required unless such adjustment would require an increase or
decrease of at least 0.1 in such ratio; provided, however, that any adjustments
which by reason of this Section 9.5 are not required to be made shall be carried
forward and taken into account in making subsequent adjustments. All
calculations under this Section 9.5 shall be made to the nearest 0.01.
(i) Whenever the Conversion Ratio is adjusted pursuant to this Section
9.5, the Corporation shall (i) promptly place on file at its principal office
and at the office of each transfer agent, if any, for the Class B Convertible
Shares, a statement, signed by the Chairman or President of the Corporation
showing in detail the facts requiring such adjustment and a computation of the
adjusted Conversion Ratio, and shall make such statement available for
inspection by shareholders of the Corporation, and (ii) cause a notice to be
mailed to each holder of record of outstanding Class B Convertible Shares
stating that such adjustment has been made and setting forth the adjusted
Conversion Ratio.
(j) In the event of any reclassification or recapitalization of the
outstanding Common Shares (except a change in par value, or from no par value to
par value, or subdivision or other split or combination of shares), or in case
of any consolidation or merger to which the Corporation is a party, except a
merger in which the Corporation is the surviving corporation and
14
<PAGE>
which does not result in any such reclassification or recapitalization, or in
case of any sale or conveyance to a person or another business entity of all or
substantially all of the property of the Corporation, the Corporation or the
successor or purchasing business entity shall provide (i) that the holder of
each Class B Convertible Share then outstanding shall thereafter have the right
to convert such share into the kind and amount of stock and other securities and
property receivable, upon such reclassification, recapitalization,
consolidation, merger, sale or conveyance, by a holder of the number of Common
Shares of the Corporation into which such Class B Convertible Shares might have
been converted, and (ii) that there shall be subsequent adjustments of the
Conversion Ratio which shall be equivalent, as nearly as practicable, to the
adjustments provided for in this Section 9.5. The provisions of this paragraph
(j) of this Section 9.5 shall similarly apply to successive reclassifications,
recapitalizations, consolidations, mergers, sales or conveyances.
(k) Common Shares issued on conversion of Class B Convertible Shares
shall be issued as fully paid shares and shall be nonassessable by the
Corporation. The Corporation shall, at all times, reserve and keep available,
for the purpose of effecting the conversion of the outstanding Class B
Convertible Shares, such number of its duly authorized Common Shares as shall be
sufficient to effect the conversion of all of the outstanding Class B
Convertible Shares.
(l) Class B Convertible Shares converted as provided herein shall not
again become available for issuance.
9.6 Definitions and Interpretation.
As used in these Articles, unless the context otherwise requires, the
following terms shall have the following meanings:
"Advisor" means the company with which the Corporation first enters into an
advisory agreement (and any successor in interest to such company which is an
affiliate of such company).
15
<PAGE>
"Advisory Agreement" means the Advisory Agreement between the Corporation
and the Advisor, as it may be in effect from time to time.
"Property Broker" means the company with which the Corporation first enters
into a property acquisition/disposition agreement (and any successor in interest
to such company which is an affiliate of such company).
"Prospectus" means the final version of the prospectus of the Corporation
in connection with the registration of certain of the Corporation's Common
Shares under a registration statement filed with the United States Securities
and Exchange Commission on Form S-11, as amended and supplemented.
"Subsidiary" means any corporation a majority of the outstanding voting
shares of which is owned, directly or indirectly, by the Corporation, by one or
more Subsidiaries of the Corpo ration or by the Corporation and one or more
Subsidiaries of the Corporation.
For the purpose of these Articles, the shares of any class of the
Corporation shall be deemed to rank as follows:
(a) senior to the Class B Convertible Shares, either as to dividends
or as to rights in liquidation, if the holders of such shares shall be entitled
to the receipt of dividends or of amounts distributable upon the liquidation,
dissolution or winding up of the affairs of the Corporation, as the case may be,
in preference or priority to the holders of Class B Convertible Shares;
(b) on a parity with the Class B Convertible Shares, either as to
dividends or as to rights in liquidation, whether or not the dividend rates,
dividend payment dates, or redemption or liquidation prices per share thereof be
different from those of the Class B Convertible Shares, if the holders of such
shares shall be entitled to the receipt of dividends or of amounts distributable
upon the liquidation, dissolution or winding up of the affairs of the
16
<PAGE>
Corporation, as the case may be, in proportion to their respective dividend
rates or liquidation prices, without preference or priority of one over the
other as between the holders of such shares; and
(c) junior to the Class B Convertible Shares, either as to dividends
or as to rights in liquidation, if such shares shall be Common Shares or if the
holders of the Class B Convertible Shares shall be entitled to the receipt of
dividends or of amounts distributable upon the liquidation, dissolution or
winding up of the affairs of the Corporation, as the case may be, in preference
or priority to the holders of such shares.
Dated: March 4, 1999 /s/ Martin B. Richards
-------------------------------
Martin B. Richards,
Incorporator
17
EXHIBIT 3.2
APPLE SUITES, INC.
BYLAWS
ARTICLE I
MEETINGS OF SHAREHOLDERS
1.1 Place and Time of Meetings. Meetings of shareholders shall be held at
such place, either within or without the Commonwealth of Virginia, and at such
time, as may be provided in the notice of the meeting and approved by the
President or the Board of Directors.
1.2 Annual Meeting. The annual meeting of shareholders, shall be held on
the second Tuesday in July of each year, or on such date, as may be designated
by resolution of the Board of Directors from time to time for the purpose of
electing directors and conducting such other business as may properly come
before the meeting.
1.3 Special Meetings. Special meetings of the shareholders may be called by
the President or the Board of Directors and shall be called by the Secretary
upon demand of shareholders as required by law. Only business within the purpose
or purposes described in the notice for a special meeting of shareholders may be
conducted at the meeting.
1.4 Record Dates. The Board of Directors may fix, in advance, a record date
to make a determination of shareholders entitled to notice of, or to vote at,
any meeting of shareholders, to receive any dividend or for any purpose, such
date to be not more than 70 days before the meeting or action requiring a
determination of shareholders. If no such record date is set then the record
date shall be the close of business on the day before the date on which the
first notice is given.
When a determination of shareholders entitled to notice of or to vote at
any meeting of shareholders has been made, such determination shall be effective
for any adjournment of the
<PAGE>
meeting unless the Board of Directors fixes a new record date, which it shall do
if the meeting is adjourned to a date more than 120 days after the date fixed
for the original meeting.
1.5 Notice of Meetings. Written notice stating the place, day and hour of
each meeting of shareholders and, in case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given not less than ten nor
more than 60 days before the date of the meeting (except when a different time
is required in these Bylaws or by law) either personally or by mail, telephone,
telegraph, teletype, telecopy or other form of wire or wireless communication,
or by private courier, to each shareholder of record entitled to vote at such
meeting and to such nonvoting shareholders as may be required by law. If mailed,
such notice shall be deemed to be effective when deposited in first class United
States mail with postage thereon prepaid, addressed to the shareholder at his
address as it appears on the share transfer books of the Corporation. If given
in any other manner, such notice shall be deemed to be effective (i) when given
personally or by telephone, (ii) when sent by telegraph, teletype, telecopy or
other form of wire or wireless communication or (iii) when given to a private
courier to be delivered.
If a meeting is adjourned to a different date, time or place, notice need
not be given if the new date, time or place is announced at the meeting before
adjournment. However, if a new record date for an adjourned meeting is fixed,
notice of the adjourned meeting shall be given to shareholders as of the new
record date, unless a court provides otherwise.
1.6 Waiver of Notice; Attendance at Meeting. A shareholder may waive any
notice required by law, the Articles of Incorporation or these Bylaws before or
after the date and time of the meeting that is the subject of such notice. The
waiver shall be in writing, be signed by the shareholder entitled to the notice,
and be delivered to the Secretary of the Corporation for
2
<PAGE>
inclusion in the minutes or filing with the corporate records.
A shareholder's attendance at a meeting (i) waives objection to lack of
notice or defective notice of the meeting, unless the shareholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting, and (ii) waives objection to consideration of a particular
matter at the meeting that is not within the purpose or purposes described in
the meeting notice, unless the shareholder objects to considering the matter
when it is presented.
1.7 Quorum and Voting Requirements. Unless otherwise required by law, a
majority of the votes entitled to be cast on a matter constitutes a quorum for
action on that matter. Once a share is represented for any purpose at a meeting,
it is deemed present for quorum purposes for the remainder of the meeting and
for any adjournment of that meeting unless a new record date is or shall be set
for that adjourned meeting. If a quorum exists, action on a matter, other than
the election of directors, is approved if the votes cast favoring the action
exceed the votes cast opposing the action, unless a greater number of
affirmative votes is required by law. Directors shall be elected by a plurality
of the votes cast by the shares entitled to vote in the election at a meeting at
which a quorum is present. Less than a quorum may adjourn a meeting.
1.8 Action Without Meeting. Action required or permitted to be taken at a
meeting of the shareholders may be taken without a meeting and without action by
the Board of Directors if the action is taken by all the shareholders entitled
to vote on the action. The action shall be evidenced by one or more written
consents describing the action taken, signed by all the shareholders and
delivered to the Secretary of the Corporation for inclusion in the minutes or
filing with the corporate records. Action taken by unanimous consent shall be
effective according to its terms when all consents are in the possession of the
Corporation, unless the consent specifies a different effective date, in which
event the action taken shall be effective as
3
<PAGE>
of the date specified therein provided that the consent states the date of
execution by each shareholder. A shareholder may withdraw a consent only by
delivering a written notice of withdrawal to the Corporation prior to the time
that all consents are in the possession of the Corporation.
If not otherwise fixed pursuant to the provisions of Section 1.5, the
record date for determining shareholders entitled to take action without a
meeting is the date the first shareholder signs the consent described in the
preceding paragraph.
ARTICLE II
DIRECTORS
2.1 General Powers. The Corporation shall have a Board of Directors. All
corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Corporation managed under the direction of, its
Board of Directors, subject to any limitation set forth in the Articles of
Incorporation.
2.2 Number, Term and Election. The number of directors of the Corporation
shall be not less than one nor more than three. This number may be changed from
time to time by amendment to these Bylaws to increase or decrease by 30 percent
or less the number of directors last elected by the shareholders, but only the
shareholders may increase or decrease the number by more than 30 percent. No
decrease in number shall have the effect of shortening the term of any incumbent
director. Each director shall hold office until his death, resignation,
retirement or removal or until his successor is elected.
Except as provided in Section 2.3 of this Article, the directors (other
than initial directors) shall be elected by the holders of the Common shares at
the annual meeting of shareholders, and
4
<PAGE>
those persons who receive the greatest number of votes shall be deemed elected
even though they do not receive a majority of the votes cast. No individual
shall be named or elected as a director without his prior consent.
2.3 Removal; Vacancies. The shareholders may remove one or more directors,
with or without cause, if the number of votes cast to remove him constitutes a
majority of the votes entitled to be cast at an election of directors. A
director may be removed by the stockholders only at a meeting called for the
purpose of removing him and the meeting notice must state that the purpose, or
one of the purposes of the meeting, is removal of the director.
A vacancy on the Board of Directors, including a vacancy resulting from the
removal of a director or an increase in the number of directors, may be filled
by (i) the shareholders, (ii) the Board of Directors or (iii) the affirmative
vote of a majority of the remaining directors though less than a quorum of the
Board of Directors, and may, in the case of a resignation that will become
effective at a specified later date, be filled before the vacancy occurs but the
new director may not take office until the vacancy occurs.
2.4 Annual and Regular Meetings. An annual meeting of the Board of
Directors, which shall be considered a regular meeting, shall be held
immediately following each annual meeting of shareholders, for the purpose of
electing officers and carrying on such other business as may properly come
before the meeting. The Board of Directors may also adopt a schedule of
additional meetings which shall be considered regular meetings. Regular meetings
shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the President or the Board of Directors shall
designate from time to time. If no place is designated, regular meetings shall
be held at the principal office of the Corporation.
2.5 Special Meetings. Special meetings of the Board of Directors may be
called by
5
<PAGE>
the President or a majority of the directors of the Corporation, and shall be
held at such times and at such places, within or without the Commonwealth of
Virginia, as the person or persons calling the meetings shall designate. If no
such place is designated in the notice of a meeting, it shall be held at the
principal office of the Corporation.
2.6 Notice of Meetings. No notice need be given of regular meetings of the
Board of Directors.
Notices of special meetings of the Board of Directors shall be given to
each director in person or delivered to his residence or business address (or
such other place as he may have directed in writing) not less than twenty-four
(24) hours before the meeting by mail, messenger, telecopy, telegraph, or other
means of written communication or by telephoning such notice to him. Any such
notice shall set forth the time and place of the meeting and state the purpose
for which it is called.
2.7 Waiver of Notice; Attendance at Meeting. A director may waive any
notice required by law, the Articles of Incorporation, or these Bylaws before or
after the date and time stated in the notice, and such waiver shall be
equivalent to the giving of such notice. Except as provided in the next
paragraph of this section, the waiver shall be in writing, signed by the
director entitled to the notice and filed with the minutes or corporate records.
A director's attendance at or participation in a meeting waives any
required notice to him of the meeting unless the director at the beginning of
the meeting or promptly upon his arrival objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
2.8 Quorum; Voting. A majority of the number of directors fixed in these
Bylaws shall constitute a quorum for the transaction of business at a meeting of
the Board of Directors.
6
<PAGE>
If a quorum is present when a vote is taken, the affirmative vote of a majority
of the directors present is the act of the Board of Directors. A director who is
present at a meeting of the Board of Directors or a committee of the Board of
Directors when corporate action is taken is deemed to have assented to the
action taken unless (i) he objects at the beginning of the meeting, or promptly
upon his arrival, to holding it or transacting specified business at the
meeting; or (ii) he votes against, or abstains from, the action taken.
2.9 Telephonic Meetings. The Board of Directors may permit any or all
directors to participate in a regular or special meeting by, or conduct the
meeting through the use of, any means of communication by which all directors
participating may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
2.10 Action Without Meeting. Action required or permitted to be taken at a
meeting of the Board of Directors may be taken without a meeting if the action
is taken by all members of the Board. The action shall be evidenced by one or
more written consents stating the action taken, signed by each director either
before or after the action taken, and included in the minutes or filed with the
corporate records reflecting the action taken. Action taken under this section
shall be effective when the last director signs the consent unless the consent
specifies a different effective date, in which event the action taken is
effective as of the date specified therein provided the consent states the date
of execution by each director.
2.11 Compensation. The Board of Directors may fix the compensation of
directors and may provide for the payment of all expenses incurred by them in
attending meetings of the Board of Directors.
7
<PAGE>
ARTICLE III
OFFICERS
3.1 Officers. The officers of the Corporation shall be a President, and a
Secretary, and, in the discretion of the Board of Directors, one or more
Vice-Presidents and such other officers as may be deemed necessary or advisable
to carry on the business of the Corporation. Any two or more offices may be held
by the same person.
3.2 Election; Term. Officers shall be elected at the annual meeting of the
Board of Directors and may be elected at such other time or times as the Board
of Directors shall determine. They shall hold office, unless removed, until the
next annual meeting of the Board of Directors or until their successors are
elected. Any officer may resign at any time upon written notice to the Board of
Directors, and such resignation shall be effective when notice is delivered
unless the notice specifies a later effective date.
3.3 Removal of Officers. The Board of Directors may remove any officer at
any time, with or without cause.
3.4 Duties of Officers. The President shall be the Chief Executive Officer
of the Corporation. He and the other officers shall have such powers and duties
as generally pertain to their respective offices as well as such powers and
duties as may be delegated to them from time to time by the Board of Directors.
The Chief Executive Officer, if he is present, shall be chairman of all meetings
of the shareholders and the Board of Directors, as well as any committee of
which he is a member.
ARTICLE IV
SHARE CERTIFICATES
4.1 Form. Shares of the Corporation shall, when fully paid, be evidenced by
8
<PAGE>
certificates containing such information as is required by law and approved by
the Board of Directors. Certificates shall be signed by the President and the
Secretary and may (but need not) be sealed with the seal of the Corporation. The
seal of the Corporation and any or all signatures on a share certificate may be
facsimile. If any officer who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer before such
certificate is issued it may be issued by the Corporation with the same effect
as if he were such officer on the date of issue.
4.2 Transfer. The Board of Directors may make rules and regulations
concerning the issue, registration and transfer of certificates representing the
shares of the Corporation. Transfers of shares and of the certificates
representing such shares shall be made upon the books of the Corporation by
surrender of the certificates representing such shares accompanied by written
assignments given by the owners or their attorneys-in-fact.
4.3 Restrictions on Transfer. A lawful restriction on the transfer or
registration of transfer of shares is valid and enforceable against the holder
or a transferee of the holder if the restriction complies with the requirements
of law and its existence is noted conspicuously on the front or back of the
certificate representing the shares. Unless so noted a restriction is not
enforceable against a person without knowledge of the restriction.
4.4 Lost or Destroyed Share Certificates. The Corporation may issue a new
share certificate in the place of any certificate theretofore issued which is
alleged to have been lost or destroyed and may require the owner of such
certificate, or his legal representative, to give the Corporation a bond, with
or without surety, or such other agreement, undertaking or security as the Board
of Directors shall determine is appropriate, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss or
destruction or the issuance of any such new certificate.
9
<PAGE>
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 Fiscal Year. The fiscal year of the Corporation shall be set by the
Board of Directors.
5.2 Amendments. These Bylaws may be amended or repealed, and new Bylaws may
be made at any regular or special meeting of the Board of Directors. Bylaws made
by the Board of Directors may be repealed or changed and new Bylaws may be made
by the shareholders, and the shareholders may prescribe that any Bylaw made by
them shall not be altered, amended or repealed by the Board of Directors.
5.3 Corporate Seal. The Corporation may, but need not, have a corporate
seal.
10
Exhibit 3.3
AMENDED AND RESTATED
BYLAWS
OF
APPLE SUITES, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLES: Page
----
ARTICLE I
THE COMPANY; DEFINITIONS..............................................1
1.1 Name.........................................................1
1.2 Nature of Company............................................1
1.3 Definitions..................................................1
ARTICLE II
MINIMUM CAPITAL.......................................................6
2.1 Minimum Capital..............................................6
2.2 [Reserved]...................................................6
ARTICLE III
OFFICES; FISCAL YEAR..................................................6
3.1 Principal Office.............................................6
3.2 Other Offices................................................6
3.3 Taxable Year.................................................6
ARTICLE IV
MEETINGS OF SHAREHOLDERS..............................................7
4.1 Place of Meetings............................................7
4.2 Annual Meetings..............................................7
4.3 Special Meetings.............................................8
4.4 Notice; Affidavit of Notice..................................8
4.5 Record Date for Shareholder Notice, Voting and Giving
Consents.....................................................9
4.6 Adjourned Meetings; Notice..................................10
4.7 Voting at Meetings of Shareholders..........................10
4.8 Quorum......................................................10
4.9 Waiver of Notice or Consent of Absent Shareholders..........11
4.10 Action Without Meeting......................................11
4.11 Proxies.....................................................11
4.12 Inspectors of Election......................................12
ARTICLE V
DIRECTORS............................................................13
5.1 Powers..........................................................13
5.2 Number, Tenure and Qualifications...............................13
5.3 Nomination of Directors.........................................14
5.4 Vacancies.......................................................15
5.5 Place of Meeting................................................16
5.6 Organization Meeting............................................16
5.7 Special Meetings................................................16
5.8 Adjournment.....................................................17
5.9 Notice of Adjournment...........................................17
5.10 Entry of Notice.................................................17
5.11 Waiver of Notice................................................17
5.12 Quorum..........................................................17
5.13 Fees and Compensation...........................................17
ii
<PAGE>
5.14 Action Without Meeting..........................................18
5.15 Independent Directors...........................................18
5.16 Removal of Director for Cause...................................20
5.17 Removal of Director Without Cause...............................20
5.18 Committees......................................................20
5.19 Fiduciary Relationship..........................................21
ARTICLE VI
OFFICERS.............................................................21
6.1 Officers....................................................21
6.2 Election....................................................21
6.3 Subordinate Officers........................................22
6.4 Removal and Resignation.....................................22
6.5 Vacancies...................................................22
6.6 Chairman of the Board.......................................22
6.7 President...................................................22
6.8 Vice Presidents.............................................23
6.9 Secretary...................................................23
6.10 Assistant Secretaries.......................................23
6.11 Chief Financial Officer.....................................23
6.12 Assistant Chief Financial Officers..........................24
ARTICLE VII
SHARES OF STOCK......................................................24
7.1 Registered Ownership, Share Certificates and Shares in
"Unissued Certificate" Form.................................24
7.2 Transfer of Shares..........................................25
7.3 Disclosures by Holders of Shares; Redemption of Shares......25
7.4 Right to Refuse to Transfer the Shares......................26
7.5 Limitation on Acquisition of Shares.........................26
7.6 Lost or Destroyed Certificates..............................28
7.7 Dividend Record Date and Closing Stock Books................28
7.8 Dividend Reinvestment Plan..................................28
ARTICLE VIII
EMPLOYMENT OF ADVISOR, LIMITATION
ON EXPENSES AND LEVERAGE.............................................29
8.1 Employment of Advisor.......................................29
8.2 Term........................................................30
8.3 Other Activities of Advisor.................................30
8.4 Limitation on Offering and Organization Expenses and
Acquisition Fees and Expenses...............................31
8.5 Limitation on Operating Expenses............................31
8.6 Limitation on Real Estate Brokerage Commissions on
Purchase and Resale of Property.............................32
8.7 Limitation on Incentive Fees................................32
8.8 Limitations on Leverage.....................................33
ARTICLE IX
RESTRICTIONS ON INVESTMENTS AND ACTIVITIES...........................33
9.1 Restrictions................................................33
ii
<PAGE>
ARTICLE X
TRANSACTIONS WITH AFFILIATES; CERTAIN DUTIES AND LIABILITIES
OF DIRECTORS, SHAREHOLDERS, ADVISOR AND AFFILIATES...................35
10.1 Transactions with Affiliates...................................35
10.2 Restriction of Duties and Liabilities..........................36
10.3 Persons Dealing with Directors or Officers.....................37
10.4 Reliance.......................................................37
10.5 Income Tax Status..............................................37
ARTICLE XI
MISCELLANEOUS........................................................38
11.1 Competing Programs.............................................38
11.2 Corporate Seal.................................................38
11.3 Inspection of Bylaws...........................................38
11.4 Inspection of Corporate Records................................39
11.5 Checks, Drafts, Etc............................................39
11.6 Contracts, Etc., How Executed..................................39
11.7 Representation of Shares of Other Corporations.................39
11.8 Annual Report..................................................39
11.9 Quarterly Reports..............................................40
11.10 Other Reports..................................................40
11.11 Provisions of the Company in Conflict with Law or
Regulation.................................................40
11.12 Voluntary Dissolution..........................................41
11.13 Distributions..................................................41
11.14 Shareholder Liability..........................................41
11.15 Return of Offering Proceeds....................................41
ARTICLE XII
AMENDMENTS TO BYLAWS.................................................41
12.1 Amendments.....................................................41
12.2 [Reserved]......................................................42
ARTICLE XIII
CONDUCT OF BUSINESS THROUGH SUBSIDIARIES.............................42
13.1 Subsidiaries...................................................42
13.2 Interpretation and Application of Bylaws.......................42
13.3 Certain Shareholder Consents...................................42
iii
<PAGE>
ARTICLE I
THE COMPANY; DEFINITIONS
1.1 Name. The name of the corporation is Apple Suites, Inc. and is referred
to in these Bylaws as the "Company." As far as practicable and except as
otherwise provided in the Organizational Documents, the Directors shall direct
the management of the business and the conduct of the affairs of the Company,
execute all documents and sue or be sued in the name of the Company. If the
Directors determine that the use of that name is not practicable, legal or
convenient, they may use such other designation or may adopt another name under
which the Company may hold property or conduct all or part of its activities.
1.2 Nature of Company. The Company is a corporation organized under the
laws of the Commonwealth of Virginia. It is intended that the Company shall
carry on business as a "real estate investment trust" ("REIT").
1.3 Definitions. Whenever used in these Bylaws, the terms defined in this
Section 1.3 shall, unless the context otherwise requires, have the respective
meanings specified in this Section 1.3. In these Bylaws, words in the singular
number include the plural and in the plural number include the singular.
(a) Acquisition Expenses. The total expenses, including but not
limited to legal fees and expenses, travel and communications expenses, costs of
appraisals, non-refundable option payments on property not acquired, accounting
fees and expenses, title insurance, and miscellaneous expenses related to
selection and acquisition of properties, whether or not acquired. Acquisition
Expenses shall not include Acquisition Fees.
(b) Acquisition Fees. The total of all fees and commissions paid by
any party in connection with the purchase or development of real property by the
Company, except a development fee paid to a person not Affiliated with the
Sponsor in connection with the actual development of a project after acquisition
of the land by the Company. Included in the computation of such fees or
commissions shall be any real estate commission, selection fee, development fee,
nonrecurring management fee, or any fee of a similar nature, however designated.
(c) Adjusted Net Asset Value. The net assets of the Company (total
assets before deducting depreciation or non-cash reserves less total
liabilities) valued at fair market value as determined by qualified appraisals
or valuations of the assets.
(d) Advisor. The Person responsible for directing or performing the
day-to-day business affairs of the
<PAGE>
Company, including a Person to which the Advisor subcontracts substantially all
such functions.
(e) Affiliate. Means (i) any Person directly or indirectly
controlling, controlled by or under common control with another Person, (ii) any
Person owning or controlling 10% or more of the outstanding voting securities or
beneficial interests of such other Person, (iii) any officer, director, trustee
or general partner of such Person, and (iv) if such other Person is an officer,
director, trustee or partner of another entity, then the entity for which that
Person acts in any such capacity. Affiliated means being an Affiliate of a
specified Person.
(f) Annual Report. As set forth in Section 11.8.
(g) Appraisal. The values as of the date of the appraisal or valuation
of property in its existing state or in a state to be created, as determined by
the Directors, the Advisor or by another person, who is a member in good
standing of the American Institute of Real Estate Appraisers or who in the sole
judgment of the Directors is properly qualified to make such a determination.
The Directors may in good faith rely on a previous Appraisal made on behalf of
another Person, provided (i) it meets the standards of this definition and was
made in connection with an investment in which the Company acquires the entire
or a participating interest, and (ii) it was prepared not earlier than two years
prior to the acquisition by the Company of its interest in the property. In
appraising properties, appraisers may take into consideration each of the
specific terms and conditions of a purchase, including any leaseback or other
guarantee arrangement. The Appraisal may not necessarily represent the cash
value of the property but may consider the value of the income stream from such
property plus the discounted value of the fee interest and other terms of the
purchase. An Appraisal shall be obtained from an independent qualified appraiser
if a majority of the Independent Directors so decides or if the transaction is
with the Advisor, Directors or any of their Affiliates. Each Appraisal shall be
maintained in the Company's records for a minimum of five years and shall be
available for inspection and duplication by any Shareholder.
(h) Articles of Incorporation. The Articles of Incorporation of the
Company, including all amendments, restatements or modifications thereof.
(i) Average Invested Assets. The average of the aggregate book value
of the assets of the Company invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for depreciation
or bad debts or other similar non-cash reserves, computed by taking the average
of such values at the end of each month during any period.
2
<PAGE>
(j) Bylaws. These Bylaws, including all amendments, restatements or
modifications hereof.
(k) Competitive Real Estate Commission. The real estate or brokerage
commission paid for the purchase or sale of a property which is reasonable,
customary and competitive in light of the size, type and location of such
property.
(l) Contract Price. The amount actually paid or allocated to the
purchase, development, construction or improvement of real property exclusive of
Acquisition Fees and Acquisition Expenses.
(m) Directors. As of any particular time, the directors of the Company
holding office at such time.
(n) Dividend Reinvestment Plan. The program adopted by the Board of
Directors pursuant to Section 5.1 hereof and available to Shareholders to
reinvest dividends in Shares available under the Liquidity Matching Program.
(o) Independent Director. A Director of the Company who is not
Affiliated, directly or indirectly, with the Advisor, whether by ownership of,
ownership interest in, employment by, any material business or professional
relationship with, or serving as an officer or director of, the Advisor, or an
Affiliated business entity of the Advisor (other than as an Independent Director
of up to three other real estate investment trusts advised by the Advisor or an
Affiliate of the Advisor). An Independent Director may perform no other services
for the Company, except as a Director. Notwithstanding anything to the contrary
herein, any member of a law firm whose only material business or professional
relationship with the Company, the Advisor and their Affiliates is as legal
counsel to any of such entities shall constitute an Independent Director (unless
such person serves as a director for more than three REITs organized by the
Advisor and its Affiliates). The independence of any Independent Director must
be maintained throughout his term as Director. An "indirect" affiliation shall
be deemed to refer to circumstances in which a member of the "immediate family"
of a Director is Affiliated with the Advisor, and a person's "immediate family"
shall mean such person's spouse, parents, children, siblings, mother and
father-in-law, sons and daughters- in-law and brothers and sisters-in-law.
(p) Initial Investment. That portion of the initial capitalization of
the Company contributed by the Sponsor or its Affiliates.
(q) Leverage. The aggregate amount of indebtedness of the Company for
money borrowed (including purchase money mortgage loans) outstanding at any
time, both
3
<PAGE>
secured and unsecured.
(r) Liquidity Matching Program. The program adopted by the Board of
Directors pursuant to Section 5.1 hereof under which Shareholders may tender
Shares for resale to participants in the Dividend Reinvestment Plan.
(s) Net Assets. The total assets of the Company (other than intangible
assets) at cost before deducting depreciation or other non-cash reserves less
total liabilities, calculated at least quarterly on a basis consistently
applied.
(t) Net Income. The total revenues of the Company for any period, less
the expenses applicable to such period other than additions to reserves for
depreciation or bad debts or other similar non-cash reserves. For purposes of
calculating Operating Expenses, Net Income shall exclude any gain from the sale
of the Company's assets.
(u) Offering and Organization Expenses. Those expenses incurred in
connection with the formation and registration of the Company and in qualifying
and marketing the Shares under applicable federal and state law, and any other
expenses actually incurred and directly related to the qualification,
registration, offer and sale of the Shares, including such expenses as (i) all
marketing expenses and payments made to broker-dealers as compensation or
reimbursement for all costs of reviewing the offering, including due diligence
investigations and fees and expenses of their attorneys, accountants and other
experts; (ii) registration fees, filing fees and taxes; (iii) the costs of
printing, amending, supplementing and distributing the registration statement
and Prospectus; (iv) the costs of obtaining regulatory clearances of, printing
and distributing sales materials used in connection with the offer and sale of
the Shares; (v) the costs related to investor and broker-dealer sales meetings
concerning the offering; and (vi) accounting and legal fees incurred in
connection with any of the foregoing.
(v) Operating Expenses. All operating, general and administrative
expenses of the Company as determined under generally accepted accounting
principles (including regular compensation payable to the Advisor), excluding,
however, the following:
(i) expenses of raising capital;
(ii) interest payments;
(iii) taxes;
(iv) non-cash expenditures, such as depreciation,
4
<PAGE>
amortization and bad debt reserve;
(v) incentive fees paid to the Advisor, if any; and
(vi) costs related directly to asset acquisition, operation and
disposition.
(w) Organizational Documents. The Articles of Incorporation and these
Bylaws.
(x) Person. An individual, corporation, partnership, joint venture,
association, company, trust, bank or other entity, or government and any agency
and political subdivision of a government.
(y) Prospectus. Shall mean a Prospectus as that term is defined by the
Securities Act of 1933, including a preliminary Prospectus, an offering circular
as described in Rule 256 of the General Rules and Regulations promulgated under
the Securities Act of 1933 and, in the case of an intra-state offering, any
document, by whatever name known, utilized for the purpose of offering and
selling securities to the public.
(z) REIT. A real estate investment trust, as defined in Section 856 of
the Internal Revenue Code of 1986, as amended.
(aa) REIT Provisions of the Internal Revenue Code. Part II, Subchapter
M of Chapter 1, of the Internal Revenue Code of 1986, as amended, or successor
statutes, and regulations and rulings promulgated thereunder.
(bb) Securities. Any stock, shares, voting trust certificates, bonds,
debentures, notes or other evidences of indebtedness, secured or unsecured,
convertible, subordinated or otherwise, or in general any instruments commonly
known as "securities."
(cc) Shares or Common Shares. All of the common shares of the Company,
no par value.
(dd) Shareholders. As of any particular date, all holders of record of
outstanding Common Shares at such time.
(ee) Sponsor. Any Person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any Person who will manage or
participate in the management of the Company, and any Affiliate of any such
Person, but not including a Person who is an Independent Director or whose only
relationship with the Company is that of an independent property manager, whose
only compensation is as such, or wholly
5
<PAGE>
independent third parties such as attorneys, accountants and underwriters whose
only compensation is for professional services. No Independent Director shall be
deemed to be a Sponsor.
(ff) Unimproved Real Property. Property which has the following three
characteristics: (i) an equity interest in property which was not acquired for
the purpose of producing rental or other operating income, (ii) has no
development or construction in process on such land, and (iii) no development or
construction on such land is planned in good faith to commence within one year.
ARTICLE II
MINIMUM CAPITAL
2.1 Minimum Capital. Prior to the public offering of the Shares, the
Sponsor or Affiliates of the Sponsor purchased 10 Common Shares for an aggregate
purchase price of $100, as an Initial Investment. The Sponsor or its Affiliates
may not withdraw the Initial Investment for a period of one year following
completion of the offering.
2.2 [Reserved].
ARTICLE III
OFFICES; FISCAL YEAR
3.1 Principal Office. The principal executive office of the Company shall
be located at 306 East Main Street, Richmond, Virginia 23219, until otherwise
established by a vote of a majority of the Board of Directors.
3.2 Other Offices. Other offices may at any time be established by the
Board of Directors at any place or places they deem appropriate.
3.3 Taxable Year. The annual accounting period of the Company shall be the
calendar year.
6
<PAGE>
ARTICLE IV
MEETINGS OF SHAREHOLDERS
4.1 Place of Meetings. All annual and all other meetings of Shareholders
shall be held at such place, either within or outside of the Commonwealth of
Virginia as from time to time may be fixed by the President or by the Board of
Directors.
4.2 Annual Meetings. The annual meetings of Shareholders shall be held on
such date as is fixed by the President or the Board of Directors; provided,
however, that the first annual meeting of Shareholders who purchase Shares in
the public offering made by the Prospectus shall be held in the year following
the year in which the Initial Closing (as defined in the Prospectus) occurs; and
provided further, that such date fixed by the Directors shall not be less than
30 days after the Board of Directors shall have caused to be sent to the
Shareholders an Annual Report as provided in Section 11.8 of these Bylaws, but
if no such date and time is fixed by the President or the Board of Directors,
the meeting for any calendar year shall be held on the first Tuesday in May in
such year, if not a legal holiday under the laws of Virginia. If the date fixed
by the President or the Board of Directors falls upon a legal holiday, then any
annual meeting of Shareholders shall be held at the same time and place on the
next day which is not a legal holiday. At each annual meeting of Shareholders,
only such business shall be conducted as is proper to consider and has been
brought before the meeting (i) pursuant to the Company's notice of the meeting,
(ii) by or at the direction of the Board of Directors, or (iii) by a Shareholder
who is a Shareholder of record of a class of Shares entitled to vote on the
business such Shareholder is proposing, both at the time of the giving of the
Shareholder's notice hereinafter described in this Section 4.2 and on the record
date for such annual meeting, and who complies with the notice procedures set
forth in this Section 4.2.
In order to bring before an annual meeting of Shareholders any business
which may properly be considered and which a Shareholder has not had included in
the Company's proxy statement for the meeting, a Shareholder who meets the
requirements set forth in the preceding paragraph must give the Company timely
written notice. To be timely, a Shareholder's notice must be given, either by
personal delivery to the Secretary of the Company at the principal office of the
Company, or by first class United States mail, with postage thereon prepaid,
addressed to the Secretary of the Company at the principal office of the
Company. Any such notice must be received (i) on or after February 1st and
before March 1st of the year in which the meeting will be held, if clause (ii)
is not applicable, or (ii) not less than 60 days before the date of the meeting
if the date of such meeting is earlier than May 1 or
7
<PAGE>
later than May 31 in such year.
Each such Shareholder's notice shall set forth as to each matter the
Shareholder proposes to bring before the annual meeting (i) the name and
address, as they appear on the Company's stock transfer books, of the
Shareholder proposing business, (ii) the class and number of Shares of stock of
the Company beneficially owned by such Shareholder, (iii) a representation that
such Shareholder is a Shareholder of record at the time of the giving of the
notice and intends to appear in person or by proxy at the meeting to present the
business specified in the notice, (iv) a brief description of the business
desired to be brought before the meeting, including the complete text of any
resolutions to be presented and the reasons for wanting to conduct such
business, and (v) any interest which the Shareholder may have in such business.
The Secretary of the Company shall deliver each Shareholder's notice that
has been timely received to the Chairman for review.
4.3 Special Meetings. Special meetings of the Shareholders may be called at
any time for any purpose or purposes whatsoever by the President, by a majority
of the Board of Directors, by a majority of Independent Directors, by the
Chairman of the Board or by one or more Shareholders holding not less than 10%
of the eligible votes. If a meeting is called by any Person or Persons other
than the Board of Directors, the Chairman of the Board or the President, a
request shall be made in writing, specifying the time of the meeting and the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board, the President, or the Secretary of
the Company. The officer receiving the request shall cause notice to be promptly
given to the Shareholders entitled to vote, in accordance with the provisions of
Section 4.4.
4.4 Notice; Affidavit of Notice. Notice of meetings of the Shareholders of
the Company shall be given in writing to each Shareholder entitled to vote
thereat, either personally or by first class mail, or, if the Company has 500 or
more Shareholders, by third-class mail, or other means of written communication,
charges prepaid, addressed to the Shareholder at his or its address appearing on
the books of the Company or given by the Shareholder to the Company for the
purpose of notice. Notice of any such meeting of Shareholders shall be sent to
each Shareholder entitled thereto not less than 10 nor more than 60 days before
the meeting; provided, however, that within 10 business days after receipt by
the Company, in person, or by registered mail, of a written request for a
meeting by Shareholders holding not less than 10% of the outstanding Shares
8
<PAGE>
entitled to vote at such meeting, the Company shall provide written notice of
such meeting to all Shareholders, and such meeting shall be held not less than
20 nor more than 60 days after the Company's receipt of such written Shareholder
request; and, provided further, that if such notice is not given within 10
business days after receipt of the request, the Person or Persons requesting the
meeting may give the notice. Nothing contained in this Section 4.4 shall be
construed as limiting, fixing or affecting the time when a meeting of
Shareholders called by action of the Board of Directors may be held. All notices
given pursuant to this Section shall state the place, date and hour of the
meeting and, (i) in the case of special meetings, the general nature of the
business to be transacted, and no other business may be transacted, or (ii) in
the case of annual meetings, those matters which the Board of Directors, at the
time of the mailing of the notice, intends to present for action by the
Shareholders, and (iii) in the case of any meeting at which Directors are to be
elected, the names of the nominees intended at the time of the mailing of the
notice to be presented by management for election. An affidavit of the mailing
or other means of giving any notice of any Shareholders' meeting shall be
executed by the Secretary, Assistant Secretary or any transfer agent of the
Company giving the notice, and shall be filed and maintained in the minute book
of the Company.
4.5 Record Date for Shareholder Notice, Voting and Giving Consents. For
purposes of determining the Shareholders entitled to notice of any meeting or to
vote or entitled to give consent to corporate action without a meeting, the
Board of Directors may fix, in advance, a record date, which shall not be more
than 60 days nor less than 10 days before the date of any meeting nor more than
60 days before any action without a meeting, and in this event only Shareholders
of record on the date so fixed are entitled to notice and to vote or to give
consents, as the case may be, notwithstanding any transfer of any Shares on the
books of the Company after the record date.
If the Board of Directors does not so fix a record date:
(a) The record date for determining Shareholders entitled to notice of
or to vote at a meeting of Shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the date on
which the meeting is held.
(b) The record date for determining Shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the Board has been taken, shall be the day on which the first written
consent in given, or (ii) when prior action of the Board has been taken, shall
be at
9
<PAGE>
the close of business on the day on which the Board adopts the resolution
relating to that action, or the 60th day before the date of the other action,
whichever is later.
4.6 Adjourned Meetings; Notice. Any Shareholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the vote of the majority of the Shares, the holders of which are either
present in person or represented by proxy, but in the absence of a quorum no
other business may be transacted at the meeting.
When any Shareholders' meeting, either annual or special, is adjourned for
more than 45 days or if after the adjournment a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given as in the case
of a special meeting. In all other cases, it shall not be necessary to give any
notice of an adjournment or of the business to be transacted at any adjourned
meeting other than by announcement at the meeting at which the adjournment is
taken.
4.7 Voting at Meetings of Shareholders. Subject to the provisions of the
Virginia Stock Corporation Act, and subject to the right of the Board of
Directors to provide otherwise, only Persons in whose name Shares entitled to
vote registered on the stock records of the Company on the record date shall be
entitled to the notice of and to vote at the meeting, notwithstanding any
transfer of any Shares on the books of the Company after the record date.
The vote may be via voice or by ballot; provided, however, that all
elections for Directors must be by ballot upon demand made by any Shareholder at
any election and before the voting begins. Except as provided in this Section
4.7, each outstanding Share shall be entitled to one vote on each matter
submitted to a vote of Shareholders.
4.8 Quorum. The presence in person or by proxy of a majority of the Shares
entitled to vote at any meeting shall constitute a quorum for the transaction of
business. Except as otherwise expressly provided in these Bylaws, if a quorum
exists, action on a matter, other than the election of Directors, is approved if
the votes cast favoring the action exceed the votes cast opposing the action
unless a vote of a greater number is required by the Articles of Incorporation
or by the Virginia Stock Corporation Act. Directors shall be elected by a
plurality of the votes cast by the Shares entitled to vote in the election at a
meeting at which a quorum is present. The Shareholders present at a duly called
or held meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough Shareholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the Shares required to
10
<PAGE>
constitute a quorum.
4.9 Waiver of Notice or Consent of Absent Shareholders. The transactions of
any meeting of Shareholders, either annual or special, however called and
noticed, shall be as valid as though made at a meeting duly held after regular
call and notice, if a quorum is present either in person or by proxy and if,
either before or after the meeting, each of the Shareholders entitled to vote,
not present in person or by proxy, signs a written waiver of notice or a consent
to the holding of the meeting or an approval of the minutes. All waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
4.10 Action Without Meeting. Any action which may be taken at any annual or
special meeting of Shareholders may be taken without a meeting and without
action by the Board of Directors, if the action is taken by all the Shareholders
entitled to vote on the action. The action shall be evidenced by one or more
written consents describing the action taken, signed by all the Shareholders
entitled to vote on the action, and delivered to the Secretary of the Company
for inclusion in the minutes or filing with the corporate records. Action taken
under this Section 4.10 shall be effective when all consents are in the
possession of the Company, unless the consent specifies a different effective
date and states the date of execution by each Shareholder, in which event it
shall be effective according to the terms of the consent. A Shareholder may
withdraw consent only by delivering a written notice of withdrawal to the
Company prior to the time that all consents are in the possession of the
Company.
The record date for determining Shareholders entitled to take action
without a meeting is the date the first Shareholder signs the consent described
in the preceding paragraph.
Any form of written consent distributed to 10 or more Shareholders must
afford the Person whose consent is thereby solicited an opportunity to specify a
choice among approval, disapproval or abstention as to each matter or group of
related matters presented, other than elections of Directors or officers.
4.11 Proxies. Every Person entitled to vote or execute consents shall have
the right to do so either in person or by one or more agents authorized by a
written proxy executed by such Person or his duly authorized agent and filed
with the Secretary of the Company, provided that no such proxy shall be valid
after the expiration of 11 months from the date of its execution, unless the
Person executing it specifics in the proxy the length of time for which the
proxy is to continue in force.
11
<PAGE>
A proxy shall be deemed signed if the Shareholder's name is placed on the
proxy (whether by manual signature, typewriting, telegraphic transmission or
otherwise) by the Shareholder or the Shareholder's attorney in fact. A validly
executed proxy which does not state that it is irrevocable shall continue in
full force and effect unless revoked by the Person executing it before the vote
pursuant to that proxy by (i) a writing delivered to the Company stating that
the proxy is revoked, (ii) execution of a subsequent proxy, (iii) attendance at
the meeting and voting in person (but only as to any items on which the
Shareholder chooses to vote in person), or (iv) transfer of the Shares
represented by the proxy to a transferee who becomes a Shareholder of record
prior to the record date established for the vote. A validly executed proxy
otherwise may be revoked by written notice of the death or incapacity of the
maker of that proxy received by the Company before the vote pursuant to that
proxy is counted.
Any proxy distributed to 10 or more Shareholders must afford the Person
voting an opportunity to specify a choice among approval, disapproval or
abstention as to each matter or group of related matters, other than election of
Directors or officers.
4.12 Inspectors of Election. Before any meeting of Shareholders, the Board
of Directors may appoint any Persons, other than nominees for office, to act as
inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the Chairman of the meeting may, and on the request
of any Shareholder or a Shareholder's proxy shall, appoint inspectors of
election at the meeting. The number of inspectors shall be either one or three.
If inspectors are appointed at a meeting on the request of one or more
Shareholders or proxies, the holders of a majority of Shares or their proxies
present at the meeting shall determine whether one or three inspectors are to be
appointed. If any Person appointed as inspector fails to appear or fails or
refuses to act, the Chairman of the meeting may, and upon the request of any
Shareholder or a Shareholder's proxy shall, appoint a Person to fill that
vacancy.
These inspectors shall:
(a) Determine the number of Shares outstanding and the voting power of
each, the Shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
12
<PAGE>
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all Shareholders.
ARTICLE V
DIRECTORS
5.1 Powers. Subject to limitations contained in the Articles of
Incorporation, these Bylaws and the Virginia Stock Corporation Act relating to
action required to be authorized or approved by the Shareholders, or by the
holders of a majority of the outstanding Shares, and subject to the duties of
Directors as prescribed by these Bylaws, all corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Company shall
be controlled by, the Board of Directors. The Board of Directors may delegate
the management of the day-to-day operation of the business of the Company to the
Advisor, provided that the business and affairs of the Company shall be managed
and all corporate powers shall be exercised under the ultimate direction of the
Board of Directors. The Board of Directors shall establish policies on
investments and borrowings and shall monitor the administrative procedures,
investment operations and performance of the Company and the Advisor, to assure
that such policies are carried out.
Each individual Director, including each Independent Director, may engage
in other business activities of the type conducted by the Company and is not
required to present to the Company any investment opportunities presented to
them even though the investment opportunities may be within the Company's
investment policies.
5.2 Number, Tenure and Qualifications. The authorized number of Directors
of the Board of Directors shall be not less than three nor more than 15 as shall
be determined from time to time by resolution of the Board of Directors.
Notwithstanding the foregoing, until Initial Closing (as defined in the
Prospectus), the number of Directors shall be not less than one.
Each individual Director, including each Independent Director, shall have
at least three years of relevant experience demonstrating the knowledge and
experience required successfully to acquire and manage the type of assets being
acquired by the Company, and as set forth in Section 5.15, at least one
13
<PAGE>
Independent Director shall have relevant real estate experience. Directors need
not be Shareholders.
Except as provided in Section 5.3, the Directors elected by the holders of
the Shares at a meeting of Shareholders at which a quorum is present shall be
those persons who receive the greatest number of votes even though they do not
receive a majority of the votes cast. No individual shall be named or elected as
a Director without his prior consent.
5.3 Nomination of Directors. No person shall be eligible for election as a
Director at a meeting of Shareholders unless nominated (i) by the Board of
Directors or any committee thereof or (ii) by a Shareholder who is a Shareholder
of record of a class of Shares entitled to vote for the election of Directors,
both at the time of the giving of the Shareholder's notice hereinafter described
in this Section 5.3 and on the record date for the meeting at which the
nominee(s) will be voted upon, and who complies with the notice procedures set
forth in this Section 5.3.
In order to nominate for election as Directors at a meeting of Shareholders
any persons who are not listed as nominees in the Company's proxy statement for
the meeting, a Shareholder who meets the requirements set forth in the preceding
paragraph must give the Company timely written notice. To be timely, a
Shareholder's notice must be given, either by personal delivery to the Secretary
of the Company at the principal office of the Company, or by first class United
States mail, with postage thereon prepaid, addressed to the Secretary of the
Company at the principal office of the Company. Any such notice must be received
(i) on or after February 1st and before March 1st of the year in which the
meeting will be held if the meeting is to be an annual meeting and clause (ii)
is not applicable, or (ii) not less than 60 days before an annual meeting, if
the date of the applicable annual meeting is earlier than May 1 or later than
May 31 in such year, or (iii) not later than the close of business on the tenth
day following the day on which notice of a special meeting of Shareholders
called for the purpose of electing Directors is first given to Shareholders.
Each such Shareholder's notice shall set forth the following: (i) as to the
Shareholder giving the notice, (a) the name and address of such Shareholder as
they appear on the Company's stock transfer books, (b) the class and number of
Shares of the Company beneficially owned by such Shareholder, (c) a
representation that such Shareholder is a Shareholder of record at the time of
giving the notice and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice, and (d) a description of
all arrangements or understandings, if any, between such Shareholder and each
nominee and any other person or persons (naming such
14
<PAGE>
person or persons) pursuant to which the nomination or nominations are to be
made; and (ii) as to each person whom the Shareholder wishes to nominate for
election as a Director, (a) the name, age, business address and residence
address of such person, (b) the principal occupation or employment of such
person, (c) the class and number of Shares of the Company which are beneficially
owned by such person, and (d) all other information that is required to be
disclosed about nominees for election as Directors in solicitations of proxies
for the election of Directors under the rules and regulations of the Securities
and Exchange Commission. In addition, each such notice shall be accompanied by
the written consent of each proposed nominee to serve as a Director if elected
and such consent shall contain a statement from the proposed nominee to the
effect that the information about him or her contained in the notice is correct.
5.4 Vacancies. Vacancies in the Board of Directors may be filled by a
majority of the remaining Directors, though less than a quorum, or by a sole
remaining Director, except that a vacancy created by the removal of a Director
by the vote or written consent of the Shareholders or by court order may be
filled only by the vote of a majority of the Shares entitled to vote represented
at a duly held meeting at which a quorum is present, or by the written consent
of holders of a majority of the outstanding Shares entitled to vote. Each
Director so elected shall hold office until his successor is elected at an
annual or a special meeting of the Shareholders.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
in case of the death, resignation or removal of any Director or if the
authorized number of Directors is increased or if the Shareholders fail, at any
annual or special meeting of Shareholders at which any Director or Directors are
elected, to elect the full authorized number of Directors to be voted for at
that meeting.
Any Director may resign effective on giving written notice to the Chairman
of the Board, the President, the Secretary, or the Board of Directors. The
Shareholders may elect a Director or Directors at any time to fill any vacancy
or vacancies not filled by the Directors. Any election by written consent to
fill a vacancy shall require the consent of a majority of the outstanding Shares
entitled to vote.
If the Board of Directors accepts the resignation of a Director tendered to
take effect at a future time, the Board or the Shareholders shall have the power
to elect a successor to take office when the resignation is to become effective;
provided, however, that any remaining Independent Directors shall nominate
replacements for vacancies among the Independent Director positions.
15
<PAGE>
No reduction of the authorized number of Directors shall have the effect of
removing any Director prior to the expiration of his term of office.
If the number of vacancies occurring during a year is sufficiently large
that a majority of the Directors in office has not been elected by the
Shareholders, the holders of 5% or more of the outstanding Shares entitled to
vote may call a special meeting of Shareholders to elect the entire Board of
Directors.
5.5 Place of Meeting. Regular meetings of the Board of Directors shall be
held at any place within or without the Commonwealth of Virginia which has been
designated from time to time by the Chairman of the Board or by written consent
of all members of the Board. In the absence of a designation, regular meetings
shall be held at the principal office of the Company. Special meetings of the
Board may be held either at a place so designated or at the principal office.
Members of the Board may participate in a meeting through use of conference
telephone or similar communication equipment, so long as all members
participating in such meeting can hear one another. Participation in a meeting
by telephone or similar communication equipment shall constitute presence in
person at the meeting.
5.6 Organization Meeting. Immediately following each annual meeting of
Shareholders, the Board of Directors shall hold a regular meeting for the
purpose of organization, election of officers and the transaction of other
business. Notice of that meeting is hereby dispensed with.
5.7 Special Meetings. Special meetings of the Board of Directors for any
purpose or purposes shall be called at any time by the Chairman of the Board or
the President or Vice President or the Secretary or any two Directors.
Written notice of the time and place of special meetings shall be delivered
personally to the Directors or sent to each Director by mail or by other form of
written communication, charges prepaid, addressed to him at his address as it
appears upon the records of the Company or, if it is not so shown or is not
readily ascertainable, at the place in which the meetings of Directors are
regularly held. In case the notice is mailed, it shall be deposited in the
United States mail in the place in which the principal office of the Company is
located at least four days prior to the time of the meeting. In case the notice
is delivered personally, telegraphed or communicated by electronic means, it
shall be delivered, deposited with the telegraph company or communicated at
least 48 hours prior to the time of the meeting. Mailing, telegraphing or
delivery, as above provided, shall be due legal and personal notice to the
Director.
16
<PAGE>
5.8 Adjournment. A majority of the Directors present, whether or not a
quorum is present, may adjourn any Directors' meeting to another time and place.
5.9 Notice of Adjournment. If a meeting is adjourned for more than 24
hours, notice of any adjournment to another time or place shall be given prior
to the time of the adjourned meeting to the Directors who were not present at
the time of adjournment.
5.10 Entry of Notice. Whenever any Director has been absent from any
special meeting of the Board of Directors, an entry in the minutes to the effect
that notice has been duly given shall be conclusive and incontrovertible
evidence that due notice of the special meeting was given to that Director as
required by law and the Bylaws of the Company.
5.11 Waiver of Notice. The transactions of any meeting of the Board of
Directors, however called and noticed, or wherever held, shall be as valid as
though authorized at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
Directors not present signs a written waiver of notice of or consent to holding
the meeting or an approval of the minutes. All waivers, consents or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
5.12 Quorum. A majority of the authorized number of Directors shall be
necessary to constitute a quorum for the transaction of business, except to
adjourn as provided above or to fill a vacancy. Every act or decision done or
made by a majority of the Directors at a meeting duly held at which a quorum is
present shall be regarded as an act of the Board of Directors unless a greater
number be required by law or by the Articles of Incorporation or these Bylaws.
However, a meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of Directors, if any action
taken after such withdrawal is approved by at least a majority of the Directors
required to constitute a quorum for the meeting.
5.13 Fees and Compensation. The Directors shall be entitled to receive such
reasonable compensation for their services as Directors as the Directors may fix
or determine from time to time by resolution of the Board of Directors;
provided, however, that Directors and officers of the Company who are Affiliated
with the Advisor shall not receive compensation from the Company for their
services as Directors or officers of the Company. The Directors shall also be
entitled to receive remuneration for services rendered to the Company, either
directly or indirectly, in any other capacity. Those services may include,
without limitation, services as an officer of the
17
<PAGE>
Company, legal, accounting or other professional services, or services as a
broker, transfer agent or underwriter, whether performed by a Director or any
Person Affiliated with a Director.
5.14 Action Without Meeting. Any action required or permitted to be taken
by the Board of Directors under the Virginia Stock Corporation Act and these
Bylaws may be taken without a meeting if all members of the Board individually
or collectively consent in writing to such action. The consent or consents shall
be filed with the minutes of the meetings of the Board. Any certificate or other
document filed under the provision of the Virginia Stock Corporation Act which
relates to action so taken shall state that the action was taken by unanimous
written consent of the Board of Directors without a meeting.
5.15 Independent Directors. At all times after Initial Closing (as defined
in the Prospectus), a majority of the Directors of the Company, and a majority
of the members of any Board committee, will be Independent Directors, except
during the 60 days following the departure of an Independent Director. Successor
Independent Directors will be nominated by any remaining Independent Directors.
At least one of the Independent Directors shall have had three years of actual
direct experience in acquiring or managing the type of real estate to be
acquired by the Company for his or her account or as an agent. The Directors
shall, in good faith, determine for all purposes which persons constitute or
would constitute Independent Directors and which persons do not or would not
constitute Independent Directors. Notwithstanding any other provision of these
Bylaws, the Independent Directors, in addition to their other duties, to the
extent that they may legally do so, shall:
(a) Monitor the relationship of the Company with the Advisor. In this
regard, the Independent Directors as a group, in addition to all Directors as a
group, will monitor the Advisor's performance of the advisory contract and will
determine at least annually that the Advisor's compensation is reasonable in
relation to the nature and quality of services performed. This determination
will be based on (i) the size of the advisory fee in relationship to the size,
composition and profitability of the invested assets; (ii) the investment
opportunities generated by the Advisor; (iii) advisory fees paid to other
advisors by other real estate investment trusts and to advisors performing
similar services by investors other than real estate investment trusts; (iv)
additional revenues realized by the Advisor and its Affiliates through their
relationship with the Company, including loan administration, underwriting or
broker commissions, servicing, engineering, inspection and other fees, whether
paid by the Company or by others with whom the Company does business; (v) the
quality and extent of service and advice furnished by the Advisor; (vi) the
performance of the investment portfolio of the
18
<PAGE>
Company, including income, conservation or appreciation of capital, frequency of
problem investments and competence in dealing with distress situations; (vii)
quality of the portfolio of the Company in relationship to the investments
generated by the Advisor for its own account; and (viii) all other factors the
Independent Directors may deem relevant. The Independent Directors will also
determine that the Advisor's compensation is within the limits prescribed by
Sections 8.5, 8.6 and 8.7 herein.
The Independent Directors shall approve all transactions between the
Company and the Advisor or any Affiliates of the Advisor (other than as provided
in Section 10.1 herein). The material terms and circumstances of all such
approved transactions shall be fully disclosed in the Annual Report of the
Company as required by Section 11.8, and the Independent Directors shall examine
and comment in the Annual Report on the fairness of such transactions.
(b) Review at least annually the Company's investment policies to
determine that they remain in the best interests of the Shareholders. The
findings of the Independent Directors shall be set forth in the minutes of
meetings of the Board of Directors. Such investment policies may be altered from
time to time by the Board of Directors with the consent of a majority of the
Independent Directors and without approval of the Shareholders upon a
determination that such a change is in the best interests of the Company and the
Shareholders.
(c) Take reasonable steps to ensure that the Annual Report is sent to
Shareholders and that the annual meeting is conducted pursuant to Article IV.
(d) Determine at least annually that the total fees and expenses of
the Company are reasonable in light of its Net Assets and Net Income, the
investment experience of the Company, and the fees and expenses of comparable
advisors in real estate. In this regard, the Independent Directors will have the
fiduciary responsibility of limiting Operating Expenses to amounts that do not
exceed the limitation set forth in Section 8.5, unless they conclude that a
higher level of expense is justified for such a year based on unusual and
nonrecurring factors which they deem sufficient.
Within 60 days after the end of any fiscal quarter of the Company for
which Operating Expenses (for the 12 months then ended) exceed the limitations
set forth in Section 8.5, there shall be sent to the Shareholders a written
disclosure of such fact together with an explanation of the factors the
Independent Directors considered in arriving at the conclusion that the higher
Operating Expenses were justified. In the event the Independent Directors
determine that the excess expenses are not justified, the Advisor shall
reimburse the Company at the
19
<PAGE>
time and in the manner set forth in the Company's agreement with the Advisor.
(e) The Independent Directors shall review at least quarterly the
aggregate borrowings, secured and unsecured, of the Company to determine that
the relation of such borrowings to Net Assets does not exceed the limitations
set forth in Sections 8.8 and 9.1(k) and (l) of these Bylaws. Any excess in
borrowings over the limitations set forth in Sections 9.1(k) and (l) shall be
approved by a majority of the Independent Directors and disclosed to
Shareholders in the next quarterly report of the Company, along with a
justification of the excess.
(f) For all purposes, a transaction which is subject to approval by
the Independent Directors shall be approved if the Independent Directors voting
to approve the transaction in any vote of the Directors or the Independent
Directors constitute an absolute majority of all Independent Directors serving
at such time.
5.16 Removal of Director for Cause. The Board of Directors may declare
vacant the office of a Director who has been declared of unsound mind by an
order of court, or who has pled guilty or nolo contendere to or been convicted
of a felony involving moral turpitude. In addition, throughout the term of the
existence of the Company, any Director may be removed for cause by: (i) a vote
or written consent of all Directors other than the Director who is to be
removed, or (ii) the vote of the holders of a majority of the outstanding Shares
of the Company at a meeting of the Shareholders called for such purpose. The
notice for such special meeting of Shareholders shall state that the purpose, or
one of the purposes, of the meeting is to vote on the removal of a Director.
"For cause" shall mean, for purposes of this Section, a willful violation of the
Articles of Incorporation or these Bylaws, or gross negligence in the
performance of a Director's duties.
5.17 Removal of Director Without Cause. Any or all Directors may be removed
without cause upon the affirmative vote of a majority of the outstanding Shares
entitled to vote. A Director may be removed by the Shareholders only at a
meeting called for the purpose of removing him and the meeting notice must state
that the purpose, or one of the purposes of the meeting, is removal of the
Director. Any reduction of the authorized number of Directors shall not operate
to remove any Director prior to the expiration such Director's term of office.
5.18 Committees. The Board of Directors may, by resolution adopted by a
majority of the authorized number of Directors, designate one or more
committees, each consisting of three or more Directors, to serve at the pleasure
of the Board of Directors. The Board of Directors may designate one or more
20
<PAGE>
Directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of Directors. Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have all the authority of the Board of Directors
in the management of the business and affairs of the Company, except that no
committee shall have authority to take any action with respect to (i) the
approval of any action requiring Shareholders' approval or approval of the
outstanding Shares, (ii) the filling of vacancies of the Board or any committee,
(iii) the fixing of compensation of Directors for serving on the Board or a
committee, (iv) the adoption, amendment or repeal of these Bylaws, (v) the
amendment or repeal of any resolution of the Board that by its express terms is
not so amendable or repealable, (vi) a distribution to Shareholders, except at a
rate or in a periodic amount or within a price range determined by the Board,
and (vii) the appointment of other committees of the Board or the members
thereof. A majority of the Directors on all committees must be Independent
Directors and only Independent Directors may serve as alternate members for
Independent Directors on committees. However, notwithstanding anything to the
contrary in these Bylaws, the Board of Directors may appoint a committee to
administer any stock incentive plan adopted by the Company, which committee may
have as few as two (2) Directors, and each of whose Directors may be either an
Independent Director or not an Independent Director, except as otherwise
provided in the applicable stock incentive plan.
5.19 Fiduciary Relationship. The Directors of the Company have a fiduciary
relationship to the Shareholders as provided by applicable Virginia law, which
includes a fiduciary duty to the Shareholders to supervise the relationship of
the Company with the Advisor. A majority of the Independent Directors must
approve matters which these Bylaws state are subject to the approval of the
Independent Directors.
ARTICLE VI
OFFICERS
6.1 Officers. The officers of the Company shall be as determined by the
Board of Directors and shall include a President and Secretary, and may include
a Chairman of the Board, Chief Financial Officer (Treasurer) and such other
officers with such titles and duties as may be appointed in accordance with the
provisions of Section 6.3 of this Article. Any number of offices may be held by
the same person.
6.2 Election. The officers of the Company, except such officers as may be
appointed in accordance with the
21
<PAGE>
provisions of Section 6.3 or Section 6.5 of this Article, shall be chosen
annually by the Board of Directors to serve at the pleasure of the Board of
Directors, and each shall hold his office until he shall resign or shall be
removed or otherwise disqualified to serve or his successor shall be elected and
qualified. All officers serve at the will of the Board of Directors and nothing
in these Bylaws shall give any officer any expectation or vesting of employment.
6.3 Subordinate Officers. The Board of Directors may appoint other officers
as the business of the Company may require, each of whom shall hold office for
the period, have the authority and perform the duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
6.4 Removal and Resignation. Any officer may be removed, either with or
without cause, by a majority of the Directors at the time in office, at any
regular or special meeting of the Board or, except in the case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the Board of
Directors or to the Chairman, the President or to the Secretary of the Company.
A resignation shall take effect at the date of the receipt of the notice or any
later time specified in the notice; and, unless otherwise specified, the
acceptance of the resignation shall not be necessary to make it effective.
6.5 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in these Bylaws for regular appointments to such office.
6.6 Chairman of the Board. The Chairman of the Board shall be the Chief
Executive Officer of the Company, and, if present, shall preside at all meetings
of the Board of Directors and Shareholders and exercise and perform all other
powers and duties as may from time to time be assigned to him by the Board of
Directors or prescribed by these Bylaws.
6.7 President. The President shall, subject to the Board of Directors and
the supervisory powers of the Chairman of the Board, have general supervision,
direction and control of the business of the Company. He shall preside at
meetings of the Shareholders or at meetings of the Board of Directors if the
Chairman is absent. He shall have general powers and duties of management,
together with any other powers and duties as may be prescribed by the Board of
Directors.
22
<PAGE>
6.8 Vice Presidents. In the absence or disability of the President, the
Vice Presidents in order of their rank as fixed by the Board of Directors or, if
not ranked, the Vice President designated by the Board of Directors, shall
perform all the duties of the President and, when so acting, shall have all the
powers of and be subject to all the restrictions upon, the President. The Vice
Presidents shall have any other powers and shall perform other duties as from
time to time may be prescribed for them respectively by the Board of Directors
or these Bylaws.
6.9 Secretary. The Secretary shall keep, or cause to be kept, a book of
minutes at the principal office, or any other place as the Board of Directors
may order, of all meetings of Directors or Shareholders, with the time and place
of holding, whether regular or special and, if special, how authorized, the
notice thereof given, the names of those present at Directors' meetings, the
number of Shares present or represented at Shareholders' meetings and the
proceedings of meetings.
The Secretary shall keep, or cause to be kept, at the principal office or
at the office of the Company's transfer agent, a Share register or a duplicate
Share register showing the names of the Shareholders and their addresses, the
number and classes of Shares held by each (whether in certificate or "unissued
certificate" form), the number and the date of certificates issues, if any, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The Secretary shall give, or cause to be given, notice of all the meetings
of the Shareholders and of the Board of Directors required by these Bylaws or by
law to be given, shall keep the seal of the Company (if any) in safe custody and
shall have such other powers and shall perform such other duties as may be
prescribed by the Board of Directors or these Bylaws.
6.10 Assistant Secretaries. In the absence or disability of the Secretary,
the Assistant Secretaries in order of their rank as fixed by the Board of
Directors or, if not ranked, the Assistant Secretary designated by the Board of
Directors, shall perform all the duties of the Secretary and, when so acting,
shall have all the powers of and be subject to all the restrictions upon, the
Secretary. The Assistant Secretaries shall have any other powers and shall
perform other duties as from time to time may be prescribed for them by the
Board of Directors or these Bylaws.
6.11 Chief Financial Officer. The Chief Financial Officer may also be
designated by the alternate title of "Treasurer." The Chief Financial Officer
shall have custody of all moneys and securities of the Company and shall keep
regular books of account. Such officer shall disburse the funds of the Company
in payment of the just demands against the Company, or as
23
<PAGE>
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Board of Directors from time to time as
may be required of such officer, an account of all transactions as Chief
Financial Officer and of the financial condition of the Company. Such officer
shall perform all duties incident to such officer or which are properly required
by the President or by the Board of Directors.
6.12 Assistant Chief Financial Officers. The Assistant Chief Financial
Officers or the Assistant Treasurers, in the order of their seniority, shall, in
the absence or disability of the Chief Financial Officer, or in the event of
such officer's refusal to act, perform the duties and exercise the powers of the
Chief Financial Officer, and shall have such powers and discharge such duties as
may be assigned from time to time by the President or by the Board of Directors.
ARTICLE VII
SHARES OF STOCK
7.1 Registered Ownership, Share Certificates and Shares in "Unissued
Certificate" Form. Certificates may be issued and transferred in accordance with
these Bylaws, but need not be issued if the Company elects to have Shares
maintained in "unissued certificate" form. The Persons in whose names
certificates of Shares in "unissued certificate" form are registered on the
records of the Company shall be deemed the absolute owners of the Shares
represented thereby for all purposes of the Company; but nothing in these Bylaws
shall be deemed to preclude the Directors or officers, or their agents or
representatives, from inquiring as to the actual ownership of Shares. The Shares
are non-assessable. Until a transfer is duly effected on the records of the
Company, the Directors shall not be affected by any notice of transfer, either
actual or constructive. The receipt by the Person in whose name any Shares are
registered on the records of the Company or of the duly authorized agent of that
Person, or if the Shares are so registered in the names of more than one Person,
the receipt by any one of these Persons, or by the duly authorized agent of that
Person, shall be a sufficient discharge for all dividends or distributions
payable or deliverable in respect of the Shares and from all liability to see
the application of those funds. The certificates of Shares of the capital stock
of the Company, if any, shall be in a form consistent with the Articles of
Incorporation and the laws of the Commonwealth of Virginia as shall be approved
by the Board of Directors. All certificates shall be signed by (i) the Chairman
of the Board or the President or a Vice President and (ii) the Treasurer or the
Secretary or any Assistant Secretary, certifying the number of Shares and the
class or series of Shares owned by the Shareholder. Any or all of the signatures
on the certificate may be facsimile signatures.
24
<PAGE>
7.2 Transfer of Shares. Subject to the provisions of law and of Sections
7.3, 7.4 and 7.5, Shares shall be transferable on the records of the Company
only by the record holder or by his agent thereunto duly authorized in writing
upon delivery to the Directors or a transfer agent of the certificate or
certificates (unless held in "unissued certificate" form, in which case an
executed stock power duly guaranteed must be delivered), properly endorsed or
accompanied by duly executed instruments of transfer and accompanied by all
necessary documentary stamps together with evidence of the genuineness of each
endorsement, execution or authorization and of other matters as may reasonably
be required by the Directors or transfer agent. Upon delivery, the transfer
shall be recorded in the records of the Company and a new certificate, if
requested, for the Shares so transferred shall be issued to the transferee and
in case of a transfer of only a part of the Shares represented by any
certificate or account, a new certificate or statement of account for the
balance shall be issued to the transferor. Any Person becoming entitled to any
Shares in consequence of the death of a Shareholder or otherwise by operation of
law shall be recorded as the holder of such Shares and shall receive a new
certificate, if requested, but only upon delivery to the Directors or a transfer
agent of instruments and other evidence required by the Directors or the
transfer agent to demonstrate that entitlement, the existing certificate (or
appropriate instrument of transfer if held in "unissued certificate" form) for
the Shares and any necessary releases from applicable governmental authorities.
Nothing in these Bylaws shall impose upon the Directors or a transfer agent any
duty or limit their rights to inquire into adverse claims.
7.3 Disclosures by Holders of Shares; Redemption of Shares. The Holders of
the Shares shall upon demand disclose to the Directors in writing such
information with respect to direct and indirect ownership of their Shares as the
Directors deem necessary to comply with the provisions of the Internal Revenue
Code of 1986, as amended, and applicable regulations, as amended, or to comply
with the requirements of any taxing authority. If the Directors shall at any
time and in good faith be of the opinion that direct or indirect ownership of
the Shares of the Company has or may become concentrated to an extent which
would prevent the Company from qualifying as a REIT under the REIT Provisions of
the Internal Revenue Code, the Directors shall have the power by lot or other
means deemed equitable by them to prevent the transfer and/or call for
redemption of a number of the Shares sufficient in the opinion of the Directors
to maintain or bring the direct or indirect ownership of the Shares into
conformity with the requirements for a REIT. The redemption price shall be (i)
the last reported sale price of the Shares on the last business day prior to the
redemption date on the principal national securities exchange on which the
Shares are listed or admitted to trading, or (ii) if the Shares are not so
25
<PAGE>
listed or admitted to trading, the average of the highest bid and lowest asked
prices on such last business day as reported by the NASDAQ, National Quotation
Bureau or a similar organization selected by the Company for that purpose, or
(iii) otherwise, as determined in good faith by the Directors. The holders of
any Shares so called for redemption shall be entitled to payment of such
redemption price within 21 days of the redemption date. From and after the date
fixed for redemption, the holders of such Shares shall cease to be entitled to
dividends, distributions, voting rights and other benefits with respect to the
Shares, excepting only the right to payment of the redemption price fixed as
described above. The redemption date with respect to any Shareholders shall be
the date specified by the Directors which is not less than one week after the
date postmarked on the disclosure demand made by the Directors under this
Section 7.3, or, if such date is not a business day, on the next business day
thereafter. For the purpose of this Section 7.3, the term "individual" shall be
construed as provided in Section 542(a)(2) of the Internal Revenue Code of 1986,
as amended, or any successor provisions and "ownership" of Shares shall be
determined as provided in Section 544 of the Internal Revenue Code of 1986, as
amended, or any successor provision.
7.4 Right to Refuse to Transfer the Shares. Whenever it is deemed by them
to be reasonably necessary to protect the tax status of the Company, the
Directors may require statements or affidavits from any holder of the Shares or
proposed transferee of the Shares or warrants to purchase such Shares, setting
forth the number of Shares (and warrants to purchase such Shares) already owned
by him or it and any related Person specified in the form prescribed by the
Directors for that purpose. If, in the opinion of the Directors, which shall be
conclusive upon any proposed transferor or proposed transferee of Shares, or
warrants to purchase such Shares, any proposed transfer or exercise would
jeopardize the status of the Company as a REIT under the Internal Revenue Code
of 1986, as amended, the Directors may refuse to permit the transfer or
exercise. Any attempted transfer or exercise as to which the Directors have
refused their permission shall be void and of no effect to transfer any legal or
beneficial interest in the Shares. All contracts for the sale or other transfer
or exercise of the Shares or warrants to purchase such Shares, shall be subject
to this provision.
7.5 Limitation on Acquisition of Shares.
(a) Subject to the provisions of Section 7.5(b), no Person may own in
excess of 9.8% of the total outstanding Shares, and no Shares shall be
transferred (or issued) to any Person if, following the transfer, the Person's
direct or indirect ownership of Shares would exceed this limit. For the purpose
of this Section 7.5, ownership of Shares shall be
26
<PAGE>
computed in accordance with Internal Revenue Code Sections 856(h), 542(a)(2) and
544.
(b) If Shares are purportedly acquired by any Person in violation of this
Section 7.5, the acquisition shall be valid only to the extent it does not
result in a violation of this Section 7.5, and the acquisition shall be null and
void ab initio with respect to the excess ("Excess Shares") unless the Person
acquiring the Excess Shares provides the Independent Directors with evidence and
an opinion of counsel so that the Independent Directors are satisfied that the
Company's qualification as a REIT will not be jeopardized and the Board of
Directors, action in its sole discretion, determines to waive such limitation.
Excess Shares shall be deemed to have been acquired and to be held on behalf of
the Company, and, as the equivalent of treasury shares for that purpose, shall
not be considered to be outstanding for quorum or voting purposes, and shall not
be entitled to receive dividends, interest or any other distribution. If prior
to the discovery by the Company of the acquisition or transfer of any Excess
Shares dividends, interest or any other distributions are paid with respect to
any Excess Shares, then such dividends, interest or any other distributions
shall be repaid to the Company.
(c) This Section 7.5 shall apply to the acquisition of Shares only
after conclusion of the earlier of the Company's sale of the Minimum Offering
(as defined in the Prospectus) or the Company's first taxable year, and a
Shareholder will not be required to dispose of Excess Shares acquired prior to
the earlier of the conclusion of the sale of the Minimum Offering or the
Company's first taxable year. So long as any Person holds more than 9.8% of the
outstanding Shares, a lower percentage limit may be established by the Directors
to the extent necessary to assure, to the extent possible, that no five persons
own in the aggregate more than 50% of the outstanding Shares.
(d) The Company shall, if deemed necessary or desirable to implement
the provisions of any portion of this Article VII, include on the face or back
of each Share certificate issued by the Company an appropriate legend referring
the holder of the certificate to the restrictions contained in any portion of
this Article VII and stating that the complete text of Article VII, or these
Bylaws, is on file with the Secretary of the Company at the Company's offices,
and/or will be furnished without charge by the Company to any Shareholder.
(e) Nothing in these Bylaws shall limit the ability of the Directors
to impose, or to seek judicial or other imposition of additional restrictions if
deemed necessary or advisable to protect the Company and the interests of its
Shareholders by preservation of the Company's status as a qualified REIT.
27
<PAGE>
(f) If any provision of this Section 7.5 is determined to be invalid,
in whole or in part, by any federal or state court having jurisdiction, the
validity of the remaining provisions shall not be affected and the provision
shall be affected only to the extent necessary to comply with the determination
of the court.
(g) For purposes of this Section 7.5 only, "Shares" means the Common
Shares of the Company as defined in these Bylaws, and includes any Shares
issuable upon conversion, surrender or exercise of any other Securities of the
Company.
(h) The Advisor and its Affiliates shall not purchase in the offering
made by the Company's Prospectus more than 2.5% of the total number of Shares
sold in such offering. This limitation shall not apply to any Shares issued
pursuant to a stock incentive plan duly adopted by the Company.
(i) The Company shall have the right to issue fractional Shares.
7.6 Lost or Destroyed Certificates. The holder of any Shares shall
immediately notify the Company of any loss or destruction of the Share
certificates, and the Company may issue a new certificate in the place of any
certificate alleged to have been lost or destroyed upon approval of the Board of
Directors. The Board may, in its discretion, as a condition to authorizing the
issue of such new certificate, require the owner of the lost or destroyed
certificate, or his legal representative, to make proof satisfactory to the
Board of Directors of the loss or destruction and to give the Company a bond or
other security, in such amount and with such surety or sureties, as the Board of
Directors may determine as indemnity against any claim that may be made against
the Company on account of the certificate alleged to have been lost or
destroyed.
7.7 Dividend Record Date and Closing Stock Books. The Board of Directors
may fix a date in the future as a record date for the determination of the
Shareholders entitled to receive any dividend or distribution or any allotment
of rights or to exercise rights with respect to any change, conversion or
exchange of Shares. The record date so fixed shall not be more than 60 days or
less than 10 days prior to the date of the event for the purposes of which it is
fixed. When a record date is so fixed, only Shareholders of record on that day
shall be entitled to receive the dividend, distribution or allotment of rights
or to exercise the rights, as the case may be, notwithstanding any transfer of
any Shares on the books of the Company after the record date.
7.8 Dividend Reinvestment Plan. The Company's Dividend Reinvestment Plan
shall provide that:
28
<PAGE>
(a) all material information regarding the distribution to the
Shareholder and the effect of reinvesting such distribution, including the tax
consequences thereof, shall be provided to the Shareholder at least annually,
and
(b) each Shareholder participating in the Dividend Reinvestment Plan
shall have a reasonable opportunity to withdraw from the Dividend Reinvestment
Plan at least annually after receipt of the information required by Section
7.8(a) of these Bylaws.
ARTICLE VIII
EMPLOYMENT OF ADVISOR, LIMITATION
ON EXPENSES AND LEVERAGE
8.1 Employment of Advisor. The Directors have absolute and exclusive
control of the management of the Company, its property and the disposition
thereof. The Directors are responsible for the general policies of the Company
and for general supervision of the business of the Company conducted by all
officers, agents, employees, advisors, managers or independent contractors of
the Company as may be necessary to insure that the business conforms to the
provisions of these Bylaws. However, the Directors shall not be required
personally to conduct all the business of the Company, and subject to their
ultimate responsibility as stated above, the Directors shall have the power to
appoint, employ or contract with any Person (including one or more of themselves
or any corporation, partnership, or company in which one or more of them may be
directors, officers, stockholders, partners or directors) as the Directors may
deem necessary or proper for the transaction of the business of the Company. The
Directors may employ or contract with such a Person and the Directors may grant
or delegate authority to any such Person as the Directors may in their sole
discretion deem necessary or desirable without regard to whether that authority
is normally granted or delegated by Directors.
The Directors (subject to the provisions of this Article VIII) shall have
the power to determine the terms and compensation of the Advisor or any other
Person whom they may employ or with whom they may contract; provided, however,
that any determination to employ or contract with any Director or any Person of
which a Director is an Affiliate, shall be valid only if made, approved or
ratified by the Independent Directors. The Directors may exercise broad
discretion in allowing the Advisor to administer and regulate the operations of
the Company, to act as agent for the Company, to execute documents on behalf of
the Company, and to make executive decisions which conform to general policies
and general principals previously established by the Directors. The Directors
must evaluate the performance of the
29
<PAGE>
Advisor and the criteria used in such evaluation shall be reflected in the
minutes of the meeting.
Notwithstanding anything to the contrary in the advisory contract or these
Bylaws, the Advisor shall not be required to, and shall not, advise the Company
as to any investments in securities, except when, and to the extent that, the
Advisor and the Company specifically agree (i) that such advice is desirable,
and (ii) that such advice can be rendered consistently with applicable legal
requirements, including any applicable provisions of relevant "investment
advisor" laws. The Directors and officers of the Company shall be responsible
for decisions as to investments in securities, except insofar as the Directors
elect to consult with (i) the Advisor in compliance with the preceding sentence,
or (ii) any other Person in compliance with any applicable laws.
8.2 Term. The Directors shall not enter into any advisory contract with the
Advisor unless the contract has a term of no more than one year and provides for
annual renewal or extension thereafter, except that the initial contract may
have a term ending one year after Final Closing, where "Final Closing" is the
last closing of the sale of Shares offered by the Prospectus. The Directors
shall not enter into a similar contract with any Person of which a Director is
an Affiliate unless the contract provides for renewal or extension by the
Independent Directors. The advisory contract with the Advisor may be terminated
by the Advisor upon 60 days' written notice or by the Company without cause by
action of the Independent Directors of the Company upon 60 days' written notice,
in a manner to be set forth in the advisory contract with the Advisor. The
advisory contract shall also require the Advisor to cooperate with the Company
to provide an orderly management transition after any termination. The Directors
shall determine that any successor Advisor (i) is qualified to perform advisory
functions for the Company and (ii) can justify the compensation provided for in
the advisory contract.
8.3 Other Activities of Advisor. The Advisor shall not be required to
administer the investment activities of the Company as its sole and exclusive
function and may have other business interests and may engage in other
activities similar or in addition to those relating to the Company, including
the performance of services and advice to other Persons (including other real
estate investment companies) and the management of other investments (including
investments of the Advisor and its Affiliates). The Directors may request the
Advisor to engage in other activities which complement the Company's investment,
and the Advisor may receive compensation or commissions for those activities
from the Company or other Persons.
30
<PAGE>
The Advisor shall be required to use its best efforts to present a
continuing and suitable investment program to the Company which is consistent
with the investment policies and objectives of the Company, but neither the
Advisor nor any Affiliate of the Advisor shall be obligated generally to present
any particular investment opportunity to the Company even if the opportunity is
of a character which, if presented to the Company, could be taken by the
Company, and, subject to the foregoing, shall be protected in taking for its own
account or recommending to others the particular investment opportunity.
Upon request of any Director, the Advisor and any Person who controls, is
controlled by, or is under common control with the Advisor shall from time to
time promptly furnish the Directors with information on a confidential basis as
to any investments within the Company's investment policies made by the Advisor
or the other Person for its own account.
8.4 Limitation on Offering and Organization Expenses and Acquisition Fees
and Expenses. The Offering and Organization Expenses paid by the Company in
connection with the Company's formation or the offering of its Shares or other
Securities shall in each case be reasonable and in no event exceed an amount
equal to 15% of the gross proceeds raised in any such offering. The Advisor
shall pay (without the right of reimbursement from the Company) any Offering and
Organization Expenses in the initial offering of Shares which, exclusive of the
Selling Commissions and Marketing Expense Allowance, exceed 3% of gross offering
proceeds.
The total of all Acquisition Fees and Acquisition Expenses paid by the
Company in connection with the purchase of real property by the Company shall be
reasonable and shall in no event exceed an amount equal to 6% of the Contract
Price for such real property, or, in the case of a mortgage loan, 6% of the
funds advanced, unless a majority of the Directors (including a majority of the
Independent Directors) not otherwise interested in the transaction approve the
transaction as being commercially competitive, fair and reasonable to the
Company.
Any Offering and Organization Expenses or Acquisition Fees and Acquisition
Expenses incurred by the Company in excess of the permitted limits set forth in
this Section 8.4 shall be payable to the Company by the Advisor immediately upon
demand of the Company.
8.5 Limitation on Operating Expenses. The total Operating Expenses of the
Company, including fees paid to the Advisor, shall not exceed in any year the
greater of 2% of the total Average Invested Assets of the Company or 25% of the
Net Income of the Company for such year. Subject to the determination referred
to in Section 5.15(d), the Advisor shall
31
<PAGE>
reimburse the Company at least annually for the amount by which Operating
Expenses of the Company exceed the above limitations. All figures used in the
foregoing computation shall be determined in accordance with generally accepted
accounting principals applied in a consistent basis. The compensation of the
Advisor shall be computed by an independent certified public accountant at the
end of each year and there shall be made any necessary adjustments between the
compensation so computed and that already paid.
8.6 Limitation on Real Estate Brokerage Commissions on Purchase and Resale
of Property. If the Advisor, any Director or any Affiliate thereof provides a
substantial amount of the services in the effort to purchase or sell the real
property of the Company, then such Person may receive a real estate or brokerage
commission which is reasonable, customary and competitive in light of the size,
type and location of such property; provided that such commission shall not
exceed an amount equal to 2% of the contracted for purchase or sales price for
such property. In the event such real estate or brokerage commissions are also
payable to any other party pursuant to such transactions, the Advisor, any
Director or any Affiliate may receive up to one-half of the brokerage commission
paid but in no event to exceed an amount equal to 2% of the contracted for
purchase or sales price for such property. In addition, the amount paid when
added to the sums paid to unaffiliated parties in such a capacity shall not
exceed the lesser of the Competitive Real Estate Commission or an amount equal
to 6% of the contracted for sales price. The Company may enter into an agreement
(with any term approved by the Directors) pursuant to which the Advisor, any
Director or any Affiliate thereof will provide the services referred to in this
Section with respect to all of the Company's properties, and will receive
compensation therefor.
8.7 Limitation on Incentive Fees. An incentive fee based upon an interest
in the gain from the sale, financing or refinancing of real property of the
Company, for which full consideration is not paid in cash or property of
equivalent value, shall be allowed provided the amount or percentage of such
interest is reasonable. Such an interest in gain from the sale of real property
of the Company shall be considered reasonable if it does not exceed 15% of the
balance of such gain remaining after payment to Shareholders, in the aggregate,
of an amount equal to 100% of the adjusted price per Share (defined to be the
original issue price of the Common Shares reduced by prior distributions of gain
from the sale of the Company's assets), plus an amount equal to a 6% per annum
cumulative (noncompounded) return on the adjusted price per Share. In the case
of multiple Advisors, Advisors and their Affiliates shall be allowed incentive
fees provided such fees are distributed by a proportional method reasonably
designed to reflect the value added to such assets by each respective Advisor or
Affiliate.
32
<PAGE>
Distribution of incentive fees to Advisors and their Affiliates in proportion to
the length of time served as Advisor while such property was held by the Company
or in ratio to the fair market value of the asset at the time of the Advisor's
termination, and the fair market value of the asset upon its disposition by the
Company shall be considered reasonable methods by which to apportion incentive
fees.
8.8 Limitations on Leverage. All borrowings by the Company must be approved
by the Directors. The aggregate borrowings of the Company, secured and
unsecured, shall be reasonable in relation to the Net Assets of the Company and
shall be reviewed by the Directors at least quarterly.
ARTICLE IX
RESTRICTIONS ON INVESTMENTS AND ACTIVITIES
9.1 Restrictions. Notwithstanding any other provision of these Bylaws, the
Company shall not:
(a) invest more than 10% of the total assets of the Company in
Unimproved Real Property or mortgage loans on Unimproved Real Property;
(b) invest in commodities or commodity future contracts or effect
short sales of commodities or securities, except when done solely for hedging
purposes;
(c) invest in or make mortgage loans on property unless the Company
shall obtain a mortgagee's or owner's title insurance policy or commitment as to
the priority of the mortgage or the condition of the title;
(d) invest in contracts for the sale of real estate unless they are
recordable in the chain of title;
(e) make or invest in mortgage loans, including construction loans, on
any one property if the aggregate amount of all mortgage loans outstanding on
the property (at the time the Company makes or invests in its mortgage loan),
including the loans of the Company, would exceed 85% of the appraised value of
the property;
(f) make or invest in junior mortgage loans (provided that this and
the preceding limitation shall not apply to the Company taking back secured debt
in connection with the sale of any property);
(g) issue securities that are redeemable;
33
<PAGE>
(h) issue debt securities unless the historical debt service coverage
(in the most recently completed fiscal year) as adjusted for known changes is
sufficient to properly service the higher level of debt or unless the cash flow
of the Company (for the last fiscal year) excluding extraordinary, nonrecurring
items, is sufficient to cover the debt service on all debt securities to be
outstanding;
(i) invest more than 20% of its total assets in the equity securities
of any non-governmental issuer, including other REITs or limited partnerships
for a period in excess of 18 months;
(j) issue equity securities on a deferred payment basis or other
similar arrangement;
(k) incur any indebtedness, secured or unsecured, which would result
in an aggregate amount of indebtedness in excess of 100% of Net Assets (before
subtracting any liabilities), unless any excess borrowing over such 100% level
shall be approved by a majority of the Independent Directors and disclosed to
the Shareholders in the next quarterly report of the Company, along with
justification for such excess;
(l) allow aggregate borrowings of the Company to exceed 50% of the
Adjusted Net Asset Value (before subtracting any liabilities) of the Company,
unless any excess borrowing over such 50% level shall be approved by a majority
of the Independent Directors and disclosed to the Shareholders in the next
quarterly report of the Company, along with justification for such excess;
(m) invest in single-family residential homes, condominiums, secondary
homes, resort or recreation properties, nursing homes, gaming facilities, mobile
home parks, or any other commercial or industrial properties (other than
shopping centers);
(n) engage in any short sale, underwrite or distribute, as an agent,
securities issued by others, or engage in trading, as compared with investment
activities; and
(o) acquire Securities in any company holding investments or engaging
in activities prohibited by the Internal Revenue Code of 1986, as amended,
Virginia law or this Section 9.1.
The foregoing limitations shall not limit the manner in which any required
investment by the Advisor or its Affiliates in the Company is made or preclude
the Company from structuring an investment in real property to minimize
Shareholder liability and facilitate the investment policies of the Company
under Article IX.
34
<PAGE>
ARTICLE X
TRANSACTIONS WITH AFFILIATES; CERTAIN DUTIES AND LIABILITIES
OF DIRECTORS, SHAREHOLDERS, ADVISOR AND AFFILIATES
10.1 Transactions with Affiliates.
(a) Neither the Advisor nor any Affiliate of the Advisor shall sell,
transfer or lend any assets or property to the Company or purchase, borrow or
otherwise acquire any assets or property from the Company, directly or
indirectly, unless the transaction comes within one of the following exceptions:
(i) the transaction consists of the acquisition of property or
assets at the formation of the Company or shortly thereafter, and is
fully disclosed in the Prospectus; or
(ii) the transaction is a borrowing of money by the Company on
terms not less favorable than those then prevailing for comparable
arms-length borrowings; or
(iii) the transaction consists of the acquisition by the Company
of federally insured or guaranteed mortgages at prices not exceeding
the currently quoted prices at which the Federal National Mortgage
Association is purchasing comparable mortgages; or
(iv) the transaction consists of the acquisition of other
mortgages if an Appraisal is obtained concerning the underlying
property and on terms not less favorable to the Company than similar
transactions involving unaffiliated parties; or
(v) the transaction consists of the acquisition by the Company of
other property at prices not exceeding the fair value thereof as
determined by an independent Appraisal.
All of the above transactions and all other transactions (other than the
entering into, and the initial term under, the Advisory Agreement, the Property
Acquisition/Disposition Agreement, and the Property Management Agreement for
each property acquired by the Company, each of which agreement is specifically
disclosed in the Prospectus), whether such transaction involves the transfer of
property, the lending of money or the rendition of any services, in which any
such Persons have any direct or indirect interest shall be permitted only if:
(i) such transaction has been approved by the affirmative vote of
the majority of the Independent Directors; and
35
<PAGE>
(ii) if the transaction involves the purchase or acquisition of
property, the purchase or acquisition from any such Person is on terms
not less favorable to the Company than those then prevailing for
arms-length transactions concerning comparable property (based upon a
determination of a majority of the Directors, including a majority of
the Independent Directors); and
(iii) each such transaction is in all respects on such terms at
the time of the transaction and under the circumstances then
prevailing, fair and reasonable to the Shareholders of the Company
and, in the case of a purchase or acquisition of property, at a price
to the Company no greater than the cost of the asset to such Persons
(based upon a determination of a majority of the Directors, including
a majority of the Independent Directors) or, if the price to the
Company is in excess of such cost, then substantial justification for
such excess must exist and such excess is not unreasonable (based upon
a determination of a majority of the Directors, including a majority
of the Independent Directors).
(b) Neither the Advisor nor any Affiliate of the Advisor shall invest
in joint ventures with the Company, unless (i) such transaction has been
approved by the affirmative vote of a majority of the Independent Directors;
(ii) the transaction is on terms not less favorable to the Company than those
then prevailing for comparable arms-length transactions (based upon a
determination of a majority of the Directors, including a majority of the
Independent Directors); and (iii) each such transaction is in all respects on
such terms at the time of the transaction and under the circumstances then
prevailing, fair and reasonable to the Shareholders of the Company and on
substantially the same terms and conditions as those received by other joint
venturers (based upon a determination of a majority of the Directors, including
a majority of the Independent Directors).
10.2 Restriction of Duties and Liabilities. The duties and liabilities of
Shareholders, Directors and officers shall in no event be greater than the
duties and liabilities of shareholders, directors and officers of a Virginia
corporation. The Shareholders, Directors and officers shall in no event have any
greater duties or liabilities than those imposed by applicable law as shall be
in effect from time to time. However, in no event shall the duties and
liabilities of Shareholders, Directors and officers be inconsistent with the
standards contained in the Articles of Incorporation.
10.3 Persons Dealing with Directors or Officers. Any act of the Directors
or officers purporting to be done in their
36
<PAGE>
capacity as such shall, as to any Persons dealing in good faith with the
Directors or officers, be conclusively deemed to be within the purposes of this
Company and within the powers of the Directors and officers.
The Directors may authorize any officer or officers or agent or agents to
enter into any contract or execute any instrument in the name and on behalf of
the Company and/or Directors.
No Person dealing in good faith with the Directors or any of them or with
the authorized officers, employees, agents or representatives of the Company,
shall be bound to see to the application of any funds or property passing into
their hands or control. The receipt of the Directors, or any of them, or of
authorized officers, employees, agents, or representatives of the Company, for
moneys or other considerations, shall be binding upon the Company.
10.4 Reliance. The Directors and officers may consult with counsel and the
advice or opinion of the counsel shall be full and complete personal protection
to all of the Directors and officers in respect of any action taken or suffered
by them in good faith and in reliance on and in accordance with such advice or
opinion. In discharging their duties, Directors and officers, when acting in
good faith, may rely upon financial statements of the Company represented to
them to be correct by the Chairman or the officer of the Company having charge
of its books of account, or stated in a written report by an independent
certified public accountant fairly to present the financial position of the
Company. The Directors may rely, and shall be personally protected in acting
upon any instrument or other document believed by them to be genuine.
10.5 Income Tax Status. Without limitation of any rights of indemnification
or non-liability of the Directors, the Directors by these Bylaws make no
commitment or representation that the Company will qualify for the dividends
paid deduction permitted by the Internal Revenue Code of 1986, as amended, and
the Rules and Regulations pertaining to real estate investment trusts under the
Internal Revenue Code of 1986, as amended, and any such failure to qualify shall
not render the Directors liable to the Shareholders or to any other Person or in
any manner operate to annul the Company.
ARTICLE XI
MISCELLANEOUS
11.1 Competing Programs. Nothing in these Bylaws shall be deemed to
prohibit any Affiliate of the Company from dealing, or otherwise engaging in
business with, Persons
37
<PAGE>
transacting business with the Company or from providing services relating to the
purchase, sale, management, development or operation of real property and
receiving compensation therefor, not involving any rebate, reciprocal
arrangement or other transaction which would have the effect of circumventing
any restrictions set forth herein relating to the dealings between the Company
and its Affiliates. The Company shall not have any right, by virtue of these
Bylaws, in or to such other ventures or activities or to the income or proceeds
derived therefrom, and the pursuit of such ventures, even if competitive with
the business of the Company, shall not be deemed wrongful or improper. No
Affiliate of the Company shall be obligated to present any particular investment
opportunity to the Company, even if such opportunity is of a character which, if
presented to the Company, could be taken by the Company; provided, however, that
until substantially all the net proceeds of the offering of the Shares have been
invested or committed to investment, the Sponsor shall be obligated to present
to the Company any investment opportunity which is of an amount and character
which, if presented to the Company, would be a suitable investment for the
Company. To the extent necessary, the Sponsor shall seek to allocate investment
opportunities between the Company and other entities based upon differences in
investment policies and objectives, the make-up of the investment portfolio of
each entity, the amount of cash available to each entity for investment
financing, the estimated income tax effects of the purchase on each entity, and
the policies of each relating to leverage. Subject to the limitations in this
Section, it will be within the discretion of the Sponsor to allocate the
investment opportunities as it deems advisable. The Sponsor shall attempt to
resolve any other conflicts of interests between the Company and others by
exercising the good faith required of fiduciaries.
11.2 Corporate Seal. The Company shall have a corporate seal in the form of
a circle containing the name of the Company and such other details as may be
required by the Board of Directors.
11.3 Inspection of Bylaws. The Company shall keep at its principal office
in this Commonwealth for the transaction of business, a list of the names and
addresses of the Company's Shareholders and the original or a copy of the
Bylaws, as amended, certified by the Secretary, which shall be open to
inspection by Shareholders at any reasonable time during office hours.
11.4 Inspection of Corporate Records. Shareholders of the Company, or any
holders of a voting trust certificate, shall have the right to inspect the
accounting books and records of the Company, and the minutes of proceedings of
the Shareholders and the Board and committees of the Board as provided by the
Virginia Stock Corporation Act.
38
<PAGE>
11.5 Checks, Drafts, Etc. All checks, drafts or other orders for payment of
money, notes or other evidences of indebtedness, issued in the name of or
payable to the Company, shall be signed or endorsed by the Person or Persons and
in the manner as from time to time shall be determined by resolution of the
Board of Directors.
11.6 Contracts, Etc., How Executed. The Board of Directors, except as
provided elsewhere in these Bylaws, may authorize any officer or officers or
agent or agents to enter into any contract or execute any instrument in the name
of and on behalf of the Company. That authority may be general or confined to
specific instances. Unless so authorized by the Board of Directors or as
otherwise provided in these Bylaws, no officer, agent or employee shall have any
power or authority to bind the Company by any contract or engagement or to
pledge its credit to render it liable for any purpose or to any amount.
11.7 Representation of Shares of Other Corporations. The Chairman or the
President or, in the event of their absence or inability to serve, any Vice
President and the Secretary or Assistant Secretary of this Company, are
authorized to vote, represent and exercise, on behalf of the Company, all rights
incidental to any and all shares of any other company registered in the name of
the Company. The authority granted to such officers to vote or represent on
behalf of the Company any and all shares held by the Company in any other
company may be exercised by any authorized Person in person or by proxy or power
of attorney duly executed by the officers.
11.8 Annual Report. The Board of Directors of the Company shall cause to be
sent to the Shareholders, not later than 120 days after the close of the
calendar year, and not less than 30 days before the date of the Company's annual
meeting of Shareholders as provided in Section 4.2 of these Bylaws, an Annual
Report in the form deemed appropriate by the Board of Directors, including
without limitation, any explanation of excess expenses as set forth in Sections
5.15 and 8.5. The reports shall also disclose the ratio of the cost of raising
capital to the capital raised during the year and the aggregate amount of the
advisory fees and other fees paid during the year to the Advisor and its
Affiliates, including fees or charges paid to the Advisor and Affiliates by a
third party on behalf of the Company. The Annual Report also shall include as
required by Section 5.15 full disclosure of all material terms, factors and
circumstances surrounding any and all transactions involving the Company and the
Directors, Advisor and/or Affiliates thereof occurring during the year, and the
Independent Directors shall examine and comment in the report as to the fairness
of any such transactions. The Annual Report shall include a statement of assets
and liabilities and a statement of income and expense of the Company prepared in
accordance with generally accepted
39
<PAGE>
accounting principles. The financial statements shall be accompanied by the
report of an independent certified public accountant. A manually signed copy of
the accountant's report shall be filed with the Directors.
11.9 Quarterly Reports. At least quarterly, the Directors shall send
interim reports to the Shareholders having the form and content as the Directors
deem proper. The quarterly reports shall disclose (i) the ratio of the costs of
raising capital during the quarter to the capital raised, and (ii) the aggregate
amount of the advisory fees and the fees paid during the quarter to the Advisor
and its Affiliates, including fees or charges paid to the Advisor and its
Affiliates by third parties on behalf of the Company. The quarterly report shall
also disclose any excess in borrowings over the level specified in Section 8.8,
along with a justification for such excess.
11.10 Other Reports. The Directors shall furnish the Shareholders at least
annually with a statement in writing advising as to the source of dividends or
distributions so distributed. If the source has not been determined, the
communication shall so state and the statement as to the source shall be sent to
the Shareholders not later than 60 days after the close of the calendar year in
which the distribution was made.
11.11 Provisions of the Company in Conflict with Law or Regulation.
(a) The provisions of these Bylaws are severable, and if the Directors
shall determine, with the advice of counsel, that any one or more of these
provisions (the "Conflicting Provisions") are in conflict with the REIT
Provisions of the Internal Revenue Code, or with other applicable laws and
regulations, the Conflicting Provisions shall be deemed never to have
constituted a part of these Bylaws. The Directors shall have the power to amend
or revise the Bylaws (which shall include both the deletion and the addition of
provisions) to the extent necessary to bring the provisions of these Bylaws into
conformity with the REIT Provisions of the Internal Revenue Code, or any other
applicable law or regulation or the requirements of any state securities
regulator or similar official, or (i) to correct any ambiguity in the Bylaws or
resolve any inconsistency between the Bylaws and the Articles of Incorporation,
(ii) to make any change in the Bylaws not materially adverse to the rights and
interests of the Shareholders, or (iii) to permit the Company to take any action
or fulfill any obligation which it is legally permitted or obligated to take or
fulfill. Any such action by the Directors shall not affect or impair any of the
remaining provisions of these Bylaws or render invalid or improper any action
taken or omitted (including but not limited to the election of Directors) prior
to the action. A certification signed by a majority of the Directors setting
forth any such action and reciting that it was duly adopted by the Directors, or
a copy of these Bylaws, with the relevant changes made, signed by a majority of
the Directors, shall be conclusive evidence of such action when logged in the
records of the Company. The Directors
40
<PAGE>
shall not be liable for failure to make any determination or take any action
under this Section 11.11.
(b) If any provisions of these Bylaws shall be held invalid or
unenforceable, the invalidity or unenforceability shall attach only to that
provision and shall not in any manner affect or render invalid or unenforceable
any other provision, and these Bylaws shall be carried out as if the invalid or
unenforceable provision were not present.
11.12 Voluntary Dissolution. The Company may elect to wind up and dissolve
by the vote of Shareholders entitled to exercise a majority of the voting power
of the Company.
11.13 Distributions. The payment of distributions on Shares shall be at the
discretion of the Directors, including a majority of the Independent Directors,
and shall depend upon the earnings, cash flow and general financial condition of
the Company, and such other facts as the Directors deem appropriate.
11.14 Shareholder Liability. The holders of the Company's Shares shall not
be personally liable on account of any obligation of the Company.
11.15 Return of Offering Proceeds. The Directors shall have the right and
power, at any time, to return to Shareholders offering proceeds to the extent
required by applicable law, including to the extent necessary to avoid
characterization of the Company as an "investment company."
ARTICLE XII
AMENDMENTS TO BYLAWS
12.1 Amendments. These Bylaws may be amended or repealed by the vote of
Shareholders entitled to exercise a majority of the voting power of the Company.
The Board of Directors may propose any such amendment to the Shareholders, but
the Board of Directors may not amend the Bylaws or any portion, except to the
extent expressly provided in Section 11.11.
12.2 [Reserved]
41
<PAGE>
ARTICLE XIII
CONDUCT OF BUSINESS THROUGH SUBSIDIARIES
13.1 Subsidiaries. To the extent permitted by the Articles of
Incorporation, these Bylaws (excluding Section 9.1 (i) hereof, which shall not
be construed to prohibit anything contemplated by this Article XIII) and
applicable law (including any required consent of the Directors and Shareholders
under applicable law), the Company may conduct its business through subsidiary
companies owned or controlled by the Company (or its subsidiaries). Any such
subsidiary company is referred to as a "Subsidiary Company" and collectively
such subsidiary companies are referred to as the "Subsidiary Companies." It is
specifically acknowledged that the conduct of the Company's business through a
Subsidiary Company or Subsidiary Companies may be effected and undertaken by the
transfer by the Company of properties to, the acquisition of properties by, and
the ownership and operation of properties in, a partnership all of whose
interests are initially owned by the Company and/or a Subsidiary Company or
Subsidiary Companies. However, the transfer described in the preceding sentence
shall not constitute an event permitting conversion of the Company's Class B
Convertible Shares.
13.2 Interpretation and Application of Bylaws. If and to the extent (i) the
Company conducts its business through Subsidiary Companies, or (ii) there are
properties which, in the absence of Subsidiary Companies, would be owned and
operated by the Company but such properties are instead owned and operated by
Subsidiary Companies, restrictions on the power of the Company to engage in
certain transactions and restrictions on the authority of Directors and officers
of the Company in these Bylaws, and in particular the restrictions contained in
Articles VIII, IX and X of these Bylaws, shall be interpreted and applied to
Subsidiary Companies in the same manner as they apply by their terms to the
Company to the extent necessary to ensure that the Bylaw provision is given the
effect intended notwithstanding that the Company's business is conducted through
Subsidiary Companies instead of by the Company directly. The Company shall
exercise any rights and powers it has as an owner or partner (directly or
indirectly) of a Subsidiary Company consistently with this provision.
13.3 Certain Shareholder Consents. If a transaction involving the proposed
sale or other transfer, whether by sale, exchange, merger, consolidation, lease,
share exchange or otherwise, by a Subsidiary Company would require pursuant to
applicable law the consent or approval of Shareholders if the Company owned
directly, and were proposing the sale or other transfer of, the relevant assets,
the Company shall not approve, undertake or effectuate any such proposed sale or
other transfer through such Subsidiary Company without first obtaining the
consent or approval of the Shareholders of the Company.
42
EXHIBIT 4.1
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (the "Agreement") is made as of the 20th day of
April, 1999, by and between APPLE SUITES, INC., a Virginia corporation (the
"Company"), and FIRST UNION NATIONAL BANK, a national banking corporation (the
"Lender").
STATEMENT OF PURPOSE
The Company has requested the Lender to extend to the Company a loan to
fund the start-up costs and the Lender has agreed to do so on the terms and
subject to the conditions set forth herein. All capitalized terms not otherwise
defined herein are defined in Paragraph 9 hereof.
Now, therefore, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENT
1. Credit Facility.
1(a) Loan. Subject to the conditions set forth herein, the Lender
agrees that it shall advance $1,000,000.00 (the "Loan") to the Company. Advances
of Loan proceeds will be made upon the written request of the Company; provided,
however, no more than three (3) such requests shall be made and all such
requests must be made on or before June 19, 1999. No amount repaid by the
Company prior to the Maturity Date may be reborrowed by the Company.
1(b) Interest Rate. The Loan shall bear interest at a rate equal to
the LIBOR-Based Rate.
1(c) Payment of Interest. The Company shall pay to the Lender interest
on the outstanding principal balance of the Loan from the date disbursed to but
not including the date of payment in full, such interest to be payable monthly,
in arrears, as provided in Paragraph 2(c) below.
1(d) Inability to Determine Rate. If the Lender determines (which
determination shall be conclusive and binding upon the Company) that by reason
of circumstances affecting the London interbank eurodollar market adequate and
reasonable means do not exist for ascertaining the LIBOR-Based Rate at any time,
the Lender shall forthwith give facsimile notice of such determination,
confirmed in writing, to the Company. If such notice is
<PAGE>
given the Loan shall bear interest at a rate determined by Lender to
approximate, as nearly as possible, the LIBOR-Based Rate. The Lender shall
withdraw such notice in the event that the circumstances giving rise thereto no
longer obtain and that adequate and reasonable means exist for ascertaining the
LIBOR-Based Rate, and following withdrawal of such notice by the Lender, the
Loan shall again earn interest at the LIBOR-Based Rate in accordance with the
terms and conditions of this Agreement.
1(e) Requirements of Law; Increased Costs. In the event that any
change subsequent to the date hereof in any applicable law, order, regulation,
treaty or directive issued by any central bank or other Governmental Authority,
or in the governmental or judicial interpretation or application thereof, or
compliance by the Lender with any request or directive (whether or not having
the force of law) by any central bank or other Governmental Authority:
(1) subjects the Lender to any tax of any kind whatsoever with
respect to this Agreement or the Loan made hereunder, or changes the basis
of taxation of payments to the Lender of principal, fee, interest or any
other amount payable hereunder (except for change in the rate of tax on the
overall net income of the Lender);
(2) imposes, modifies or holds applicable any reserve, capital
requirement, special deposit, compulsory loan or similar requirements
against assets held by, or deposits or other liabilities in or for the
account of, advances or loans by, or other credit extended by, or any other
acquisition of funds by, any office of the Lender which are not otherwise
included in the determination of the LIBOR-Based Rate; or
(3) imposes on the Lender any other condition;
and the result of any of the foregoing is to increase the cost to the Lender of
making, renewing or maintaining the Loan or to reduce any amount receivable in
respect thereof or to reduce the rate of return on such capital of the Lender or
any Person controlling the Lender, then, in any such case, the Company shall
promptly pay to the Lender, upon written demand by the Lender, any additional
amounts necessary to compensate such Lender for such additional cost or reduced
amounts receivable or rate of return as determined by such Lender with respect
to this Agreement or the Loan made hereunder. If the Lender becomes entitled to
claim any additional amounts pursuant to this Paragraph 1(e), it shall promptly
notify the Company of the event by reason of which it has become so entitled. A
certificate as to any additional amounts payable pursuant to the foregoing
sentence containing the calculation thereof in reasonable detail submitted by
the Lender to the Company shall be conclusive in the absence of manifest error.
The provisions hereof shall survive the termination of this Agreement and
payment of the outstanding Loan and all other amounts payable hereunder.
1(f) Funding. The Lender shall be entitled to fund all or any portion
of the Loan in any manner it may determine in its sole discretion, but all
calculations and transactions hereunder shall be conducted as though the Lender
actually funds the Loan through the purchase in London of offshore dollar
deposits in the amount of the Loan.
2
<PAGE>
2. Miscellaneous Lending Provisions.
2(a) Use of Proceeds. The proceeds of the Loan shall be used by the
Company solely for the purpose of funding start-up costs.
2(b) Note. The obligations of the Company to repay the Loan shall be
evidenced by a note payable to the order of the Lender in the form attached
hereto as Exhibit A (the "Note").
2(c) Interest and Fee Billing and Payment. The Lender shall, on or
before the fifth Business Day of each month, deliver to the Company an interest
and fee billing for the immediately preceding month, which billing shall set
forth interest accrued and payable on the Loan and fees payable hereunder for
such month and which billing shall be payable no later than the second Business
Day following receipt thereof by the Company.
2(d) Repayment of Principal. The Company shall pay the principal
amount of the Loan and any accrued and unpaid interest on the Maturity Date.
2(e) Nature and Place of Payments. All payments made on account of the
Obligations shall be made without set-off or counterclaim in lawful money of the
United States of America in immediately available same day funds, free and clear
of and without deduction for any taxes, fees or other charges of any nature
whatsoever imposed by any taxing authority upon the Lender and if received by
the Lender by 2:00 p.m. (Charlotte, North Carolina time) such payment will be
credited on the Business Day received. If a payment is received after 2:00 p.m.
(Charlotte, North Carolina time) by the Lender, such payment will be credited on
the next succeeding Business Day and interest thereon shall be payable at the
then applicable rate until credited. If any payment required to be made by the
Company hereunder becomes due and payable on a day other than a Business Day,
the due date thereof shall be extended to the next succeeding Business Day and
interest thereon shall be payable at the then applicable rate during such
extension.
2(f) Post-Maturity Interest. Any Obligations not paid when due
(whether at stated maturity, upon acceleration or otherwise) shall bear interest
from the date due until paid in full at a per annum rate equal to four percent
(4%) above the interest rate otherwise applicable thereto, or, if such
Obligations do not otherwise bear interest, four percent (4%) above the
LIBOR-Based Rate.
2(g) Computations. All computations of interest and fees payable
hereunder shall be based upon a year of 360 days for the actual number of days
elapsed.
2(h) Prepayments.
(1) The Company may voluntarily prepay Loans hereunder in whole
or in part at any time.
3
<PAGE>
(2) The Company shall pay in connection with any prepayment
hereunder all interest accrued but unpaid on the Loan to which such
prepayment is applied concurrently with payment of any principal amounts.
2(i) Fees. The Company shall pay the following fees: (i) an upfront
fee of $5,000 to Lender upon Closing.
3. Conditions to Making of the Loan. As conditions precedent to the
Lender's obligation to make the Loan hereunder:
(1) The Company shall have delivered to the Lender, in form and
substance satisfactory to the Lender and its counsel each of the following:
(i) A duly executed copy of this Agreement;
(ii) A duly executed copy of the Note;
(iii) A copy of the Guaranty duly executed by the Guarantor;
(iv) Such credit applications, financial statements,
authorizations and such information concerning the Company and its
businesses, operations and conditions (financial and otherwise) as the
Lender may reasonably request;
(v) Certified copies of resolutions of the Board of Directors of
the Company approving the execution and delivery of the Credit Documents,
the performance of the Obligations thereunder and the consummation of the
transactions contemplated thereby;
(vi) A certificate of the Secretary or an Assistant Secretary of
the Company certifying the names and true signatures of the officers of the
Company authorized to execute and deliver the Credit Documents;
(vii) A copy of the Articles of Incorporation of the Company
certified by the Secretary or an Assistant Secretary of the Company as of
the date of this Agreement as being accurate and complete;
(viii) A copy of the Bylaws of the Company certified by the
Secretary or an Assistant Secretary of the Company as of the date of this
Agreement as being accurate and complete;
(ix) A certificate of the Secretary of State of the State of
Virginia, certifying as of a recent date that the Company is in good
standing
4
<PAGE>
(2) All acts and conditions (including, without limitation, the
obtaining of any necessary regulatory approvals and the making of any
required filings, recordings or registrations) required to be done and
performed and to have happened precedent to the execution, delivery and
performance of the Credit Documents and to constitute the same legal, valid
and binding obligations, enforceable in accordance with their respective
terms, shall have been done and performed and shall have happened in due
and strict compliance with all applicable laws.
(3) All documentation, including, without limitation,
documentation for corporate and legal proceedings in connection with the
transactions contemplated by the Credit Documents shall be satisfactory in
form and substance to the Lender and its counsel, and all legal and
financial due diligence on the Company and its operation and conditions
shall be completed and shall be satisfactory to Lender and its counsel.
(4) All fees required to be paid on or before the date hereof
pursuant to Paragraph 2(i) above shall have been paid prior to (or will be
paid concurrently with) the making of the Loan hereunder.
4. Representations and Warranties of the Company.
The Company represents and warrants to the Lender that:
4(a) Corporate Existence; Compliance with Law. The Company: (1) is
duly organized, validly existing and in good standing as a corporation under the
laws of Virginia and is qualified to do business in each other jurisdiction
where its ownership of property or conduct of business requires such
qualification and where failure to qualify could have a material adverse effect
on the Company or its property or business or on the ability of the Company to
pay or perform the Obligations, (2) has the corporate power and authority and
the legal right to own and operate its property and to conduct business in the
manner in which it does and proposes so to do, and (3) is in compliance with all
Requirements of Law and Contractual Obligations, the failure to comply with
which could have a material adverse effect on the business, operations, assets
or financial or other condition of the Company.
4(b) Corporate Power; Authorization; Enforceable Obligations The
Company has the corporate power and authority and the legal right to execute,
deliver and perform the Credit Documents and has taken all necessary corporate
action to authorize the execution, delivery and performance of the Credit
Documents. The Credit Documents have been duly executed and delivered on behalf
of the Company and constitute legal, valid and binding obligations of the
Company enforceable against the Company in accordance with their respective
terms, subject to the effect of applicable bankruptcy and other similar laws
affecting the rights of creditors generally and the effect of equitable
principles whether applied in an action at law or a suit in equity.
4(c) Investment Companies Act. The Company is not an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
5
<PAGE>
4(d) Federal Reserve Board Regulations. The Company is not engaged,
and will not engage, principally or as one of its important activities, in the
business of extending credit for the purpose of "purchasing" or "carrying" any
"margin stock" within the respective meanings of such terms under Regulation U.
No part of the proceeds of the Loan issued hereunder will be used, directly or
indirectly, for "purchasing" or "carrying" "margin stock" as so defined or for
any purpose which violates, or which would be inconsistent with, the provisions
of the Regulations of the Board of Governors of the Federal Reserve System.
4(e) Ownership and Subsidiaries. As of the date hereof, the
outstanding stock of the Company is owned by Parent, and the Company has no
subsidiaries.
5. Affirmative Covenants. The Company hereby covenants and agrees with the
Lender that, as long as any Obligations remain unpaid, the Company shall:
5(a) Payment of Indebtedness. Pay or otherwise satisfy at or before
maturity or before it becomes delinquent or accelerated, as the case may be, all
its Indebtedness (including taxes), except Indebtedness being contested in good
faith by appropriate proceedings and for which provision is made to the
satisfaction of the Lender for the payment thereof in the event any Company is
found to be obligated to pay such Indebtedness and which Indebtedness is
thereupon promptly paid by such Company.
5(b) Maintenance of Existence and Properties. Maintain its corporate
existence and obtain and maintain all rights, privileges, licenses, approvals,
franchises, properties and assets necessary or desirable in the normal conduct
of its business.
5(c) Inspection of Property; Books and Records; Audits.
(1) Keep proper books of record and account in which full, true
and correct entries in conformity with GAAP and all Requirements of Law
shall be made of all dealings and transactions in relation to its business
and activities; and
(2) Permit: (i) representatives of the Lender, to (A) visit and
inspect any of its properties and examine and make abstracts from any of
its books and records at any reasonable time and as often as may reasonably
be desired by the Lender, (but, prior to the occurrence of an Event of
Default, only upon not less than two Business Days' prior notice), and (B)
discuss the business, operations, properties and financial and other
condition of the Company with officers and employees of the Company, and
with the independent certified public accountants of the Company, and (ii)
representatives of the Lender to conduct periodic operational audits of the
Company's business and operations of the Company.
5(d) Notices. Promptly give written notice to the Lender of:
6
<PAGE>
(1) The occurrence of any Potential Default or Event of Default
known to responsible management personnel of the Company and the proposed
method of cure thereof;
(2) Any litigation or proceeding affecting the Company which
could have a material adverse effect on the business, operations, property,
or financial or other condition of the Company;
(3) A material adverse change known to responsible management
personnel of the Company in the business, operations, property or financial
or other condition of any Company;
(4) A default under the terms of any Indebtedness to which the
Company is a party (whether or not such default gives rise to the right of
the affected lender to accelerate such Indebtedness); and
(6) Any violation of any Requirements of Law or Contractual
Obligations to which the Company may be subject or a party.
5(e) Expenses. Pay all reasonable out-of-pocket costs and expenses
(including fees and disbursements of legal counsel): (1) of the Lender incident
to the preparation, negotiation and administration of the Credit Documents,
including with respect to or in connection with any waiver or amendment thereof
or thereto, (2) of the Lender associated with any periodic audits conducted
pursuant to Paragraph 5(d)(2)(ii) above, and (3) of the Lender incident to the
enforcement of payment of the Obligations, whether by judicial proceedings or
otherwise, including, without limitation, in connection with bankruptcy,
insolvency, liquidations reorganization moratorium or other similar proceedings
involving the Company or a "workout" of the Obligations. The obligations of the
Company under this Paragraph 5(f) shall survive payment of all other
Obligations.
5(f) Credit Documents. Comply with and observe all terms and
conditions of the Credit Documents.
5(g) Insurance. Obtain and maintain insurance with responsible
companies in such amounts and against such risks as are usually carried by
corporations engaged in similar businesses similarly situated, including,
without limitation, errors and omissions coverage and fidelity coverage in form
and substance acceptable to the Lender, and furnish the Lender on request full
information as to all such insurance, and to provide within five (5) days after
receipt, certificates or other documents evidencing the renewal of each such
policy.
5(h) Year 2000 Compatibility. The Company shall take all action
necessary to assure that the Company's computer-based systems are able to
operate and effectively process data including dates on or after January 1,
2000. At the request of the, the Company shall provide the Lender assurance
acceptable to the Lender of the Company's Year 2000 compatibility.
7
<PAGE>
6. Negative Covenants. The Company hereby agrees that, as long as any
Obligations remain unpaid, the Company shall not at any time, directly or
indirectly:
6(a) Consolidation and Merger; Change of Business. Liquidate or
dissolve or enter into any consolidation or merger or enter into any
partnership, joint venture, syndicate or other combination or make any change in
the nature of its business as presently conducted.
7. Events of Default. Upon the occurrence of any of the following events
(an "Event of Default"):
7(a) The Company shall fail to pay principal or interest on the Loan
or any fee payable pursuant to Paragraph 2(i) above when due; or
7(b) Any representation or warranty made or deemed made by the Company
in any Credit Document or in connection with any Credit Document shall be
inaccurate or incomplete in any material respect on or as of the date made or
deemed made; or
7(c) The Company shall fail to maintain its corporate existence or
shall default in the observance or performance of any covenant or agreement
contained in Paragraph 6; or
7(d) Glade M. Knight is no longer serving as Chairman of the Board and
President of the Company; or
7(e) The Company shall fail to observe or perform any other term or
provision contained in the Credit Documents and such failure shall continue for
thirty (30) days; or
7(f) The Company shall default in any payment of principal of or
interest on any Indebtedness in the aggregate principal amount of $100,000 or
more (and without regard for the dollar amount of the defaulted payment), or any
other event shall occur, the effect of which is to permit such Indebtedness to
be declared or otherwise to become due prior to its stated maturity; or
7(g) (1) The Company or the Parent shall commence any case, proceeding
or other action (i) relating to bankruptcy, insolvency, reorganization or relief
of debtors, seeking to have an order for relief entered with respect to the
Company or the Parent, or seeking to adjudicate the Company or the Parent a
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to the Company or the Parent or the debts of either of them, or (ii) seeking
appointment of a receiver, trustee, custodian or other similar official for the
Company or the Parent or for all or any substantial part of the assets of the
Company or the Parent, or the Company or the Parent shall make a general
assignment for the benefit of its creditors; or (2) there shall be commenced
against the Company or the Parent any case, proceeding or other action of a
nature referred to in clause (1) above which (i) results in the entry of an
order for relief or any such adjudication or appointment, or (ii) remains
undismissed, undischarged or unbonded for a period of sixty (60) days; or (3)
there shall be commenced against the Company or the Parent any case, proceeding
8
<PAGE>
or other action seeking issuance of a warrant of attachment, execution,
distraint or similar process against all or substantially all of the assets of
either of them which results in the entry of an order for any such relief which
shall not have been vacated, discharged, stayed, satisfied or bonded pending
appeal within sixty (60) days from the entry thereof; or (4) the Company or the
Parent shall take any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in (other than in connection with a final
settlement), any of the acts set forth in clauses (1), (2) or (3) above; or (5)
the Company or the Parent shall generally not, or shall be unable to, or shall
admit in writing its inability to pay its debts as they become due; or
7(h) One or more judgments or decrees in an aggregate amount in excess
of $100,000 shall be entered against the Company and all such judgments or
decrees shall not have been vacated, discharged, stayed, satisfied or bonded
pending appeal within sixty (60) days from the entry thereof; or
THEN:
(1) Automatically upon the occurrence of an Event of Default
under Paragraph 7(g) above; and
(2) In all other cases, at the option of the Lender;
the principal balance of outstanding Loan and interest accrued but unpaid
thereon shall become immediately due and payable, without demand upon or
presentment to the Company, which are expressly waived by the Company.
8. Miscellaneous Provisions.
8(a) Assignment. The Company may not assign its rights or obligations
under this Agreement without the prior written consent of the Lender. Subject to
the foregoing, all provisions contained in this Agreement or any document or
agreement referred to herein or relating hereto shall inure to the benefit of
the Lender, and its successors and assigns, and shall be binding upon the
Company, and its successors and assigns.
8(b) Amendment. Neither this Agreement nor any of the other Credit
Documents may be amended or terms or provisions hereof or thereof waived unless
such amendment or waiver is in writing and signed by the Lender and the Company.
8(c) Cumulative Rights; No Waiver. The rights, powers and remedies of
the Lender under the Credit Documents are cumulative and in addition to all
rights, powers and remedies provided under any and all agreements among the
Company and the Lender relating hereto, at law, in equity or otherwise. Any
delay or failure by the Lender to exercise any right, power or remedy shall not
constitute a waiver thereof by the Lender, and no single or partial
9
<PAGE>
exercise by the Lender of any right, power or remedy shall preclude other or
further exercise thereof or any exercise of any other rights, powers or
remedies.
8(d) Entire Agreement. This Agreement and the documents and agreements
referred to herein embody the entire agreement and understanding between the
parties hereto and supersede all prior agreements and understandings relating to
the subject matter hereof and thereof.
8(e) Survival. All representations, warranties, covenants and
agreements on the part of the Company contained in the Credit Documents shall
survive the termination of this Agreement and shall be effective until the
Obligations are paid and performed in full or longer as expressly provided
herein.
8(f) Notices. All notices given by any party to the others under the
Credit Documents shall be in writing unless otherwise provided for herein,
delivered personally or by depositing the same in the United States mail,
registered, with postage prepaid, addressed to the party at the address set
forth on Schedule I attached hereto. Any party may change the address to which
notices are to be sent by notice of such change to each other party given as
provided herein. Such notices shall be effective on the date received or, if
mailed, on the third Business Day following the date mailed.
8(g) Governing Law/Waiver of Jury Trial. This Agreement shall be
governed by and construed in accordance with the laws of the State of North
Carolina. TO THE EXTENT PERMITTED BY LAW, THE COMPANY HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN
CONNECTION WITH THE CREDIT DOCUMENTS. THIS PROVISION IS A MATERIAL INDUCEMENT
FOR THE LENDER ENTERING INTO THE CREDIT DOCUMENTS.
8(h) Counterparts. This Agreement and the other Credit Documents may
be executed in any number of counterparts, all of which together shall
constitute one agreement.
8(i) Binding Arbitration. Upon demand of any party hereto, whether
made before or after institution of any judicial proceeding, any dispute, claim
or controversy arising out of, connected with or relating to the Note or any
other Credit Document ("Disputes"), between or among parties to the Note or any
other Credit Document shall be resolved by binding arbitration as provided
herein. Institution of a judicial proceeding by a party does not waive the right
of that party to demand arbitration hereunder. Disputes may include, without
limitation, tort claims, counterclaim, claims brought as class actions, claims
arising from Credit Documents executed in the future, or claims concerning any
aspect of the past, present or future relationships arising out of or connected
with the Credit Documents. Arbitration shall be conducted under and governed by
the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of
the American Arbitration Association and Title 9 of the U.S. Code. All
arbitration hearings shall be conducted in Charlotte, North Carolina. The
expedited procedures set forth in Rule 51, et seq. of the Arbitration Rules
shall be applicable to claims of less than $1,000,000. All applicable
10
<PAGE>
statutes of limitation shall apply to any Dispute. A judgment upon the award may
be entered in any court having jurisdiction. The panel from which all
arbitrators are selected shall be comprised of licensed attorneys. The single
arbitrator selected for expedited procedure shall be a retired judge from the
highest court of general jurisdiction, state or federal, of the state where the
hearing will be conducted. Notwithstanding the foregoing, this paragraph shall
not apply to any hedging arrangement that is a Credit Document.
9. Definitions. For purposes of this Agreement, the terms set forth below
shall have the following meanings:
"Affiliate" shall mean, as to any Person, any other Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with, such Person. "Control" as used herein means the power to direct the
management and policies of such Person.
"Agreement" shall mean this Agreement, as the same may be amended, extended
or replaced from time to time.
"Business Day" shall mean any day other than a Saturday, a Sunday or a day
on which banks in Charlotte, North Carolina are authorized or obligated to close
their regular banking business.
"Company" shall have the meanings given such terms in the introductory
paragraph hereof.
"Contractual Obligation" as to any Person shall mean any provision of any
security issued by such Person or of any agreement, instrument or undertaking to
which such Person is a party or by which it or any of its property is bound.
"Credit Documents" shall mean this Agreement and the Note and each other
document, instrument and agreement executed by the Company in connection
herewith, as any of the same may be amended, extended or replaced from time to
time.
"Eurodollar Rate" shall mean the arithmetic average of the rates at which
deposits in immediately available U.S. dollars in an amount equal to the
aggregate amount of Eurodollar Loans proposed to be subject to such rates having
a maturity approximately equal to six (6) months are offered to or by banks in
the London interbank market, as determined by the Lender in accordance with its
standard practices and calculated by the Lender on each Business Day during the
term of this Agreement, it being understood that the Eurodollar Rate may change
from day to day based on the Lender's determination of the Eurodollar Rate as
provided above, said changes to be effective as of the date of determination of
the Eurodollar Rate by the Lender.
"Event of Default" shall have the meaning set forth in Paragraph 7 above.
"GAAP" shall mean generally accepted accounting principles in the United
States of America in effect from time to time.
11
<PAGE>
"Governmental Authority" shall mean any nation or government, any state or
other political subdivision thereof, or any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Guarantor" shall mean Glade M. Knight.
"Guaranty" shall mean the Guaranty of even date herewith executed by
Guarantor for the benefit of Lender as same may be amended from time to time.
"Indebtedness" of any Person shall mean all items of indebtedness which, in
accordance with GAAP and practices thereof, would be included in determining
liabilities as shown on the liability side of a statement of condition of such
Person as of the date as of which indebtedness is to be determined, including:
without limitation, all obligations for money borrowed, all amounts for which
such Person may be obligated under gestation or other repurchase facilities, and
shall also include all indebtedness and liabilities of others assumed or
guaranteed by such Person or in respect of which such Person is secondarily or
contingently liable (other than by endorsement of instruments in the course of
collection) whether by reason of any agreement to acquire such indebtedness or
to supply or advance sums or otherwise.
"Lender" shall have the meaning given such term in the introductory
paragraph hereof.
"LIBOR-Based Rate" shall mean a rate of interest equal to the Eurodollar
Rate plus one and one-half percent (1.50%) per annum.
"Lien" shall mean any security interest, mortgage, pledge, lien, claim on
property, charge or encumbrance (including any conditional sale or other title
retention agreement), any lease in the nature thereof, and the filing of or
agreement to give any financing statement under the Uniform Commercial Code of
any jurisdiction.
"Loan" shall have the meaning given such term in Paragraph 1(a) above.
"Maturity Date" shall mean October 20, 1999, as such date may be extended
from time to time in writing by the Lender, in its sole discretion.
"Note" shall mean have the meaning given such term in Paragraph 2(b)
hereof.
"Obligations" shall mean any and all debts, obligations and liabilities of
the Company to the Lender (whether now existing or hereafter arising, voluntary
or involuntary, whether or not jointly owed with others, direct or indirect,
absolute or contingent, liquidated or unliquidated, and whether or not from time
to time decreased or extinguished and later increased, created or incurred),
arising out of or related to the Credit Documents.
"Parent" shall mean Apple Suites Advisors, Inc., a Virginia Corporation.
"Person" shall mean any corporation, natural person, firm, joint venture,
partnerships, trust, unincorporated organization or Governmental Authority.
12
<PAGE>
"Potential Default" shall mean an event which but for the lapse of time or
the giving of notice, or both, would constitute an Event of Default.
"Requirements of Law" shall mean, as to any Person, the Articles or
Certificate of Incorporation and Bylaws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation, or a final
and binding determination of an arbitrator or a determination of a court or
other Governmental Authority, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its property is
subject.
"Subsidiary" shall mean any corporation, partnership or joint venture more
than fifty percent (50%) of the stock or other ownership interest of which
having by the terms thereof ordinary voting power to elect the board of
directors, managers or trustees of such corporation, partnership or joint
venture (irrespective of whether or not at the time stock of any other class or
classes of such corporation, partnership or joint venture shall have or might
have voting power by reason of the happening of any contingency) shall, at the
time as of which any determination is being made, be owned, either directly or
through Subsidiaries.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and sealed as of the day and year first above written.
APPLE SUITES, INC., a Virginia corporation
By: /s/ Glade M. Knight
---------------------------------------
Name: Glade M. Knight
-------------------------------------
Title: President
------------------------------------
FIRST UNION NATIONAL BANK, a national
banking association
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
13
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
------------------------------
Schedule I Schedule of Addresses
Exhibit A Form of Promissory Note
<PAGE>
Schedule of Addresses
LENDER COMPANY
- ------ -------
First Union National Bank Apple Suites, Inc.
One First Union Center, DC-6 306 East Main Street
301 South College Street Richmond, Virginia 23219
Charlotte, North Carolina 28288-0166 Attention: S.J. Olander, Jr.
Attention: John Schissel Telephone No.: (804) 643-1761
Telephone No.: (704) 383-1967 Telecopy No.: (804) 782-9302
Telecopy No.: (704) 383-6205
2
EXHIBIT 4.2
PROMISSORY NOTE
---------------
April 20, 1999
FOR VALUE RECEIVED, APPLE SUITES, INC., a Virginia corporation the
"Company") hereby unconditionally promises to pay to the order of FIRST UNION
NATIONAL BANK, a national banking association (the "Lender"), at the office of
FIRST UNION NATIONAL BANK, located at One First Union Center, TW-06, 301 South
College Street, Charlotte, North Carolina 28288-0166, in lawful money of the
United States and in immediately available funds, on the dates required under
that certain Credit Agreement dated as of April 20, 1999 by and between the
Company and the Lender (as the same may be amended, extended or replaced from
time to time, the "Agreement" and with the capitalized terms not otherwise
defined herein used with the meanings given such terms in the Agreement), the
principal amount of the Loan made under the Agreement.
The Company further agrees to pay interest in like money and funds at the
office of the Lender referred to above, on the unpaid principal balance hereof
from the date advanced until paid in full on the dates and at the applicable
rates set forth in the Agreement. The holder of this Note is hereby authorized
to record the date and amount of each payment of principal and interest, and
applicable interest rates and other information with respect thereto, on the
schedules annexed to and constituting a part of this Note (or by any analogous
method the holder hereof may elect consistent with its customary practices) and
any such recordation shall, absent manifest error, constitute prima facie
evidence of the accuracy of the information so recorded; provided, however, that
the failure to make a notation or the inaccuracy of any notation shall not limit
or otherwise affect the obligations of the Company under the Credit Documents.
This Note is the Note referred to in, and is entitled to all the benefits
of, the Agreement. Reference is hereby made to the Agreement for rights and
obligations of payment and prepayment, Events of Default and the rights of
acceleration of the maturity hereof upon the occurrence of an Event of Default.
<PAGE>
This Note shall be governed by, and construed in accordance with, the laws
of the State of North Carolina, and is being executed by the duly authorized
officers of the Company as of the day and year first above written.
APPLE SUITES, INC.,
a Virginia corporation
By: /s/ Glade M. Knight
---------------------------------------
Name: Glade M. Knight
-------------------------------------
Title: President
------------------------------------
2
EXHIBIT 4.3
GUARANTY
THIS GUARANTY (the "Guaranty") is made and dated as of the 20th day of
April, 1999 by GLADE M. KNIGHT ("Guarantor").
RECITALS
A. Pursuant to that certain Credit Agreement of even dated herewith
between the Company and First Union National Bank (the "Lender"), (as amended,
extended and replaced from time to time, the "Credit Agreement," and with
capitalized terms not otherwise defined herein used with the same meanings as in
the Credit Agreement) the Lender agreed to extend credit to APPLE SUITES, INC.,
a Virginia corporation ("Company"), on the terms and subject to the conditions
set forth therein.
B. As a condition precedent to the effectiveness of the Credit Documents
and pursuant to the terms of and as specifically required as a condition to the
effectiveness of the Credit Agreement, the Guarantor is required to execute and
deliver to the Lender this Guaranty.
C. The Guarantor is the sole shareholder of Parent, which is the sole
shareholder of the Company and thus will derive material benefit from the
extension of credit by the Lender to the Company pursuant to the Credit
Agreement.
NOW, THEREFORE, in consideration of the above Recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Guarantor hereby agrees as follows:
AGREEMENT
1. Guarantor hereby irrevocably and unconditionally guarantees the payment
when due, upon maturity, acceleration or otherwise, of the Obligations, whether
heretofore, now, or hereafter made, incurred or created, whether voluntary or
involuntary and however arising, absolute or contingent, liquidated or
unliquidated, determined or undetermined, whether or not such Obligations are
from time to time reduced, or extinguished and thereafter increased or incurred,
whether Company may be liable individually or jointly with others, whether or
not recovery upon such Obligations may be or hereafter become barred by any
statute of limitations, and whether or not such Obligations may be or hereafter
become otherwise invalid or unenforceable. This Guaranty is a guaranty of
payment and not of collection.
2. Guarantor irrevocably and unconditionally guarantees the payment of the
Obligations whether or not due or payable by Company upon: (a) the dissolution,
insolvency or business failure of, or any assignment for benefit of creditors
by, or commencement of any bankruptcy, reorganization, arrangement, moratorium
or other debtor relief proceedings by or against, Company or Guarantor, or (b)
the appointment of a receiver for, or the attachment, restraint of or making or
levying of any order of court or legal process affecting, the property of
<PAGE>
Company or Guarantor, and unconditionally promises to pay such Obligations to
Lender, or order, on demand, in lawful money of the United States.
3. The liability of Guarantor hereunder is exclusive and independent of
any security for or other guaranty of the Obligations, whether executed by
Guarantor or by any other party, and the liability of Guarantor hereunder is not
affected or impaired by (a) any direction of application of payment by Company
or by any other party, or (b) any other guaranty, undertaking or maximum
liability of Guarantor or of any other party as to the Obligations, or (c) any
payment on or in reduction of any such other guaranty or undertaking, or (d) any
revocation or release of any obligations of any other guarantor of the
Guaranteed Obligations, or (e) any payment made to Lender on the Obligations
which any of such Persons repay to Company pursuant to court order in any
bankruptcy, reorganization, arrangement, moratorium or other debtor relief
proceeding, and Guarantor waives any right to the deferral or modification of
Guarantor's obligations hereunder by reason of any such proceeding.
4. (a) The obligations of Guarantor hereunder are independent of the
Obligations of Company, and a separate action or actions may be brought and
prosecuted against Guarantor whether or not action is brought against Company
and whether or not Company be joined in any such action or actions. Guarantor
waives, to the fullest extent permitted by law, the benefit of any statute of
limitations affecting its liability hereunder or the enforcement thereof. Any
payment by Company or other circumstance which operates to toll any statute of
limitations as to Company shall operate to toll the statute of limitations as to
Guarantor.
(b) All payments made by Guarantor under this Guaranty shall be made
without set-off or counterclaim and free and clear of and without deductions for
any present or future taxes, fees, charges, withholdings or conditions of any
nature ("Taxes"). Guarantor shall pay any such Taxes, including Taxes on any
amounts so paid, and will promptly furnish Lender with copies of any tax
receipts or such other evidence of payment as Lender may require. However,
Guarantor shall not be liable for any income tax liability arising under the
Loan.
5. Guarantor authorizes Lender (whether or not after termination of this
Guaranty), without notice or demand (except as shall be required by applicable
statute and cannot be waived), and without affecting or impairing its liability
hereunder, from time to time to (a) renew, compromise, extend, increase,
accelerate or otherwise change the time for payment of, or otherwise change the
terms of, the Obligations or any part thereof, including increase or decrease of
the rate of interest thereon; (b) take and hold security for the payment of this
Guaranty or the Obligations and exchange, enforce, waive and release any such
security; (c) apply such security and direct the order or manner of sale thereof
as Lender, in its discretion may determine; and (d) release or substitute any
one or more endorsers, guarantors, Company or other obligors. Lender may without
notice to or the further consent of Company or Guarantor assign this Guaranty in
whole or in part to any person acquiring an interest in the Obligations.
6. It is not necessary for Lender to inquire into the capacity or power of
Company or the officers acting or purporting to act on its behalf, and
Obligations made or created in reliance upon the professed exercise of such
powers shall be guaranteed hereunder.
2
<PAGE>
7. Guarantor waives any right to require Lender to (a) proceed against
Company or any other party; (b) proceed against or exhaust any security held
from Company; or (c) pursue any other remedy in Lender's power whatsoever. To
this end, and without limiting the generality of the foregoing, Guarantor
expressly waives any rights Guarantor might otherwise have had under the
provisions of North Carolina General Statutes ss.26-7 et seq.. Guarantor waives
any personal defense based on or arising out of any personal defense of Company
other than payment in full of the Obligations, including, without limitation,
any defense based on or arising out of the disability of Company, or the
invalidity or unenforceability of the Obligations or any part thereof from any
cause, or the cessation from any cause of the liability of Company other than
payment in full of the Obligations. Lender may, at its election, foreclose on
any security held for the Guaranteed Obligations by one or more judicial or
nonjudicial sales, or exercise any other right or remedy Lender may have against
Company, or any security, without affecting or impairing in any way the
liability of Guarantor hereunder except to the extent the Obligations have been
paid. Guarantor waives any defense arising out of any such election, even though
such election operates to impair or extinguish any right of reimbursement or
subrogation or other right or remedy of Guarantor against Company or any
security. Guarantor hereby waives, until such time as all of his obligations
under this Guaranty have been performed, discharged or terminated, and all
Obligations under the Loan have been performed, discharged or terminated, any
claim or other rights which Guarantor may now have or may hereafter acquire
against the Company or any other guarantor of all or any of the Guaranteed
Obligations that arise from the existence or performance of the Guarantor's
obligations under this Guaranty or any other of the Credit Documents (as such
claims and rights being referred to as the "Guarantor's Conditional Rights"),
including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution, or indemnification, or any right to participate in
any claim or remedy which the Lender has against the Company or any collateral
which the Lender now has or hereafter acquire for the Obligations, whether or
not such claim, remedy or right arises in equity or under contract, statute or
common law, by any payment made hereunder or otherwise, including, without
limitation, the right to take or receive from the Company, directly or
indirectly, in cash or other property or setoff or in any other manner, payment
or security on account of such claim or other rights. If, notwithstanding the
foregoing provisions, any amount shall be paid to the Guarantor on account of
the Guarantor's Conditional Rights and either (a) such amount is paid to the
Guarantor at any time when the Obligations shall not have been paid or performed
in full, or (b) regardless of when such amount is paid to the Guarantor any
payment made by Company to the Lender is at any time determined to be a
preferential payment, then such amount paid to the Guarantor shall be deemed to
be held in trust for the benefit of the Lender and shall forthwith be paid to
the Lender to be credited and applied upon the Obligations, whether matured or
unmatured, in such order and manner as the Lender shall determine. To the extent
that any of the provisions of this Paragraph shall not be enforceable, the
Guarantor agrees that until such time as the Obligations have been paid and
performed in full and the period of time has expired during which any payment
made by the Company or the Guarantor to the Lender may be determined to be a
preferential payment, the Guarantor's Conditional Rights to the extent not
validly waived shall be subordinate to the Lender's right to full payment and
performance of the Obligations and the Guarantor shall not seek to enforce the
Guarantor's Conditional Rights during such period. Guarantor waives all
presentments, demands for performance, protests and notices, including, without
limitation, notices of nonperformance, notices of protest, notices of dishonor,
notices of acceptance of this Guaranty, and notices of the
3
<PAGE>
existence, creation or incurring of new or additional Obligations. Guarantor
assumes all responsibility for being and keeping itself informed of Company's
financial condition and assets, and of all other circumstances bearing upon the
risk of nonpayment of the Obligations and the nature, scope and extent of the
risks which Guarantor assumes and incurs hereunder, and agrees that Lender shall
have no duty to advise Guarantor of information known to any of them regarding
such circumstances or risks.
8. In addition to the Obligations, Guarantor agrees to pay reasonable
attorneys' fees and all other costs and expenses incurred by Lender in enforcing
this Guaranty in any action or proceeding arising out of, or relating to, this
Guaranty. This Guaranty and the liability and obligations of Guarantor hereunder
are binding upon Guarantor and his successors and assigns, and this Guaranty
inures to the benefit of and is enforceable by Lender and its successors,
transferees, and assigns.
9. No right or power of Lender hereunder shall be deemed to have been
waived by any act or conduct on the part of the Lender, or by any neglect to
exercise such right or power, or by any delay in so doing; and every right or
power shall continue in full force and effect until specifically waived or
released by an instrument in writing executed by Lender.
10. Guarantor agrees to execute any and all further documents, instruments
and agreements as Lender from time to time reasonably requests to evidence
Guarantor's obligations hereunder.
11. Guarantor hereby represents and warrants and agrees that:
(a) Guarantor: (1) is in compliance with all Requirements of Law and
Contractual Obligations to the extent that failure to so comply could have a
material adverse effect on Guarantor or Company or their property or business or
on the ability of the Company to pay or perform the Obligations or the ability
of Guarantor to pay or perform Guarantor's obligations hereunder, and (2) has
reviewed and approved the Credit Documents.
(b) The execution, delivery and performance by Guarantor of any Credit
Documents to which Guarantor is a party will not violate any Requirement of Law
or any Contractual Obligation of Guarantor to the extent that failure to comply
could have a material adverse effect on Guarantor or his property or business or
on the ability to pay or perform the Obligations or his obligations hereunder.
(c) No litigation, investigation or proceeding of or before any court,
arbitrator or Governmental Authority is pending or, to the knowledge of the
Guarantor, threatened by or against the Guarantor or against any of the
Guarantor's properties or revenues which is likely to be adversely determined
and which, if adversely determined, is likely to have a material adverse effect
on the business, operations, property or financial or other condition of the
Guarantor or the Company.
(d) The Guarantor and the Company have filed or caused to be filed all
tax returns that are required to be filed and have paid all taxes shown to be
due and payable on said
4
<PAGE>
returns or on any assessments made against them or any of their property other
than taxes which are being contested in good faith by appropriate proceedings
and as to which the Guarantor or the Company has established adequate reserves
in conformity with GAAP.
(e) No consent, approval, authorization of, or registration, declaration
or filing with, any Governmental Authority is required on the part of the
Guarantor in connection with the execution and delivery of the Credit Documents
to which Guarantor is a party or the performance of or compliance with the
terms, provisions and conditions hereof or thereof.
12. Guarantor hereby agrees to deliver to the Lender, within ninety (90)
days after the last day of each fiscal year of the Company, personal statements
of income and cash flow for such year and personal balance sheets as of the end
of such year, presented fairly in accordance with GAAP.
13. This Guaranty shall be deemed to be made under and shall be governed
by the laws of the State of North Carolina.
14. If any of the provisions of this Guaranty shall contravene or be held
invalid under the laws of any jurisdiction, this Guaranty shall be construed as
if not containing those provisions and the rights and obligations of the parties
hereto shall be construed and enforced accordingly.
Executed and sealed as of the day and year first above written.
/s/ GLADE M. KNIGHT [SEAL]
-------------------------
GLADE M. KNIGHT
5
EXHIBIT 5
____________, 1999
Board of Directors
Apple Suites, Inc.
9 North Third Street
Richmond, Virginia 23219
Dear Sirs:
We have acted as counsel to Apple Suites, Inc. (the "Company"), a Virginia
corporation, in connection with the preparation of the registration statement on
Form S-11 to which this opinion is an exhibit (the "Registration Statement"),
which is being filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act"), for the registration under the
Act of 30,166,666.67 Common Shares of the Company. Terms not otherwise defined
herein shall have the meanings assigned to them in the Registration Statement.
We have reviewed originals or copies of (i) the Articles of Incorporation,
Bylaws and other corporate documents of the Company, (ii) certain resolutions of
the Board of Directors of the Company, and (iii) the Registration Statement and
the prospectus included therein (the "Prospectus"). In addition, we have
reviewed such other documents and have made such legal and factual inquiries as
we have deemed necessary or advisable for purposes of rendering the opinions set
forth below.
Based upon and subject to the foregoing we are of the opinion that:
1. The Company is duly organized and validly existing under the laws
of the Commonwealth of Virginia; and
2. The Common Shares to be registered under the Registration Statement
have been duly authorized and, when issued and paid for as described in the
Registration Statement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the reference to our firm under the captions "Legal
Matters" and "Federal Income Tax Considerations" in the Registration Statement
and to the filing of this opinion as an exhibit to the Registration Statement.
In giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Act, or the rules and regulations
promulgated thereunder by the Securities and Exchange Commission.
Very truly yours,
EXHIBIT 8
_______________, 1999
Board of Directors
Apple Suites, Inc.
9 North Third Street
Richmond, VA 23219
Dear Sirs:
We have acted as counsel to Apple Suites, Inc. (the "Company"), a Virginia
corporation, in connection with the preparation of the registration statement on
Form S-11 to which this opinion is attached as an exhibit (the "Registration
Statement"). The Company is filing the Registration Statement with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), to register under the Act 30,166,666.67 Common Shares of the
Company. Terms not otherwise defined herein shall have the meanings assigned to
them in the Registration Statement.
We have reviewed originals or copies of (i) the Articles of Incorporation,
Bylaws and other corporate documents of the Company, (ii) certain resolutions of
the Board of Directors of the Company, (iii) the Registration Statement and the
prospectus included therein (the "Prospectus"), and (iv) the form of Advisory
Agreement between the Company and Apple Suites, Inc., a Virginia corporation
(the "Advisor"), included in the Registration Statement as an exhibit. In
addition, we have reviewed such other documents and have made such legal and
factual inquiries as we have deemed necessary or advisable for purposes of
rendering the opinions set forth below.
We understand and assume that the Company will duly elect to be treated as
a real estate investment trust ("REIT") for federal income tax purposes
commencing with its taxable year ended December 31, 1999. The Company's initial
and continuing qualification as a REIT depends upon the satisfaction of various
requirements under the Internal Revenue Code of 1986, as amended (the "Code").
The satisfaction of those requirements generally will be within the control of
the Company's Board of Directors and the Advisor, which has been engaged to
conduct the affairs of the Company under the supervision of the Board of
Directors. The Advisor and appropriate officers of the Company have made the
following representations to us with respect to the operation of the Company:
<PAGE>
Board of Directors
__________, 1999
Page 2
1. The Company will operate in compliance with the Articles of
Incorporation and the Bylaws;
2. The Company will not operate so that it becomes either (i) a financial
institution referred to in Section 582(c)(5) of the Code, or (ii) an insurance
company to which subchapter L of the Code applies;
3. The Company will have at least 100 Shareholders for at least 335 days of
each full taxable year, or proportionate part of any shorter taxable year, after
its first taxable year and will not be closely held as defined in Section 856(h)
of the Code;
4. The Company will use a calendar year for federal income tax purposes;
5. The Company will elect to be treated as a REIT under the Code, and will
not elect to be treated as an S Corporation, a real estate mortgage investment
conduit, a regulated investment company, or any entity other than a REIT for
federal income tax purposes;
6. The Company will not revoke its election to be treated as a REIT and
will satisfy all relevant filing and other administrative requirements
established by the Internal Revenue Service that must be met to elect and to
maintain REIT status;
7. The Company will not have, as of the close of any taxable year, any
earnings and profits accumulated in any year during which the Company was not
treated as a REIT under the Code;
8. The Company will conduct its operations as described in the Registration
Statement (including the Prospectus), will operate in a manner so as to qualify
for taxation as a REIT under the Code, and intends to continue to operate in
such a manner;
9. The Company will invest in assets that, when acquired by the Company,
will cause the Company to satisfy (i) the asset test described in the
Prospectus, and (ii) the sources of income tests described in the Prospectus;
10. The Company will not hold any assets for sale to customers in the
ordinary course of a trade or business and will attempt to comply with the terms
of safe-harbor provisions in the Code prescribing when asset sales by a REIT
will not be characterized as prohibited transactions;
11. The Company expects that substantially all of the operating gross
income from the properties of the Company will be considered "rents from real
property" within the meaning of Section 856(d) of the Code;
12. The Company will comply with the distribution requirements of the Code
applicable to REITs;
<PAGE>
Board of Directors
__________, 1999
Page 3
13. The Company will comply for each taxable year with the Treasury
regulations prescribed for the purpose of ascertaining the actual ownership of
outstanding Shares of the Company; and
14. The Company anticipates that it will be a "domestically controlled
REIT," within the meaning of Section 897(h) of the Code.
Based on the foregoing documents, representations, and assumptions being,
and continuing to be, accurate, we are of the opinion that:
1. The Company's proposed method of operation should enable it to meet the
requirements for qualification as a REIT under the Code;
2. Provided that a Shareholder which is an Exempt Organization does not
incur any "acquisition indebtedness" as defined in Section 514(c) of the Code in
connection with its acquisition of Shares, dividends paid by the Company to such
Shareholder will not constitute unrelated business taxable income under Section
512 of the Code even if the Company owns "debt-financed property" as that term
is defined in Section 514(b) of the Code; and
3. The statements and legal conclusions contained in the Registration
Statement under the caption "Federal Income Tax Considerations" describe the
material federal income tax aspects of the offering made by the Registration
Statement applicable to the Company and the Shareholders, are correct in all
material respects, and the discussion thereunder does not omit any material
provision with respect to the matters covered.
With respect to our opinion contained in paragraph 1 above, you should note
that qualification of the Company as a REIT will depend, in part, upon the
Company's ability, through its actual operations, to meet the qualification
tests as described in the Prospectus.
The foregoing opinions are based solely on the provisions of the Code, the
Treasury regulations promulgated thereunder and the judicial and administrative
rulings, pronouncements and decisions now in effect, all of which are subject to
change, which change may be retroactively applied, or possible differing
interpretations that may affect the conclusions stated herein. To the extent
this opinion relies upon recent tax legislation, and recently promulgated
Treasury regulations, no assurance can be given as to the interpretations of
such recent legislation that will be reflected in applicable Internal Revenue
Service rulings and future Treasury regulations, which could be applied
retroactively. Further, this opinion does not purport to deal with any aspects
of state law that may affect particular investors nor with certain types of
investors subject to special treatment under the federal income tax laws.
<PAGE>
Board of Directors
__________, 1999
Page 4
We hereby consent to the reference to our firm under the captions "Federal
Income Tax Considerations" and "Legal Matters" in the Registration Statement and
to the filing of this opinion as an exhibit to the Registration Statement. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Act or the rules and regulations
promulgated thereunder by the Securities and Exchange Commission.
Very truly yours,
Exhibit 10.1
ADVISORY AGREEMENT
between
APPLE SUITES, INC.
and
APPLE SUITES ADVISORS, INC.
<PAGE>
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT, dated as of , 1999, is between APPLE
SUITES, INC., a Virginia corporation (the "Company"), and APPLE SUITES ADVISORS,
INC., a Virginia corporation (the "Advisor").
RECITALS
A. The purpose of the Company is to invest primarily in corporate apartment
and extended-stay hotel properties in selected metropolitan areas of the United
States and, to a lesser extent, in certain other permitted investments described
in the Prospectus (as hereinafter defined). The Company intends to qualify as a
real estate investment trust pursuant to Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended.
B. The Company desires to engage the Advisor to provide information,
advice, assistance and facilities to the Company and to have the Advisor
undertake the duties and responsibilities hereinafter set forth, all subject to
the supervision of the Company's Board of Directors, on the terms and conditions
set forth herein. In consideration therefor, the Company desires to pay the
Advisor certain fees as herein set forth.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, the parties agree as follows:
1. Definitions. For purposes of this Agreement, the following terms shall
have the meanings set forth below.
(a) "Affiliate" means (i) any Person directly or indirectly
controlling, controlled by or under common control with another Person,
(ii) any Person owning or controlling 10% or more of the outstanding voting
securities or beneficial interests of such other Person, (iii) any officer,
director, trustee or general partner of such Person and (iv) if such other
Person is an officer, director, trustee or partner of another entity, then
the entity for which that Person acts in any such capacity. "Affiliated"
means being an Affiliate of a specified Person.
(b) "Articles of Incorporation" means the Company's Articles of
Incorporation filed with the Virginia State Corporation Commission,
including all amendments, restatements or modifications thereof.
(c) "Asset Management Fee" means the fee payable to the Advisor for
its services hereunder. Such fee will be paid pursuant and subject to
Section 11 of this Agreement.
<PAGE>
(d) "Average Invested Assets" for any period means the average of the
aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate, before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month
during such period.
(e) "Board of Directors" means the Company's Board of Directors as of
any particular time.
(f) "Bylaws" means the Company's Bylaws, including all amendments,
restatements or modifications thereof.
(g) "Calendar Year" means the year ended December 31st and any portion
thereof treated by the Internal Revenue Service as a reporting period for
the Company.
(h) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, including successor statutes thereto.
(i) "Directors" means, as of any particular time, the directors of the
Company holding office at such time.
(j) "Funds from Operation" means net income (computed in accordance
with generally accepted accounting principles) excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation of real
property, and after adjustments for significant non-recurring items and
unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures will be calculated to
reflect funds from operation on the same basis.
(k) "Independent Director" means a Director of the Company who is not
Affiliated, directly or indirectly, with the Advisor, whether by ownership
of, ownership interest in, employment by, any material business or
professional relationship with, or serving as an officer or director of,
the Advisor, or an Affiliated business entity of the Advisor (other than as
an Independent Director of up to three other real estate investment trusts
advised by the Advisor or an Affiliate of the Advisor). An Independent
Director may perform no other services for the Company, except as a
Director. Notwithstanding anything to the contrary herein, any member of a
law firm whose only material business or professional relationship with the
Company, the Advisor and their Affiliates is as legal counsel to any of
such entities shall constitute an Independent Director (unless such person
serves as a director for more than three real estate investment trusts
organized by the Advisor and its
2
<PAGE>
Affiliates). An "indirect" affiliation shall be deemed to refer to
circumstances in which a member of the "immediate family" of a Director is
Affiliated with the Advisor, and a person's "immediate family" shall mean
such person's spouse, parents, children, siblings, mother and
father-in-law, sons and daughters-in-law and brothers and sisters-in-law.
(l) "Net Income" for any period means the total revenues of the
Company for such period, less expenses applicable to such period other than
additions to reserves for depreciation or bad debts or other similar
non-cash reserves. "Net Income," for purposes of calculating Operating
Expenses in Section 15 of this Agreement, does not include the gain from
the sale of the Company's assets.
(m) "Offering" means the public offering of the Company's Common
Shares.
(n) "Operating Expenses" means all operating, general and
administrative expenses of the Company as determined under generally
accepted accounting principles (including regular compensation payable to
the Advisor), excluding, however, the following:
(i) expenses of raising capital;
(ii) interest payments;
(iii) taxes;
(iv) non-cash expenditures, such as depreciation, amortization
and bad debt reserves;
(v) incentive fees paid to the Advisor, if any; and
(vi) costs related directly to asset acquisition, operation and
disposition.
(o) "Organizational and Offering Expenses" means all expenses incurred
in connection with the formation and registration of the Company and in
qualifying and marketing the Shares under applicable federal and state law,
and any other expenses actually incurred and directly related to the
qualification, registration, offer and sale of the Shares, including such
expenses as (i) all marketing expenses and payments made to broker-dealers
as compensation or reimbursement for all costs of reviewing the Offering,
including due diligence investigations and fees and expenses of their
attorneys, accountants and other experts; (ii) registration fees, filing
fees and taxes; (iii) the costs of printing, amending, supplementing and
distributing the
3
<PAGE>
registration statement and Prospectus; (iv) the costs of obtaining
regulatory clearances of, and printing and distributing, sales materials
used in connection with the offer and sale of the Shares; (v) the costs
related to investor and broker-dealer sales meetings concerning the
Offering; and (vi) accounting and legal fees incurred in connection with
any of the foregoing.
(p) "Person" includes an individual, corporation, partnership, joint
venture, association, company, trust, bank or other entity, or government
and any agency and political subdivision of a government.
(q) "Property" or "Properties" means partial or entire equity
interests, including equity participation interests such as general
partnership interests and joint venture interests, owned by the Company in
real property as described in the Prospectus.
(r) "Prospectus" has the meaning given to that term by Section 2(10)
of the Securities Act of 1933, as amended, and as used herein, the term
means the Prospectus of the Company pursuant to which the Shares are
offered to the public.
(s) "Return Ratio" means, for any period, the ratio of Funds from
Operation to Total Contributions.
(t) "Shares" or "Common Shares" means the Common Shares of the
Company, no par value.
(u) "Shareholders" means the holders of record of the Company's Common
Shares.
(v) "Total Contributions" means the gross offering proceeds which have
been received by the Company from time to time from the sale or sales of
the Shares. Total Contributions shall be calculated to reflect the average
of the daily amounts during the period in question of the gross offering
proceeds which have been received by the Company from time to time from the
sales of Shares, to extent such Shares are issued and such sales have
actually been closed.
2. Duties of the Advisor. Subject to the terms of the Articles of
Incorporation, the Bylaws, and the supervision of the Board of Directors, the
Advisor, at its own cost and expense, unless otherwise set forth herein, on
behalf of the Company, shall:
(a) serve as the Company's investment advisor and consultant in
connection with policy and investment decisions to be made by the Board of
Directors, furnish reports to the Board of Directors, and provide research,
4
<PAGE>
economic and statistical data in connection with the acquisition,
financing, refinancing, holding, leasing and disposition of Properties and
other investments of the Company;
(b) administer the day-to-day operations of the Company and perform or
supervise the various administrative functions reasonably necessary for the
management of the Company;
(c) investigate, select and, on behalf of the Company, engage and
conduct business with (including, but not limited to, entering into
contracts in the name of the Advisor or the Company) consultants,
accountants, correspondents, lenders, servicers, technical advisors,
attorneys, brokers, underwriters, corporate fiduciaries, escrow agents,
depositaries, custodians, agents for collection, insurers, insurance
agents, banks, builders, developers, property owners, mortgagors, and other
mortgage and investment participants, any and all agents for any of the
foregoing, including Affiliates of the Advisor, and Persons acting in any
other capacity deemed by the Board of Directors necessary or desirable for
the performance of any of the foregoing services;
(d) act as attorney-in-fact or agent in acquiring, financing,
refinancing, leasing and disposing of Properties and other investments, in
disbursing and collecting funds of the Company, in paying the debts and
fulfilling the obligations of the Company and in handling, prosecuting and
settling any claims of the Company, including the foreclosure or other
enforcement of any mortgage or other lien securing Properties or other
investments, and exercise its own discretion in doing so; provided that any
fees and costs payable to independent Persons incurred by the Advisor in
connection with the foregoing shall be the responsibility of the Company;
(e) negotiate on behalf of the Company with banks or other lenders for
loans to be made to the Company, and negotiate on behalf of the Company
with investment banking firms and broker-dealers or negotiate private sales
of the securities of the Company or obtain loans for the Company, but in no
event in such a way so that the Advisor shall be acting as broker-dealer or
underwriter; and provided, further, that any fees and costs payable to
third parties incurred by the Advisor in connection with the foregoing
shall be the responsibility of the Company;
5
<PAGE>
(f) invest or reinvest any money of the Company, as directed by the
Board of Directors or subject to such discretionary powers as the Board of
Directors may from time to time delegate;
(g) if requested by the Company, provide appraisal reports on any real
property that is, or is proposed to be, acquired by the Company for
investment;
(h) at any time reasonably requested by the Board of Directors (but
not more than monthly) make reports of its performance of services to the
Company;
(i) communicate on behalf of the Company with the Shareholders of the
Company as required to satisfy the continuous reporting and other
requirements of any governmental bodies or agencies to the Shareholders and
third parties and to maintain effective relations with the Shareholders;
(j) counsel the Company in connection with policy decisions to be made
by the Board of Directors;
(k) provide the executive and administrative personnel, office space
and services required in rendering the foregoing services to the Company;
and
(l) perform such other services as may be required from time to time
for management and other activities relating to the assets of the Company
as the Advisor shall deem appropriate under the particular circumstances.
3. Commitments. In order to meet the investment requirements of the
Company, but only as determined by the Board of Directors, or any authorized
committee thereof, from time to time, the Advisor agrees at the direction of the
Board of Directors or any such committee to issue on behalf of the Company
commitments on such terms as are established by the Board of Directors or any
such committee, for the acquiring of Properties or other assets.
4. Duties of the Board of Directors. In order for the Advisor to fulfill
its duties, the Board of Directors shall, to the extent it deems proper, provide
the Advisor with full information concerning the Company, its capitalization and
investment policies and the intentions of the Board of Directors with respect to
future investments. The Company shall furnish the Advisor with a copy of all
audited financial statements, a signed copy of each report prepared by
independent accountants, and such other information with regard to its affairs
as the Advisor may from time to time reasonably request.
6
<PAGE>
5. Advice. In addition to the services described in Section 2 above, the
Advisor shall consult with the Board of Directors and the officers of the
Company and shall furnish them with advice and recommendations with respect to
the acquiring of Properties or commitments therefor, or other investments of, or
investments considered by, the Company, and shall furnish advice and
recommendations with respect to other aspects of the business and affairs of the
Company. In order to facilitate the investment of the funds of the Company and
enable it to avail itself of investment opportunities as they arise, the Advisor
may from time to time be granted, but is not hereby granted, the power and
authority to make and dispose of investments and to make and terminate
commitments for investments, on behalf of and in the name of the Company,
without further or express authority from the Board of Directors; provided,
however that the Board of Directors shall have the power to revoke, suspend,
modify or limit such power and authority at any time or from time to time, but
not retroactively. Unless otherwise notified by the Board of Directors, a
representative of the Advisor shall attend all regular and special meetings of
the Board of Directors, and the Board of Directors shall notify the Advisor of
such meetings.
The Advisor shall first present to the Company all investment opportunities
which are suitable for the Company, because such investment opportunities are
within the investment objectives and policies of the Company, before the Advisor
offers such opportunities to any other Person or takes for its own account. It
is expressly understood, however, that the primary investments of the Company
are expected to be existing residential apartment communities in Texas and the
southwestern region of the United States.
6. Bank Accounts. The Advisor may establish and maintain one or more bank
accounts in the name of the Company and may collect and deposit into any such
account or accounts, and disburse from any such account or accounts, any money
on behalf of the Company, under such terms and conditions as the Board of
Directors may approve, provided that all such accounts shall be maintained in
such fashion as to make clear that the funds therein are the property of the
Company and not of the Advisor. The Advisor shall from time to time render
appropriate accountings of such collections and payments to the Board of
Directors and to the auditors of the Company.
7. Investment Undertakings. The Advisor shall use its best efforts to
assure that (i) any mortgage securing a Property of the Company shall be and
remain a valid lien upon the mortgaged property according to its terms; (ii) the
title to any Property is insured by appropriate policies of title insurance;
(iii) any Property is duly insured against loss or damage by fire, with extended
coverage, and against such other insurable hazards and risks as is customary and
appropriate in the
7
<PAGE>
circumstances; and (iv) the policies from time to time specified by the Board of
Directors with regard to the protection of the Company's investments are carried
out. Any and all fees and costs incurred by the Advisor in performing such
functions, whether payable to its Affiliates or independent Persons shall be
borne by the Company.
8. Records; Confidentiality. The Advisor shall maintain appropriate records
of all its activities hereunder and make such records available for inspection
by the Board of Directors and by counsel, auditors and authorized agents of the
Company, at any time or from time to time during normal business hours. The
Advisor shall at all reasonable times have access to the books and records of
the Company. The Advisor shall keep confidential any and all information
obtained in connection with the services rendered hereunder and shall not
disclose any such information to nonaffiliated Persons except with the prior
consent of the Board.
9. Limitation of Activities. Anything else in this Agreement to the
contrary notwithstanding:
(a) The Advisor shall refrain from taking any action which, in its
sole judgment made in good faith, would adversely affect the status of the
Company as a real estate investment trust as defined in the Code, subject
the Company to regulation under the Investment Company Act of 1940, violate
any law, rule or regulation or would otherwise not be permitted by the
Articles of Incorporation or Bylaws of the Company, except if such action
shall be ordered by the Board of Directors, in which case the Advisor shall
notify promptly the Board of Directors of the Advisor's judgment of the
potential impact of such action and shall refrain from taking such action
until it receives further clarification or instructions from the Board of
Directors. Notwithstanding the foregoing, the Advisor and its stockholders,
directors, officers and employees shall not be liable to the Company, or to
the Company's Board of Directors or Shareholders for any act or omission by
the Advisor, or its stockholders, directors, officers or employees except
as provided in Section 16 of this Agreement.
(b) In performing its duties and obligations under this Agreement, the
Advisor shall abide by and comply with the provisions and policies set
forth in the Articles of Incorporation and Bylaws.
10. Relationship with Board of Directors. Employees of the Advisor may
serve as members of the Board of Directors or any committee thereof and as
officers of the Company, except that no employee of the Advisor who also is a
Director or officer of the Company shall receive any compensation from the
Company for
8
<PAGE>
serving as a Director or officer other than for reasonable reimbursement for
travel and related expenses incurred in attending meetings of the Board of
Directors or any committee thereof.
11. Fees.
(a) Asset Management Fee. The Company shall pay to the Advisor
quarterly, for services rendered under this Agreement, an Asset Management
Fee calculated as follows: The Asset Management Fee for any calendar
quarter shall be a applicable percentage of the Total Contributions. The
applicable percentage used to calculate such Asset Management Fee shall be
based upon the Return Ratio, calculated on a per annum basis, for the
preceding calendar quarter. The Asset Management Fee shall be as follows
with respect to any such quarter: 0.1% of Total Contributions if the Return
Ratio for the preceding calendar quarter is 6.0% per annum or less; 0.15%
of Total Contributions if the Return Ratio for the preceding calendar
quarter is more than 6.0% per annum but not more than 8.0% per annum; and
0.25% of Total Contributions if the Return Ratio for the preceding calendar
is above 8.0% per annum. If the Asset Management Fee is payable with
respect to any partial calendar quarter, it shall be prorated based on the
number of days elapsed during any such partial calendar quarter.
(b) Payment of Asset Management Fee. The Advisor shall compute the
compensation payable to it under Section 11(a) of this Agreement within 45
days of the end of each calendar quarter. A copy of the computations made
by the Advisor to calculate its compensation shall thereafter promptly be
delivered to the Board of Directors and, upon such delivery, payment of the
compensation earned under Section 11(a) of this Agreement shown therein
shall be due and payable within 60 days after the end of such calendar
quarter.
12. Expenses.
(a) The Company shall pay directly or reimburse the Advisor for the
following expenses in addition to the compensation provided for in this
Agreement:
(i) all costs of personnel employed by the Company and involved
in the business of the Company;
(ii) expenses incurred in connection with the initial investment
of the funds of the Company, including all direct expenses incurred in
connection with investigation and acquisition of Properties;
9
<PAGE>
(iii) interest and other costs for borrowed money, including
discounts, points and other similar fees;
(iv) taxes and assessments on income or property and taxes as an
expense of doing business;
(v) fees and commissions, including finder's fees and brokerage
commissions with respect to the acquisition and disposition of assets
of the Company, whether payable to an Affiliate of the Advisor or an
unrelated Person, including, without limitation, costs of foreclosure,
maintenance, repair and improvement of Property;
(vi) costs associated with insurance required in connection with
the business of the Company or by the Board of Directors;
(vii) expenses of managing and operating real property owned by
the Company, whether payable to an Affiliate of the Advisor or an
unrelated Person;
(viii) fees and expenses of legal counsel for the Company;
(ix) fees and expenses of independent auditors and accountants
for the Company;
(x) all expenses in connection with payments to the Board of
Directors or any committee thereof and meetings of the Board of
Directors or any committee thereof and Shareholders;
(xi) expenses associated with listing the Shares on a national
stock exchange or quoting the Shares on the NASDAQ National Market
System if requested by the Board of Directors, or with the issuance
and distribution of any additional Shares of the Company at any time,
such as taxes, legal and accounting fees, listing and registration
fees, and other expenses;
(xii) dividend and dividend distributions;
(xiii) expenses of organizing, revising, amending, converting,
modifying or terminating the Company, the Articles of Incorporation or
the Bylaws; and
(xiv) expenses of maintaining communications with Shareholders,
including the cost of preparation, printing, and mailing annual
reports and other
10
<PAGE>
Shareholder reports, proxy statements and other reports required by
governmental entities.
Expenses incurred by the Advisor on behalf of the Company and payable pursuant
to this Section, shall be reimbursed quarterly to the Advisor within 60 days
after the end of each quarter. The Advisor shall prepare a statement documenting
the expenses of the Company during each quarter, and shall deliver such
statement to the Company within 45 days after the end of each quarter.
(b) Except as otherwise provided herein, the Advisor shall pay all
expenses of performing its obligations under this Agreement, including,
without limitation, the following expenses:
(i) employment expenses of the Advisor, including, but not
limited to, salaries, wages, payroll taxes, costs of employee benefit
plans, and temporary help expenses, except to the extent that such
expenses are otherwise reimbursable pursuant to Section 12(a) of this
Agreement or the Articles of Incorporation or Bylaws;
(ii) audit fees and expenses of the Advisor;
(iii) legal fees and other expenses of professional services to
the Advisor;
(iv) rent, telephone, utilities and other office expenses of the
Advisor;
(v) insurance of the Advisor; and
(vi) all other administrative expenses of the Advisor.
13. Limitation on the Advisor's Investment Advice. Notwithstanding anything
to the contrary in this Agreement, the Advisor shall not be required to, and
shall not, advise the Company as to any investments in securities, except when,
and to the extent that, the Advisor and the Company specifically agree (i) that
such advice is desirable, and (ii) that such advice can be rendered consistently
with applicable legal requirements, including any applicable provisions of
relevant "investment advisor" laws.
14. Other Services. Should the Board of Directors request that the Advisor
or any employee thereof render material services for the Company other than set
forth in Section 2, such services shall be separately compensated and shall not
be deemed to be services pursuant to the terms of this Agreement.
11
<PAGE>
15. Limitation on Operating Expenses. Within 120 days from the end of any
Calendar Year, the Advisor shall refund to the Company the amount, if any, by
which the Operating Expenses of the Company, excluding extraordinary
nonrecurring items and those items referred to in Section 14, during such
Calendar Year exceeded the greater of either of the following limitations:
(a) 2% of the Average Invested Assets of the Company for such Calendar
Year; or
(b) 25% of the Company's Net Income for such Calendar Year, determined
in accordance with generally accepted accounting principles.
The Independent Directors of the Company may determine that, because of unusual
and nonrecurring factors which they deem sufficient, a higher level of Operating
Expenses is justified for such Calendar Year. The Advisor shall be promptly
reimbursed for any payments made under this Section 15 if, in any succeeding
Calendar Year, the Operating Expenses of the Company are less than the permitted
level of Operating Expenses.
16. Advisory Responsibility. The Advisor assumes no responsibility under
this Agreement other than to render the services called for hereunder in good
faith and with integrity, and shall not be responsible for any action of the
Company in following or declining to follow any advice or recommendation of the
Advisor. Neither the Advisor, its shareholders, directors, officers nor
employees nor any of its Affiliates, nor any Person contracting with the Advisor
for services and its shareholders, directors, officers and employees nor any of
its Affiliates shall be liable to the Company or its Shareholders, except by
reason of acts constituting gross negligence or willful misconduct. The Advisor
hereby agrees to look solely to the assets of the Company for satisfaction of
all claims against the Company, and in no event shall any Shareholder, Director,
officer or agent of the Company have any personal liability for the obligation
of the Company under this Agreement.
17. Incorporation of the Articles of Incorporation and Bylaws. To the
extent the Articles of Incorporation and Bylaws impose obligations or
restrictions on the Advisor or grant the Advisor certain rights which are not
set forth in this Agreement, the Advisor shall abide by such obligations or
restrictions and such rights shall inure to the benefit of the Advisor with the
same force and effect as if they were set forth herein.
18. Fiduciary Duty and Indemnification. Subject to Section 16, the Advisor
shall have a fiduciary relationship to the Shareholders. However, the Company
shall indemnify the Advisor, to the fullest extent permitted by law, for its
liabilities and losses arising from the operations of the Company (including its
12
<PAGE>
costs and expenses, including legal fees and expenses, incurred in connection
with investigating and defending itself against such liabilities and losses) if
the following conditions are met:
(a) the Directors have determined, in good faith, that the course of
conduct which caused the liability or loss was undertaken in good faith
within what the Advisor reasonably believed to be the scope of its
employment or authority and for a purpose which it reasonably believed to
be in the best interests of the Company;
(b) the Directors have determined, in good faith, that the liability
or loss was not the result of willful misconduct, bad faith, reckless
disregard of duties or violation of the criminal law on the part of the
Advisor; and
(c) the indemnified amount is recoverable only out of the assets of
the Company and not from the Shareholders.
Notwithstanding the foregoing, indemnification will not be allowed for any
liability imposed by judgment, and costs associated therewith, including
attorneys' fees, arising from or out of a violation of state or federal
securities laws associated with the Offering of the Common Shares unless (i)
there has been a successful adjudication on the merits of each count involving
alleged securities laws violations as to the particular indemnitee, or (ii) such
claims have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee or (iii) a court of competent
jurisdiction approves a settlement of the claims against a particular
indemnitee.
19. Transactions between the Advisor and the Company. All transactions
between the Advisor and the Company shall require the approval by a majority of
the Directors (including a majority of the Independent Directors) and shall
otherwise comply with the conflict of interest provisions of the Bylaws.
20. Relationship of Advisor and Company. The Company and the Advisor are
not partners or joint venturers with each other, and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
21. Other Activities. Except as otherwise expressly provided herein,
nothing contained herein shall limit the right of the Advisor or any of its
officers, directors or employees, whether or not a Director, officer or employee
of the Company, to engage in other business activities or to render services of
any kind to any other Person even if such other business activities or services
may be in direct competition with the Company.
13
<PAGE>
22. Term; Termination of Agreement.
(a) This Agreement shall have an initial term ending five years from
the date of this Agreement, and thereafter shall be renewed for additional
two-year terms upon the consent of the Directors.
(b) Prior to any renewal of this Agreement, the Independent Directors
shall review (i) the performance of the Advisor hereunder to determine its
compliance with the provisions of this Agreement, and (ii) the fees payable
to the Advisor hereunder to determine whether they are reasonable in
relation to the nature and quality of services performed. The findings of
the Independent Directors shall be recorded in the minutes of the
Directors.
(c) This Agreement shall be terminable (i) without cause by the
Advisor or (ii) without cause by a majority of the Independent Directors,
in each case upon 60 days' prior written notice to the non-terminating
party.
(d) In the event of the termination of the Advisor, the Advisor will
cooperate with the Company and take all reasonable steps requested to
assist the Directors in making an orderly transition of the advisory
function to another Person.
(e) At the sole option of a majority of the Independent Directors,
this Agreement may be terminated for cause by written notice of termination
from the Company to the Advisor if any of the following events occur:
(i) if the Advisor shall violate or default in the performance of
any material provision of this Agreement and, after written notice of
such violation or default, shall not cure such violation or default
within 30 days;
(ii) if the Advisor shall be adjudged bankrupt or insolvent by a
court of competent jurisdiction, or an order shall be made by a court
of competent jurisdiction for the appointment of a receiver,
liquidator or trustee of the Advisor, or of all or substantially all
of its property by reason of the foregoing, or approving any petition
filed against the Advisor for reorganization, and such adjudication or
order shall remain in force or unstayed for a period of 30 days; or
14
<PAGE>
(iii) if the Advisor shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the
federal bankruptcy laws, or for relief under any law for relief of
debtors, or shall consent to the appointment of a receiver for itself
or for all or substantially all of its property, or shall make a
general assignment for the benefit of its creditors, or shall admit in
writing its inability to pay its debts, generally, as they become due.
(f) Any notice of termination under this Section shall (except to the
extent this Section requires a different notice period) be effective on the
date specified in such notice, which may be the day on which such notice is
given or any date thereafter. The Advisor agrees that if any of the events
specified in subparagraph (ii) or (iii) of Section 22(e) shall occur, it
shall give written notice thereof to the Board of Directors within 5 days
after the occurrence of such event.
23. Action Upon Termination.
(a) From and after the effective date of termination of this Agreement
pursuant to Section 22 hereof, the Advisor shall not be entitled to
compensation for further services rendered hereunder, but shall be entitled
to receive from the Company within 30 days after the effective date of such
termination, an amount in cash equal to all earned but unpaid Asset
Management Fees payable to the Advisor prior to the termination of this
Agreement.
(b) Within a reasonable period of time, but in no event later than 30
days after the termination of this Agreement, the Advisor shall:
(i) pay over to the Company all money collected and held for the
account of the Company pursuant to this Agreement, after deducting any
accrued compensation and reimbursement for its expenses to which it is
then entitled;
(ii) deliver to the Board of Directors a full accounting,
including a statement showing all payments collected by it and a
statement of all money held by it, covering the period following the
date of the last accounting furnished to the Board of Directors; and
15
<PAGE>
(iii) deliver to the Board of Directors all property and
documents of the Company then in the custody of the Advisor.
The Advisor shall be entitled to receive, promptly after such 30-day
period, reimbursement for any additional expenses to which it is entitled
(and for which it has not been reimbursed under clause (i) of Section
23(b)).
24. Assignment Prohibition. This Agreement may not be assigned by the
Advisor without the approval of a majority of the Board of Directors; provided,
however, that such approval shall not be required in the case of an assignment
to a corporation, association, trust or organization which may take over the
assets and carry on the affairs of the Advisor, provided that at the time of
such assignment, such successor organization shall be owned substantially by the
Advisor or its Affiliates and that an officer of the Advisor shall deliver to
the Board of Directors a statement in writing indicating the ownership structure
of the successor organization. Such an assignment shall bind the assignees
hereunder in the same manner as the Advisor is bound hereunder. This Agreement
shall not be assigned by the Company without the consent of the Advisor, except
in the case of an assignment by the Company to a corporation or other
organization which is a successor to the Company, in which case such successor
organization shall be bound hereunder and by the terms of said assignment in the
same manner as the Company is bound hereunder.
25. Bylaws. The execution and performance of this Agreement hereby is
expressly made subject to Article VIII of the Bylaws of the Company.
26. Notices. Any notice, report or other communication required or
permitted to be given hereunder shall be in writing unless some other method of
giving such notice, report or other communication is accepted by the party to
whom it is given, and shall be given by being delivered to the addresses set
forth herein:
To the Board of
Directors or
to the Company: Apple Suites, Inc.
306 E. Main Street
Richmond, Virginia 23219
Attn: Board of Directors
16
<PAGE>
To the Advisor: Apple Suites Advisors, Inc.
306 E. Main Street
Richmond, Virginia 23219
Attn: Glade M. Knight
Either party may at any time give notice in writing to the other party of a
change in its address for the purposes of this Section.
27. Modification. This Agreement shall not be changed, modified, amended,
terminated or discharged, in whole or in part, except by an instrument in
writing signed by both parties hereto, or their respective successors or
assigns.
28. Shareholder Liability. No Shareholder of the Company shall be
personally liable for any of the obligations of the Company under this
Agreement.
29. Severability. The provisions of this Agreement are independent of and
severable from each other, and no provision shall be affected or rendered
invalid or unenforceable by virtue of the fact that for any reason any other or
others of them may be invalid or unenforceable in whole or in part.
30. Binding. This Agreement shall bind any successors or permitted assigns
of the parties hereto as herein provided.
31. Construction. The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the Commonwealth of Virginia.
32. Entire Agreement. This Agreement contains the entire agreement and
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements, understandings,
inducements and conditions, express or implied, oral or written, of any nature
whatsoever with respect to the subject matter hereof. The express terms hereof
control and supersede any course of performance and/or usage of the trade
inconsistent with any of the terms hereof.
33. Indulgences, Not Waivers. Neither the failure nor any delay on the part
of a party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such
17
<PAGE>
right, remedy, power or privilege with respect to any other occurrence. No
waiver shall be effective unless it is in writing and is signed by the party
asserted to have granted such waiver.
34. Gender. Words used herein regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
35. Titles Not to Affect Interpretation. The titles of sections and
subsections contained in this Agreement are for convenience only, and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
36. Execution in Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original as against any
party whose signature appears thereon, and all of which shall together
constitute one and the same instrument. This Agreement shall become binding when
one or more counterparts hereof, individually or taken together, shall bear the
signatures of all of the parties reflected hereon as the signatories.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers as of the date first written above.
APPLE SUITES, INC.
a Virginia corporation
By:________________________________
Title:_____________________________
APPLE SUITES ADVISORS, INC.,
a Virginia corporation
By:_________________________________
Title:______________________________
18
Exhibit 10.2
PROPERTY ACQUISITION/DISPOSITION
AGREEMENT
THIS AGREEMENT is made and entered into as of the ___ day of _______,
1999, by and between Apple Suites, Inc., a Virginia corporation (hereinafter
referred to as "Owner"), and Apple Suites Realty Group, Inc., a Virginia
corporation (hereinafter referred to as "Agent").
W I T N E S S E T H :
WHEREAS, Owner plans to conduct business as a "real estate investment
trust," and, in connection therewith, plans to, from time to time, acquire and
dispose of real property, including particularly corporate apartments and
extended-stay hotel properties (hereinafter referred to individually as a
"Property" and collectively as the "Properties");
WHEREAS, Owner desires to use the services of Agent as a broker in
connection with the acquisition and disposition of the Properties on the terms
set forth in this Agreement; and
WHEREAS, Owner and Agent desire to enter into this Agreement for the
purposes herein contained.
NOW, THEREFORE, in consideration of the promises herein contained, and for
other valuable consideration, receipt of which is hereby acknowledged, the
parties agree as follows:
1. Engagement of Agent as Broker for the Properties. Owner hereby engages
Agent as a broker in connection with the purchase and sale of the Properties,
upon the conditions and for the term and compensation herein set forth. All or
any portion of the services being performed by Agent may be contracted or
subcontracted by Agent to another company, provided that such company agrees to
be bound by the terms of this Agreement.
2. Term of Agreement; Renewal. This Agreement shall be valid for an initial
term of five (5) years. Unless either party by written notice sent to the other
party at least sixty (60) days before the end of any 5-year term hereof elects
not to renew this Agreement, this Agreement shall renew automatically for
successive terms of five (5) years on the same terms as contained herein.
3. Acceptance of Engagement. Agent hereby accepts its engagement as a
broker for the purchase and sale of the Properties and agrees to perform all
services necessary to
<PAGE>
effectuate such purchases and sales which are customarily provided by commercial
real estate brokers, and, without limitation, Agent agrees:
a. To supervise, on behalf of Owner, the preparation of contracts of
purchase or sale for each Property, on such terms as are specified by Owner or
its duly authorized representatives, and all other documents related thereto or
required to effectuate such purchase or sale;
b. To coordinate the activities of, and act as liaison between Owner
and, independent professionals connected with the purchase or sale of a
Property, including attorneys, appraisers, engineers, inspectors, lenders, if
any, and others;
c. To assist Owner and its authorized representatives in satisfying
any conditions precedent to the purchase or sale of a Property, which shall
include contracting on behalf of Owner with any third parties whose services are
required to close any such purchase or sale;
d. To represent Owner at the closing of the purchase or sale of a
Property, to coordinate the activities of professionals and other third persons
connected with such closing, and to supervise the compliance by Owner with all
requirements and customary actions associated with such purchase or sale,
including, without limitation, the obtaining of property title insurance, the
delivery and recordation of deeds and other instruments of conveyance, and the
delivery and recordation, as required, of any documents evidencing loans
obtained or made by Owner;
e. Generally to act on behalf of Owner in connection with such
purchase or sale as a commercial real estate broker would customarily act with
respect to such transaction, including the provision of such additional services
as would normally be provided by such a person.
4. Indemnification. Owner hereby agrees to indemnify and hold harmless
Agent against and in respect of any loss, cost or expense (including reasonable
investigative expenses and attorneys' fees), judgment, award, amount paid in
settlement, fine, penalty and liability of any and every kind incurred by or
asserted against Agent by reason of or in connection with the engagement of
Agent hereunder, the performance by Agent of the services described herein or
the occurrence or existence of any event or circumstance which results or is
alleged to have resulted in death or injury to any person or destruction of or
2
<PAGE>
damage to any property and any suit, action or proceeding (whether threatened,
initiated or completed) by reason of the foregoing; provided, however, that no
such indemnification of Agent shall be made, and Agent shall indemnify and hold
Owner harmless against, and to the extent of, any loss that a court of competent
jurisdiction shall, by final adjudication, determine to have resulted from
willful misconduct, gross negligence or fraud by or on the part of Agent.
5. Compensation of Agent. Owner shall pay to Agent a real estate commission
in connection with each purchase of a Property in an amount equal to two percent
(2%) of the gross purchase price of the Property (which does not include amounts
budgeted for repairs and improvements), in consideration of Agent (or any person
with whom Agent subcontracts or contracts hereunder) performing the services
provided for in this Agreement in connection with the purchase of the Property.
In consideration of Agent (or any person with whom Agent subcontracts or
contracts hereunder) performing the services provided for in this Agreement in
connection with the sale of a Property, Owner shall pay to Agent the following:
a real estate commission in connection with the sale of a Property in an amount
equal to two percent (2%) of the gross sales price of the Property, if, but only
if, the sales price of the Property exceeds the sum of (A) the Company's cost
for the Property (consisting of the original purchase price plus all capitalized
costs and expenditures connected with the Property), without any reduction for
depreciation, and (B) ten percent (10%) of such cost. If the sales price of the
Property does not equal such amount, Agent shall be entitled only to payment by
the Company of its "direct costs" incurred in marketing such property (where
"direct costs" refers to a reasonable allocation of all costs, including
salaries of personnel, overhead and utilities), allocable to services in
marketing such property. If the two percent (2%) real estate commission is
payable in connection with sale of a Property, Agent shall not also be paid the
reimbursement of its "direct costs" as described in the preceding sentence. If
the person from whom Owner purchases or to whom Owner sells a Property pays any
fee to Agent, such amount shall decrease the amount of Owner's obligation to
Agent. Furthermore, Agent shall not be entitled to any real estate commission in
connection with a sale of a Property by Owner to Cornerstone Realty Income
Trust, Inc. or any Affiliate of Agent (where "Affiliate" has the meaning
specified in the Prospectus of Owner), but Agent will, in such case, be entitled
to payment by Owner of its direct costs in such regard. The fees and expenses
provided for herein shall be payable if Owner sells a Property, sells shares in
Owner, effects a merger of Owner with another entity, or undertakes any other
transaction, the purpose or effect of which is, in essence, to dispose of some
or all Properties. In any case other than an actual sale of Properties, Owner
and Agent shall in good faith agree upon an allocation of purchase price to each
Property which is effectively disposed of.
3
<PAGE>
6. Power of Attorney. Owner hereby makes, constitutes and appoints Agent
its true and lawful attorney-in-fact, for it and in its name, place and stead
and for its use and benefit to sign, acknowledge and file all documents and
agreements (other than contracts for purchase or sale of a Property, promissory
notes, mortgages, deeds of trust or other documents or instruments which would
bind Owner to purchase or sell a Property, result or evidence the incurrence of
debt by Owner, or encumber a Property) necessary to perform or effect the duties
and obligations of Agent under the terms of this Agreement. The foregoing power
of attorney is a special power of attorney coupled with an interest. It shall
terminate when this Agreement terminates as provided herein.
7. Relationship of Parties. The parties agree and acknowledge that Agent is
and shall operate as an independent contractor in performing its duties under
this Agreement, and shall not be deemed an employee of Owner.
8. Entire Agreement. This Agreement represents the entire understanding
between the parties hereto with regard to the transactions described herein and
may only be amended by a written instrument signed by the party against whom
enforcement is sought.
9. Governing Law. This Agreement shall be construed in accordance with and
be governed by the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
OWNER:
APPLE SUITES, INC.,
a Virginia corporation
By:
---------------------------------
Title:
------------------------------
AGENT:
APPLE SUITES REALTY GROUP, INC.,
a Virginia corporation
By:
---------------------------------
Title:
------------------------------
4
Exhibit 10.3
APPLE SUITES, INC.
1999 INCENTIVE PLAN
Effective ______ __, 1999
<PAGE>
APPLE SUITES, INC.
1999 INCENTIVE PLAN
1. PURPOSE. The purpose of this Apple Suites, Inc. 1999 Incentive Plan (the
"Plan") is to further the long term stability and financial success of Apple
Suites, Inc. (the "Company") by attracting and retaining key employees of the
Company and its affiliates through the use of stock incentives. It is believed
that ownership of Company Stock will stimulate the efforts of those employees of
the Company and its affiliates upon whose judgment and interest the Company is
and will be largely dependent for the successful conduct of its business. It is
also believed that Incentive Awards granted to such employees under this Plan
will strengthen their desire to remain with the Company and its affiliates and
will further the identification of those employees' interests with those of the
Company's shareholders. The Plan is intended to conform to the provisions of
Securities and Exchange Commission Rule 16b-3.
2. DEFINITIONS. As used in the Plan, the following terms have the meanings
indicated:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
(b) "Applicable Withholding Taxes" means the aggregate amount of
federal, state and local income and payroll taxes
2
<PAGE>
that the Employer is required to withhold in connection with any exercise
of an Option or any lapse of restrictions on Restricted Stock.
(c) "Board" means the board of directors of the Company.
(d) "Change of Control" means:
(i) The acquisition, other than from the Company, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Act), of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Act) of 20% or more of either the
then outstanding shares of common stock of the Company or the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors, but excluding
for this purpose, any such acquisition by the Company or any of its
subsidiaries, or any employee benefit plan (or related trust) of the
Company or its sub sidiaries, or any corporation with respect to
which, following such acquisition, more than 50% of, respectively, the
then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of
such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by the
individuals and entities who were
3
<PAGE>
the beneficial owners, respectively, of the common stock and voting
securities of the Company immediately prior to such acquisition in
substantially the same proportion as their ownership, immediately
prior to such acquisition, of the then outstanding shares of common
stock of the Company or the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors, as the case may be; or
(ii) Individuals who, as of the date hereof, constitute the Board
(as of the date hereof the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any
individual becoming a director subsequent to the date hereof whose
election or nomination for election by the Company's shareholders was
approved by a vote of at least a majority of the directors comprising
the Incumbent Board shall be considered as though such individual were
a member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election
of the Directors of the Company (as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Act); or
4
<PAGE>
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, in each case, with respect to
which the individuals and entities who were the respective beneficial
owners of the common stock and voting securities of the Company
immediately prior to such reorganization, merger or consolidation do
not, following such reorganization, merger or consolidation,
beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such reorganization, merger
or consolidation, or a complete liquidation or dissolution of the
Company or a sale or other disposition of all or substantially all of
the assets of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means the committee appointed by the Board as
described under Section 13.
(g) "Company" means Apple Suites, Inc., a Virginia corporation.
(h) "Company Stock" means common stock, no par value, of the Company.
If the par value of the Company Stock is changed, or in the event of a
change in the capital
5
<PAGE>
structure of the Company (as provided in Section 12), the shares resulting
from such a change shall be deemed to be Company Stock within the meaning
of the Plan.
(i) "Date of Grant" means the date on which an Incentive Award is
granted by the Committee.
(j) "Disability" or "Disabled" means a physical or mental condition
that prevents the Participant from performing his customary duties with the
Employer. The Committee shall determine whether a Disability exists on the
basis of competent medical evidence, and such determination shall be
conclusive.
(k) "Employer" means the Company, Apple Suites Advisors, Inc., and
Apple Suites Realty Group, Inc.
(l) "Fair Market Value" means, on any given date, (i) if the Company
Stock is traded on an exchange, the closing registered sales prices of the
Company Stock on such day on the exchange on which it generally has the
greatest trading volume, (ii) if the Company Stock is traded on the
over-the-counter market, the average between the closing bid and asked
prices on such day as reported by NASDAQ, or (iii) if the Company Stock is
not traded on any exchange or over-the-counter market, the fair market
value shall be determined by the Committee using any reasonable method in
good faith.
(m) "Incentive Award" means, collectively, the award of an Option or
Restricted Stock under the Plan.
6
<PAGE>
(n) "Initial Closing" means the first closing of the Offering that
will occur after the Minimum Offering is achieved.
(o) "Insider" means a person subject to Section 16(b) of the Act.
(p) "Minimum Offering" means the sale of the first $15,000,000 in
shares of Company Stock pursuant to the Offering.
(q) "Nonstatutory Stock Option" means an Option that does not meet the
requirements of Code section 422, or, even if meeting the requirements of
Code section 422, is not intended to be an incentive stock option and is so
designated.
(r) "Offering" means, collectively, (1) the sale of up to $300,000,000
in shares of Company Stock to the public and the registration of such
shares with the Securities and Exchange Commission, as authorized by
resolutions of the Board dated March 5, 1999 (the "Initial Offering"), and
(2) the sale of any additional shares of Company Stock to the public and
the registration of such shares with the Securities and Exchange
Commission, as authorized by resolutions of the Board from time to time,
which sales occur before the expiration of five years from June 1, 1999
(the "Additional Offerings").
7
<PAGE>
(s) "Option" means a right to purchase Company Stock granted under the
Plan, at a price determined in accordance with the Plan.
(t) "Participant" means any employee of the Employer who receives an
Incentive Award under the Plan.
(u) "Restricted Stock" means Company Stock awarded upon the terms and
subject to the restrictions set forth in Section 6.
(v) "Rule 16b-3" means Rule 16b-3 of the Securities and Exchange
Commission promulgated under the Act. A reference in the Plan to Rule 16b-3
shall include a reference to any corresponding rule (or number
redesignation) of any amendments to Rule 16b-3 enacted after the effective
date of the Plan's adoption.
(w) "Window Period" means the period beginning on the third business
day and ending on the twelfth business day following the release for
publication of quarterly or annual summary statements of the Company's
sales and earnings. The release for publication shall be deemed to have
occurred if the specified financial data (i) appears on a wire service,
(ii) appears in a financial news service, (iii) appears in a newspaper of
general circulation, or (iv) is otherwise made publicly available.
8
<PAGE>
3. GENERAL. The following types of Incentive Awards may be granted under
the Plan: Options and Restricted Stock. Options granted under the Plan shall be
Nonstatutory Stock Options.
4. STOCK. Subject to Section 12 of the Plan, there shall be reserved for
issuance under the Plan an aggregate of (1) 35,000 shares of Company Stock plus
(2) 4.625% of the number of shares of Company Stock sold in the Initial Offering
in excess of the Minimum Offering plus (3) 4.4% of the total number of shares of
Company Stock sold in the Additional Offerings, which shall be authorized, but
unissued shares. Shares allocable to Options or portions thereof granted under
the Plan that expire or otherwise terminate unexercised may again be subjected
to an Option under the Plan. The Committee is expressly authorized to make an
Incentive Award to a Participant conditioned upon the surrender for cancellation
of an option granted under an existing Incentive Award. For purposes of
determining the number of shares that are available for Incentive Awards under
the Plan, such number shall, to the extent permissible under Rule 16b-3, include
the number of shares surrendered by an optionee or retained by the Company in
payment of Applicable Withholding Taxes.
5. ELIGIBILITY.
(a) All present and future employees of the Employer who hold
positions with management responsibilities with the Employer (or any parent or
subsidiary of the Company, whether now existing or hereafter created or
acquired) shall be eligible to
9
<PAGE>
receive Incentive Awards under the Plan. The Committee shall have the power and
complete discretion, as provided in Section 13, to select eligible employees to
receive Incentive Awards and to determine for each employee the terms and
conditions, the nature of the award and the number of shares to be allocated to
each employee as part of each Incentive Award.
(b) The grant of an Incentive Award shall not obligate the Employer or
any parent or subsidiary of the Company to pay an employee any particular amount
of remuneration, to continue the employment of the employee after the grant or
to make further grants to the employee at any time thereafter.
6. RESTRICTED STOCK AWARDS.
(a) Whenever the Committee deems it appropriate to grant Restricted
Stock, notice shall be given to the Participant stating the number of shares of
Restricted Stock granted and the terms and conditions to which the Restricted
Stock is subject. This notice, when accepted in writing by the Participant shall
become an award agreement between the Company and the Participant and
certificates representing the shares shall be issued and delivered to the
Participant. Restricted Stock may be awarded by the Committee in its discretion
without cash consideration.
(b) Restricted Stock issued pursuant to the Plan shall be subject to
the following restrictions:
(i) No shares of Restricted Stock may be sold, assigned,
transferred or disposed of by an Insider within a six-month period
beginning on the Date of Grant, and
10
<PAGE>
Restricted Stock may not be pledged, hypothecated or otherwise encumbered
within a six-month period beginning on the Date of Grant if such action
would be treated as a sale or disposition under Rule 16b-3.
(ii) No shares of Restricted Stock may be sold, assigned,
transferred, pledged, hypothecated, or otherwise encumbered or disposed of
until the restrictions on such shares as set forth in the Participant's
award agreement have lapsed or been removed pursuant to paragraph (d) or
(e) below.
(iii) If a Participant ceases to be employed by the Employer or a
parent or subsidiary of the Company, the Participant shall forfeit to the
Company any shares of Restricted Stock on which the restrictions have not
lapsed or been removed pursuant to paragraph (d) or (e) below on the date
such Participant shall cease to be so employed.
(c) Upon the acceptance by a Participant of an award of Restricted
Stock, such Participant shall, subject to the restrictions set forth in
paragraph (b) above, have all the rights of a shareholder with respect to such
shares of Restricted Stock, including, but not limited to, the right to vote
such shares of Restricted Stock and the right to receive all dividends and other
distributions paid thereon. Certificates representing Restricted Stock shall
bear a legend referring to the restrictions set forth in the Plan and the
Participant's award agreement.
11
<PAGE>
(d) The Committee shall establish as to each award of Restricted Stock
the terms and conditions upon which the restrictions set forth in paragraph (b)
above shall lapse. Such terms and conditions may include, without limitation,
the lapsing of such restrictions as a result of the Disability, death or
retirement of the Participant or the occurrence of a Change of Control.
(e) Notwithstanding the provisions of paragraphs (b)(ii) and (iii)
above, the Committee may at any time, in its sole discretion, accelerate the
time at which any or all restrictions will lapse or remove any and all such
restrictions.
(f) Each Participant shall agree at the time his Restricted Stock is
granted, and as a condition thereof, to pay to the Company, or make arrangements
satisfactory to the Company regarding the payment to the Company of, Applicable
Withholding Taxes. Until such amount has been paid or arrangements satisfactory
to the Company have been made, no stock certificate free of a legend reflecting
the restrictions set forth in paragraph (b) above shall be issued to such
Participant.
7. STOCK OPTIONS.
(a) Whenever the Committee deems it appropriate to grant Options,
notice shall be given to the Participant stating the number of shares for which
Options are granted, the Option price per share, and the conditions to which the
grant and exercise of the Options are subject. This notice, when duly
12
<PAGE>
accepted in writing by the Participant, shall become a stock option agreement
between the Company and the Participant.
(b) The exercise price of shares of Company Stock covered by an Option
shall be not less than 100% of the Fair Market Value of such shares on the Date
of Grant.
(c) Options may be exercised in whole or in part at such times as may
be specified by the Committee in the Participant's stock option agreement;
provided that, the exercise provisions for Options shall in all events not be
more liberal than the following provisions:
(i) No Option may be exercised after ten years from the Date of
Grant.
(ii) Except as otherwise provided in this paragraph, no Option
may be exercised unless the Participant is employed by the Employer or a
parent or subsidiary of the Company at the time of the exercise and has
been so employed at all times since the Date of Grant. If a Participant's
employment is terminated other than by reason of his Disability or death at
a time when the Participant holds an Option that is exercisable (in whole
or in part), the Participant may exercise any or all of the exercisable
portion of the Option (to the extent exercisable on the date of
termination) within 60 days after the Participant's termination of
employment. If a Participant's employment is terminated by reason of his
Disability at a time when the Participant holds an Option that is
exercisable (in whole or
13
<PAGE>
in part), the Participant may exercise any or all of the exercisable
portion of the Option (to the extent exercisable on the date of Disability)
within 180 days after the Participant's termination of employment. If a
Participant's employment is terminated by reason of his death at a time
when the Participant holds an Option that is exercisable (in whole or in
part), the Option may be exercised (to the extent exercisable on the date
of death) within 180 days after the Participant's death by the person to
whom the Participant's rights under the Option shall have passed by will or
by the laws of descent and distribution.
(d) Notwithstanding the foregoing, no Option shall be exercisable by
an Insider within the first six months after it is granted (as determined under
Rule 16b-3); provided that, this restriction shall not apply if the Participant
becomes Disabled or dies during the six-month period.
(e) The Committee may, in its discretion, grant Options that by their
terms become fully exercisable upon a Change of Control, notwithstanding other
conditions on exercisability in the stock option agreement.
8. METHOD OF EXERCISE OF OPTIONS.
(a) Options may be exercised by the Participant giving written notice
of the exercise to the Company, stating the number of shares the Participant has
elected to purchase under the Option. Such notice shall be effective only if
accompanied by the exercise price in full in cash; provided that, if the terms
14
<PAGE>
of an Option so permit, the Participant may (i) deliver shares of Company Stock
(valued at their Fair Market Value on the date of exercise) in satisfaction of
all or any part of the exercise price, (ii) deliver a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company, from the sale or loan proceeds with respect to the sale of Company
Stock or a loan secured by Company Stock, the amount necessary to pay the
exercise price and, if required by the Committee, Applicable Withholding Taxes,
or (iii) deliver an interest bearing promissory note, payable to the Company, in
payment of all or part of the exercise price together with such collateral as
may be required by the Committee at the time of exercise. The interest rate
under any such promissory note shall be established by the Committee and shall
be at least equal to the minimum interest rate required at the time to avoid
imputed interest under the Code.
(b) The Company may place on any certificate representing Company
Stock issued upon the exercise of an Option any legend deemed desirable by the
Company's counsel to comply with federal or state securities laws, and the
Company may require a customary written indication of the Participant's
investment intent. Until the Participant has made any required payment,
including any Applicable Withholding Taxes, and has had issued a certificate for
the shares of Company Stock acquired, he shall possess no shareholder rights
with respect to the shares.
15
<PAGE>
(c) As an alternative to making a cash payment to the Company to
satisfy Applicable Withholding Taxes, if the Option so provides, the Participant
may, subject to the provisions set forth below, elect to (i) deliver shares of
already owned Company Stock or (ii) have the Company retain that number of
shares of Company Stock that would satisfy all or a specified portion of the
Applicable Withholding Taxes. The Committee shall have sole discretion to
approve or disapprove any such election. If the Participant is an Insider, the
following provisions apply to elections to satisfy Applicable Withholding Taxes,
to the extent required by Rule 16b-3:
(i) The Participant's election to have the Company retain from
the shares of Company Stock to be issued upon exercise of an Option the
number of shares of Company Stock that would satisfy Applicable Withholding
Taxes must be made at least six months after the Option was granted and
either:
(x) during a Window Period; or
(y) at least six months before the amount of Applicable
Withholding Taxes is calculated.
(ii) The Participant's election must be irrevocable.
(iii) Notwithstanding any of the foregoing provisions, the manner
and timing of elections may be varied from those provided, and elections
previously made as
16
<PAGE>
irrevocable may be revoked, if such variance or revocation is permissible
under Rule 16b-3.
(d) Notwithstanding anything herein to the contrary, Options shall
always be granted and exercised in such a manner as to conform to the provisions
of Rule 16b-3.
9. NONTRANSFERABILITY OF OPTIONS. Options by their terms shall not be
transferable except by will or by the laws of descent and distribution or, if
permitted by Rule 16b-3, pursuant to a qualified domestic relations order (as
defined in Code section 414(p)) ("QDRO") and shall be exercisable, during the
Participant's lifetime, only by the Participant or, if permitted by Rule 16b-3,
an alternate payee under a QDRO, or by his guardian, duly authorized
attorney-in-fact or other legal representative.
10. EFFECTIVE DATE OF THE PLAN. This Plan is effective on March __, 1999,
having been approved by the shareholders of the Company on such date. Until the
requirements of any applicable state or federal securities laws have been met,
no Option shall be exercisable.
11. TERMINATION, MODIFICATION, CHANGE. If not sooner terminated by the
Board, this Plan, as amended and restated, shall terminate at the close of
business on ________, 2009. No Incentive Awards shall be made under the Plan
after its termination. The Board may terminate the Plan or may amend the Plan in
such respects as it shall deem advisable; provided that, if and to the extent
required by Rule 16b-3, no change shall be
17
<PAGE>
made that increases the total number of shares of Company Stock reserved for
issuance pursuant to Incentive Awards granted under the Plan (except pursuant to
Section 12), materially modifies the requirements as to eligibility for
participation in the Plan, or materially increases the benefits accruing to
Participants under the Plan, unless such change is authorized by the
shareholders of the Company. Notwithstanding the foregoing, the Board may
unilaterally amend the Plan and Incentive Awards as it deems appropriate to
ensure compliance with Rule 16b-3. Except as provided in the preceding sentence,
a termination or amendment of the Plan shall not, without the consent of the
Participant, adversely affect the Participant's rights under an Incentive Award
previously granted to him.
12. CHANGE IN CAPITAL STRUCTURE.
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or merger in which the Company is the surviving
corporation or other change in the Company's capital stock (including, but not
limited to, the creation or issuance to shareholders generally of rights,
options or warrants for the purchase of common stock or preferred stock of the
Company), the number and kind of shares of stock or securities of the Company to
be subject to the Plan and to Options then outstanding or to be granted
thereunder, the maximum number of shares or securities which may be delivered
under the Plan, the exercise price and other relevant provisions shall be
appropriately adjusted by the Committee, whose determination
18
<PAGE>
shall be binding on all persons. If the adjustment would produce fractional
shares with respect to any unexercised Option, the Committee may adjust
appropriately the number of shares covered by the Option so as to eliminate the
fractional shares.
(b) If the Company is a party to a consolidation or a merger in which
the Company is not the surviving corporation, a transaction that results in the
acquisition of substantially all of the Company's outstanding stock by a single
person or entity, or a sale or transfer of substantially all of the Company's
assets, the Committee may take such actions with respect to outstanding
Incentive Awards as the Committee deems appropriate.
(c) Notwithstanding anything in the Plan to the contrary, the
Committee may take the foregoing actions without the consent of any Participant,
and the Committee's determination shall be conclusive and binding on all persons
for all purposes.
13. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Committee, which shall consist of not less than two members of the Board, who
shall be appointed by the Board. The Committee shall have general authority to
impose any limitation or condition upon an Incentive Award the Committee deems
appropriate to achieve the objectives of the Incentive Award and the Plan and,
without limitation and in addition to powers set forth elsewhere in the Plan,
shall have the following specific authority:
(a) The Committee shall have the power and complete discretion to
determine (i) which eligible employees shall
19
<PAGE>
receive Incentive Awards and the nature of each Incentive Award, (ii) the
number of shares of Company Stock to be covered by each Incentive Award,
(iii) the Fair Market Value of Company Stock, (iv) the time or times when
an Incentive Award shall be granted, (v) whether an Incentive Award shall
become vested over a period of time and when it shall be fully vested, (vi)
when Options may be exercised, (vii) whether a Disability exists, (viii)
the manner in which payment will be made upon the exercise of Options, (ix)
conditions relating to the length of time before disposition of Company
Stock received upon the exercise of Options is permitted, (x) whether to
approve a Participant's elections under the Plan, (xi) notice provisions
relating to the sale of Company Stock acquired under the Plan, and (xii)
any additional requirements relating to Incentive Awards that the Committee
deems appropriate. The Committee shall have the power to amend the terms of
previously granted Incentive Awards so long as the terms as amended are
consistent with the terms of the Plan and provided that the consent of the
Participant is obtained with respect to any amendment that would be
detrimental to him, except that such consent will not be required if such
amendment is for the purpose of complying with Rule 16b-3.
(b) The Committee may adopt rules and regulations for carrying out the
Plan. The interpretation and construction of any provision of the Plan by
the Committee shall be final
20
<PAGE>
and conclusive. The Committee may consult with counsel, who may be counsel
to the Company, and shall not incur any liability for any action taken in
good faith in reliance upon the advice of counsel.
(c) A majority of the members of the Committee shall constitute a
quorum, and all actions of the Committee shall be taken by a majority of
the members present. Any action may be taken by a written instrument signed
by all of the members, and any action so taken shall be fully effective as
if it had been taken at a meeting.
(d) The Board from time to time may appoint members previously
appointed and may fill vacancies, however caused, in the Committee. Insofar
as it is necessary to satisfy the requirements of Section 16(b) of the Act,
no member of the Committee shall be eligible to participate in the Plan or
in any other plan of the Company or any parent or subsidiary of the Company
that entitles participants to acquire stock, stock options or stock
appreciation rights of the Company or any parent or subsidiary of the
Company, and no person shall become a member of the Committee if, within
the preceding one-year period, the person shall have been eligible to
participate in such a plan (other than a "safe harbor plan" permitted under
Rule 16b-3(c)(2)(i) and (ii)).
14. NOTICE. All notices and other communications required or permitted to
be given under this Plan shall be in writing and shall be deemed to have been
duly given if delivered personally
21
<PAGE>
or mailed first class, postage prepaid, as follows (a) if to the Company - at
its principal business address to the attention of the President; (b) if to any
Participant - at the last address of the Participant known to the sender at the
time the notice or other communication is sent.
15. GOVERNING LAW. The terms of this Plan shall be governed by the laws of
the Commonwealth of Virginia.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed this
___ day of _______, 1999.
APPLE SUITES, INC.
By
------------------------
Glade M. Knight,
Chairman of the Board
22
Exhibit 10.4
APPLE SUITES, INC.
1999 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Effective ________, 1999
<PAGE>
APPLE SUITES, INC.
1999 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
1. PURPOSE. The purpose of this Apple Suites, Inc. 1999 Non-Employee
Directors Stock Option Plan (the "Plan") is to encourage ownership in Apple
Suites, Inc. (the "Company") by non- employee members of the Board, in order to
promote long-term stockholder value and to provide non-employee members of the
Board with an incentive to continue as directors of the Company.
2. DEFINITIONS. As used in the Plan, the following terms have the meanings
indicated:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
(b) "Board" means the board of directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Company" means Apple Suites, Inc., a Virginia corporation.
(e) "Company Stock" means common stock, no par value, of the Company.
If the par value of the Company Stock is changed, or in the event of a
change in the capital structure of the Company (as provided in Section 12),
the
2
<PAGE>
shares resulting from such a change shall be deemed to be Company Stock
within the meaning of the Plan.
(f) "Date of Grant" means the date as of which an Eligible Director is
automatically awarded an Option pursuant to Section 7.
(g) "Disability" or "Disabled" means a physical or mental condition
that prevents the director from performing his customary duties with the
Company. The Board shall determine whether a Disability exists on the basis
of competent medical evidence, and such determination shall be conclusive.
(h) "Eligible Director" means a director described in Section 4.
(i) "Employer" means the Company, Apple Suites Advisors, Inc., and
Apple Suites Realty Group, Inc.
(j) "Fair Market Value" means, on any given date, (i) if the Company
Stock is traded on an exchange, the closing registered sales prices of the
Company Stock on such day on the exchange on which it generally has the
greatest trading volume, (ii) if the Company Stock is traded on the
over-the-counter market, the average between the closing bid and asked
prices on such day as reported by NASDAQ, or (iii) if the Company Stock is
not traded on any exchange or over-the-counter market, the fair market
value shall be determined by the Board using any reasonable method in good
faith.
3
<PAGE>
(k) "Initial Closing" means the first closing of the Offering that
will occur after the Minimum Offering is achieved.
(l) "Insider" means a person subject to Section 16(b) of the Act.
(m) "Minimum Offering" means the sale of the initial 15,000,000 in
shares of Company Stock pursuant to the Offering.
(n) "Offering" means, collectively, (1) the sale of up to $300,000,000
in shares of Company Stock to the public and the registration of such
shares with the Securities and Exchange Commission, as authorized by
resolutions of the Board dated March 5, 1999 (the "Initial Offering"), and
(2) the sale of any additional shares of Company Stock to the public and
the registration of such shares with the Securities and Exchange
Commission, as authorized by resolutions of the Board from time to time,
which sales occur before the expiration of five years from June 1, 1999
(the "Additional Offerings").
(o) "Option" means a right to acquire Company Stock granted under the
Plan, at a price determined in accordance with the Plan.
3. ADMINISTRATION. The Plan shall be administered by the Board. Options
shall be granted as described in Section 7. However, the Board shall have all
powers vested in it by the terms of the Plan, including, without limitation, the
authority
4
<PAGE>
(within the limitations described herein) to prescribe the form of the agreement
embodying the grant of Options, 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
in the administration of the Plan, as described herein, shall be final and
conclusive. The Board may act only by a majority of its members in office,
except that members thereof may authorize any one or more of their number or any
officer of the Company to execute and deliver documents on behalf of the Board.
No member of the Board shall be liable for anything done or omitted to be done
by him or any other member of the Board in connection with the Plan, except for
his own willful misconduct or as expressly provided by statute.
4. PARTICIPATION IN THE PLAN. Each director of the Company who is not
otherwise an employee of the Employer or any subsidiary of the Company and was
not an employee of the Employer or subsidiary for a period of at least one year
before the Date of Grant shall be eligible to participate in the Plan.
5. STOCK SUBJECT TO THE PLAN. Subject to Section 12 of the Plan, there
shall be reserved for issuance under the Plan an aggregate of 45,000 shares of
Company Stock plus 1.8% of the total number of shares of Company Stock sold in
the Offering in excess of the Minimum Offering, which shall be authorized, but
unissued shares. Shares allocable to Options or portions thereof
5
<PAGE>
granted under the Plan that expire or otherwise terminate unexercised may again
be subjected to an Option under the Plan.
6. NON-STATUTORY STOCK OPTIONS. All options granted under the Plan shall be
non-statutory in nature and shall not be entitled to special tax treatment under
Code section 422.
7. AWARD, TERMS, CONDITIONS AND FORM OF OPTIONS. Each Option shall be
evidenced by a written agreement in such form as the Board shall from time to
time approve, which agreement shall comply with and be subject to the following
terms and conditions:
(a) Automatic Award of Option.
(i) As of the Initial Closing, each Eligible Director shall
automatically receive an Option to purchase 5,500 shares of Company
Stock plus 0.0125% of the number of shares of Company Stock in excess
of the Minimum Offering sold by the Initial Closing.
(ii) As of each June 1 during the years 1999 through 2003
(inclusive), each Eligible Director shall automatically receive an
Option to purchase 0.02% of the total number of shares of Company
Stock issued and outstanding on that date.
(iii) As of the election as a director of any new person who
qualifies as an Eligible Director, such Eligible Director shall
automatically receive an Option to purchase 5,000 shares of Company
Stock.
(iv) If at any time under the Plan there are not sufficient
shares available to fully permit the
6
<PAGE>
automatic Option grants described in this paragraph, the Option grants
shall be reduced pro rata (to zero if necessary) so as not to exceed
the number of shares available.
(b) Option Exercise Price. The Option exercise price shall be the Fair
Market Value of the shares of Company Stock subject to the Option on the Date of
Grant.
(c) Options Not Transferable. An Option shall not be transferable by
the optionee otherwise than by will, or by the laws of descent and distribution,
and shall be exercised during the lifetime of the optionee only by him. An
Option transferred by will or by the laws of descent and distribution may be
exercised by the optionee's personal representative within one year of the date
of the optionee's death to the extent the optionee could have exercised the
Option on the date of his death. No Option or interest therein may be
transferred, assigned, pledged or hypothecated by the optionee during his
lifetime, whether by operation of law or otherwise, or be made subject to
execution, attachment or similar process.
(d) Exercise of Options. In no event shall an Option be exercisable
earlier than six months from the later of the Date of Grant or the date of
approval of the Plan by stockholders of the Company. Furthermore, no Option may
be exercised:
(i) unless at such time the optionee is a director of the
Company, except that he may exercise the Option within three years of
the date he ceases to
7
<PAGE>
be a director of the Company if he ceased to be a director more than
six months after the Date of Grant of the Option;
(ii) after the expiration of ten years from the Date of Grant;
and
(iii) except by written notice to the Company at its principal
office, stating the number of shares the optionee has elected to
purchase, accompanied by payment in cash and/or by delivery to the
Company of shares of Company Stock (valued at Fair Market Value on the
date of exercise) in the amount of the full Option exercise price for
the shares of Company Stock being acquired thereunder.
8. WITHHOLDING. If the Company is required by law to withhold federal or
state income taxes when an Option is exercised, the Company shall have the right
to retain or sell without notice shares of Company Stock having a Fair Market
Value sufficient on such date or dates as may be determined by the Board (but
not more than five business days prior to the date on which such shares would
otherwise have been delivered) to cover the amount of any federal or state
income tax required to be withheld or otherwise deducted and paid with respect
to such payment and the exercise of the Option, remitting any balance to the
optionee; provided, however, that the optionee shall have the right to make
other arrangements satisfactory to the Company or to provide the Company with
the funds to enable it to pay such
8
<PAGE>
tax. Notwithstanding the foregoing, the Company shall not sell shares of Company
Stock if the Optionee is an Insider and such sale will cause the Optionee to
incur a liability under Section 16(b) of the Exchange Act.
9. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. The Board shall have the
power to modify, extend or renew outstanding Options and to authorize the grant
of new Options in substitution therefor, provided that any such action may not
enhance the rights of the optionee without stockholder approval or have the
effect of altering, enhancing or impairing any rights or obligations of any
person under any Option previously granted without the consent of the optionee.
10. TERMINATION. The Plan shall terminate upon the earlier of:
(e) the adoption of a resolution of the Board terminating the Plan; or
(f) ________, 2009.
No termination of the Plan shall without his consent materially and adversely
affect any of the rights or obligations of any person under any Option
previously granted under the Plan.
11. LIMITATION OF RIGHTS.
(g) No Right to Continue as a Director. Neither the Plan nor the
granting of an Option nor any other action taken pursuant to the Plan shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Company will retain any person as a director for any period of time.
9
<PAGE>
(h) No Stockholders Rights Under Options. An optionee shall have no
rights as a stockholder with respect to shares covered by his Option until the
date of exercise of the Option, and, except as provided in Section 12, no
adjustment will be made for dividends or other rights for which the record date
is prior to the date of such exercise.
12. CHANGES IN CAPITAL STRUCTURE.
(i) In the event of a stock dividend, stock split or combination of
shares, recapitalization or merger in which the Company is the surviving
corporation or other change in the Company's capital stock (including, but not
limited to, the creation or issuance to shareholders generally of rights,
options or warrants for the purchase of common stock or preferred stock of the
Company), the number and kind of shares of stock or securities of the Company to
be subject to the Plan and to Options then outstanding or to be granted
thereunder, the maximum number of shares or securities which may be delivered
under the Plan, the exercise price and other relevant provisions shall be
appropriately adjusted by the Board, whose determination shall be binding on all
persons. If the adjustment would produce fractional shares with respect to any
unexercised Option, the Board may adjust appropriately the number of shares
covered by the Option so as to eliminate the fractional shares.
(j) If the Company is a party to a consolidation or a merger in which
the Company is not the surviving corporation, a transaction that results in the
acquisition of substantially all
10
<PAGE>
of the Company's outstanding stock by a single person or entity, or a sale or
transfer of substantially all of the Company's assets, the Board may take such
actions with respect to outstanding Options as the Board deems appropriate.
(k) Notwithstanding anything in the Plan to the contrary, the Board
may take the foregoing actions without the consent of any optionee and the
Board's determination shall be conclusive and binding on all persons for all
purposes.
13. AMENDMENT OF THE PLAN. The Board (except as provided below) may suspend
or discontinue the Plan or revise or amend the Plan in any respect; provided,
however, that without approval of the stockholders of the Company no revision or
amendment shall increase the number of shares subject to the Plan (except as
provided in Section 12) or materially increase the benefits accruing to
participants under the Plan. The Plan shall not be amended more than once every
six months other than an amendment required to comply with changes in the
Internal Revenue Code or the Employee Retirement Income Security Act of 1974 or
regulations thereunder. Notwithstanding the foregoing, the Board may
unilaterally amend the Plan and the terms of Options granted hereunder to ensure
compliance with Rule 16b-3 of the Securities and Exchange Commission promulgated
under the Securities Exchange Act of 1934, as amended.
14. NOTICE. All notices and other communications required or permitted to
be given under this Plan shall be in writing and shall be deemed to have been
duly given if delivered personally
11
<PAGE>
or mailed first class, postage prepaid, as follows: (a) if the Company - at its
principal business address to the attention of the President; (b) if to any
participant - at the last address of the participant know to the sender at the
time the notice or other communication is sent.
15. GOVERNING LAW. The terms of this Plan shall be governed by the laws of
the Commonwealth of Virginia.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed this
___ day of ______, 1999.
APPLE SUITES, INC.
By
-------------------------
Glade M. Knight,
Chairman of the Board
12
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 21, 1999, in the Registration Statement (Form S-11
No. 333-00000) and related Prospectus of Apple Suites, Inc. for the registration
of 30,166,666 shares of its common stock.
/s/ Ernst & Young LLP
Richmond, VA
April 21, 1999
