AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1999
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CORNERSTONE REALTY INCOME TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 6798 54-1589139
(State or other jurisdiction (Primary standard industrial (I.R.S. Employer
of organization) classification code) Identification No.)
306 East Main Street
Richmond, Virginia 23219
(804) 643-1761
(Address, including zip code, and telephone number. including area code, of
registrant's principal executive office)
Glade M. Knight
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:
<TABLE>
<S> <C> <C>
Leslie A. Grandis David H. Pankey Elizabeth G. Hester
McGuire, Woods, Battle & Boothe LLP McGuire, Woods, Battle & Boothe LLP Mays & Valentine, L.L.P.
One James Center Washington Square, Suite 1200 NationsBank Center
901 East Cary Street 1050 Connecticut Avenue, N.W. 1111 East Main Street
Richmond, Virginia 23219 Washington, D.C. 20036 Richmond, Virginia 23219
</TABLE>
Approximate date of commencement of proposed sale to the public: Upon
consummation of the merger of Apple Residential Income Trust, Inc. with and into
Cornerstone Acquisition Company, with Cornerstone Acquisition Company as the
surviving corporation, pursuant to an Agreement and Plan of Merger dated as of
March 30, 1999, described in the enclosed Joint Proxy Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH
CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A Convertible Preferred Shares ......... 12,670,964 $ $263,040,244 $ 73,125.19
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This Registration Statement also relates to such additional number of
shares of the Registrant's stock as may be issuable as a result of a stock
dividend, stock split, split-up, recapitalization or other similar event.
(2) Represents the estimated maximum number of shares of the Registrant's
Series A Convertible Preferred Shares to be issued to shareholders of Apple
in connection with the merger.
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) and based on the book value as of March 31,
1999 of all Apple common shares and Apple Class B Convertible Shares
outstanding, all of which are to be acquired by Cornerstone.
--------------
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
[CORNERSTONE REALTY INCOME TRUST, INC. LOGO OMITTED] [APPLE LOGO APPEARS HERE]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Cornerstone Realty Income Trust, Inc. and Apple
Residential Income Trust, Inc. have each unanimously approved the Agreement and
Plan of Merger, dated as of March 30, 1999, by and between Cornerstone, Apple
and Cornerstone Acquisition Company, a subsidiary of Cornerstone, by which
Apple is to merge with and into Cornerstone Acquisition. Cornerstone
Acquisition will be the surviving corporation.
In the merger, holders of Apple common shares will receive one Cornerstone
Series A Convertible Preferred Share for each 2.5 Apple common shares they own.
Holders of Cornerstone common shares will continue to own their existing
Cornerstone common shares.
Glade M. Knight, Stanley J. Olander, Jr. and Debra A. Jones own all 200,000
of the outstanding Apple Class B Convertible Shares. Pursuant to the terms of
these securities, and in conjunction with the merger, the Apple Class B
Convertible Shares will convert into 1,600,000 Apple common shares which will
immediately be exchanged for 640,000 Cornerstone Series A Convertible Preferred
Shares, or one Cornerstone Series A Convertible Preferred Share for each 2.5
Apple common shares, the same exchange ratio applicable to all other Apple
common shareholders.
At a special meeting of Cornerstone's shareholders, Cornerstone's
shareholders will be asked to vote on the merger, the related issuance of Series
A Convertible Preferred Shares and the related bylaw amendments.
At a special meeting of Apple's shareholders, Apple's shareholders will be
asked to vote on the merger.
THE CORNERSTONE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE
MERGER, THE RELATED ISSUANCE OF SERIES A CONVERTIBLE PREFERRED SHARES AND THE
RELATED BYLAW AMENDMENTS.
THE APPLE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE MERGER.
The merger requires the approval of the holders of at least a majority of
the outstanding Apple common shares entitled to vote. The merger, the related
issuance of Series A Convertible Preferred Shares and the related bylaw
amendments require the approval of a majority of the outstanding Cornerstone
common shares entitled to vote. As parties to the merger agreement, the holders
of all the Apple Class B Convertible Shares outstanding have consented to and
approved the merger.
/s/ Glade M. Knight /s/ Glade M. Knight
Glade M. Knight Glade M. Knight
Chairman and Chief Executive Officer Chairman and Chief Executive Officer
Cornerstone Realty Income Trust, Inc. Apple Residential Income Trust, Inc.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend your
shareholders meeting, please vote on the proposal(s) submitted at your meeting
by completing and mailing the enclosed proxy card to us. If you sign, date and
mail your proxy card without indicating how you wish to vote, your proxy will be
counted as a vote in favor of the proposal(s) submitted at your meeting. If you
fail to return your proxy card, the effect will be a vote against the merger
unless you attend the shareholders meeting and vote in favor of the merger.
<PAGE>
The dates, times and places of the shareholders meetings are as follows:
For Cornerstone Realty Income Trust, Inc. shareholders:
July ___, 1999 at [ ] a.m. [p.m.]
The Jefferson Hotel
101 West Franklin Street
Richmond, Virginia 23219
For Apple Residential Income Trust, Inc. shareholders:
July ___, 1999 at [ ] a.m. [p.m.]
The Jefferson Hotel
101 West Franklin Street
Richmond, Virginia 23219
This Joint Proxy Statement/Prospectus provides you with detailed
information about the merger and the other matters that will be submitted for
shareholder approval at Cornerstone's and Apple's respective shareholders
meetings. We encourage you to read this entire document carefully. In addition,
you may obtain information about our companies from documents that we have filed
with the Securities and Exchange Commission.
SHAREHOLDERS ARE URGED TO CONSIDER THOSE MATTERS SET FORTH IN "RISK
FACTORS" BEGINNING ON PAGE [ ] OF THIS JOINT PROXY STATEMENT / PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED OR DISAPPROVED OF THE SHARES TO BE ISSUED UNDER THIS
JOINT PROXY STATEMENT/PROSPECTUS OR PASSED UPON THE ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Joint Proxy Statement/Prospectus dated June ___, 1999, and first mailed to
shareholders on or about June ___, 1999.
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of Cornerstone Realty Income Trust, Inc.
will be held at The Jefferson Hotel, 101 West Franklin Street, Richmond,
Virginia 23219, on July ___, 1999 at [ ] a.m. [p.m.], local time. At this
meeting, we propose to consider and approve the merger of Apple Residential
Income Trust, Inc. with and into Cornerstone Acquisition Company, a subsidiary
of Cornerstone, the related issuance of Series A Convertible Preferred Shares
and the related bylaw amendments.
The merger and related matters and transactions are described more fully in
the attached Joint Proxy Statement/Prospectus, which includes a copy of the
merger agreement.
Only shareholders who owned Cornerstone common shares at the close of
business on June ___, 1999 may vote at this meeting. A list of holders of
Cornerstone common shares will be available during ordinary business hours at
Cornerstone's executive office, 306 East Main Street, Richmond, Virginia 23219,
for ten days prior to the meeting. Holders of Cornerstone common shares may
examine this list for purposes related to the meeting.
THE CORNERSTONE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE
MERGER, THE RELATED ISSUANCE OF SERIES A CONVERTIBLE PREFERRED SHARES AND THE
RELATED BYLAW AMENDMENTS.
THE CORNERSTONE BOARD OF DIRECTORS IS SOLICITING THE ENCLOSED PROXY CARD.
PLEASE FILL IN AND SIGN THE CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. YOU MAY REVOKE THIS PROXY PRIOR TO THE MEETING BY
WRITING TO CORNERSTONE AND STATING THAT YOU REVOKE THE PROXY OR BY DELIVERING A
LATER DATED PROXY. YOU MAY ATTEND THE MEETING AND VOTE IN PERSON, EVEN IF YOU
ALREADY DELIVERED A PROXY CARD.
By order of the Board of Directors of
Cornerstone Realty Income Trust, Inc.
/s/ Stanley J. Olander, Jr.
----------------------------------------
STANLEY J. OLANDER, JR.
Secretary
Richmond, Virginia
June ___, 1999
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of Apple Residential Income Trust, Inc.
will be held at The Jefferson Hotel, 101 West Franklin Street, Richmond,
Virginia 23219, on July ___, 1999 at [ ] a.m. [p.m.], local time. At this
meeting, we propose to consider and approve the merger of Apple with and into
Cornerstone Acquisition Company, a subsidiary of Cornerstone Realty Income
Trust, Inc.
The merger and related matters and transactions are described more fully in
the attached Joint Proxy Statement/Prospectus, which includes a copy of the
merger agreement.
Only shareholders who owned Apple common shares at the close of business on
June ___, 1999 may vote at this meeting. A list of holders of Apple common
shares will be available during ordinary business hours at Apple's executive
office, 306 East Main Street, Richmond, Virginia 23219, for ten days prior to
the meeting. Holders of Apple common shares may examine this list for purposes
related to the meeting.
Holders of Apple common shares who object to the merger will be entitled to
dissenters rights under Virginia law.
THE APPLE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE MERGER.
THE APPLE BOARD OF DIRECTORS IS SOLICITING THE ENCLOSED PROXY CARD. PLEASE
FILL IN AND SIGN THE CARD AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. YOU MAY REVOKE THIS PROXY PRIOR TO THE MEETING BY WRITING TO APPLE AND
STATING THAT YOU REVOKE THE PROXY OR BY DELIVERING A LATER DATED PROXY. YOU MAY
ATTEND THE MEETING AND VOTE IN PERSON, EVEN IF YOU ALREADY DELIVERED A PROXY
CARD.
By order of the Board of Directors of
Apple Residential Income Trust, Inc.
/s/ Stanley J. Olander, Jr.
----------------------------------------
STANLEY J. OLANDER, JR.
Secretary
Richmond, Virginia
June ___, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER ................................................ 1
SUMMARY ............................................................................... 4
The Companies ........................................................................ 4
Summary Historical and Unaudited Pro Forma Condensed Combined Financial Data ......... 5
The Cornerstone Board of Directors' Recommendation to its Shareholders and Reasons for
the Merger ......................................................................... 8
The Apple Board of Directors' Recommendation to its Shareholders and Reasons for the
Merger ............................................................................. 9
The Cornerstone Meeting .............................................................. 10
The Apple Meeting .................................................................... 11
The Merger ........................................................................... 11
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE ....................................... 14
COMPARATIVE MARKET AND PER SHARE DATA ................................................. 16
RISK FACTORS .......................................................................... 16
THE MEETINGS .......................................................................... 22
THE CORNERSTONE MEETING ............................................................... 22
THE APPLE MEETING ..................................................................... 25
APPROVAL OF THE AGREEMENT AND PLAN OF MERGER .......................................... 26
THE COMPANIES ......................................................................... 27
INTERESTS OF CERTAIN PERSONS IN THE MERGER ............................................ 53
THE MERGER AGREEMENT .................................................................. 55
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS ............................................. 62
PRINCIPAL AND MANAGEMENT SHAREHOLDERS OF CORNERSTONE .................................. 67
PRINCIPAL AND MANAGEMENT SHAREHOLDERS OF APPLE ........................................ 68
COMPARATIVE PER SHARE MARKET PRICE AND DISTRIBUTION INFORMATION ....................... 68
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS. 69
CORNERSTONE SELECTED FINANCIAL INFORMATION ............................................ 70
APPLE SELECTED FINANCIAL INFORMATION .................................................. 72
DESCRIPTION OF CAPITAL STOCK OF CORNERSTONE ........................................... 86
COMPARISON OF SHAREHOLDER RIGHTS ...................................................... 90
OTHER MATTERS ......................................................................... 92
LEGAL MATTERS ......................................................................... 93
EXPERTS ............................................................................... 93
WHERE YOU CAN FIND MORE INFORMATION ................................................... 95
ANNEX A: AGREEMENT AND PLAN OF MERGER ................................................. A-1
ANNEX B: OPINION OF PAINEWEBBER INCORPORATED .......................................... B-1
ANNEX C: OPINION OF BOWLES HOLLOWELL CONNER ........................................... C-1
ANNEX D: ARTICLE 15 OF THE VIRGINIA STOCK CORPORATION ACT ............................. D-1
</TABLE>
i
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE CORNERSTONE AND APPLE PROPOSING THE MERGER?
A: The merger will provide both Apple and Cornerstone greater opportunities as
part of a larger and more geographically diverse owner and operator of
apartment properties. The merger will create a leading owner and operator
of apartment properties in the southern United States by combining Apple's
established presence in the Dallas/Fort Worth market with Cornerstone's
presence in the southeastern United States. Cornerstone and Apple expect
the merger to enhance their balance sheet flexibility, through a lower debt
to total market capitalization and debt to total assets ratio, and to
provide greater access to capital on more attractive terms. Cornerstone and
Apple management also believe that the long term growth prospects for the
combined companies are more attractive than the growth prospects for each
company standing alone. Additionally, the merger will resolve issues
regarding the timing and terms of Cornerstone's publicly disclosed
intention to acquire Apple.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Apple Shareholders:
In the merger, holders of Apple common shares will receive one Cornerstone
Series A Convertible Preferred Share for each 2.5 Apple common shares held
by them.
Cornerstone Shareholders:
Holders of Cornerstone common shares will continue to own those shares
immediately after the merger.
Q: WHAT ARE THE RIGHTS OF THE SERIES A CONVERTIBLE PREFERRED SHARES?
A: The Series A Convertible Preferred Shares:
o are entitled to cumulative preferred quarterly distributions when
declared at an annual rate of $2.125 (8.5%) for the first twelve
months following the merger, $2.25 (9.0%) for the second twelve months
and $2.375 (9.5%) thereafter;
o are convertible into Cornerstone common shares at an initial
conversion rate of 1.582 common shares for each Series A Convertible
Preferred Share;
o are entitled to a liquidation preference of $25.00 per share;
o may not be redeemed by Cornerstone for five years after the merger,
after which Cornerstone may redeem them by paying the liquidation
preference in cash or Cornerstone common shares; and
o will not vote for the election of Cornerstone directors unless their
distributions have not been paid for six consecutive quarters, in
which event, they would be entitled to elect two additional directors
until all their distributions have been paid.
Q: WHAT HAPPENS TO MY FUTURE DISTRIBUTIONS?
A: Holders of Apple common shares will continue to receive distributions on
the Apple common shares, when and if declared, pro rated to the date of the
merger. After the merger, holders of Series A Convertible Preferred Shares
will be entitled to receive distributions when and if declared by the
Cornerstone Board of Directors. Such distributions, if declared, are to be
paid quarterly at an annual rate per share of $2.125 (8.5%) for the first
twelve months following the merger, $2.25 (9.0%) for the second twelve
months following the merger and $2.375 (9.5%) thereafter. If the
Cornerstone Board does not declare dividends on the Series A Convertible
Preferred Shares, dividends on such shares will accumulate and be payable
in arrears.
1
<PAGE>
Cornerstone common shareholders will continue to receive distributions when
and if declared by the Cornerstone Board of Directors, except that holders
of Cornerstone Series A Convertible Preferred Shares will be entitled to
receive distributions prior to distributions being paid on the Cornerstone
common shares.
The amount and timing of any future distributions will be subject to
approval by Cornerstone's Board of Directors. As a real estate investment
trust, Cornerstone will be obligated to distribute substantially all of its
current taxable earnings to its shareholders on an annual basis. The
payment of distributions in the future will depend on tax law requirements,
Cornerstone's financial condition and earnings, business conditions and
other factors.
Q: WHY ARE APPLE COMMON SHAREHOLDERS RECEIVING SERIES A CONVERTIBLE PREFERRED
SHARES?
A: Much of Apple's property portfolio has been recently acquired and,
therefore, does not yet reflect the full benefit of the improvements
completed since its acquisition. To provide the Apple shareholders with the
benefit of the anticipated future growth in this portfolio and at the same
time providing Cornerstone with the benefits of accretion from the merger,
Cornerstone offered a convertible preferred share with dividends that will
increase to $2.375 (9.5%) after 2 years. In addition, Apple shareholders
may participate in the appreciation of Cornerstone's common shares by
converting their Series A Convertible Preferred Shares at any time. In the
meanwhile, the Series A Convertible Preferred Shares will benefit from
their senior position in Cornerstone's capital structure with a $25
liquidation preference and a priority in dividend payments over the
Cornerstone common shareholders.
Q: WHAT ARE THE DETRIMENTS OF THE PROPOSED MERGER?
A: Cornerstone and Apple expect the merger to have the following potential
detriments to their shareholders:
o holders of Series A Convertible Preferred Shares will have a
preference with respect to regular distributions and distributions
upon liquidations over Cornerstone common shareholders;
o as holders of Cornerstone Series A Convertible Preferred Shares, Apple
common shareholders generally will no longer be entitled to vote for
the election of directors or with respect to other matters; and
o the risk that the benefits sought in the merger will not be obtained.
Q: WHAT DO I NEED TO DO NOW?
A: Complete, sign and mail your proxy card in the enclosed return envelope as
soon as possible, so that your shares may be represented at the
shareholders meetings. The Cornerstone and Apple Boards of Directors each
independently and unanimously recommend voting in favor of the merger.
Q: SHOULD I ACT NOW TO EXCHANGE MY APPLE COMMON SHARES?
A: No. After the merger is completed, Apple shareholders will receive written
instructions for exchanging their Apple common shares for Cornerstone
Series A Convertible Preferred Shares.
Q: CAN I CHANGE MY VOTE AFTER I SEND IN MY PROXY?
A: Yes. You can change your vote at any time before we vote your proxy at the
shareholders meeting. You can do so in one of three ways. First, you can
send a written notice dated after your proxy stating that you would like to
revoke your proxy. Second, you can complete a new proxy card and send it to
the Secretary of Cornerstone or Apple, as the case may be, and the new
proxy card will automatically replace any earlier dated proxy card that you
returned. Third, you can attend your shareholders meeting and vote in
person.
2
<PAGE>
You should send any written notice of revocation, request for a new proxy
card or completed new proxy card to the Secretary of Cornerstone or Apple,
as the case may be, at the following addresses:
Cornerstone Realty Income Trust, Inc. Apple Residential Income Trust, Inc.
306 East Main Street 306 East Main Street
Richmond, Virginia 23219 Richmond, Virginia 23219
Attention: Secretary Attention: Secretary
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares with respect to the merger only if you
provide instructions to your broker on how to vote. Please tell your broker
how you would like him or her to vote your shares. If you do not tell your
broker how to vote, you will be in effect voting against the merger.
Q: WHEN AND WHERE ARE THE SHAREHOLDERS MEETINGS?
A: The Cornerstone meeting will be held at The Jefferson Hotel, 101 West
Franklin Street, Richmond, Virginia 23219, on July ___, 1999 at [ ] a.m.
[p.m.], local time.
The Apple meeting will be held at The Jefferson Hotel, 101 West Franklin
Street, Richmond, Virginia 23219, on July ___, 1999 at [ ] a.m. [p.m.],
local time.
Q: IN ADDITION TO VOTING ON THE MERGER, WHAT ELSE WILL HAPPEN AT THE
CORNERSTONE SHAREHOLDERS MEETING?
A: The Cornerstone common shareholders will also vote on the issuance of the
Series A Convertible Preferred Shares and the bylaw amendments related to
the merger. No other matters are currently scheduled to be voted on at the
Cornerstone meeting.
Q: IN ADDITION TO VOTING ON THE MERGER, WHAT ELSE WILL HAPPEN AT THE APPLE
SHAREHOLDERS MEETING?
A: No other matters are currently scheduled to be voted on at the Apple
meeting.
Q: WHY WILL APPLE SHAREHOLDERS RECEIVE CORNERSTONE SERIES A CONVERTIBLE
PREFERRED SHARES BUT CORNERSTONE SHAREHOLDERS WILL NOT RECEIVE ANY
ADDITIONAL SHARES OF STOCK IN THE MERGER?
A: Apple will be merged with and into Cornerstone Acquisition Company, a
subsidiary of Cornerstone, and will no longer be a separate company. As the
parent of Cornerstone Acquisition, all of Cornerstone's currently
outstanding stock will remain outstanding.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the merger shortly after the shareholders meetings.
Q: WILL I HAVE TO PAY FEDERAL INCOME TAXES AS A RESULT OF THE MERGER?
A: No. The receipt of Cornerstone Series A Convertible Preferred Shares is
expected to be tax-free to Apple's shareholders.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have questions about the merger, you should contact:
For Cornerstone Shareholders: For Apple Shareholders:
Cornerstone Realty Income Trust, Inc. Apple Residential Income Trust, Inc.
306 East Main Street 306 East Main Street
Richmond, Virginia 23219 Richmond, Virginia 23219
Attention: David McKenney Attention: David McKenney
Phone Number: (804) 643-1761 Phone Number: (804) 643-1761
3
<PAGE>
SUMMARY
This summary highlights selected information from this Joint Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To better understand the merger and for a more complete
description of the legal terms of the merger, you should carefully read this
entire document and the documents to which we have referred you under the
heading "Where You Can Find More Information" on page[ ].
This Joint Proxy Statement/Prospectus contains certain forward-looking
statements concerning, among other things, the benefits expected as a result of
the merger and the future financial performance of Cornerstone after the merger.
Actual results may differ significantly from the forward-looking statements.
Please see the Risk Factors disclosed on page [ ].
THE COMPANIES
CORNERSTONE REALTY INCOME TRUST, INC.
306 East Main Street
Richmond, Virginia 23219
(804) 643-1761
Cornerstone is a self-administered and self-managed real estate investment
trust with expertise in the management, acquisition, repositioning and ownership
of apartment communities. Cornerstone acquires and operates existing residential
apartment complexes located in North Carolina, Virginia, South Carolina and
Georgia. As of April 30, 1999, Cornerstone owned 58 properties, comprising
13,462 apartment units, and had total assets of approximately $555 million.
APPLE RESIDENTIAL INCOME TRUST, INC.
306 East Main Street
Richmond, Virginia 23219
(804) 643-1761
Apple is an externally-advised and externally-managed real estate
investment trust focused on the acquisition and ownership of apartment
properties principally in Texas. Apple has no paid employees and has engaged
Cornerstone to serve as its advisor and property manager. As of April 30, 1999,
Apple owned 27 properties, comprising 7,274 apartment units within Texas and
Virginia, principally in the Dallas/Fort Worth area, and had total assets of
approximately $305 million.
THE COMBINED COMPANIES
After the merger, Cornerstone will have consolidated total assets of
approximately $860 million and will own 85 properties comprising 20,736
apartment units within Texas, North Carolina, Virginia, South Carolina and
Georgia.
TERMS OF THE MERGER
Holders of Apple common shares will receive one Cornerstone Series A
Convertible Preferred Share for each 2.5 Apple common shares they own. Holders
of the 200,000 Apple Class B Convertible Shares outstanding will convert these
shares into 1,600,000 Apple common shares, which will immediately be exchanged
for 640,000 Cornerstone Series A Convertible Preferred Shares, or one
Cornerstone Series A Convertible Preferred Shares for each 2.5 Apple common
shares, the same exchange ratio applicable to all other Apple common
shareholders. Holders of Cornerstone capital stock will continue to own their
existing Cornerstone capital stock.
4
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
We are providing the following summary historical financial and pro forma
data to aid you in your analysis of the financial aspects of the merger. This
information is only a summary and you should read it in conjunction with
Cornerstone's and Apple's historical financial statements (and related notes)
contained in the reports that have been filed with the Securities and Exchange
Commission and incorporated by reference into this Joint Proxy Statement /
Prospectus. You should also read the unaudited pro forma condensed combined
financial statements (and related notes) appearing elsewhere in this Joint Proxy
Statement / Prospectus. See "Where You Can Find More Information." Cornerstone
and Apple's consolidated financial information for each of the fiscal years
presented were derived from their respective audited financial statements. The
financial information for each of the quarterly periods presented were derived
from their respective unaudited financial statements.
The pro forma data accounts for the merger under purchase accounting and
assumes the merger had occurred on January 1, 1998 and 1999, and as if six
apartment communities acquired during 1998 had been acquired by Cornerstone on
January 1, 1998. Also, the pro forma combined operating and other data assumes
16 apartment communities acquired by Apple during 1998 and 2 apartment
communities acquired by Apple during 1999 had been acquired on January 1, 1998.
The pro forma data includes the historical results of operations for the periods
indicated regardless of when Cornerstone or Apple, as the case may be, acquired
such properties. As a result, the pro forma data may not be indicative of the
results of operations in future periods. The March 31, 1999 pro forma balance
sheet data assumes the merger had occurred on that date.
5
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996
<S> <C> <C> <C>
OPERATING DATA:
Rental income .......................................... $ 8,158,994 $16,266,610 $ 40,261,674
Property operating expense (a) ......................... $ 5,901,759 $11,005,558 $ 17,198,882
Interest income (expense) .............................. $ 110,486 $ (65,548) $ (1,140,667)
Net income (loss) ...................................... $ 2,386,303 $ 5,229,715 $ (4,169,849)
Distributions declared and paid common shareholders..... $ 2,977,136 $ 6,316,185 $ 15,934,901
- --------------------------------------------------------- ------------ ----------- ------------
PER SHARE:
Net income (loss) ...................................... $ 0.60 $ 0.64 $ (0.21)
Distributions to commons shareholders .................. $ 0.89 $ 0.96 $ 0.99
Distributions representing return of capital ........... $ 0.21 $ 0.17 $ 0.14
Weighted average shares outstanding-basic .............. 4,000,558 8,176,803 20,210,432
- --------------------------------------------------------- ------------ ----------- ------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
PRO FORMA(E)
COMBINED
1997 1998 1998
<S> <C> <C> <C>
OPERATING DATA:
Rental income .......................................... $ 70,115,678 $ 88,752,254 $ 138,612,871
Property operating expense (a) ......................... $ 27,339,955 $ 33,797,439 $ 56,991,318
Interest income (expense) .............................. $ (7,230,205) $ (12,175,940) $ (16,082,530)
Net income (loss) ...................................... $ 19,225,553 $ 23,210,642 $ 33,407,342
Distributions declared and paid common shareholders..... $ 31,324,870 $ 38,317,602 $ 39,078,676
- ---------------------------------------------------------- ------------ ------------- -------------
PER SHARE:
Net income (loss) ...................................... $ 0.59 $ 0.62 $ 0.26
Distributions to commons shareholders .................. $ 1.00 $ 1.03 $ 1.03
Distributions representing return of capital ........... $ 0.23 $ 0.20 --
Weighted average shares outstanding-basic .............. 32,617,823 37,630,546 37,940,463
- ---------------------------------------------------------- ------------ ------------- -------------
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31,
-------------------------------------------------
PRO FORMA(E)
COMBINED
1998 1999 1999
<S> <C> <C> <C>
OPERATING DATA:
Rental income .......................................... $ 20,120,435 $ 23,467,091 $ 34,883,374
Property operating expense (a) ......................... $ 7,535,693 $ 8,710,621 $ 13,347,567
Interest income (expense) .............................. $ (2,727,908) $ (3,324,574) $ (3,501,748)
Net income (loss) ...................................... $ 5,236,048 $ 5,832,410 $ 9,269,657
Distributions declared and paid common shareholders..... $ 8,879,092 $ 10,169,836 $ 10,222,147
- --------------------------------------------------------- ------------ ------------ ------------
PER SHARE:
Net income (loss) ...................................... $ 0.15 $ 0.15 $ 0.26
Distributions to commons shareholders .................. $ 0.26 $ 0.26 $ 0.26
Distributions representing return of capital ........... -- -- --
Weighted average shares outstanding-basic .............. 35,758,411 39,315,952 39,315,952
- --------------------------------------------------------- ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in rental property ....... $54,107,358 $129,696,447 $329,715,853 $487,575,196 $587,438,358
Total assets ........................ $57,257,950 $133,181,032 $322,870,574 $474,186,450 $552,347,608
Notes payable ....................... $ 5,000,000 $ 8,300,000 $ 55,403,000 $151,569,147 $201,892,999
Shareholders' equity ................ $51,436,863 $122,154,420 $254,569,705 $315,328,252 $339,171,496
Shares outstanding .................. 5,458,648 12,754,331 28,141,509 35,510,327 39,113,917
- -------------------------------------- ----------- ------------ ------------ ------------ ------------
<CAPTION>
AS OF MARCH 31,
-------------------------------
PRO FORMA
COMBINED
1999 1999
<S> <C> <C>
BALANCE SHEET DATA:
Investment in rental property ....... $589,198,018 $848,785,615
Total assets ........................ $553,118,097 $853,399,814
Notes payable ....................... $205,503,092 $237,541,421
Shareholders' equity ................ $337,377,662 $600,417,906
Shares outstanding .................. 39,370,146 39,370,146
- --------------------------------------- ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1994 1995 1996
<S> <C> <C> <C>
OTHER DATA:
Cash Flow from:
Operating activities .................................... $ 3,718,086 $ 9,618,956 $ 20,162,776
Investing activities .................................... $ (28,557,568) $ (75,589,089) $(194,519,406)
Financing activities .................................... $ 25,519,648 $ 68,754,842 $ 170,466,134
Number of properties owned at period-end ................ 9 19 40
- ---------------------------------------------------------- ------------- ------------- -------------
Ratio of earnings to combined fixed charges and
preferred stock distributions ........................... 188.36 17.77 (d)
- ---------------------------------------------------------- -------------- -------------- ----------------
FUNDS FROM OPERATIONS CALCULATION:
Net income (loss) before minority interest in operating
partnership ............................................. $ 2,386,303 $ 5,229,715 $ (4,169,849)
Depreciation of real estate ............................. 1,210,818 2,788,818 8,068,063
Distributions to preferred shareholders ................. -- -- --
Imputed interest on increasing rate preferred stock ..... -- -- --
Write off of start-up costs ............................. -- -- --
Management contract termination (b) ..................... -- -- 16,526,012
- ---------------------------------------------------------- -------------- -------------- -------------
Funds from operations (c) ............................... $ 3,597,121 $ 8,018,533 $ 20,424,226
- ---------------------------------------------------------- -------------- -------------- -------------
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
PRO FORMA(E)
COMBINED
1997 1998 1998
<S> <C> <C> <C>
OTHER DATA:
Cash Flow from:
Operating activities .................................... $ 34,973,533 $ 45,027,655 $ 61,129,885
Investing activities .................................... $ (161,969,343) $ (97,863,162) $ (116,559,973)
Financing activities .................................... $ 128,327,145 $ 50,911,886 $ 172,082,542
Number of properties owned at period-end ................ 51 58 84
- ----------------------------------------------------------- -------------- ------------- --------------
Ratio of earnings to combined fixed charges and
preferred stock distributions ........................... 3.51 2.82 1.24
- ----------------------------------------------------------- --------------- -------------- ---------------
FUNDS FROM OPERATIONS CALCULATION:
Net income (loss) before minority interest in operating
partnership ............................................. $ 19,225,553 $ 23,225,335 $ 33,513,094
Depreciation of real estate ............................. 15,163,593 20,741,130 30,144,024
Distributions to preferred shareholders ................. -- -- (23,673,643)
Imputed interest on increasing rate preferred stock ..... -- -- 2,172,386
Write off of start-up costs ............................. -- -- --
Management contract termination (b) ..................... 402,907 -- --
- ----------------------------------------------------------- --------------- -------------- ---------------
Funds from operations (c) ............................... $ 34,792,053 $ 43,966,465 $ 42,155,861
- ----------------------------------------------------------- --------------- -------------- ---------------
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31,
-----------------------------------------------------
PRO FORMA(E)
COMBINED
1998 1999 1999
<S> <C> <C> <C>
OTHER DATA:
Cash Flow from:
Operating activities .................................... $ 9,825,996 $ 10,211,096 $ 15,722,313
Investing activities .................................... $ (32,979,468) $ (1,759,660) $ (14,082,291)
Financing activities .................................... $ 22,401,192 $ (4,076,005) $ (1,035,519)
Number of properties owned at period-end ................ 53 58 84
- ----------------------------------------------------------- ------------- ------------ -------------
Ratio of earnings to combined fixed charges and
preferred stock distributions ........................... -- 2.69 1.20
- ----------------------------------------------------------- ------------- ------------- --------------
FUNDS FROM OPERATIONS CALCULATION:
Net income (loss) before minority interest in operating
partnership ............................................. $ 5,236,048 $ 5,883,111 $ 9,320,358
Depreciation of real estate ............................. 4,683,384 5,802,371 8,171,407
Distributions to preferred shareholders ................. -- -- (7,099,029)
Imputed interest on increasing rate preferred stock ..... -- -- 630,429
Write off of start-up costs ............................. -- 55,657 55,657
Management contract termination (b) ..................... -- -- --
- ----------------------------------------------------------- ------------- ------------- --------------
Funds from operations (c) ............................... $ 9,919,432 $ 11,741,139 $ 11,078,821
- ----------------------------------------------------------- ------------- ------------- --------------
</TABLE>
6
<PAGE>
(a) Property operating expenses include property and maintenance expense, taxes
and insurance expense, and property management expense.
(b) Included in the 1997 and 1996 operating results are $402,907 and
$16,526,012, respectively, of management contract termination expense
resulting from the Company's conversion to "self-administered" and
"self-managed" status. See Note 6 to the consolidated financial statements.
(c) Funds from operations is defined as income before gains (losses) on
investments, minority interest of unitholders in operating partnership, and
extraordinary items (computed in accordance with generally accepted
accounting principles) plus real estate depreciation and after adjustment
for significant nonrecurring items, if any. This definition conforms to the
recommendations set forth in a White Paper adopted by the National
Association of Real Estate Investment Trusts (NAREIT). Cornerstone
considers funds from operations in evaluating property acquisitions and its
operating performance, and believes that funds from operations should be
considered along with, but not as an alternative to, net income and cash
flows as a measure of Cornerstone's operating performance and liquidity.
Funds from operations, which may not be comparable to other similarly
titled measures of other REITs, does not represent cash generated from
operating activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available to fund cash
needs.
(d) Earnings for the year ended December 31, 1996 were inadequate to cover
fixed charges due to management contract termination expense resulting from
Cornerstone's conversion to "self-administered" and "self-managed" status.
See Note 6 to the consolidated financial statements. The amount of coverage
deficiency was $4,169,849 for the year ended December 31, 1996.
(e) To give effect to the merger with Apple and the operations of property
acquisitions made during 1998 and 1999 by Apple and seven property
acquisitions made by Cornerstone during 1998. (See Unaudited Pro Forma
Condensed Combined Financial Statements.)
7
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
SUMMARY HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------- ------------------------------
1996(C) 1997 1998 1998 1999
----------- -------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental income .......................... -- $12,005,968 $ 30,764,904 $ 4,928,751 $11,416,283
Property operating expenses (a) ........ -- $ 5,993,492 $ 14,958,699 $ 2,232,017 $ 5,116,362
Interest income (expense) .............. -- $ (235,708) $ 900,669 $ 323,886 $ (14,874)
Net income (loss) ...................... -- $ 3,499,194 $ 10,079,908 $ 1,959,718 $ 3,640,682
Distributions declared and paid ........ -- $ 3,249,098 $ 13,040,936 $ 2,038,051 $ 5,432,882
- ----------------------------------------- -- ----------- ------------ ------------ -----------
PER SHARE:
Net income (loss) ...................... -- $ 0.54 $ 0.51 $ 0.14 $ 0.12
Distributions .......................... -- $ 0.60 $ 0.82 $ 0.20 $ 0.21
Distributions representing return
of capital ........................... -- -- -- -- --
Weighted average shares
outstanding-basic .................... -- 6,493,114 19,910,408 13,882,117 29,243,930
- ----------------------------------------- -- ----------- ------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
AS OF DECEMBER 31, 1999
---------------------------------------- ----------------
1996 1997 1998
-------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in rental property ........ -- $ 89,634,348 $241,759,925 $262,999,579
Total assets ......................... $100 $112,485,520 $281,847,152 $304,168,956
Notes payable ........................ -- -- $ 25,165,861 $ 32,038,329
Shareholders' equity ................. $100 $109,340,555 $249,199,621 $266,800,244
Shares outstanding ................... 10 12,371,829 28,331,274 30,495,187
- --------------------------------------- ---- ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------------- -----------------------------------
1996 1997 1998 1998 1999
-------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Cash Flow from:
Operating activities ................ -- $ 7,075,025 $ 17,122,276 $ 2,274,018 $ 5,937,504
Investing activities ................ -- $ (88,753,814) $ (130,842,627) $ (26,755,525) $ (14,196,810)
Financing activities ................ -- $ 105,841,261 $ 129,630,977 $ 36,920,045 $ 13,891,854
Number of properties owned at
period-end ........................ -- 11 25 14 26
- -------------------------------------- -- ------------- -------------- ------------- -------------
FUNDS FROM OPERATIONS CALCULATION:
Net income .......................... -- $ 3,499,194 $ 10,079,908 $ 1,959,718 $ 3,640,682
Depreciation of real estate ......... -- 1,898,003 5,788,476 889,545 2,330,543
Write-off of start-up cost .......... -- -- -- -- 126,544
- -------------------------------------- -- ------------- -------------- ------------- -------------
Funds from operations(b) ............ -- $ 5,397,197 $ 15,868,384 $ 2,849,263 $ 6,097,769
- -------------------------------------- -- ------------- -------------- ------------- -------------
</TABLE>
(a) Property operating expenses include property and maintenance expenses,
taxes and insurance expenses, and property management fees.
(b) Funds from operations is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. This definition
conforms to the recommendations set forth in a White Paper adopted by the
National Association of Real Estate Investment Trusts (NAREIT). Apple
considers funds from operations in evaluating property acquisitions and its
operating performance, and believes that funds from operations should be
considered along with, but not as an alternative to, net income and cash
flows as a measure of Apple's operating performance and liquidity. Funds
from operations, which may not be comparable to other similarly titled
measures of other REITs, does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to fund cash needs.
(c) Apple commenced operations in January 1997.
8
<PAGE>
THE CORNERSTONE BOARD OF DIRECTORS'
RECOMMENDATION TO ITS SHAREHOLDERS
AND REASONS FOR THE MERGER
The Board of Directors of Cornerstone believes that the merger is advisable
and unanimously recommends that Cornerstone common shareholders vote for the
merger, the related issuance of Series A Convertible Preferred Shares and
related bylaw amendments.
We recommend the merger because:
o we expect the merger to be accretive to Cornerstone's funds from
operations per share;
o the merger will result in a larger and more geographically diverse
company by combining Apple's portfolio of apartment home communities
located primarily in the Dallas/Fort Worth area of Texas with
Cornerstone's portfolio of apartment communities in North Carolina,
Virginia, South Carolina and Georgia, resulting in a leading owner and
operator of apartment properties in the southern United States;
o we have extensive knowledge of Apple's portfolio, resulting from our
role as Apple's advisor;
o we should be able to easily integrate Apple's operations into
Cornerstone, since Cornerstone already manages Apple's properties;
o the larger combined portfolio of properties should improve operating
and administrative efficiencies;
o we expect the merger to provide enhanced balance sheet flexibility and
greater access to capital on more attractive terms than would be
available to Cornerstone on a stand-alone basis;
o the merger resolves issues regarding the timing and terms of
Cornerstone's publicly disclosed intention to acquire Apple; and
o the Cornerstone Special Committee unanimously recommended the merger
to the Cornerstone Board.
In deciding to recommend the merger, we also considered that:
o the merger will decrease Cornerstone's fixed charge coverage ratio,
after consideration of distributions to be paid to holders of the
Series A Convertible Preferred Shares;
o the merger will result in Cornerstone common shareholders being
exposed to risks of those markets in which Apple's properties are now
located; and
o the larger asset base of the combined companies could make the
perpetuation of the rate of growth in funds from operations from
acquisitions more difficult.
To review the Cornerstone Board's reasons for the merger in greater detail,
as well as related uncertainties, see pages ___ through ___.
THE APPLE BOARD OF DIRECTORS'
RECOMMENDATION TO ITS SHAREHOLDERS
AND REASONS FOR THE MERGER
The Board of Directors of Apple believes that the merger is advisable and
unanimously recommends that Apple common shareholders vote for the merger.
We recommend the merger because:
o the merger provides Apple shareholders with cumulative preferred
quarterly distributions of $2.125 (8.5%) for the first twelve months
following the merger, increasing to $2.25 (9.0%) in the second twelve
months and to $2.375 (9.5%) twelve months thereafter, before
distributions may be paid to Cornerstone common shareholders;
9
<PAGE>
o if Cornerstone were liquidated after the merger, you would receive
$25.00 per share before Cornerstone common shareholders may receive
anything;
o since the Series A Convertible Preferred Shares to be received by
Apple shareholders in the merger are convertible into Cornerstone
common shares, Apple shareholders will have the opportunity to share
in any future appreciation of Cornerstones common shares;
o we expect the anticipated future listing of the Series A Convertible
Preferred Shares on the NYSE to provide Apple shareholders with
greater liquidity;
o the merger will result in a larger and more geographically diverse
company by combining Apple's portfolio of apartment home communities
located primarily in the Dallas/Fort Worth area of Texas with
Cornerstone's portfolio of apartment communities in North Carolina,
Virginia, South Carolina and Georgia, resulting in a leading owner of
apartment properties in the southern United States;
o the larger combined portfolio of properties should improve operating
and administrative efficiencies;
o we expect the merger to provide enhanced balance sheet flexibility and
greater access to capital on more attractive terms than would be
available to Apple on a stand-alone basis;
o Apple will become part of a self-administered and self-managed REIT,
without having to incur the costs associated with creating or
acquiring a management company; and
o the Apple Special Committee unanimously recommended the merger to the
Apple Board.
In deciding to recommend the merger, we also considered:
o that while Apple common shareholders now possess sole voting power to
elect Apple directors, as holders of Series A Convertible Preferred
Shares after the merger, they will not, except in limited
circumstances, have the power to elect directors of Cornerstone;
o the merger will result in Apple common shareholders being exposed to
the risks of those markets in which Cornerstone's properties are now
located; and
o the larger asset base of the combined companies could make the
perpetuation of the rate of growth in funds from operations from
acquisitions more difficult.
To review the Apple Board's reasons for the merger in greater detail, as
well as related uncertainties, see pages ___ through ___.
THE CORNERSTONE MEETING
The special meeting of Cornerstone shareholders will be held at The
Jefferson Hotel, 101 West Franklin Street, Richmond, Virginia 23219, on July
___, 1999 at [ ] a.m. [p.m.], local time.
At the Cornerstone meeting, Cornerstone shareholders will consider and vote
upon a proposal to approve the merger, the related issuance of Series A
Convertible Preferred Shares and the related bylaw amendments.
The merger, the related issuance of Series A Convertible Preferred Shares
and the related bylaw amendments require the approval of at least a majority of
the outstanding Cornerstone common shares entitled to vote.
Only shareholders who owned Cornerstone common shares at the close of
business on June ___, 1999 may vote at the meeting. As of June ___, 1999, a
total of ______________ Cornerstone common shares were eligible to be voted at
the Cornerstone meeting. Directors and executive officers of Cornerstone and
their affiliates beneficially owned approximately ____% of these Cornerstone
common shares.
10
<PAGE>
THE APPLE MEETING
The special meeting of Apple shareholders will be held at The Jefferson
Hotel, 101 West Franklin Street, Richmond, Virginia 23219, on July ___, 1999 at
[ ] a.m. [p.m.], local time.
At the Apple meeting, Apple shareholders will consider and vote upon a
proposal to approve the merger.
The merger requires the approval of the holders of at least a majority of
the outstanding Apple common shares entitled to vote.
Only shareholders who owned Apple common shares at the close of business on
June ___, 1999 may vote at the meeting. As of June ___, 1999, a total of
________ Apple common shares were eligible to be voted at the Apple meeting.
Directors and executive officers of Apple beneficially owned approximately ____%
of these Apple common shares.
THE MERGER
The merger agreement is attached as Annex A to this Joint Proxy
Statement/Prospectus. We encourage you to read the entire merger agreement as it
is the legal document that governs the merger.
WHAT APPLE SHAREHOLDERS WILL RECEIVE IN THE MERGER
In the merger, holders of Apple common shares will receive one Cornerstone
Series A Convertible Preferred Share for each 2.5 Apple common shares they own.
Holders of the 200,000 Apple Class B Convertible Shares outstanding will convert
these shares into 1,600,000 Apple common shares, which will immediately be
exchanged for 640,000 Cornerstone Series A Preferred Shares, or one Cornerstone
Series A Convertible Preferred share for each 2.5 Apple common shares, the same
exchange ratio applicable to all other Apple common shareholders.
TERMS OF SERIES A CONVERTIBLE PREFERRED SHARES
The Series A Convertible Preferred Shares:
o are entitled to cumulative preferred quarterly distributions, if
declared, at an annual rate of $2.125 (8.5%) for the first twelve
months following the merger, $2.25 (9.0%) for the second twelve months
and $2.375 (9.5%) thereafter;
o are convertible into Cornerstone common shares at an initial
conversion rate of 1.582 common shares for each Series A Convertible
Preferred Share;
o are entitled to a liquidation preference of $25.00 per share;
o may not be redeemed by Cornerstone for five years after the merger,
after which Cornerstone may redeem them by paying the liquidation
preference in cash or Cornerstone common shares; and
o will not vote for the election of Cornerstone directors unless their
distributions have not been paid for six consecutive quarters, in
which event, they would be entitled to elect two additional directors
until all their distributions have been paid;
WHAT CURRENT SHAREHOLDERS OF CORNERSTONE WILL OWN AFTER THE MERGER
Holders of Cornerstone capital stock will continue to own their existing
Cornerstone capital stock after the merger.
11
<PAGE>
EFFECTIVE TIME OF THE MERGER
Under Virginia law, the merger will be effective when the Virginia State
Corporation Commission issues a Certificate of Merger in connection with the
filing of Articles of Merger relating to the merger. Assuming all conditions
have been satisfied or waived, we expect that the merger will be completed as
soon as practicable following approval by the Cornerstone and Apple shareholders
at their shareholders meetings.
CERTAIN INTERESTS OF CORNERSTONE AND APPLE OFFICERS, DIRECTORS AND CERTAIN
SHAREHOLDERS IN THE MERGER
Glade M. Knight, Chairman and Chief Executive Officer of both Apple and
Cornerstone, holds an option dated November 9, 1998 granted by Apple to acquire
up to 348,771 Apple common shares. Upon a change of control of Apple, such as
the merger, the option entitles Mr. Knight to receive a cash payment
approximating $3.5 million. In conjunction with the merger, Mr. Knight has
waived his right to receive this cash payment. In return, Cornerstone has agreed
to grant Mr. Knight a comparable option to acquire Cornerstone common shares on
the same terms as are in his existing option, including the right to receive
cash payments upon a future sale, if any, of substantially all of Cornerstone's
assets, stock or business.
As of June __, 1999, the directors and executive officers at Cornerstone
owned an aggregate of approximately ____ Cornerstone common shares and held
options to purchase an aggregate of approximately ____ Cornerstone common shares
at a weighted average exercise price per share of approximately $____.
As of June ___, 1999, the directors and executive officers of Apple owned
an aggregate of approximately ____________ Apple common shares and held options
to purchase an aggregate of approximately _________ Apple common shares at a
weighted average exercise price per share of approximately $_____. Apple's
executive officers and directors are to receive the same consideration for their
Apple common shares as the other Apple shareholders are to receive. Upon
consummation of the merger, except for Mr. Knight's option discussed above, all
outstanding options to purchase Apple common shares will automatically be deemed
to constitute an option to acquire that number of Cornerstone Series A
Convertible Preferred Shares that the holders of such options would have been
entitled to receive if such holders had exercised their options immediately
prior to the merger.
Glade M. Knight, Debra A. Jones and Stanley J. Olander, Jr. hold all
200,000 Apple Class B Convertible Shares outstanding, all of which were issued
in 1996. Pursuant to the terms of the Class B Convertible Shares, the holders of
those shares will be entitled to receive, upon the occurrence of certain events,
including consummation of the merger, eight Apple common shares for each Class B
Convertible Share they own. Accordingly, holders of the 200,000 Class B
Convertible Shares outstanding will convert these shares into 1,600,000 Apple
common shares which will immediately be exchanged for 640,000 Cornerstone Series
A Convertible Preferred Shares, or one Cornerstone Series A Convertible
Preferred Share for each 2.5 Apple common shares, the same exchange ratio
applicable to all other Apple common shareholders.
CONDITIONS TO THE MERGER
A number of conditions must be met before the merger is completed
including, among other things:
o approval of the merger by the shareholders of Cornerstone and Apple;
o receipt by Apple of a legal opinion, reasonably satisfactory to Apple,
that the merger should qualify as a tax-free reorganization under
Section 368 of the Internal Revenue Code of 1986, as amended; and
o holders of no more than 5% of the outstanding Apple common shares as
of the applicable record date shall have indicated their intention to
exercise dissenters' rights under the Virginia Stock Corporation Act.
Some of the conditions to the merger may be waived.
12
<PAGE>
TERMINATION OF THE MERGER AGREEMENT
Cornerstone and Apple may agree to terminate the merger agreement before
the merger has been completed, and either Cornerstone or Apple may terminate the
merger agreement if any of the following occurs:
o the merger has not been consummated by September 30, 1999, unless the
delay is caused by the breach of a representation, warranty or
covenant by the party who wishes to terminate;
o the required shareholder approvals are not obtained;
o a court or other governmental authority permanently prohibits the
merger; or
o the other party materially breaches certain of the representations,
warranties or covenants contained in the merger agreement and such
breaches are not cured within the time period specified therein.
The following are additional grounds for termination of the merger agreement:
o Apple may terminate the merger agreement before the Apple
shareholders' meeting if the Apple Board withdraws or adversely
changes its recommendation to shareholders that they vote in favor of
the merger, if in connection with the withdrawal Apple approves or
recommends a competing transaction; and
o Cornerstone may terminate the merger agreement if (1) before the Apple
shareholders' meeting the Apple Board withdraws or adversely changes
its recommendation to Apple shareholders that they vote in favor of
the merger, if in connection with the withdrawal Apple approves or
recommends a competing transaction, (2) Apple enters into an agreement
for a competing transaction, or (3) the Apple Board or any committee
of the Apple Board resolves to do either of the preceding things.
Apple may also terminate the merger agreement if, between the date of the merger
agreement and the closing of the merger, the average closing price of
Cornerstone common shares on the New York Stock Exchange for a ten-trading day
period is less than $8.50.
TERMINATION FEE AND EXPENSES
Apple generally must pay Cornerstone, in lieu of other existing contractual
termination arrangements, a $7.25 million fee and up to $750,000 in expenses
incurred by Cornerstone if the merger agreement is terminated because the Apple
Board, as a consequence of a competing transaction, withdraws or adversely
changes its recommendation to its shareholders that they vote in favor of the
merger. In certain instances, including failure to obtain shareholder approval,
Cornerstone and Apple may be required to pay up to $750,000 of expenses incurred
by the other in connection with the merger.
ACCOUNTING TREATMENT
The merger is expected to be accounted for by Cornerstone using the
purchase method of accounting.
OPINIONS OF FINANCIAL ADVISORS
Opinion of Financial Advisor to Cornerstone.
PaineWebber Incorporated has acted as financial advisor to Cornerstone in
connection with the merger. PaineWebber delivered to the Cornerstone Special
Committee an oral opinion on March 30, 1999, which was confirmed by a written
opinion dated as of March 30, 1999, to the effect that, as of the date of such
opinion and based upon and subject to certain matters stated therein, the
consideration to be paid by Cornerstone pursuant to the merger is fair to
Cornerstone from a financial point of view. The full text of the written opinion
of PaineWebber, which sets forth the
13
<PAGE>
assumptions made, matters considered and limitations on the review undertaken,
is attached as Annex B to this Joint Proxy Statement/Prospectus and should be
read carefully in its entirety. The opinion of PaineWebber was provided for the
information and assistance of the Cornerstone Special Committee and addresses
only the fairness to Cornerstone of the consideration to be paid by Cornerstone
pursuant to the merger from a financial point of view and does not address the
merits of the underlying decision by Cornerstone to engage in the transaction
and does not constitute a recommendation to any shareholder as to how a
shareholder should vote on the merger.
Opinion of Financial Advisor to Apple.
Bowles Hollowell Conner, a division of First Union Capital Markets Corp.,
has acted as financial advisor to Apple in connection with the merger. Bowles
Hollowell Conner delivered to the Apple Special Committee an oral opinion on
March 30, 1999, which was confirmed by a written opinion dated as of March 30,
1999, to the effect that, as of the date of the opinion and based upon and
subject to certain matters stated in the opinion, the merger consideration is
fair, from a financial point of view, to the common shareholders of Apple (other
than Cornerstone and its affiliates). The full text of the written opinion of
Bowles Hollowell Conner, which sets forth the assumptions made, matters
considered and limitations on the review undertaken, is attached as Annex C to
this Joint Proxy Statement/Prospectus and should be read carefully in its
entirety. The opinion of Bowles Hollowell Conner was provided for the
information and assistance of the Apple Special Committee and addresses only the
fairness, from a financial point of view, of the merger consideration to the
Apple common shareholders (other than Cornerstone and its affiliates) and does
not address the merits of the underlying decision by Apple to engage in the
transaction and does not constitute a recommendation to any shareholder as to
how a shareholder should vote on the merger.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Apple Shareholders. The transaction is anticipated to be tax-free to the
holders of Apple common shares who exchange their Apple common shares for
Cornerstone Series A Convertible Preferred Shares. Holders of Apple common
shares who choose to and successfully assert dissenter's rights generally will
recognize taxable gain or loss on the receipt of cash in exchange for their
Apple common shares.
Cornerstone Shareholders. No gain or loss will be recognized by
Cornerstone or its shareholders as a result of the merger.
REIT Status of Cornerstone and Cornerstone Acquisition Company. Cornerstone
has previously elected and operates as a REIT and Cornerstone Acquisition
Company will elect to be taxed as a REIT under the Internal Revenue Code. It is
expected that Cornerstone will continue to qualify as a REIT and that
Cornerstone Acquisition Company will operate in a manner so as to qualify as a
REIT after the merger. The ability of Cornerstone and Cornerstone Acquisition
Company to qualify as REITs depends upon their ability to meet certain
distribution levels, specified diversity of stock ownership, specified income
and asset tests and various other qualifications imposed by the Code.
APPRAISAL RIGHTS
Under Article 15 of the Virginia Stock Corporation Act, holders of Apple
common shares will have the right to dissent from the merger and to obtain
payment of the fair value of their Apple common shares. Holders of Cornerstone
common shares, however, will not have the right to dissent from the merger. A
copy of Article 15 of the Virginia Stock Corporation Act is attached to this
Joint Proxy Statement / Prospectus as Annex D.
FORWARD-LOOKING STATEMENTS
MAY PROVE INACCURATE
Cornerstone and Apple have each made forward-looking statements in this
document (and in documents that are incorporated herein by reference) that are
subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of
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operations of Cornerstone or Apple, including the anticipated benefits from the
merger. Also, when we use words such as "believes," "expects," "anticipates" or
similar expressions, we are making forward-looking statements. Shareholders of
Cornerstone and Apple should note that many factors could affect the future
financial results of Cornerstone after the merger and could cause these results
to differ materially from those expressed in our forward-looking statements.
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COMPARATIVE MARKET AND PER SHARE DATA
Cornerstone common shares are listed on the NYSE. On March 30, 1999, the
last full trading day prior to the public announcement of the signing of the
merger agreement, Cornerstone common shares closed at $11.0625 per share. On
June ___, 1999, Cornerstone common shares closed at $_____ per share. Apple
common shares do not actively trade.
RISK FACTORS
This Joint Proxy Statement/Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Cornerstone's
actual results could differ materially from those set forth in the
forward-looking statements because of, among other reasons, the following list
of risk factors. The list below may not be exhaustive.
EXPECTED BENEFITS OF MERGER MAY NOT BE REALIZED
Although we expect the merger to be accretive to Cornerstone's fully
converted funds from operations per share for 1999 and 2000, we cannot assure
you that it will be so. We may not realize the anticipated benefits of the
merger. Further we may incur unanticipated costs as a result of the merger such
as transfer taxes, consent fees, or professional expenses or unexpected future
operating expenses including increased personnel costs, property taxes or travel
expenses. If we do not realize the expected benefits of the merger or if we
incur unexpected costs, the merger could significantly dilute Cornerstone's FFO
per share.
EXISTING APPLE AND CORNERSTONE RELATIONSHIP MAY HAVE AFFECTED MERGER TERMS
Prior to execution of the merger agreement, Apple and Cornerstone, and
their respective officers and directors, were related in a variety of ways which
may have resulted in the merger terms being different than terms which unrelated
third parties would have agreed to. For example, Cornerstone has a right of
first refusal to purchase any property proposed for sale by Apple and a right of
first refusal with respect to the sale or disposition of Apple or substantially
all of Apple's assets, business or stock. In addition, certain officers and
directors of Cornerstone hold substantial interests in the capital stock of both
Apple and Cornerstone. Also, two of the seven member Cornerstone board serve as
directors of Apple. Further, Cornerstone currently manages Apple's operations
and properties through contractual arrangements with Apple that, among other
things, require the payment to Cornerstone of a brokerage commission upon the
sale of Apple assets. Because of these factors, we cannot assure you that the
merger terms represent the same terms that would be agreed upon in the absence
of such inter-relationships.
INABILITY TO CONTINUE GROWTH RATE
As a result of the merger, Cornerstone's consolidated asset base will
increase significantly and Cornerstone's total market capitalization is expected
to increase significantly. However, because of this increased size, we cannot
assure you that our growth rate after the merger will equal or exceed our
historical growth rate.
REDUCTION IN OWNERSHIP AND VOTING POWER FOR SHAREHOLDERS
The percentage ownership interests of both Cornerstone common shareholders
and Apple common shareholders will be substantially reduced relative to their
pre-merger interests in Cornerstone and Apple. Also, except in certain
circumstances when their distributions are not paid, holders of Cornerstone
Series A Convertible Preferred Shares will not have the right to vote with
Cornerstone common shares. Therefore, holders of Apple common shares will
experience a substantial reduction in their effective voting power relative to
their effective voting power in Apple prior to the merger. In the future,
Cornerstone may issue additional capital stock which would further reduce the
percentage ownership interests and effective voting power of holders of
Cornerstone capital stock.
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SERIES A CONVERTIBLE PREFERRED SHARES HAVE DISTRIBUTION PRIORITY
After the merger, holders of Cornerstone common shares will not receive
distributions unless all preferred distributions have been paid to the Series A
Convertible Preferred Shareholders.
HOLDERS OF CORNERSTONE SERIES A CONVERTIBLE PREFERRED SHARES WILL HAVE
DIFFERENT RIGHTS THAN HOLDERS OF APPLE COMMON SHARES
Unlike holders of Apple common shares, holders of Series A Convertible
Preferred Shares:
o will have their quarterly distributions fixed at an annual rate of
$2.125 (8.5%) the first twelve months after the merger, $2.25 (9.0%)
during the second twelve months and $2.375 (9.5%) thereafter, as a
result of which their participation in the growth of Cornerstone may
be effected solely through conversion of their Series A Convertible
Preferred into Cornerstone common shares;
o are entitled to no more than a liquidation preference of $25.00 per
share;
o might have their Series A Convertible Preferred Shares redeemed by
Cornerstone after five years; and
o will no longer be entitled to vote for directors, except in certain
circumstances.
ABSENCE OF PUBLIC TRADING MARKET AND IMPACT OF ECONOMIC FACTORS ON MARKET PRICE
While we expect that the Series A Convertible Preferred Shares will be
listed on the NYSE approximately one year after the merger, we cannot assure you
that they will be listed or that an active trading market will develop or be
sustained. Events outside of our control may occur which could adversely affect
the market value of our assets, as well as the market price of Cornerstone
common shares and Series A Convertible Preferred Shares. For instance, an
increase in market interest rates may cause purchasers of the Series A
Convertible Preferred Shares to seek a higher annual yield, which could
adversely affect the market price of the Series A Convertible Preferred Shares.
In addition, a change in the business, operations or prospects of Cornerstone or
in the market price of Cornerstone common shares may affect the value of the
Series A Convertible Preferred Shares due to the conversion feature of the
Series A Convertible Preferred Shares.
STATUS OF MERGER AS A TAX-FREE REORGANIZATION
We expect the merger to qualify as a tax-free reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended. Neither Cornerstone nor
Apple shareholders should recognize taxable gain or loss as a result of the
merger. We have agreed to obtain a legal opinion from counsel stating that the
merger should be treated as a tax-free reorganization. However, such legal
opinion will not be binding on the Internal Revenue Service. If the merger does
not qualify as a tax-free reorganization, each Apple shareholder will recognize
gain or loss equal to the difference between the shareholder's tax basis in the
Apple common shares and the fair market value of the Cornerstone Series A
Convertible Preferred Shares received. Further, even if the merger qualifies as
a reorganization, Apple shareholders may be required to recognize a gain or loss
if the Cornerstone Series A Convertible Preferred Shares are determined to be
"nonqualified preferred stock."
SUBSTANTIAL EXPENSES AND FEES RELATED TO THE MERGER
We cannot assure you that the merger will be completed. Under certain
circumstances, Apple may have to pay Cornerstone a $7.25 million termination fee
and/or Cornerstone's out-of-pocket expenses up to $750,000. Similarly, under
certain circumstances, Cornerstone may have to pay Apple's out-of-pocket
expenses up to $750,000. Further, Cornerstone and Apple each have incurred
substantial expenses in connection with the merger. If the merger is not
completed, these expenses and termination fees could materially impact
Cornerstone's and/or Apple's operating results and ability to pay future
distributions to their shareholders.
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NO APPRAISAL RIGHTS FOR CORNERSTONE COMMON SHAREHOLDERS
Under Virginia law, while holders of Apple common shares will have the
right to dissent from the merger and to obtain payment of the fair value of
their Apple common shares, holders of Cornerstone common shares will not have
the right to dissent from the merger.
DEPENDENCE ON KEY PERSONS
Cornerstone is dependent on its executive officers. While we believe that
we could replace them if necessary, the loss of their services could adversely
affect Cornerstone. Furthermore, Glade M. Knight, Cornerstone's Chairman and
Chief Executive Officer, is involved in other ventures that compete for his
time.
ACQUISITION RISKS
We intend to continue to acquire and reposition apartment communities
employing Cornerstone's existing acquisition strategy and underwriting policies.
Risks associated with this strategy and these policies include the following,
any of which may adversely affect our ability to achieve projected yields and
could prevent us from making expected distributions to shareholders:
o delays in finding suitable properties to acquire;
o acquisition opportunities may be abandoned, requiring Cornerstone to
write off significant related costs;
o renovation costs may exceed original estimates due to hidden defects,
unexpected cost increases or otherwise;
o inability to increase rents to offset increased renovation or other
costs;
o occupancy and lease-up rates and rents at newly acquired communities
may fluctuate depending on various factors and may not be sufficient
to make the community profitable; and
o an inability to charge rents in repositioned communities that are
sufficient to offset increased costs.
NEW MARKETS
After the merger, 66% of Cornerstone's 20,736 total apartment units will be
located in North Carolina, Virginia, South Carolina and Georgia. Accordingly,
Apple common shareholders will be exposed to the risks attendant to the
management, acquisition, repositioning and ownership of apartment communities in
those states, to which risks they are not currently exposed. Similarly, after
the merger, 34% of Cornerstone's apartment units will be located in Texas,
primarily in the Dallas/Fort Worth area. After the merger, Cornerstone common
shareholders will be exposed to the risks attendant to the management,
acquisition, repositioning and ownership of apartment communities in the
Dallas/Fort Worth area, to which risks they are not currently exposed.
We may acquire and operate apartment communities in new markets. We cannot
assure you that we will successfully apply our significant experience in any new
market in which we may invest. By expanding into new markets, we may expose
ourselves to risks associated with, among other things:
o a lack of market knowledge and understanding of the local economy;
o an inability to identify property acquisition opportunities;
o an inability to obtain construction tradespeople;
o sudden adverse shifts in supply and demand factors; and
o an unfamiliarity with local governmental and permitting procedures.
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DEPENDENCE ON PRIMARY MARKETS
Our experience has been primarily in North Carolina, Virginia, South
Carolina, Georgia and Texas. Many apartment units have been constructed recently
in these markets and more are in varying stages of development. These markets
have experienced and in the future may experience periods of over-supply which
we believe may adversely effect operating results. Unemployment rate increases,
decreases in household formation, cost increases from local economic conditions
and other local factors may adversely affect our operating results.
EXPOSURE TO UNSEASONED APARTMENT COMMUNITIES
Since January 1, 1998, Apple has acquired 17 properties and Cornerstone has
acquired seven properties. Repositioning of these properties is either in
progress or recently completed. As a result, we have had limited experience
operating these properties. Therefore, operating results from these properties
may vary from our expectations.
REAL ESTATE FINANCING RISKS
No Limitation on Debt. Our charter and bylaws do not limit the amount of
indebtedness we may incur. Thus, we may incur any level of indebtedness without
shareholder approval. Further, any indebtedness we may incur may be secured or
unsecured, at our discretion.
Existing Debt Maturities, Balloon Payments and Refinancing Risks. We
regularly borrow money to finance acquisitions and operations. Amounts are
payable under these loans from time to time. We may not have sufficient cash to
make the required loan payments as they come due. Because we anticipate that
only a small portion of the principal of our indebtedness will be repaid prior
to maturity, we expect that we may need to refinance debt. Accordingly, there is
a risk that existing indebtedness may not be able to be refinanced or that the
terms of any refinancing may not be as favorable as the terms of the existing
indebtedness.
Risk of Rising Interest Rates. Historically, we have incurred, and we
expect that we will continue to incur in the future, variable rate indebtedness
under credit facilities, to finance the acquisition of apartment communities or
for other purposes. As of March 31, 1999, 84% of Cornerstone and Apple's total
combined indebtedness was variable rate indebtedness. Unless protected by
interest rate protection arrangements, increases in variable rates will increase
our interest costs, thereby reducing results from operations and amounts
available for distribution to shareholders.
REAL ESTATE INVESTMENT RISKS
General Risks. If our communities do not generate revenues sufficient to
meet operating expenses, debt service and capital expenditures, our cash flow
and ability to pay distributions to shareholders will be adversely affected. Our
apartment community's revenues and value may be adversely affected by a number
of factors, including those listed below:
o national economic trends;
o local economic trends (which may be adversely impacted by plant
closings, industry slowdowns and other factors);
o local real estate conditions (such as an oversupply of or a reduced
demand for apartment homes);
o the perceptions by prospective residents of the safety, convenience
and attractiveness of the community;
o the availability of adequate management, maintenance and insurance;
and
o increased operating costs (including real estate taxes and utilities).
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Many significant expenditures associated with real estate investments (i.e.
mortgage payments, real estate taxes, insurance and maintenance costs) are
generally not reduced when operating revenues drop. If we mortgage any of our
communities and are unable to meet the mortgage payments, we could suffer losses
from foreclosure on the community or the exercise of other remedies by the
mortgagee. Further, real estate values and income from communities are also
affected by other factors, including the cost of compliance with government
regulations, including zoning and tax laws, interest rate levels and the
availability of financing.
Operating Risks. Each of our communities is subject to all operating risks
common to apartment communities in general. Such risks might adversely affect
the occupancy or rental rates of our apartments. Increases in unemployment and a
decline in household formation might adversely affect occupancy or rental rates.
We might not be able to offset increases in operating costs due to inflation and
other factors by increasing rents. Our residents may be unable or unwilling to
pay rent increases. Rent control or rent stabilization laws or other laws
regulating housing may prevent us from raising rents to offset increases in
operating costs. Similarly, the local rental market may limit the extent to
which we may increase rents to meet increased expenses without decreasing
occupancy rates. If any of the above occurs, our ability to achieve desired
yields on our communities and to make expected distributions to shareholders
could be adversely affected.
Market Illiquidity. Real estate investments are relatively illiquid and as
a result, we may not be able to vary our portfolio promptly in response to
changes in economic or other conditions. In addition, our ability to sell
communities held for fewer than four years will be limited by the Internal
Revenue Code, thereby affecting our ability to sell communities without
adversely affecting returns to shareholders.
Competition. Numerous housing alternatives compete with apartment
communities in attracting residents. Our apartment communities compete directly
with other local rental apartments and single-family home rentals. Our apartment
communities also compete for residents with new and existing single-family home
markets which may be impacted by changing mortgage rates. The number of local
competitive residential communities could adversely affect our ability to lease
apartment homes and to charge sufficient rents. In addition, competitors for
acquisitions of apartment communities may have greater resources than we have,
thereby putting us at a competitive disadvantage.
POTENTIAL ENVIRONMENTAL LIABILITIES
We may be required by various federal, state and local environmental laws,
ordinances and regulations to investigate and remediate the effects of hazardous
or toxic substances or petroleum product releases at our properties. We may be
held liable to governmental entities or third parties for property damage and
for investigation and remediation costs incurred in connection with real estate
contamination. Such costs may be substantial. The presence of hazardous or toxic
substances or petroleum products (or the failure to properly remediate the
contamination) may materially and adversely affect our ability to borrow
against, sell or rent the affected property. In addition, certain environmental
laws create liens on contaminated sites in favor of the government for damages
and costs it incurs in connection with the contamination.
Certain laws and regulations govern the removal, encapsulation or
disturbance of asbestos-containing materials in real property. Such laws and
regulations generally apply when asbestos containing materials are in poor
condition or when buildings are constructed, remodeled, renovated or demolished.
These laws may impose liability for release of asbestos-containing materials and
may allow third parties to seek recovery from us for personal injury associated
with asbestos-containing materials.
All of the Cornerstone and Apple communities have been subjected to a Phase
I or similar environmental assessment. These assessments have not revealed any
environmental liability that we believe would have a material adverse effect on
Cornerstone or Apple's business, assets, financial condition or results of
operations. Nevertheless, it is possible that such assessments will not reveal
all
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environmental liabilities or there are material environmental liabilities of
which we are unaware. We cannot assure you that (i) future laws, ordinances or
regulations will not impose material environmental liability or (ii) the current
environmental condition of our communities or other communities which we acquire
will not be affected by the condition of land or operations in the vicinity of
such communities (such as the presence of previously undisclosed underground
storage tanks) or by properties of third parties unrelated to us.
FEDERAL INCOME TAX RISKS--FAILURE TO QUALITY AS A REIT
In the past we have operated as REITs and we intend for Cornerstone and
Cornerstone Acquisition Company to operate as REITs following the merger.
Qualification as a REIT involves the application of highly technical and complex
Internal Revenue Code provisions for which there are limited judicial or
administrative interpretations and involves the determination of various factual
matters and circumstances not entirely within our control. Therefore, we cannot
assure you that we will qualify as REITs. If Cornerstone and Apple have not
qualified as REITs prior to the merger, Cornerstone may be disqualified as a
REIT and/or may be subject to significant tax liabilities.
If we fail to qualify as REITs, we will be subject to federal income tax at
regular corporate rates and to potentially significant tax liabilities. If this
happens, the amount of cash available for distribution to shareholders would be
reduced and possibly eliminated. If we fail to qualify as REITs and are not
entitled to relief under certain statutory provisions, we would also be
disqualified from treatment as REITs for the four taxable years following the
year during which such qualification was lost.
THE ABILITY OF STOCKHOLDERS TO CONTROL THE POLICIES OF CORNERSTONE AND TO
EFFECT A CHANGE OF CONTROL OF CORNERSTONE IS LIMITED
Shareholder Approval is Not Required to Change Policies of Cornerstone. Our
operating and financial policies, including those with respect to acquisitions,
growth, operations, indebtedness, capitalization and distributions, will be
determined by Cornerstone's Board of Directors. Accordingly, the shareholders of
Cornerstone will have no direct control over changes in these or similar
policies, and changes in these policies may not fully serve the interests of all
shareholders.
Shareholder Approval is Not Required to Engage in Investment Activity. We
expect to continue to acquire additional real estate assets pursuant to our
investment strategies and consistent with our investment policies. You will
generally not be entitled to receive historical financial statements regarding,
or to vote on, any such acquisition and, instead, will be required to rely
entirely on the decisions of management and the Cornerstone Board with respect
thereto (although in the case of acquisitions that are material, Cornerstone
will, as required by federal securities law, provide financial information
regarding the acquisitions in public filings).
Stock Ownership Limits in Cornerstone's Bylaws Could Inhibit Changes in
Control. In order to maintain its qualification as a REIT for federal income tax
purposes, not more than 50% in value of the outstanding stock of Cornerstone may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Internal Revenue Code to include certain entities). To help ensure its
qualification as a REIT for federal income tax purposes, and to otherwise
address concerns relating to concentration of stock ownership, Cornerstone's
bylaws generally prohibit any person from acquiring or holding, directly or
indirectly, ownership of a number of common shares in excess of 9.8% of the
outstanding Cornerstone common shares. The bylaws provide that (i) those who
acquire shares in excess of 9.8% are not entitled to voting rights, dividends or
distributions, (ii) Cornerstone may redeem shares acquired in excess of 9.8% and
(iii) any acquisition of Cornerstone common shares that would disqualify
Cornerstone as a REIT is void to the fullest extent permitted by law. In
connection with the merger, Cornerstone shareholders will vote on a proposed
amendment to the bylaws that would apply the 9.8% limitation to each separate
class or series of Cornerstone stock. These provisions may have the effect of
delaying, deferring or preventing a change in control and, therefore, could
adversely affect the shareholders' ability to realize a premium over the
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then-prevailing market price for Cornerstone's common shares or Series A
Convertible Preferred Shares in connection with such a change in control, even
if the transaction were in the best interests of some, or a majority, of
Cornerstone's shareholders.
Affiliated Transactions and Control Share Acquisitions Statutes Could
Inhibit Changes in Control. Virginia law contains provisions governing
"affiliated transactions" designed to deter uninvited takeovers of Virginia
corporations. These provisions, with several exceptions discussed below, require
approval of material acquisition transactions between a Virginia corporation and
any holder of more than 10% of any class of its outstanding voting shares by the
holders of at least two-thirds of the remaining voting shares. For three years
following the time that a 10% shareholder becomes an owner of 10% of the
outstanding voting shares, Virginia corporations cannot engage in an affiliated
transaction with such shareholder without approval of two-thirds of the voting
shares other than those shares beneficially owned by such shareholder, and
majority approval of the "disinterested directors." At the expiration of the
three year period, the statute requires approval of affiliated transactions by
two-thirds of the voting shares other than those beneficially owned by such
shareholder, absent an exception. The principal exceptions require either that
the transaction be approved by a majority of the corporation's disinterested
directors or that the transaction satisfy the fair-price requirements of the
law. Virginia law also provides that shares acquired in a transaction that would
cause an acquiring person's voting strength to cross any of three thresholds
(20%, 33 1/3%, or 50%) have no voting rights unless granted by a majority vote
of shares not owned by the acquiring person or any officer or employee-director
of the corporation. An acquiring person may require the corporation to hold a
special meeting of shareholders to consider the matter within 50 days of its
request.
THE MEETINGS
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies (i) by the Cornerstone Board from the holders of
Cornerstone common shares for use at the Cornerstone meeting and (ii) by the
Apple Board from the holders of Apple common shares for use at the Apple
meeting. This Joint Proxy Statement/Prospectus and accompanying form of proxy
are first being mailed to the respective shareholders of Cornerstone and Apple
on or about June ___, 1999.
THE CORNERSTONE MEETING
PURPOSE OF THE MEETING
A Special Meeting of the Shareholders of Cornerstone will be held at The
Jefferson Hotel, 101 West Franklin Street, Richmond, Virginia 23219, on July
___, 1999 at [ ] a.m. [p.m.], local time, to consider and approve the Agreement
and Plan of Merger, dated as of March 30, 1999 , by and among Cornerstone, Apple
and Cornerstone Acquisition Company, a subsidiary of Cornerstone, by which Apple
is to merge with and into Cornerstone Acquisition, the related issuance of
Series A Convertible Shares and the related bylaw amendments.
Only business within the purposes described in the Cornerstone Notice of
Special Meeting of Shareholders may be conducted at the Cornerstone meeting. Any
action may be taken on the foregoing at the Cornerstone meeting on the date
specified above, or on any date or dates to which it may be postponed or to
which, by original or later adjournment, the Cornerstone meeting may be
adjourned.
RECORD DATE; VOTING RIGHTS; PROXIES
Cornerstone has fixed the close of business on June ___, 1999 as the record
date for determining holders of Cornerstone common shares entitled to notice of,
and to vote at, the Cornerstone meeting. Only holders of Cornerstone common
shares at the close of business on such record date will be entitled to notice
of and to vote at the Cornerstone meeting. As of such record date, there were
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____________ issued and outstanding Cornerstone common shares. Each holder of
record of Cornerstone common shares on such record date is entitled to one vote
per share, which may be cast either in person or by properly executed proxy.
All Cornerstone common shares which are entitled to vote and are
represented at the Cornerstone meeting by properly executed proxies received
prior to or at the Cornerstone meeting, and not revoked, will be voted at such
meeting in accordance with the instructions indicated on the proxies. IF NO
INSTRUCTIONS ARE GIVEN ON A PROXY CARD, IT WILL BE VOTED FOR APPROVAL OF THE
MERGER, THE RELATED ISSUANCE OF SERIES A CONVERTIBLE PREFERRED SHARES AND THE
RELATED BYLAW AMENDMENTS.
Votes cast by proxy or in person at the Cornerstone meeting will be
tabulated by the inspector of elections appointed for the meeting who will
determine whether or not a quorum is present. The inspector of elections will
treat abstentions as shares that are present and entitled to vote for purposes
of determining the presence of a quorum, but as not voting for purposes of
determining the approval of the merger agreement, the merger and the other
transactions contemplated by the merger agreement. If a broker indicates on the
proxy that it does not have discretionary authority as to certain shares to vote
on a particular matter, those shares will be considered as present for purposes
of determining a quorum but not voting with respect to that matter.
If any other matters are properly presented at the Cornerstone meeting for
consideration, including, among other things, consideration of a motion to
adjourn such meeting to another time and/or place (including, without
limitation, for the purposes of soliciting additional proxies or allowing
additional time for the satisfaction of conditions to the merger), the persons
named in the proxies will have discretion to vote on such matters in accordance
with their best judgment. However, proxies voted against a proposal will not be
voted in favor of adjournment in order to continue to solicit proxies with
respect to the merger agreement, the merger and the other transactions
contemplated by the merger agreement.
Any proxy given by a Cornerstone common shareholder pursuant to this
solicitation may be revoked by the person giving it at any time before it is
voted by (i) filing with the Secretary of Cornerstone, at or before the taking
of the vote at the Cornerstone meeting, a written notice of revocation bearing a
later date than the proxy, (ii) duly executing a later dated proxy relating to
the same shares and delivering it to the Secretary of Cornerstone before the
taking of the vote at such meeting, or (iii) voting in person at the meeting
(although attendance at the Cornerstone meeting will not by itself constitute a
revocation of a proxy). Any written notice of revocation or subsequent proxy
should be sent to Cornerstone Realty Income Trust, Inc., 306 East Main Street,
Richmond, Virginia 23219, Attention: Secretary, or hand delivered to the
Secretary at or before the taking of the vote at the Cornerstone meeting.
SOLICITATION OF PROXIES
Cornerstone will bear its own costs of solicitating of proxies, except that
the cost of preparing, printing and mailing this Joint Proxy
Statement/Prospectus will be borne equally by Cornerstone and Apple. Brokerage
houses, fiduciaries, nominees and others will be reimbursed for their
out-of-pocket expenses in forwarding proxy materials to owners of Cornerstone
common shares held in their names. In addition to the solicitation of proxies by
use of the mails, proxies may be solicited from Cornerstone shareholders by
directors, officers and employees of Cornerstone in person or by telephone,
telegraph, facsimile or other appropriate means of communications. No additional
compensation, except for reimbursement of reasonable out-of-pocket expenses,
will be paid to these directors, officers and employees of Cornerstone in
connection with the solicitation ______________, a proxy solicitation firm, has
been engaged by Cornerstone to act as proxy solicitor and will receive fees
estimated at $___________, plus reimbursement of reasonable out of pocket
expenses. In addition, Cornerstone has retained David Lerner Associates, Inc. to
solicit, and for advice and assistance in connection with the solicitation of,
proxies for the Cornerstone meeting at a cost of $200,000 including
out-of-pocket expenses. Any questions or requests for assistance regarding this
Joint Proxy Statement/Prospectus and related proxy materials may be directed to
Cornerstone by telephone at (804) 643-1761, attention David McKenney.
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QUORUM
The holders of a majority of all of the votes entitled to be cast, present
in person or represented by proxy, will constitute a quorum at the Cornerstone
meeting. Shares which abstain from voting and broker non-votes will be treated
as shares that are present and entitled to vote at the Cornerstone meeting for
purposes of determining whether a quorum exists.
REQUIRED VOTE
The approval of the merger, the related issuance of Series A Convertible
Preferred shares and the related bylaw amendments will require the affirmative
vote of the holders of at least a majority of the Cornerstone common shares
entitled to vote thereon outstanding on the record date. ACCORDINGLY,
ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
MERGER, THE RELATED ISSUANCE OF SERIES A CONVERTIBLE PREFERRED SHARES AND THE
RELATED BYLAW AMENDMENTS.
REGARDLESS OF THE NUMBER OF SHARES YOU OWN, YOUR VOTE IS IMPORTANT TO
CORNERSTONE. PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY
CARD TODAY.
24
<PAGE>
THE APPLE MEETING
PURPOSE OF THE MEETING
A Special Meeting of the Shareholders of Apple will be held at The
Jefferson Hotel, 101 West Franklin Street, Richmond, Virginia 23219, on July
___, 1999 at [ ] a.m. [p.m.], local time, to consider and approve the Agreement
and Plan of Merger, dated as of March 30, 1999 , by and among Cornerstone, Apple
and Cornerstone Acquisition Company, a subsidiary of Cornerstone, by which Apple
is to merge with and into Cornerstone Acquisition.
Only business within the purposes described in the Apple Notice of Special
Meeting of Shareholders may be conducted at the Apple meeting. Any action may be
taken on the foregoing at the Apple meeting on the date specified above, or on
any date or dates to which it may be postponed or to which, by original or later
adjournment, the Apple meeting may be adjourned.
RECORD DATE; VOTING RIGHTS; PROXIES
Apple has fixed the close of business on June ___, 1999 as the record date
for the determination of the shareholders entitled to notice of, and to vote at,
the Apple meeting. Only holders of record of Apple common shares at the close of
business on such record date will be entitled to notice of, and to vote at, the
Apple meeting. As of such record date, there were _____________ Apple common
shares issued and outstanding. Each holder of record of Apple common shares on
such record date is entitled to one vote per share, which may be cast either in
person or by properly executed proxy.
All Apple common shares represented at the Apple meeting by properly
executed proxies received prior to or at such meeting, and not revoked, will be
voted at the Apple meeting in accordance with the instructions indicated on such
proxies. IF NO INSTRUCTIONS ARE GIVEN ON A PROXY CARD, IT WILL BE VOTED FOR
APPROVAL OF THE MERGER AGREEMENT.
Votes cast by proxy or in person at the Apple meeting will be tabulated by
the inspector of elections appointed for the meeting who will determine whether
or not a quorum is present. The inspector of elections will treat abstentions as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum, but as not voting for purposes of determining the approval
of any matter submitted to the shareholders for a vote. If a broker indicates on
the proxy that it does not have discretionary authority as to certain shares to
vote on a particular matter, those shares will be considered as present for
purposes of determining a quorum but not voting with respect to that matter.
If any other matters are properly presented at the Apple meeting for
consideration, including, among other things, consideration of a motion to
adjourn such meeting to another time and/or place (including, without
limitation, for the purposes of soliciting additional proxies or allowing
additional time for the satisfaction of conditions to the merger), the persons
named in the proxies will have discretion to vote on such matters in accordance
with their best judgment. However, proxies voted against the merger will not be
voted in favor of adjournment in order to continue to solicit proxies with
respect to that proposal.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted by (i) filing with the Secretary of
Apple, at or before the taking of the vote at the Apple meeting, a written
notice of revocation bearing a later date than the proxy, (ii) duly executing a
later dated proxy relating to the same shares and delivering it to the Secretary
before the taking of the vote at such meeting, or (iii) voting in person at the
meeting (although attendance at the Apple meeting will not by itself constitute
a revocation of a proxy). Any written notice of revocation or subsequent proxy
should be sent to Apple Residential Income Trust, Inc., 306 East Main Street,
Richmond, Virginia 23219, Attention: Secretary, or hand delivered to the
Secretary of Apple at or before the taking of the vote at the Apple meeting.
25
<PAGE>
SOLICITATION OF PROXIES
Apple will bear its own costs of soliciting of proxies, except that the
cost of preparing, printing and mailing this Joint Proxy Statement/Prospectus
will be borne equally by Apple and Cornerstone. Arrangements also will be made
with brokerage houses, custodians, nominees and fiduciaries for forwarding of
proxy solicitation materials to beneficial owners of shares held of record by
such brokerage houses, custodians, nominees and fiduciaries, and Apple will
reimburse such brokerage houses, custodians, nominees and fiduciaries for their
reasonable expenses incurred in connection therewith. In addition to
solicitation by use of the mails, proxies may be solicited from the Apple
shareholders by directors, officers and employees of Apple in person or by
telephone, telegraph, facsimile or other means of communications. Such
directors, officers and employees will not be additionally compensated, but may
be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. Apple has retained David Lerner Associates, Inc. to solicit, and
for advice and assistance in connection with the solicitation of, proxies for
the Apple meeting at a cost of $200,000 including out-of-pocket expenses. Any
questions or requests for assistance regarding this Joint Proxy
Statement/Prospectus and related proxy materials may be directed to Apple by
telephone at (804) 643-1761, attention David McKenney.
QUORUM
The holders of a majority of the votes entitled to be cast, present in
person or represented by proxy, will constitute a quorum at the Apple meeting.
Shares which abstain from voting and broker non-votes will be treated as shares
that are present and entitled to vote at the Apple meeting for purposes of
determining whether a quorum exists.
REQUIRED VOTE
The approval of the merger will require the affirmative vote of the holders
of at least a majority of the Apple common shares entitled to vote thereon
outstanding on the record date. ACCORDINGLY, ABSTENTIONS AND BROKER NON-VOTES
WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT, THE MERGER AND
THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT. As parties to the
merger agreement, the holders of all the Apple Class B Convertible Shares
outstanding, have consented to and approved the merger agreement, the merger and
the other transactions contemplated by the merger agreement.
REGARDLESS OF THE NUMBER OF SHARES YOU OWN, YOUR VOTE IS IMPORTANT TO
APPLE. PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD
TODAY.
APPROVAL OF THE
AGREEMENT AND PLAN OF MERGER
THE MERGER PROPOSAL
On March 30, 1999, each of the Cornerstone Board and the Apple Board deemed
advisable and unanimously approved the merger.
REQUIRED VOTE AND RECOMMENDATION
Proxies will be voted to approve the merger, the related issuance of Series
A Convertible Preferred Shares and the related bylaw amendments unless contrary
instructions are set forth in the proxy. Only shareholders of record of
Cornerstone common shares and Apple common shares are entitled to vote on this
proposal. Approval of the merger, the related issuance of Series A Convertible
Preferred Shares and the related bylaw amendments requires the affirmative vote
of at least a majority of the outstanding Cornerstone common shares entitled to
vote thereon and approval of the merger requires the affirmative vote of at
least a majority of the outstanding Apple common
26
<PAGE>
shares entitled to vote thereon. ACCORDINGLY, ABSTENTIONS AND BROKER NON-VOTES
WILL HAVE THE EFFECT OF VOTES AGAINST THIS PROPOSAL. As parties to the merger
agreement, Glade M. Knight, Debra A. Jones and Stanley J. Olander, Jr., holders
of all the Apple Class B Convertible Shares outstanding, have consented to and
approved the merger, the related issuance of Series A Convertible Preferred
Shares and the related bylaw amendments.
THE CORNERSTONE BOARD AND THE APPLE BOARD EACH INDEPENDENTLY AND
UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT, THE
MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT,
INCLUDING, IN THE CASE OF THE CORNERSTONE BOARD, THE RELATED ISSUANCE OF SERIES
A CONVERTIBLE PREFERRED SHARES AND THE RELATED BYLAW AMENDMENTS.
THE COMPANIES
CORNERSTONE
General
Cornerstone, a self-administered and self-managed equity apartment REIT
headquartered in Richmond, Virginia, is a fully integrated real estate
organization with expertise in the acquisition, repositioning, renovation and
management of apartment communities. Cornerstone focuses on the ownership of
well-located, "middle-market" apartment communities in growing markets in North
Carolina, Virginia, South Carolina and Georgia, states which management expects
to experience household growth above the national average. On April 30, 1999,
Cornerstone owned 58 apartment communities comprising 13,462 apartment units.
For the month ended April 30, 1999, the apartment communities had an economic
occupancy of 92% and an average monthly rent of $621 per unit.
Cornerstone seeks to acquire properties that target the "middle market"
tenant, those persons having incomes ranging between 90% to 115% of the median
incomes within the properties' respective markets. Management believes the
middle market represents the largest segment of renters and that this segment
has less turnover than other market sectors. Management generally believes it
can achieve better long-term results, with less risk, by acquiring, upgrading
and repositioning existing well-located properties rather than developing new
properties. On average, Cornerstone has paid approximately $43,916 per unit
acquired, which management believes to be significantly less than replacement
cost for comparable units.
Cornerstone is led by Glade M. Knight, Stanley J. Olander, Jr., and Debra
A. Jones, who have worked together in the multi-family real estate business for
approximately 18 years. In addition, highly-qualified, experienced individuals
provide leadership at all levels of Cornerstone's management. The corporate
staff assisting Cornerstone's senior management includes specialists in all
areas of residential property acquisition, repositioning, renovation,
management, marketing, leasing, development, accounting and information systems.
Altogether, Cornerstone currently employs approximately 450 individuals who are
dedicated to maintaining Cornerstone's high standards in the operation of
residential apartment communities.
Cornerstone seeks to maximize long-term growth in net operating income and
portfolio value. Management believes there is substantial opportunity for growth
from the active management of its currently owned apartment communities and the
acquisition of additional multi-family properties in North Carolina, Virginia,
South Carolina and Georgia.
Acquisitions
Cornerstone's value-added strategy is to acquire under-managed,
under-capitalized apartment assets in good locations whereby Cornerstone can
enhance rental revenues and occupancies through both capital investment and
active property management. Cornerstone generally will make selected renovations
to an apartment community's clubhouse and common areas to improve its curb
appeal.
27
<PAGE>
Moreover, Cornerstone may renovate apartment units as they become available upon
the expiration of leases. Through its on-site staff, management strives to
provide superior service, thus enabling Cornerstone to increase rental rates,
maintain high occupancy and decrease turnover.
Cornerstone targets markets characterized by a diversified economy, stable
employment and increasing household formation and household incomes. Management
believes that a geographically diversified portfolio reduces risks resulting
from adverse changes in local economic conditions. Accordingly, the apartment
communities are located in 16 distinct markets throughout North Carolina,
Virginia, South Carolina and Georgia. Management expects to strengthen its
presence in its current markets and possibly expand into additional geographic
regions with similar environments, convenient access to Company offices and
sufficient opportunities to create additional operating efficiencies through the
acquisition of a critical mass of apartments.
Management
Management's goals include keeping rental rates at or above market levels,
maintaining high economic occupancy through tenant retention, effectively
advertising and marketing each apartment community to create a positive property
identity, and controlling operating expenses at the property level. In order to
achieve these goals, Cornerstone has divided its management team into two
groups, marketing and property management.
The marketing division seeks to create a unique identity for each of
Cornerstone's properties by emphasizing curb appeal, signage, and attractive
common area facilities. Each property is marketed as a "Cornerstone Community."
Each property has a dedicated, on-site marketing person whose responsibility is
to position and market the property within the local community to increase
tenant retention.
In conjunction with the marketing division, the property management
division utilizes two strategies to promote efficient property management.
First, management gives substantial decision-making responsibility to on-site
and regional employees, including responsibility for most decisions on marketing
and routine maintenance. Second, because Cornerstone grows principally through
property acquisitions, management has created dedicated "Takeover Teams" to
provide immediate transitional management and leasing services for new property
acquisitions.
Financing
Cornerstone has a strong equity base and maintains a low leverage policy to
allow maximum financial flexibility. Cornerstone has no secured debt and uses
its unsecured line of credit to finance property acquisitions. Cornerstone's
current unsecured line of credit bears interest equal to one-month London
interbank offered rate ("LIBOR") plus 1.35% and matures on October 30, 2000. As
of March 31, 1999, Cornerstone's debt to total market capitalization and debt to
total asset ratios were 33% and 37%, respectively. While Cornerstone does not
currently have any secured indebtedness, it may borrow on a secured basis in the
future.
Cornerstone offers its shareholders the opportunity to participate in its
dividend reinvestment/stock purchase plan ("DRIP"). Through Cornerstone's DRIP,
it issued 983,657 common shares raising approximately $10.9 million during 1998.
This reinvestment represents approximately 28% of total distributions for the
same period.
28
<PAGE>
Properties
As of April 30, 1999, Cornerstone owned 58 apartment communities comprising
13,462 apartment units. All of these apartment communities are located in North
Carolina, Virginia, South Carolina and Georgia. The following table sets forth
specific information regarding the apartment communities as of April 30, 1999:
<TABLE>
<CAPTION>
INITIAL
YEAR DATE OF ACQUISITION
PROPERTY CITY COMPLETED ACQUISITION COST
- ------------------------------- ------------ ----------- ---------------- -------------
<S> <C> <C> <C> <C>
GEORGIA
Ashley Run ................... Atlanta 1987 April 1997 $18,000,000
Carlyle Club ................. Atlanta 1974 April 1997 11,580,000
Dunwoody Springs ............. Atlanta 1981 July 1997 15,200,000
Stone Brook .................. Atlanta 1986 October 1997 7,850,000
Spring Lake .................. Atlanta 1986 August 1998 9,000,000
West Eagle Greens ............ Augusta 1974 March 1996 4,020,000
Savannah West ................ Augusta 1968 July 1996 9,843,620
NORTH CAROLINA
The Meadows .................. Asheville 1974 January 1996 6,200,000
Pinnacle Ridge Apartments..... Asheville 1951 April 1998 5,731,150
Hanover Landing .............. Charlotte 1972 August 1995 5,725,000
Sailboat Bay ................. Charlotte 1973 November 1995 9,100,000
Bridgetown Bay ............... Charlotte 1986 April 1996 5,025,000
Beacon Hill .................. Charlotte 1985 May 1996 13,579,203
Meadow Creek ................. Charlotte 1984 May 1996 11,100,000
Paces Glen ................... Charlotte 1986 July 1996 7,425,000
Heatherwood .................. Charlotte 1980 September 1996 17,630,457
Charleston Place ............. Charlotte 1986 May 1997 9,475,000
Stone Point Apartments ....... Charlotte 1986 January 1998 9,700,000
Summerwalk ................... Concord 1983 May 1996 5,660,000
The Landing .................. Durham 1984 May 1996 8,345,000
Parkside at Woodlake ......... Durham 1996 September 1996 14,663,886
Deerfield .................... Durham 1985 November 1996 10,675,000
Wind Lake .................... Greensboro 1985 April 1995 8,760,000
Signature Place .............. Greenville 1981 August 1996 5,462,948
The Hollows .................. Raleigh 1974 June 1993 4,200,000
The Trestles ................. Raleigh 1987 December 1994 10,350,000
Highland Hills ............... Raleigh 1987 September 1996 12,100,000
Paces Arbor .................. Raleigh 1986 March 1997 5,588,219
Paces Forest ................. Raleigh 1986 March 1997 6,473,481
Clarion Crossing ............. Raleigh 1972 September 1997 10,600,000
Remington Place .............. Raleigh 1985 October 1997 7,900,000
St. Regis .................... Raleigh 1986 October 1997 9,800,000
The Timbers Apartments ....... Raleigh 1983 June 1998 8,100,000
Wimbledon Chase .............. Wilmington 1976 February 1994 3,300,000
<CAPTION>
TOTAL COST NUMBER AVERAGE AVERAGE AVERAGE
THROUGH OF COST UNIT AVERAGE ECONOMIC
PROPERTY APRIL 30, 1999 UNITS PER UNIT SIZE RENT OCCUPANCY
- ------------------------------- ---------------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
GEORGIA
Ashley Run ................... $19,632,306 348 $56,415 1,150 $764 93%
Carlyle Club ................. 13,005,682 243 53,521 1,089 742 92%
Dunwoody Springs ............. 18,456,151 350 52,732 948 696 97%
Stone Brook .................. 8,770,526 188 46,652 937 673 94%
Spring Lake .................. 9,535,057 188 50,718 1,009 663 94%
West Eagle Greens ............ 6,386,932 165 38,709 796 496 96%
Savannah West ................ 13,468,863 456 29,537 877 476 77%
NORTH CAROLINA
The Meadows .................. 7,465,344 176 42,417 1,068 633 90%
Pinnacle Ridge Apartments..... 6,090,728 168 36,254 885 541 91%
Hanover Landing .............. 7,484,648 192 38,983 832 592 92%
Sailboat Bay ................. 13,566,373 358 37,895 906 578 94%
Bridgetown Bay ............... 5,855,647 120 48,797 867 645 95%
Beacon Hill .................. 14,716,223 349 42,167 734 596 93%
Meadow Creek ................. 12,558,087 250 50,232 860 631 90%
Paces Glen ................... 8,149,284 172 47,380 907 654 93%
Heatherwood .................. 24,057,206 476 50,540 1,186 623 94%
Charleston Place ............. 10,266,320 214 47,973 806 620 93%
Stone Point Apartments ....... 10,217,132 192 53,214 848 643 97%
Summerwalk ................... 7,579,816 160 47,374 963 639 92%
The Landing .................. 10,138,894 200 50,694 960 649 97%
Parkside at Woodlake ......... 15,148,084 266 56,948 865 712 88%
Deerfield .................... 11,271,911 204 55,254 888 755 95%
Wind Lake .................... 11,188,225 299 37,419 727 517 92%
Signature Place .............. 7,305,001 171 42,719 1,037 543 93%
The Hollows .................. 6,186,785 176 35,152 903 667 91%
The Trestles ................. 11,553,152 280 41,261 776 600 94%
Highland Hills ............... 14,457,299 264 54,762 1,000 770 95%
Paces Arbor .................. 5,995,007 101 59,357 899 673 88%
Paces Forest ................. 7,007,335 117 59,892 883 674 96%
Clarion Crossing ............. 11,094,861 228 48,662 769 646 92%
Remington Place .............. 8,506,608 136 62,549 1,098 766 90%
St. Regis .................... 10,195,033 180 56,639 840 700 90%
The Timbers Apartments ....... 8,502,113 176 48,307 745 624 94%
Wimbledon Chase .............. 5,704,224 192 29,710 818 573 90%
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
INITIAL
YEAR DATE OF ACQUISITION
PROPERTY CITY COMPLETED ACQUISITION COST
- -------------------------------- ----------------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C>
Chase Mooring ................. Wilmington 1968 August 1994 3,594,000
Osprey Landing ................ Wilmington 1974 November 1995 4,375,000
Mill Creek .................... Winston Salem 1984 September 1995 8,550,000
Glen Eagles ................... Winston Salem 1986 October 1995 7,300,000
SOUTH CAROLINA
Westchase ..................... Charleston 1985 January 1997 11,000,000
Hampton Pointe Apartments Charleston 1986 March 1998 12,225,000
Stone Ridge ................... Columbia 1975 December 1993 3,325,000
The Arbors at Windsor Lake Columbia 1991 January 1997 10,875,000
Polo Club ..................... Greenville 1972 June 1993 4,300,000
Breckinridge .................. Greenville 1973 June 1995 5,600,000
Magnolia Run .................. Greenville 1972 June 1995 5,500,000
Cape Landing .................. Myrtle Beach 1998 October 1998 17,100,000
VIRGINIA
Trophy Chase .................. Charlottesville 1970 April 1996 3,710,000
Greenbrier .................... Fredericksburg 1970/1990 October 1996 11,099,525
Tradewinds .................... Hampton 1988 November 1995 10,200,000
County Green .................. Lynchburg 1976 December 1993 3,800,000
Ashley Park ................... Richmond 1988 March 1996 12,205,000
Trolley Square ................ Richmond 1964/1965 June 1996 10,242,575
Hampton Glen .................. Richmond 1986 August 1996 11,599,931
The Gables .................... Richmond 1987 July 1998 11,500,000
Mayflower Seaside ............. Virginia Beach 1950 October 1993 7,634,144
Bay Watch Pointe .............. Virginia Beach 1972 July 1995 3,372,525
Arbor Trace ................... Virginia Beach 1985 March 1996 5,000,000
Harbour Club .................. Virginia Beach 1988 May 1994 5,250,000
----------
Total or Average ............. $497,520,664
------------
<CAPTION>
TOTAL COST NUMBER AVERAGE AVERAGE AVERAGE
THROUGH OF COST UNIT AVERAGE ECONOMIC
PROPERTY APRIL 30, 1999 UNITS PER UNIT SIZE RENT OCCUPANCY
- -------------------------------- ---------------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Chase Mooring ................. 5,865,751 224 26,186 867 554 77%
Osprey Landing ................ 7,286,596 176 41,401 981 639 87%
Mill Creek .................... 9,607,809 220 43,672 897 594 85%
Glen Eagles ................... 8,298,991 166 49,994 952 689 86%
SOUTH CAROLINA
Westchase ..................... 12,882,748 352 36,599 706 564 99%
Hampton Pointe Apartments 14,395,335 304 47,353 1,035 631 97%
Stone Ridge ................... 5,849,493 191 30,626 1,047 553 92%
The Arbors at Windsor Lake 11,540,608 228 50,617 966 682 92%
Polo Club ..................... 7,621,382 365 20,880 807 440 93%
Breckinridge .................. 7,078,006 236 29,992 726 460 94%
Magnolia Run .................. 6,935,210 212 32,713 993 566 86%
Cape Landing .................. 17,331,537 288 60,179 933 662 99%
VIRGINIA
Trophy Chase .................. 6,737,516 185 36,419 803 604 89%
Greenbrier .................... 12,506,503 258 48,475 851 656 95%
Tradewinds .................... 11,363,037 284 40,011 930 636 95%
County Green .................. 5,308,724 180 29,493 1,000 531 94%
Ashley Park ................... 13,181,722 272 48,462 765 619 91%
Trolley Square ................ 13,351,423 325 41,081 589 577 93%
Hampton Glen .................. 12,789,986 232 55,129 788 702 93%
The Gables .................... 11,976,361 224 53,466 700 626 93%
Mayflower Seaside ............. 10,294,424 263 39,142 698 730 91%
Bay Watch Pointe .............. 5,075,525 160 31,722 911 625 95%
Arbor Trace ................... 6,072,616 148 41,031 850 616 91%
Harbour Club .................. 6,328,786 214 29,574 813 602 94%
---------- --- ------ ----- --- --
Total or Average ............. $591,196,946 13,462 $43,916 888 $621 92%
------------ ------ ------- ----- ---- --
</TABLE>
30
<PAGE>
APPLE
General
Apple is an externally-advised and externally-managed equity REIT focused
on the acquisition and ownership of well-located, "middle-market" apartment
communities in growing markets in Texas. On April 30, 1999, Apple owned 27
apartment communities comprising 7,034 apartment units. For the month ended
April 30, 1999, the apartment communities had an economic occupancy of 91% and
an average monthly rent of $569 per unit.
Apple has no paid employees and has engaged Cornerstone to serve as its
advisor and manager. Pursuant to the terms of the advisory agreement between
Apple and Cornerstone, Cornerstone has agreed to use its best efforts to (i)
supervise and arrange for the day-to-day management of Apple and (ii) assist
Apple in maintaining a continuing and suitable property investment program.
Pursuant to the terms of the management agreement between Apple and Cornerstone,
Cornerstone has agreed to provide the day-to-day management for Apple and all of
its properties.
Apple seeks to own properties that target the "middle market" tenant, those
persons having incomes ranging between 90% to 115% of the median incomes within
the properties' respective markets. Cornerstone, Apple's advisor, believes the
middle market represents the largest segment of renters and that this segment
has less turnover than other market sectors. Cornerstone further believes it can
achieve better long-term results, with less risk, by acquiring, upgrading and
repositioning existing well-located properties rather than developing new
properties. On average, Apple has paid approximately $37,168 per unit acquired,
which Cornerstone believes to be significantly less than replacement cost for
comparable units.
Apple seeks to maximize long-term growth in net operating income and
portfolio value. Cornerstone, as Apple's advisor, believes there is substantial
opportunity for growth from the active management of Apple's currently owned
apartment communities and the acquisition of additional multi-family properties
in Texas.
Acquisitions
Apple's investment strategy is to acquire under-managed, under-capitalized
apartment assets in good locations whereby its property manager can enhance
rental revenues and occupancies through both capital investment and active
property management. Apple generally will make selected renovations to an
apartment community's clubhouse and common areas to improve its curb appeal.
Moreover, Apple may renovate apartment units as they become available upon the
expiration of leases. Apple's on-site property management strives to provide
superior service, thus enabling Apple to increase rental rates, maintain high
occupancy, and decrease turnover.
On January 5, 1999, Apple acquired Sierra Ridge Apartments, a 230-unit
apartment complex in San Antonio, Texas for a purchase price of $5,817,000. On
February 1, 1999, Apple purchased Grayson Square Apartments, a 200-unit
apartment complex in Grapevine, Texas for a purchase price of $9,350,000. On
April 9, 1999, Apple purchased Hunters Creek Apartments, a 240 unit complex near
Charlottesville, Virginia for a purchase price of $7,750,000.
Financing
Apple has a strong equity base and maintains a low leverage policy to allow
maximum financial flexibility. Apple has approximately $32,100,000 of secured
debt at an annual effective fixed interest rate of 6.475%. Apple's current
unsecured line of credit currently bears interest equal to one-month London
interbank offered rate ("LIBOR") plus 1.20% and matures on October 30, 2000. As
of March 31, 1999, Apple's debt to total market capitalization and debt to total
assets ratios were 11% and 11%, respectively.
On March 19, 1999, Apple completed a best-efforts, continuous offering
underwritten by David Lerner Associates, Inc. Through this offering, Apple
raised $299.1 million, the net proceeds of which have been invested, or are
intended for investment in apartment communities primarily in Texas.
31
<PAGE>
PROPERTIES
As of April 30, 1999, Apple owned 27 apartment communities comprising 7,274
apartment units. All of these apartment communities are located in Texas and
Virginia. The following table sets forth specific information regarding the
apartment communities as of April 30, 1999:
<TABLE>
<CAPTION>
INITIAL
YEAR DATE OF ACQUISITION
PROPERTY CITY COMPLETED ACQUISITION COST
- --------------------------------- ----------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
TEXAS
Aspen Hills .................... Arlington 1979 January 1997 $ 5,690,560
Mill Crossing .................. Arlington 1979 February 1997 4,544,121
Polo Run ....................... Arlington 1984 March 1997 6,858,974
Cottonwood Crossing ............ Arlington 1985 July 1998 5,700,000
Burney Oaks .................... Arlington 1985 October 1998 9,300,000
Newport ........................ Austin 1988 July 1998 6,330,000
The Arbors on Forest Ridge ..... Bedford 1986 April 1997 7,748,907
Park Village ................... Bedford 1983 July 1998 7,000,000
Brookfield ..................... Dallas 1984 January 1997 5,458,485
Toscana ........................ Dallas 1986 March 1997 5,854,531
Pace's Cove .................... Dallas 1982 June 1997 9,277,355
Timberglen ..................... Dallas 1984 February 1998 12,000,000
The Courts on Pear Ridge ....... Dallas 1988 November 1998 11,500,000
Main Park ...................... Duncanville 1984 February 1998 8,000,000
Wildwood ....................... Euless 1984 March 1997 3,963,519
Copper Crossing ................ Fort Worth 1981 November 1997 9,275,000
Bitter Creek ................... Grand Prairie 1982/1984 July 1998 18,210,000
Grayson Square ................. Grapevine 1985 February 1999 20,280,000
Eagle Crest .................... Irving 1983/1985 January 1997 15,650,000
Remington at Las Colinas ....... Irving 1984/1985 August 1997 13,100,000
Estrada Oaks ................... Irving 1983 July 1998 9,350,000
Pace's Point ................... Lewisville 1985 July 1998 11,405,000
Summer Tree .................... North Dallas 1980 June 1998 5,700,000
Devonshire ..................... North Dallas 1978 July 1998 5,205,000
Brandywine Park ................ Richardson 1978 October 1998 8,100,000
Sierra Ridge ................... San Antonio 1981 January 1999 5,825,000
VIRGINIA
Hunters Creek .................. Charlottesville 1970 April 1999 $ 7,750,000
------------
Total or Average .............. $239,076,452
============
<CAPTION>
NUMBER AVERAGE AVERAGE AVERAGE
OF COST UNIT AVERAGE ECONOMIC
PROPERTY TOTAL COST UNITS PER UNIT SIZE RENT OCCUPANCY
- --------------------------------- --------------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
Aspen Hills .................... $ 7,602,372 240 $31,677 671 $514 91%
Mill Crossing .................. 5,654,164 184 30,729 691 522 88%
Polo Run ....................... 8,134,887 224 36,316 854 604 91%
Cottonwood Crossing ............ 6,279,775 200 31,399 751 516 95%
Burney Oaks .................... 9,740,644 240 40,586 794 616 93%
Newport ........................ 7,466,256 200 37,331 741 592 96%
The Arbors on Forest Ridge ..... 8,675,691 210 41,313 736 632 91%
Park Village ................... 7,685,041 238 32,290 647 523 88%
Brookfield ..................... 6,193,928 232 26,698 714 534 94%
Toscana ........................ 6,839,735 192 35,624 601 536 94%
Pace's Cove .................... 9,885,459 328 30,139 670 552 96%
Timberglen ..................... 13,188,341 304 43,383 728 576 85%
The Courts on Pear Ridge ....... 11,994,247 242 49,563 774 678 88%
Main Park ...................... 8,832,608 192 46,003 1,182 712 98%
Wildwood ....................... 4,760,254 120 39,669 755 644 94%
Copper Crossing ................ 11,432,027 400 28,580 773 489 89%
Bitter Creek ................... 20,651,437 642 32,167 815 530 93%
Grayson Square ................. 21,638,522 450 48,086 840 618 91%
Eagle Crest .................... 17,910,178 484 37,005 887 640 90%
Remington at Las Colinas ....... 15,556,620 362 42,974 955 817 85%
Estrada Oaks ................... 10,098,099 248 40,718 771 609 95%
Pace's Point ................... 13,119,592 300 43,732 762 601 95%
Summer Tree .................... 6,744,487 232 29,071 575 512 87%
Devonshire ..................... 6,888,944 144 47,840 876 638 88%
Brandywine Park ................ 9,308,631 196 47,493 1,010 685 90%
Sierra Ridge ................... 6,330,235 230 27,523 751 467 94%
VIRGINIA
Hunters Creek .................. $ 7,786,002 240 32,444 933 524 92%
------------ --- ------- ----- ---- --
Total or Average .............. $270,362,174 7,274 $37,168 787 $569 91%
============ ===== ======= ===== ==== ==
</TABLE>
32
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC. (POST-MERGER)
Upon consummation of the merger, Cornerstone will become a leading owner
and operator of apartment properties in the southern United States, with a total
pro forma market capitalization in excess of $860 million and a portfolio of 85
multi-family communities consisting of 20,736 apartment units. The combined
company resulting from the Merger is expected to have the following important
characteristics, which are intended to create long-term shareholder value:
o Increased Asset Base. A total asset base of approximately $860 million
with 20,736 units in 85 apartment communities;
o Enhanced Market Diversification. A diversified portfolio of apartment
communities throughout North Carolina, Virginia, South Carolina,
Georgia and Texas;
o Lower Leverage. Debt to market capitalization and debt to total assets
ratios at 26% and 28%, respectively;
o Reduced Cost of Capital. Decreasing cost of equity and debt capital as
a consequence of being a larger, more diversified REIT; and
o Greater Administrative and Operating Efficiencies. Improved operating
and administrative efficiencies as a consequence of a larger property
portfolio.
The following table sets forth the properties at Cornerstone in each of its
20 metropolitan markets after the merger:
<TABLE>
<CAPTION>
TOTAL COST
NUMBER NUMBER OF AT PERCENTAGE
OF APARTMENT APRIL 30, OF
COMMUNITIES UNITS 1999 PORTFOLIO
------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
GEORGIA
Atlanta .......................... 5 1,317 $ 69,399,722 8.06%
Augusta .......................... 2 621 19,855,795 2.30%
NORTH CAROLINA
Asheville ........................ 2 344 13,556,072 1.57%
Charlotte ........................ 9 2,323 106,870,920 12.40%
Greenville ....................... 1 171 7,305,001 0.85%
Raleigh/Durham ................... 13 2,488 127,636,898 14.81%
Wilmington ....................... 3 592 18,856,571 2.19%
Winston Salem/Greensboro ......... 3 685 29,095,025 3.38%
SOUTH CAROLINA
Charleston ....................... 2 656 27,278,083 3.17%
Columbia ......................... 2 419 17,390,101 2.02%
Greenville ....................... 3 813 21,634,598 2.51%
Myrtle Beach ..................... 1 288 17,331,537 2.01%
TEXAS
Austin ........................... 1 200 7,466,256 0.87%
Dallas ........................... 24 6,604 248,779,681 28.88%
San Antonio ...................... 1 230 6,330,235 0.73%
VIRGINIA
Charlottesville .................. 2 425 14,523,518 1.69%
Fredericksburg ................... 1 258 12,506,503 1.45%
Lynchburg ........................ 1 180 5,308,724 0.62%
Richmond ......................... 4 1,053 51,299,492 5.95%
Virginia Beach ................... 5 1,069 39,134,388 4.54%
-- ----- ------------- ------
Total ........................... 85 20,736 $ 861,559,120 100.00%
== ====== ============= ======
</TABLE>
BACKGROUND OF THE MERGER
In August 1996, Glade M. Knight, Chairman and Chief Executive Officer of
Cornerstone, formed Apple to pursue real estate investment opportunities in
Texas and other parts of the Southwest by employing the apartment community
acquisition, renovation and management strategies that
33
<PAGE>
Cornerstone had employed in the Southeast. Mr. Knight formed Apple to pursue
these opportunities because, as Cornerstone's offering documents disclosed,
Cornerstone's practice had been to limit its investments to the Southeast region
of the United States and because Cornerstone common shareholders had no market
into which to sell their shares if they did not agree with a decision to expand
into Texas. From inception, Apple was managed and advised by entities owned
entirely by Mr. Knight or Cornerstone. Also, at inception, Cornerstone was
granted a right of first refusal to acquire any or all of Apple's business or
properties. Such right provided that any such sale to Cornerstone would have to,
among other things, be approved by a majority of Apple's independent directors
and, depending upon the form of any such transaction, a majority of the holders
of outstanding Apple common shares. The Apple Board approved this right on
November 1, 1996, and Cornerstone, through its Chief Executive Officer, approved
this right on the same date.
In November 1996, Apple commenced a "best-efforts" public offering of its
commons shares managed by David Lerner Associates, Inc. Apple's registration
statement disclosed that Apple had granted to Cornerstone the right of first
refusal to acquire any or all of Apple's business or properties and information
related thereto.
In February 1997, Cornerstone first filed its prospectus relating to its
first underwritten public offering in which it stated its intention to evaluate
the possible acquisition of Apple by the end of 1997.
On February 10, 1997, the Apple Board, in response to a request from
Cornerstone, authorized the grant to Cornerstone of a continuing right to
acquire up to 9.8% of Apple common shares outstanding.
In April 1997, Cornerstone completed its first underwritten public
offering. In its prospectus, Cornerstone stated its interest in acquiring Apple
by the end of 1997, subject to a determination that such acquisition would be in
its best interests.
On April 25, 1997, Cornerstone acquired 417,778 common shares of Apple for
$3,760,000.
In December 1997, Cornerstone, working with its financial advisors,
determined that the acquisition of Apple would be dilutive to its projected 1998
funds from operations and, therefore, not in its best interests at that time.
Cornerstone stated that it expected to reevaluate the desirability of seeking to
acquire Apple from time to time in the future.
On May 5, 1998, the Cornerstone Board, having considered presentations by
management, determined it was appropriate and desirable to establish and did
establish a special committee of independent directors (consisting of Harry S.
Taubenfeld and Glenn W. Bunting, Jr.) to explore the feasibility of acquiring
Apple and to represent the interests of holders of Cornerstone's common shares
in connection therewith. In appointing Mr. Taubenfeld to the special committee,
the Cornerstone Board took into account that Mr. Taubenfeld's law firm renders
legal services from time to time to Cornerstone and Apple and concluded that
this would not adversely affect his ability to discharge his duties as a special
committee member.
Between July and September 1998, Mr. Knight and Mr. Olander, as officers of
both Apple and Cornerstone, had a series of discussions with PaineWebber, in its
capacity as investment banker to Cornerstone, regarding the prospects of a
transaction between Apple and Cornerstone or alternatives thereto. As a
consequence thereof, PaineWebber conducted an initial financial analysis and
review of the Apple property portfolio. Initial analysis indicated that a merger
using Cornerstone common shares at that time would be dilutive.
In September 1998, Mr. Olander and a representative of PaineWebber began to
consider the use of a convertible preferred stock as consideration for
Cornerstone's acquisition of Apple.
On September 17, 1998, the Apple Board met and discussed the prospects of a
transaction between Apple and Cornerstone. At this meeting, at the request of
the Apple Board, Apple management discussed possible transaction structures,
including transactions involving the use of a Cornerstone convertible preferred
stock as consideration for a combination between Cornerstone and
34
<PAGE>
Apple. At this meeting, the Apple Board formed a special committee of
independent directors (consisting of Bruce H. Matson and Lisa B. Kern) to
represent the interests of holders of Apple common shares in considering a
possible combination with Cornerstone. In appointing Mr. Matson to the special
committee, the Apple Board took into account that Mr. Matson's law firm renders
legal services from time to time to Cornerstone and concluded that this would
not adversely affect his ability to discharge his duties as a special committee
member.
On September 23, 1998, the Apple Special Committee met to discuss its
obligations and how it would proceed, including the need to seek and hire
financial and legal advisors.
On October 22, 1998, Mr. Olander and a representative of PaineWebber met
with the Cornerstone Special Committee to discuss possible merger structures and
preliminary indications of the value of Apple.
On October 23, 1998, a representative of PaineWebber met with the
Cornerstone Board to provide them with an overview of market conditions and to
discuss informally the possibility of a combination with Apple.
Between October 23 and December 29, 1998, Mr. Olander held periodic
discussions with representatives of PaineWebber and members of the Cornerstone
Special Committee concerning terms and conditions of a possible business
combination to be proposed to Apple.
On December 29, 1998, Mr. Olander, on behalf of the Cornerstone Special
Committee, delivered to the Apple Special Committee a letter of intent
expressing Cornerstone's interest in a combination with Apple and the general
terms thereof, including the requirement that the letter of intent be accepted
by January 7, 1999. On this date, the Apple Special Committee discussed with Mr.
Olander and Mr. Knight by phone, the background and reasoning leading up to the
proposal, inquiring as to the details of the offer and the procedures to be
followed in evaluating the proposal. The Apple Special Committee did not accept
the Cornerstone proposal by the January 7, 1999 deadline.
From January 4 through January 13, 1999, the Apple Special Committee
interviewed candidates to serve as its financial advisor and its legal counsel
and selected Bowles Hollowell Conner, a division of First Union Capital Markets
Corp., and Mays & Valentine, L.L.P. to serve as its financial advisor and legal
counsel, respectively.
On January 14, 1999, the Apple Special Committee met with Bowles Hollowell
Conner and Mays & Valentine to discuss the status of, and a likely timetable to
evaluate, a potential proposal and the due diligence to be undertaken.
In January 1999, the Cornerstone Special Committee concluded negotiations
with PaineWebber with respect to the terms on which PaineWebber would represent
the Cornerstone Special Committee. Thereafter, PaineWebber commenced a formal
due diligence review of Apple on behalf of the Cornerstone Special Committee.
On January 22, 1999, the Apple Special Committee consulted with its
financial advisor and legal counsel regarding an appropriate process for
considering the proposed transaction with Cornerstone. Following that meeting,
Bowles Hollowell Conner and Mays & Valentine commenced a due diligence analysis
of Apple and Cornerstone, and evaluation of a possible transaction between Apple
and Cornerstone.
On February 4, 1999, Cornerstone delivered a second letter of intent
stating a new expiration date for a response from Apple of February 5, 1999 with
respect to Cornerstone's letter of intent dated December 29, 1998. The Apple
Special Committee did not accept the Cornerstone's proposal by the February 5,
1999 deadline.
On February 5, 1999, the Apple Special Committee met with its financial
advisor and legal counsel to discuss Cornerstone's letter of intent, preliminary
valuation efforts conducted by Bowles Hollowell Conner and to review additional
due diligence to be completed.
35
<PAGE>
On February 8, 1999, Mays & Valentine, following further discussion among
the Apple Special Committee and its advisors, delivered to Cornerstone a written
proposal of the terms by which Apple would be interested in pursuing a
combination with Cornerstone. The terms of this proposal differed from the terms
in the preceding Cornerstone proposal and were not acceptable, as presented, to
the Cornerstone Special Committee.
From February 8 through March 30, 1999, the advisors to the Apple Special
Committee and to the Cornerstone Special Committee continued their due diligence
investigations, communicated regularly with their respective clients concerning
the terms of a possible merger agreement and met with each other to negotiate
the terms and conditions by which Cornerstone might acquire Apple and the manner
in which the differences between the Cornerstone and Apple proposals might be
resolved. Such negotiations and communications focused principally on the
following: the priority, conversion price and voting rights of the preferred
shares, break-up fees to be paid if a transaction was not consummated and
Apple's right to decline to consummate a transaction after a definitive
agreement was signed based on adverse changes in Cornerstone's stock price.
On February 9, 1999, Cornerstone issued a press release announcing that
discussions with Apple were underway regarding a possible combination between
Apple and Cornerstone.
On March 16, 1999, the Apple Special Committee met with its financial
advisors and legal counsel to discuss the status of negotiations and to review
legal issues related thereto.
On March 25, 1999, a representative of PaineWebber formally updated the
Cornerstone Special Committee on the status of negotiations with the Apple
representatives. In addition, representatives from PaineWebber and McGuire Woods
reviewed the terms of a draft of the proposed Agreement and Plan of Merger
relating to the transaction. The Cornerstone Special Committee took no formal
action.
On March 30, 1999, in a presentation to the Cornerstone Special Committee,
PaineWebber and McGuire Woods reviewed the terms of a draft of the merger
agreement relating to the transaction, and PaineWebber delivered an oral opinion
regarding the fairness of the proposed transaction pursuant to the merger
agreement. The Cornerstone Special Committee unanimously concluded that the
merger was in the best interests of Cornerstone and the Cornerstone shareholders
and approved the merger and merger agreement and recommended the merger and
merger agreement to the Cornerstone Board.
On the same day, immediately following the Cornerstone Special Committee
meeting, the Cornerstone Board met to consider the proposed transaction with
Apple and to receive the Cornerstone Special Committee's recommendation
regarding the proposed transaction. The Cornerstone Special Committee presented
its unanimous recommendation that the Cornerstone Board approve the merger and
the merger agreement. Based upon the recommendation of the Cornerstone Special
Committee, the Cornerstone Board unanimously approved the merger and the merger
agreement.
On March 30, 1999, in a presentation to the Apple Special Committee, Bowles
Hollowell Conner and Mays & Valentine reviewed the terms of the merger agreement
relating to the transaction, and Bowles Hollowell Conner delivered an oral
opinion regarding the fairness of the proposed transaction pursuant to the
merger agreement. The Apple Special Committee unanimously concluded that the
merger was in the best interests of Apple and the Apple shareholders and
approved the merger and merger agreement and recommended the merger and merger
agreement to the Apple Board.
On the same day, immediately following the Apple Special Committee meeting,
the Apple Board met to consider the proposed transaction with Cornerstone and to
receive the Apple Special Committee's recommendation regarding the proposed
transaction. The Apple Special Committee presented its unanimous recommendation
that the Apple Board approve the merger and the merger agreement. Based upon the
recommendation of the Apple Special Committee, the Apple Board unanimously
approved the merger and the merger agreement.
36
<PAGE>
On March 30, 1999, Cornerstone, Apple and Cornerstone Acquisition Company
executed and delivered the definitive form of merger agreement.
OTHER COMMUNICATIONS CONCERNING CORNERSTONE
During March 1999, Cornerstone received a series of letters from Mr. Irwin
L. Jacobs indicating that he and certain associates might have an interest in
acquiring Cornerstone, subject to the performance of the due diligence and other
conditions.
In a letter dated March 16, Mr. Jacobs stated that he and his associates
desired to commence a due diligence investigation of Cornerstone in order to
explore the feasibility of a cash offer of $11.50 or more per Cornerstone common
share. By letter dated March 17, the Executive Committee of Cornerstone stated
that in light of its existing business strategy, it was not interested in
pursuing Mr. Jacobs' proposal.
In a letter dated March 22, Mr. Jacobs again stated his interest in
commencing a due diligence investigation of Cornerstone and committed that,
without the approval of Cornerstone, he would not make an offer for less than
$12.50 per Cornerstone common share. In response to this letter, Cornerstone
indicated that Mr. Jacobs' correspondence would be discussed with the
Cornerstone Board in due course.
The correspondence of Mr. Jacobs was discussed by the Cornerstone Board,
together with its legal and financial advisors, at its meeting on March 30. The
Board concluded at that time that Mr. Jacobs' communications did not warrant a
change from Cornerstone's strategy to pursue a merger with Apple. The Board also
concluded that a merger with Apple did not preclude Cornerstone's ability to
pursue other value-enhancing transactions in the future.
As a result of the Board discussions at the meeting of March 30, by letter
dated March 31, Cornerstone expressed to Mr. Jacobs that the Board had
substantial doubts as to his seriousness because of the conditionality and
vagueness of his indications of interest. In addition, Cornerstone stated that
if Mr. Jacobs wished to pursue the matter further, he should at a minimum
demonstrate that he had a sincere interest in producing maximum value for
Cornerstone's shareholders by sharing with Cornerstone, in writing information
on the business and financial analysis underlying his approach; his plans for
the business; the terms and amounts of equity and debt funding available with
verification that the amounts were unconditionally available for use in an
acquisition; the expertise of his management team; the identity of his partners
and his and their share ownership in Cornerstone; the amount of analysis he had
conducted to date; the extent of additional information he would require; and
the probable timing and structure of any transaction he might propose.
The letter of March 31 from Cornerstone indicated that only after receipt
of this information and a fully developed, credible proposal would the Board be
in a position to decide whether to proceed further with discussions with Mr.
Jacobs. To date, Mr. Jacobs has not responded to this request.
RECOMMENDATION OF THE CORNERSTONE BOARD; CORNERSTONE'S REASONS FOR THE MERGER
On March 30, 1999, the Cornerstone Board met to consider the merger and to
receive the Cornerstone Special Committee's recommendation regarding the merger.
Based upon a review of the terms of the merger agreement, consultation with
Cornerstone's management, as well as its financial advisors and legal counsel,
consideration of the factors described below and the unanimous recommendation of
the Cornerstone Special Committee that the Cornerstone Board approve the merger
and the merger agreement, the Cornerstone Board unanimously approved the merger
and the merger agreement and the transactions contemplated thereby, the related
issuance of Series A Convertible Preferred Shares and the related bylaw
amendments and unanimously recommends that Cornerstone shareholders vote for the
approval and adoption of the merger, the merger agreement and the transactions
contemplated thereby, including the related issuance of Series A Convertible
Preferred Shares and the related bylaw amendments.
37
<PAGE>
In reaching its determination and recommendation, the Cornerstone Board
considered the following material positive factors:
(i) Accretive Effect. Cornerstone believes that the acquisition of Apple
will be accretive to its FFO per share for 1999 and 2000, on a fully
converted basis.
(ii) Increased Asset Base. Cornerstone's total asset base will increase
from approximately $555 million to approximately $860 million, and
the number of apartments will increase from 13,462 units in 58
apartment properties to 20,736 units in 85 apartment properties.
(iii) Enhanced Market Diversification. Cornerstone will diversify its
exposure to its existing markets in the southeastern United States
with the addition of Apple's properties in the Dallas/Fort Worth
market of Texas.
(iv) Acquired Solid Portfolio in Dallas/Fort Worth Market. Cornerstone
will acquire a solid portfolio of 27 apartment properties containing
7,274 units located principally in the high-growth markets of the
Dallas-Ft. Worth metropolitan area. Dallas is the eighth largest
metro area in the United States. In addition, it is one of the
fastest growing areas in country. During the fourth quarter of 1998,
Dallas added over 57,000 new jobs, ranking it second in the south
and fourth in the nation for new job creation.
(v) Portfolio Consistent with Cornerstone's Existing Properties. Apple's
properties were identified and acquired by Cornerstone on behalf of
Apple principally within the past two years. Apple's properties have
recently undergone renovation or are in the process of renovation
and are consistent with the quality of Cornerstone's own portfolio.
Apple's properties are comparable to Cornerstone's in terms of size
of units, age, rental per square foot and other factors.
(vi) Ease of Integration. Because Apple has no employees, Cornerstone has
served as its advisor and property manager. When the merger is
consummated, Cornerstone will not add any new employees, but will
continue to operate Apple's properties with the same people who are
operating the properties prior to the merger. Additionally, because
Cornerstone has maintained all of Apple's corporate and property
records, the consolidation of Cornerstone's and Apple's property
portfolios is expected to be relatively simple.
(vii) Greater Operating and Administrative Efficiencies. Through operating
a larger portfolio of properties, Cornerstone believes that it will
achieve improved operating and administrative efficiencies.
(viii) Reduced Cost of Capital. As a larger, more diversified apartment
REIT, Cornerstone believes that its costs of equity and debt capital
will decrease over time.
(ix) Lower Leverage. After the consummation of the merger, Cornerstone's
debt to market capitalization and debt to total assets ratios are
expected to be reduced to approximately 26% and 28%, respectively.
In addition, Cornerstone's earnings to fixed charges ratio is
expected to exceed 2 times.
(x) Eliminate Speculation Concerning Transaction with Apple. The merger
resolves issues regarding the timing and terms of Cornerstone's
publicly disclosed intention to acquire Apple.
(xi) Recommendation of Cornerstone Special Committee. The Cornerstone
Board placed special emphasis on the recommendation of the
Cornerstone Special Committee. In determining to recommend the
merger to the Cornerstone Board, the Cornerstone Special Committee
considered the same factors described herein which were considered
by the Cornerstone Board as a whole. In addition, the Cornerstone
Special Committee considered the opinion, analyses and presentation
of PaineWebber described below under "-- Opinion of Cornerstone's
Financial Advisor," to the effect that, as of the date of such
opinion and based upon and subject to certain matters stated
therein, the consideration to be paid by
38
<PAGE>
Cornerstone pursuant to the merger is fair to Cornerstone from a
financial point of view. The Cornerstone Board viewed PaineWebber's
opinion as favorable to its determination because PaineWebber is a
prominent investment banking and financial advisory firm with
experience in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
distributions of securities, private placements and valuations for
corporate purposes, especially with respect to REITs and other real
estate companies.
The Cornerstone Board and Cornerstone Special Committee also considered
certain potentially negative factors which could result from the merger. These
included, among others, the possibility that the anticipated benefits of the
merger might not be fully realized, that the merger will expose Cornerstone
common shareholders to risks of those markets in which Apple's properties are
now located that the merger will decrease Cornerstone's fixed charge coverage
ratio after consideration of distributions to be paid on the Series A
Convertible Preferred Shares, and that the larger combined asset base of the two
companies could make the perpetuation of growth in funds from operations from
external investment more difficult and the significant transaction costs
involved in connection with consummating the merger. The Cornerstone Board also
evaluated the benefits of the transaction to be received by certain officers and
directors of Apple and Cornerstone as described under "The Merger--Interests of
Certain Persons in the Merger." The Cornerstone Board did not believe that the
negative factors were sufficient, either individually or collectively, to
outweigh the advantages of the merger.
The foregoing discussion of the information and factors considered by the
Cornerstone Board and Cornerstone Special Committee is not intended to be
exhaustive, but includes the material factors considered by the Cornerstone
Board. The Cornerstone Board did not assign relative weights to the above
factors or determine that any factor was of greater importance than another. A
determination of various weightings would, in the view of the Cornerstone Board,
be impractical. Rather, the Cornerstone Board viewed its position and
recommendations as being based on the totality of the information presented to
and considered by it. In addition, individual members of the Cornerstone Board
may have given different weight to different factors.
OPINION OF CORNERSTONE'S FINANCIAL ADVISOR
The Cornerstone Special Committee retained PaineWebber to act as the
financial advisor to the Cornerstone Special Committee in connection with a
possible business combination with Apple. In connection with this engagement,
the Cornerstone Special Committee requested that PaineWebber render an opinion
as to whether the issuance of the Series A Convertible Preferred Shares in the
merger is fair to Cornerstone from a financial point of view.
The Cornerstone Special Committee retained PaineWebber to act as its
financial advisor based upon PaineWebber's prominence as an investment banking
and financial advisory firm with experience in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, distributions of securities, private placements and valuations
for corporate purposes, especially with respect to REITs and other real estate
companies.
On March 30, 1999, PaineWebber delivered an oral opinion to the Cornerstone
Special Committee which was confirmed by a written opinion dated as of March 30,
1999, to the effect that, as of the date of such opinion, based on PaineWebber's
review and subject to certain assumptions and limitations described therein, the
consideration to be paid by Cornerstone pursuant to the merger was fair to
Cornerstone from a financial point of view. The PaineWebber opinion does not
constitute a recommendation to the Cornerstone shareholders as to how they
should vote on the merger. Additionally, the PaineWebber opinion does not
address the relative merits of the merger and any other transactions or business
strategies that might be available to Cornerstone, including alternative
business combinations with third parties, or the decision of the Board of
Directors of Cornerstone to proceed with the merger.
A COPY OF THE PAINEWEBBER OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND CERTAIN LIMITATIONS ON THE SCOPE OF THE
39
<PAGE>
REVIEW UNDERTAKEN BY PAINEWEBBER, IS ATTACHED TO THIS JOINT PROXY STATEMENT/
PROSPECTUS AS ANNEX B AND IS INCORPORATED HEREIN BY REFERENCE. THE DESCRIPTION
OF THE FAIRNESS OPINION OF PAINEWEBBER SET FORTH HEREIN IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE WRITTEN OPINION. STOCKHOLDERS OF
CORNERSTONE ARE URGED TO READ THE PAINEWEBBER OPINION IN ITS ENTIRETY.
In connection with its opinion, PaineWebber, among other things: (i)
reviewed Apple's Annual Reports, Forms 10-K and related financial information
for the two fiscal years ended December 31, 1997 and Apple's Form 10-Q and the
related unaudited financial information for the nine months ended September 30,
1998; (ii) reviewed Cornerstone's Annual Reports and Forms 10-K and related
financial information for the five fiscal years ended December 31, 1997, and
Cornerstone's Form 10-Q and the related unaudited financial information for the
nine months ended September 30, 1998; (iii) reviewed certain information,
including financial forecasts, relating to the business, earnings, cash flow,
assets and prospects of Apple and Cornerstone, furnished to PaineWebber by Apple
and Cornerstone, respectively; (iv) conducted discussions with members of senior
management of Apple and Cornerstone concerning their respective businesses and
prospects; (v) compared the results of operations of Apple and Cornerstone with
that of certain companies which PaineWebber deemed to be relevant; (vi) compared
the proposed financial terms of the transactions contemplated by the merger
agreement with the financial terms of certain other mergers and acquisitions
which PaineWebber deemed to be relevant; (vii) compared the terms of the Series
A Convertible Preferred Shares to the terms of other securities which
PaineWebber deemed to be relevant; (viii) participated in certain discussions
relating to the merger with representatives of Cornerstone and Apple and their
financial and legal advisors; (ix) considered the potential pro forma impact of
the merger; (x) reviewed a draft of the merger agreement dated March 25, 1999;
(xi) reviewed a draft of the Articles of Amendment to the Amended and Restated
Articles of Incorporation of Cornerstone designating the Series A Convertible
Preferred Shares that was attached to the March 25, 1999 draft of the merger
agreement; and (xii) reviewed such other financial studies and analyses and
performed such other investigations and took into account such other matters as
PaineWebber deemed necessary.
In preparing the PaineWebber opinion, PaineWebber relied on the accuracy
and completeness of all information supplied or otherwise made available to
PaineWebber by Cornerstone and Apple, and PaineWebber did not assume any
responsibility to verify independently such information. With respect to the
financial forecasts examined by PaineWebber, PaineWebber assumed that they were
reasonably prepared and reflect the best currently available estimates and good
faith judgments of the management of Cornerstone and Apple, respectively, as to
the future performance of Cornerstone and Apple, respectively. PaineWebber also
relied upon assurances of the management of Cornerstone and Apple, respectively,
that they were unaware of any facts that would make the information or financial
forecasts provided to PaineWebber incomplete or misleading. PaineWebber did not
make any independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of Cornerstone or Apple nor was PaineWebber furnished
with any such evaluations or appraisals. PaineWebber also assumed, with the
consent of the Cornerstone Special Committee, that the merger will be accounted
for under the purchase method of accounting and the merger will be a tax free
reorganization. PaineWebber expressed no opinion as to the price at which the
Series A Convertible Preferred Shares to be issued in connection with the merger
to the shareholders of Apple or the Cornerstone common shares may trade at any
time. Furthermore, the PaineWebber opinion is based on economic, monetary and
market conditions existing on the date thereof.
Certain of the analyses conducted by PaineWebber in connection with its
opinion required reference to the historical market prices and published First
Call earnings estimates for Cornerstone, Apple and selected comparative
companies and to the historical results of various broader stock market indices.
In this regard, PaineWebber utilized historical market prices through March 26,
1999.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses and
the application of those methods to the particular circumstances, and therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Accordingly, PaineWebber believes that its analysis must be
considered as a
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whole and that considering any portion of the analysis and of the factors
considered, without considering all analyses and factors, could create a
misleading or incomplete picture of the process underlying the PaineWebber
opinion. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth therein. In addition,
analyses relating to the values of businesses do not purport to be appraisals or
to reflect the prices at which businesses may actually be sold. Accordingly,
such analyses and estimates are inherently subject to substantial uncertainty,
and PaineWebber does not assume responsibility for the accuracy of such analyses
or estimates. The following paragraphs summarize the significant quantitative
and qualitative analyses performed by PaineWebber in arriving at its opinion.
Unless the context otherwise requires, references throughout this section to
Cornerstone common shares and related per share amounts include Cornerstone
common shares issuable upon the exchange of outstanding partnership units.
Net Asset Valuation Analysis. PaineWebber performed a net asset valuation
analysis of Apple. PaineWebber divided Apple's projected net operating income
("NOI") by a range of nominal capitalization rates of between 9.75% and 8.75% to
produce a range of asset values for Apple's real estate properties. These asset
values were then increased by the amount of Apple's other assets, decreased by
Apple's liabilities, and divided by the number of shares of Apple common shares
outstanding at March 30, 1999. For this analysis, Apple's projected NOI was
computed by annualizing the actual operating results for Apple's real estate
properties (except for two recent acquisitions where estimated NOI was used) for
the three month period ended February 1999. This net asset valuation analysis
produced a range of values per Apple common share of between $8.03 and $8.88.
Discounted Equity Analysis. PaineWebber performed a discounted equity
analysis of Apple. A discounted equity analysis is based on the assumption that
the value of an equity interest in an ongoing business is equal to the net
present value of expected future cash distributions payable to equity holders
plus the present value of expected future cash flow from the assumed sale of the
equity interest at a future date. To establish a current value under this
approach, future cash flow must be estimated and an appropriate discount rate
determined. PaineWebber analyzed Apple based on a discounted cash flow analysis
using projections of funds from operations ("FFO") and cash distributions per
share prepared by the management of Apple for the years 1999 through 2003.
PaineWebber derived a range of per share values for Apple by calculating the
present value of projected cash distributions and a terminal equity value.
PaineWebber assumed a range of discount rates of between 12.0% and 15.0%. A
terminal equity value was calculated using projected FFO per share for the year
ended December 31, 2003 and terminal FFO multiples of 8.5x to 9.5x. The
discounted equity analysis produced a range of values per Apple common share of
between $7.57 and $9.06.
Selected Comparative Public Companies Analysis. Using publicly available
information, PaineWebber compared selected historical and projected financial,
operating and stock market performance data of Apple to the corresponding data
of certain publicly-traded companies that PaineWebber considered comparative
(the "PaineWebber Comparative Companies"). The PaineWebber Comparative Companies
represented a selection of REITs which focused on the ownership of multifamily
apartment homes. The PaineWebber Comparative Companies consisted of Cornerstone,
Apartment Investment and Management Company, Camden Property Trust, Berkshire
Realty Company, Home Properties of New York, Essex Property Trust, Town and
Country Trust and Grove Property Trust.
PaineWebber derived ranges of values per Apple common share by applying
projected FFO per share of Apple, as estimated by Apple's management, for the
years ended December 31, 1999 and December 31, 2000 to the corresponding ranges
of estimated FFO multiples for the PaineWebber Comparative Companies for the
same periods. The estimated FFO multiples for the PaineWebber Comparative
Companies were obtained by dividing the closing stock price on March 26, 1999 by
the FFO estimate. PaineWebber observed that the estimated FFO multiples for the
PaineWebber Comparative Companies for the years ended December 31, 1999 and
December 31, 2000 were 7.7x to 9.1x and 7.1x to 8.6x, respectively. Based on
projected FFO per share and estimated FFO multiples for the year ended December
31, 1999, this method produced a range of values per Apple common
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share of between $6.78 and $8.01. Based on projected FFO per share and estimated
FFO multiples for the year ended December 31, 2000, this method produced a range
of values per Apple common share of between $6.60 and $8.00.
Selected Transactions Analysis. PaineWebber reviewed the financial terms of
eleven announced or completed mergers involving publicly-traded REITs which had
focused on the ownership of multifamily apartment homes (the "PaineWebber
Comparative Transactions"). The PaineWebber Comparative Transactions included
(acquiror/target): (i) United Dominion Realty/Southwest Properties; (ii) Camden
Property Trust/Paragon Group; (iii) Equity Residential Properties/Wellsford
Residential; (iv) Post Properties/Columbus Realty; (v) Equity Residential
Properties/Evans Withycombe Residential; (vi) Camden Property Trust/Oasis
Residential; (vii) United Dominion Realty/ASR Investments; (viii) Apartment
Investment & Management Company/Ambassador Apartments; (ix) Security Capital
Pacific Trust/Security Capital Atlantic Trust; (x) Equity Residential
Properties/Merry Land & Investment Company; and (xi) The Irvine Company/Irvine
Apartment Communities. Using publicly available information, PaineWebber
calculated the premium of the implied offer value per share relative to the
acquired company's stock price one, seven and thirty day(s) prior to the
announcement of the respective transaction. PaineWebber observed that the range
of premiums paid in connection with the PaineWebber Comparative Transactions was
between 0.0% and 31.4%. Applying this range of premiums to the mean of the range
of implied values for Apple's common shares, based upon Apple's 1999 projected
FFO per share and the estimated FFO multiples for 1999 for the PaineWebber
Comparative Companies, produced a range of values per Apple common share of
between $7.50 and $9.16.
Pro Forma Merger Analysis. PaineWebber performed an analysis of the effect
of the merger on Cornerstone's FFO per share for 1999 and 2000, based on
projected FFO per share results and other information supplied by the management
of Cornerstone and Apple. PaineWebber combined the projected, stand-alone FFO
per share of Cornerstone with the projected FFO per share of Apple to arrive at
projected, post-merger FFO per share for Cornerstone. The pro forma merger
analysis assumed a closing of the merger on January 1 of each year presented. In
addition, PaineWebber assumed annual cost savings of approximately $250,000 and
that $10 million of estimated transaction expenses would be financed by
Cornerstone's existing line of credit, resulting in additional annual interest
expense of approximately $680,000. PaineWebber divided the resulting projected,
post-merger FFO for Cornerstone by the number of Cornerstone common shares
(including Cornerstone common shares issuable upon the conversion of the Series
A Convertible Preferred Shares) expected to be outstanding upon consummation of
the merger. PaineWebber compared Cornerstone's projected, post-merger FFO per
share in each year to the projected, stand-alone FFO per share of Cornerstone.
This analysis indicated that the pro forma impact of the merger was accretive to
Cornerstone's FFO per share in 1999 and 2000. In addition, PaineWebber noted
that Cornerstone's pro forma debt-to-total market capitalization ratio was
approximately 26% (based on the March 26, 1999 closing stock price for
Cornerstone common shares), compared to approximately 34% for Cornerstone on a
stand-alone basis.
Contribution Analysis. PaineWebber reviewed the financial contribution of
stand-alone Cornerstone and Apple to post-merger Cornerstone, and noted the
relative ownership of Cornerstone's and Apple's existing shareholders in
post-merger Cornerstone, after giving effect to the currently outstanding
Cornerstone common shares and the additional Cornerstone common shares issuable
to Apple common shareholders upon the conversion of the Series A Convertible
Preferred Shares. Using projected FFO per share results and other information
supplied by management of Cornerstone and Apple for the years ended December 31,
1999 and December 31, 2000, and without attributing any synergistic savings from
the merger, PaineWebber calculated that stand-alone Cornerstone's contributions
to the projected, post-merger FFO of Cornerstone in 1999 and 2000 were 63.5% and
63.1%, respectively, and Apple's contributions to the projected, post-merger FFO
of Cornerstone in 1999 and 2000 were 36.5% and 36.9%, respectively. PaineWebber
calculated the relative ownership of Cornerstone's and Apple's existing
shareholders in post-merger Cornerstone to be 66.2% and 33.8%, respectively.
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Stock Trading History. PaineWebber reviewed the history of market prices
for Cornerstone common shares (from April 18, 1997 to March 26, 1999) and
reviewed the trading history of Cornerstone common shares in relation to the
PaineWebber Multifamily REIT index and the National Association of Real Estate
Investment Trusts ("NAREIT") Equity REIT Index. The PaineWebber Multifamily REIT
Index included 22 Multifamily REITs. The NAREIT Equity REIT Index included all
publicly traded equity REITs. The comparisons to the PaineWebber Multifamily
REIT Index were used to consider the historical stock performance of Cornerstone
relative to companies with similar properties. The comparison to the NAREIT
Equity REIT Index was utilized to consider the historical stock performance of
Cornerstone relative to the REIT market in general. PaineWebber observed that
Cornerstone common shares outperformed the PaineWebber Multifamily REIT Index
and the NAREIT Equity REIT Index.
Analysis of Preferred Shares. In reviewing the Series A Convertible
Preferred Shares, PaineWebber considered the following factors: (i) the terms of
the Series A Convertible Preferred Shares; (ii) the aggregate amount of Series A
Convertible Preferred Shares to be issued to the current holders of Apple common
shares and the relative size of the Series A Convertible Preferred Shares to
Cornerstone's equity and total assets; (iii) the relationship between the yield
on the Series A Convertible Preferred Shares and the dividend yield on
Cornerstone common shares; (iv) the relationship between the conversion price on
the Series A Convertible Preferred Shares and the closing price of Cornerstone
common shares on March 26, 1999; (v) Cornerstone's public market float and
equity market capitalization; (vi) the historical and expected volatility of
Cornerstone's common shares; (vii) the size, terms and trading levels of
comparative perpetual and convertible preferred stock issues; and (viii) the
overall condition of the equity, perpetual and convertible preferred stock and
bond markets, as well as other economic conditions as of March 26, 1999. Based
upon its review of the foregoing, PaineWebber estimated that the Series A
Convertible Preferred Shares would likely have a theoretical per share value of
between $18.20 and $22.08, equivalent to a range of values per Apple common
share of between $7.28 and $8.83.
Pursuant to an engagement letter dated February 9, 1999, PaineWebber
received a fee of $750,000 for the delivery of its fairness opinion on March 30,
1999. In the event the merger is consummated, PaineWebber will receive a
transaction fee of $2,950,000, against which will be credited the fairness
opinion fee described above. Pursuant to a letter dated March 30, 1999,
Cornerstone agreed to expand the scope of PaineWebber's engagement to include
acting as financial advisor in connection with Cornerstone's consideration of
alternative business combinations. As compensation for these services,
Cornerstone agreed to pay PaineWebber a non-refundable retainer and additional
fees to be agreed upon by Cornerstone and PaineWebber. Cornerstone has also
agreed to indemnify PaineWebber, its affiliates and their respective directors,
officers, employees, agents and controlling persons against certain liabilities,
including liabilities under federal securities laws.
In the past, PaineWebber and its affiliates have provided investment
banking and other financial services to Cornerstone and received fees for the
rendering of these services. PaineWebber and its affiliates may continue to
provide investment banking services to Cornerstone in the future. In the
ordinary course of business, PaineWebber and its affiliates may trade in the
securities of Cornerstone for its own account and for the accounts of its
customers, and accordingly, PaineWebber may at any time hold long or short
positions in such securities.
BYLAW AMENDMENTS
The issuance of the Series A Convertible Preferred Shares requires certain
amendments to Cornerstone's Bylaws to conform the Bylaws to the Articles of
Amendment to the Articles of Incorporation of Cornerstone which create the
Series A Convertible Preferred Shares. The proposed amendments to the Bylaws
would (i) provide that the holders of the Series A Convertible Preferred Shares
may exercise the limited voting rights granted to them under the Articles of
Amendment or by law, (ii) permit the Series A Convertible Preferred Shares to be
issued in uncertificated form, (iii) amend the Bylaws' limitation on share
ownership designed to preserve REIT tax classification to provide that no person
(as defined in the Bylaws) may own more than 9.8% of the total number of
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issued and outstanding shares of any separate class or series of Cornerstone
capital stock and (iv) permit the Cornerstone Board to interpret or amend the
Bylaws to give effect to the foregoing provisions.
Set forth below are the amendments to the bylaws being submitted for
shareholder approval in conjunction with the merger and the related issuance of
Series A Convertible Preferred Shares. These amendments are needed to conform
certain provisions in the Bylaws with provisions in the Articles of Amendment
that create the Series A Convertible Preferred Shares to be issued in the
merger.
1. Add Bylaw 5.20 to Address Preferred Share Voting Rights:
5.20 Preferred Shares and Other Securities. Notwithstanding anything to the
contrary in this Article V or elsewhere in these Bylaws, holders of any
preferred shares or other Securities of the Company who, pursuant to the
documents duly creating such preferred shares or other Securities, are granted
voting rights, including rights to nominate and elect Directors, shall have such
rights as set forth in the documents creating such preferred shares or other
Securities. Furthermore, notwithstanding anything to the contrary in these
Bylaws, the Directors may interpret these Bylaws and may propose and adopt
amendments to these Bylaws as they deem necessary or convenient to give effect
to the foregoing provision of this Section 5.20.
2. Renumber existing Bylaw 7.1 as 7.1(a) and add a new Bylaw 7.1(b) to address
Series A Preferred Shares Being Uncertificated:
(b) Notwithstanding anything to the contrary in this Section 7.1 or
elsewhere in these Bylaws, if the documents duly creating any preferred shares
or other Securities of the Company provide that such preferred shares or other
Securities of the Company are to be "uncertificated," certificates need not be
issued in respect of such preferred shares or other Securities. The provisions
of these Bylaws addressing Shares held in uncertificated form shall apply to any
such preferred shares or other Securities. Notwithstanding anything to the
contrary in these Bylaws, the Directors may interpret these Bylaws and may
propose and adopt such amendments to these Bylaws as shall be necessary or
convenient to give effect to the foregoing provisions of this Section 7.1(b).
3. To address Share Accumulation Restrictions:
Replace Existing Bylaw 7.5(g) with the following:
(g) For purposes of Sections 7.3, 7.4 and 7.5, "Shares" means the
Common Shares of the Company and any other stock of the Company (as "stock"
is defined in applicable Internal Revenue Code Sections addressing stock
ownership requirements for REIT's).
Amend the first sentence of Bylaw 7.5(a)(i) to read as follows:
(a)(i) Subject to the provisions of Section 7.5(b), no Person may own
in excess of 9.8% of the total number of the issued and outstanding Shares
of any separate class or series, and no Shares shall be transferred (or
issued) to any person if, following the transfer or issuance, the Person's
direct or indirect ownership of Shares would exceed this limit.
4. Add sentence to Bylaw 11.11 to enable Bylaw amendments:
The Board of Directors may also amend or revise the Bylaws to the extent
other provisions of these Bylaws expressly permit such amendment or revision.
THE CORNERSTONE BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, AND RECOMMENDS
THAT CORNERSTONE COMMON SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER, THE
RELATED ISSUANCE OF SERIES A CONVERTIBLE PREFERRED SHARES AND THE RELATED BYLAW
AMENDMENTS.
RECOMMENDATION OF THE APPLE BOARD; APPLE'S REASONS FOR THE MERGER.
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On March 30, 1999, the Apple Board met to consider the merger and to
receive the Apple Special Committee's recommendation regarding the merger. Based
upon a review of the terms of the merger agreement, consultation with Apple's
management, as well as its financial advisors and legal counsel, consideration
of the factors described below and the unanimous recommendation of the Apple
Special Committee that the Apple Board approve the merger and the merger
agreement, the Apple Board unanimously approved the merger and the merger
agreement and the transactions contemplated thereby, and unanimously recommends
that Apple shareholders vote for the approval and adoption of the merger
agreement and the transactions contemplated thereby, including the merger.
In reaching its determination and recommendation, the Apple Board
considered the following material positive factors:
(i) Attractive Preferred Dividend Income. The Cornerstone Series A
Convertible Preferred Shares will provide Apple investors with a
distribution that increases from $2.125 (8.5%) during the first
twelve months following the merger, to $2.25 (9.0%) in the second
twelve months and to $2.375 (9.5%) thereafter. As a preferred stock
distribution, Apple's holders will receive payment of their
distribution prior to the payment of any amounts to Cornerstone's
common shareholders. The liquidation preference on the Cornerstone
Series A Convertible Preferred Shares is $25.00 per share.
(ii) Opportunity for Growth. The Cornerstone Series A Convertible
Preferred Shares to be received by Apple common shareholders will be
convertible into Cornerstone common shares, providing the Apple
common shareholders with an opportunity to share in the future
appreciation of Cornerstone's common shares. Each Cornerstone Series
A Convertible Preferred Share will initially be convertible into
1.582 Cornerstone common shares, determined by dividing $25.00 by
the initial conversion price of $15.80.
(iii) Increased Asset Base. The asset base in which Apple shareholders
will have an interest will increase from approximately $305 million
to approximately $860 million and the number of apartments will
increase from 7,274 units in 27 apartment properties to 20,736 units
in 85 apartment properties.
(iv) Enhanced Market Diversification. Apple will diversify its exposure
from essentially one market, the Dallas/Ft. Worth metropolitan area,
to more than a dozen markets in North Carolina, Virginia, South
Carolina and Georgia, Cornerstone's existing markets. Enhanced
market diversification will help to insulate Apple's shareholders
from any periods of future weakness in its existing market due to
lower rental growth and/or occupancies.
(v) Increased Asset Base. Cornerstone expects to have the Cornerstone
Series A Convertible Preferred Shares listed on the NYSE one year
after the closing of the merger, and is obligated to use its best
efforts to effect such listing within two years after the merger.
(vi) Enhanced Organizational Structure. After the merger, Apple will be
part of a self-administered and self-managed REIT. Generally, to
become self-administered and self-managed, a REIT must either create
or acquire a management company, either of which may be dilutive to
Apple's earnings.
(vii) Eliminate Advisory, Property Management and Real Estate Brokerage
Fees Expenses. As Apple's advisor, in 1998, Cornerstone earned
$526,000, $1,695,000 and $2,665,000 of advisory fee, property
management fee and real estate brokerage fee income from Apple.
After the merger, Apple will no longer incur such costs.
(viii) Recommendation of Apple Special Committee. The Apple Board placed
special emphasis on the recommendation of the Apple Special
Committee. In determining to recommend the merger to the Apple
Board, the Apple Special Committee considered the same factors
described herein which were considered by the Apple Board as a
whole. In addition, the Apple Special Committee considered the
opinion, analysis and presentation of Bowles Hollowell Conner to the
Apple Special Committee described below under "--Opinion of
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Apple's Financial Advisors," to the effect that, as of the date of
such opinion and based upon and subject to certain matters stated
therein, the merger consideration is fair, from a financial point of
view, to the common shareholders of Apple (other than Cornerstone
and its affiliates). The Apple Special Committee viewed Bowles
Hollowell Conner's opinion as favorable to its determination because
Bowles Hollowell Conner and its affiliates, as part of their
investment banking activities, are regularly engaged in the
valuation of businesses and their securities in connection with
merger transactions and other types of acquisition, negotiated
underwriting, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and
other purposes, and also because of Bowles Hollowell Conner's
experience and expertise in transactions similar to the merger and
its reputation in the REIT industry.
The Apple Board and Apple Special Committee also considered certain
potentially negative factors which could arise from the merger. These included,
among others, the reduction in voting power of Apple common shareholders after
the merger, the possibility that the anticipated benefits of the merger might
not be fully realized, that the merger will expose Apple common shareholders to
the risks of those markets in which Cornerstone's properties are now located,
that the larger combined asset base of the two companies could make the
perpetuation of growth in funds from operations from acquisitions more
difficult, the significant transaction costs involved in connection with
consummating the merger, and the potential obligation of Apple to pay a
termination fee, under certain circumstances, if the merger is not consummated.
The Apple Board and Apple Special Committee also evaluated the benefits of the
transaction to be received by certain officers and directors of Apple and
Cornerstone as described under "The Merger--Interests of Certain Persons in the
Merger." The Apple Board and Apple Special Committee did not believe that the
negative factors were sufficient, either individually or collectively, to
outweigh the advantages of the merger.
The foregoing discussion of the information and factors considered by the
Apple Board and Apple Special Committee is not intended to be exhaustive, but
includes the material factors considered by the Apple Board and Apple Special
Committee. The Apple Board and Apple Special Committee did not assign relative
weights to the above factors or determine that any factor was of greater
importance than another. A determination of various weightings would, in the
view of the Apple Board and Apple Special Committee, be impractical. Rather, the
Apple Board and Apple Special Committee viewed their position and
recommendations as being based on the totality of the information presented to
and considered by it. In addition, individual members of the Apple Board and
Apple Special Committee may have given different weight to different factors.
THE APPLE BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, AND RECOMMENDS
THAT APPLE SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT, THE MERGER
AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
OPINION OF APPLE'S FINANCIAL ADVISOR
At the March 30, 1999 meeting of the Apple Special Committee, Bowles
Hollowell Conner, a division of First Union Capital Markets, rendered its oral
opinion, which was subsequently confirmed by a written opinion dated the same
date, that as of such date, and based upon and subject to the various
qualifications and assumptions described therein, the consideration to be
received by the holders of Apple common shares in the merger is fair from a
financial point of view to the holders of Apple common shares, excluding
Cornerstone and its affiliates.
The full text of the written opinion of Bowles Hollowell Conner dated March
30, 1999, which sets forth assumptions made, procedures followed, matters
considered and limitations on the review undertaken in connection with the
opinion, is attached as Annex C to this joint proxy statement and prospectus and
is incorporated herein by reference. Holders of Apple common shares are urged
to, and should, read such opinion in its entirety. Bowles Hollowell Conner's
opinion is addressed to the Apple Special Committee and addresses only the
fairness to the holders of Apple common shares
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(other than Cornerstone and its affiliates) of the merger consideration and does
not constitute a recommendation to any holder of Apple common shares as to how
such holder should vote with respect to the merger.
In arriving at its opinion, Bowles Hollowell Conner, among other things,
reviewed:
o the financial terms of the merger, as set forth in the merger
agreement;
o the historical business, financial and other information regarding
Apple and Cornerstone that was publicly available or furnished to
Bowles Hollowell Conner by members of Cornerstone management (the
"Advisor");
o the internal financial forecasts for Apple and Cornerstone, including
projected cost savings prepared by the Advisor;
o the potential pro forma impact of the merger on Cornerstone;
o certain agreements between Apple and the Advisor, including the
Property Acquisition/ Disposition Agreement and the Cornerstone Right
of First Refusal Agreement; and
o certain market and economic data applicable to this transaction.
Bowles Hollowell Conner also held discussions with senior members of the
Advisor concerning the strategic rationale for, and the potential benefits of,
the merger and the past and current business operations, financial condition and
future prospects of Cornerstone and Apple. In addition, Bowles Hollowell Conner
reviewed the reported price and trading activity for the Cornerstone common
shares, compared financial information for Apple and Cornerstone and stock
market information for Cornerstone with similar information for other companies,
the securities of which are publicly traded, reviewed the financial terms of
recent business combinations in the real estate industry specifically and
performed such other studies and analyses as it considered appropriate.
Bowles Hollowell Conner relied upon the accuracy and completeness of all of
the financial and other information reviewed by it and has assumed such accuracy
and completeness for purposes of rendering its opinion. In that regard, Bowles
Hollowell Conner assumed, with Apple's consent, that the financial results
projected by the Advisor, including the projected cost savings resulting from
the merger, were reasonably prepared on a basis reflecting the best currently
available judgments and estimates of the Advisor. In addition, Bowles Hollowell
Conner did not make an independent evaluation or appraisal of the assets and
liabilities of Apple or Cornerstone or any of their subsidiaries and Bowles
Hollowell Conner was not furnished with any such evaluation or appraisal.
Furthermore, the Apple Special Committee did not authorize Bowles Hollowell
Conner to solicit, and Bowles Hollowell Conner did not solicit, any indications
of interest from any third party with respect to a purchase of all or any part
of Apple's business. The opinion referred to herein was provided for the
information and assistance of the Apple Special Committee in connection with its
consideration of the merger and such opinion does not constitute a
recommendation as to how any holder of Apple common shares should vote with
respect to such transaction.
Bowles Hollowell Conner's opinion was based on economic, monetary, market
and other conditions as in effect on, and the information made available to
Bowles Hollowell Conner as of, the date of the opinion. Accordingly, although
subsequent developments may affect its opinion, Bowles Hollowell Conner did not
assume and does not have any obligation to update, revise or reaffirm its
opinion. Bowles Hollowell Conner also assumed that the merger will be
consummated in accordance with the terms described in the merger agreement,
without any amendments thereto, and without waiver by Apple of any of the
conditions to its obligations thereunder. Bowles Hollowell Conner further
assumed that the merger would qualify as a tax-free reorganization under the
Internal Revenue Code and that no taxable gain would accrue to the Apple
shareholders as a result of the exchange of their shares for the Series A
Convertible Preferred Shares. The merger agreement is filed as Annex A hereto
and the terms of the merger agreement and the conditions to the Apple's
obligations thereunder should be reviewed and understood by holders of Apple
common shares in connection with their consideration of the merger.
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The following is a summary of the principal financial analyses used by
Bowles Hollowell Conner in connection with providing its written opinion dated
March 30, 1999, to the Apple Special Committee.
VALUATION OF THE SERIES A CONVERTIBLE PREFERRED SHARES.
In assessing the Series A Convertible Preferred Shares, Bowles Hollowell
Conner also considered the following factors:
o the terms of the Series A Convertible Preferred Shares;
o the relative size of the Series A Convertible Preferred Shares to
Cornerstone's post-merger capitalization;
o the yield of the Series A Convertible Preferred Shares compared to the
yield on the Apple common shares and Cornerstone common shares;
o the relationship between the conversion price of the Series A
Convertible Preferred Shares and the 60 day average closing price
ending March 24, 1999 of Cornerstone common shares and the historical
volatility of Cornerstone common shares;
o perpetual and convertible preferred stock issues for REITs with
comparable credit statistics to Cornerstone; and
o such other economic and general market data that Bowles Hollowell
Conner deemed appropriate.
Theoretical Valuation. Bowles Hollowell Conner analyzed the Series A
Convertible Preferred Shares offered Apple shareholders utilizing a theoretical
valuation approach, which considers a convertible security as a combination of a
bond and a call option on the underlying common stock. The bond value was
derived by discounting the projected preferred dividend stream by an estimated
long term unsecured cost of debt for an issuer with Cornerstone's credit
profile, expressed as a range of spreads to the 30 year U.S. Treasury bond of
400 to 600 basis points. This range of spreads was determined to be reasonable
by reference to the yield on recent issues of REIT unsecured notes and perpetual
preferred stock of REITs with comparable credit statistics to Cornerstone. The
option value was calculated under the Black-Scholes binomial method using
expected future volatility rates for the Cornerstone common shares. The sum of
the bond and option value yielded a theoretical value for each Series A
Convertible Preferred Share, which was further discounted by 5% to reflect the
observed discount to the theoretical value of several recent REIT convertible
preferred issues. Bowles Hollowell Conner arrived at a range of values of $19.54
to $23.41 for each Series A Convertible Preferred Share, which equates (based on
the exchange ratio of 1 Series A Convertible Preferred Share for 2.5 Apple
common shares) to a range of values per Apple common share of $7.82 to $9.36.
Discounted Investor Cash Flow Analysis. Bowles Hollowell Conner performed a
discounted cash flow analysis, (i.e., an analysis of the present value of the
projected equity cash flows for the periods using indicated discount rates) to
value the Series A Convertible Preferred Shares. Utilizing the Advisor's
projections for the merged entity and assuming a range of forward FFO multiples
of 7.5x to 9.0x, Bowles Hollowell Conner ascertained a range of predicted prices
for the underlying Cornerstone common shares for 1999 through 2003. For 2004
through 2009, Bowles Hollowell Conner ascertained a range of predicted prices
using the same range of forward FFO multiples and assuming a constant fully
diluted FFO growth rate, per the Advisor's estimates. Similarly, Bowles
Hollowell Conner projected the common dividend by applying a dividend growth
rate equal to one-half of the annual common FFO growth rate, per the Advisor's
estimates. Bowles Hollowell Conner then discounted the equity cash flows
accruing to a Series A Convertible Preferred Share at a range of discount rates
of 11% to 13%, reflecting the estimated convertible preferred equity cost of
capital for Cornerstone, post-merger. This method indicated a range of values
per Series A Convertible Preferred Share of $19.44 to $23.66, which equates to a
range of values per Apple share of $7.78 to $9.47.
Comparable REIT Perpetual Preferreds. In addition to valuing the Series A
Convertible Preferred Shares by a discounted investor cash flow Analysis,
Bowles Hollowell Conner compared the
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dividend yield of the Series A Convertible Preferred Shares (8.5% in year 1,
9.0% in year 2, and 9.5% thereafter) to a range of market strip yields of
comparable REIT perpetual preferred securities. For the purpose of this
analysis, the perpetual preferred securities of the following companies were
used: Apartment Investment and Management Company, Mid-America Apartment
Communities, Meridian Industrial Trust Inc., Equity Inns Inc., Meditrust Corp.,
Health Care REIT, Inc., EastGroup Properties, Inc., Prime Group Realty Trust,
Jameson Inns Inc., CCA Prison Realty Trust, LTC Properties, Inc., Winston
Hotels, Inc. and Kranzco Realty Trust. Discounting the projected dividend stream
of the Series A Convertible Preferred Shares by the indicated range of market
yields resulted in a range of values for each Series A Convertible Preferred
Share of $19.60 to $23.48, which equates to a range of values per Apple common
share of $7.84 to $9.39.
VALUATION OF APPLE COMMON SHARES.
Bowles Hollowell Conner considered the following in their assessment of the
Apple common shares:
o the absence of an actively traded public market for the Apple common
shares;
o the absence of a contractual obligation to list the Apple common
shares at some future date;
o the geographic concentration of the Apple portfolio in the Dallas/Fort
Worth markets;
o the fact that Apple is externally managed and advised;
o the contractual interrelationships between Apple and Cornerstone; and
o such other economic and general market data that Bowles Hollowell
Conner deemed appropriate.
Net Asset Value -- NPV of Apple Property Cash Flows. Bowles Hollowell
Conner utilized the Advisor's five-year projections of operating cash flow for
the existing portfolio of 27 Apple properties to ascertain a range of values for
Apple as a stand-alone portfolio. These portfolio-level cash flows were adjusted
for the Advisor's estimated repositioning capital expenditures and were
increased to capture assumed savings on management fees. Bowles Hollowell Conner
then discounted these portfolio cash flows based upon a range of required
internal rates of return for multifamily assets of 11% to 13% as obtained from
the Korpacz 1998 fourth quarter National Apartment Market survey, and a range of
terminal cap rates of 9.5% to 11.5%. The resulting gross asset value was
adjusted for net working capital and mortgage debt at February 1, 1999, as well
as the 2% asset disposition fee that would accrue under the Asset Acquisition
and Disposition Agreement between Apple and the Advisor. The analysis indicated
a range of values per Apple common share of $7.90 to $9.59.
Net Asset Value -- Comparable Sales Analysis. Bowles Hollowell Conner
collected data for multifamily assets sold during the last 18 months that were
comparable to those owned by, and located within, the same sub-markets as the
Apple assets. Based on this comparable sales data, Bowles Hollowell Conner
derived a range of real estate values per square foot for each Apple sub-market.
The sub-market value range was then applied to the corresponding square footage
of the Apple portfolio within a given sub-market. Bowles Hollowell Conner added
to that range of values the repositioning capital improvements invested through
December 31, 1998, to the Apple properties. The resulting gross asset value was
adjusted for net working capital and mortgage debt at February 1, 1999, as well
as the 2% asset disposition fee that would accrue under the Asset Acquisition
and Disposition Agreement between Apple and the Advisor. The analysis resulted
in a range of values per Apple common share of $6.82 to $8.40.
Net Asset Value -- Book Value Analysis. Bowles Hollowell Conner examined
the book value as of December 31, 1998, of Apple's undepreciated real estate
assets and adjusted for acquisitions and equity raises through February 1, 1999.
This undepreciated real estate value was further adjusted to include estimated
working capital and deduct mortgage debt at February 1, 1999. The analysis
yielded a net book value per Apple common share of $8.49 as of February 1, 1999.
Bowles Hollowell Conner then deducted the 2% asset disposition fee that would
accrue under the Asset Acquisition and
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Disposition Agreement between Apple and the Advisor, which resulted in a net
book value per Apple common share of $8.32 as of February 1, 1999.
Discounted Cash Flow Analysis. Bowles Hollowell Conner performed a
discounted cash flow analysis, i.e. analysis of the present value of the
projected equity cash flows for the periods using indicated discount rates, to
value the Apple portfolio. Using the Advisor's five year cash flow projections
for Apple, Bowles Hollowell Conner computed the present value of the cash
available for distribution to shareholders for a range of discount rates of 12%
to 14%, which range of discount rates is consistent with the estimated
risk-adjusted equity return requirement for Apple common shareholders. A
terminal value was calculated by applying a 7.5x to 9.0x range of multiples to
the projected 2004 FFO. Bowles Hollowell Conner utilized the Advisor's estimates
for revenue and expense growth from 2002 to 2003 to project FFO for 2004. The
analysis yielded a range of values per Apple common share of $7.47 to $8.99.
Comparable Companies Analysis. Bowles Hollowell Conner employed a
comparable companies analysis to establish an implied public value for Apple
common shares. Bowles Hollowell Conner reviewed and compared financial
information for the following publicly traded real estate investment trusts:
AMLI Residential Properties Trust, Apartment Investment and Management Company,
Archstone Communities Trust, Associated Estates Realty Corporation, AvalonBay
Communities Inc., Berkshire Realty Company Inc., BRE Properties Inc., Camden
Property Trust, Charles E. Smith Residential Realty Inc., Cornerstone Realty
Income Trust Inc., Equity Residential Properties Trust, Essex Property Trust
Inc., Gables Residential Trust, Home Properties of New York Inc., Irvine
Apartment Communities Inc., Lexford Residential Trust, Mid-America Apartment
Communities Inc., Post Properties Inc., Summit Properties Inc., Town and Country
Trust, United Dominion Realty Trust Inc., Walden Residential Properties Inc.
(the "Apple Comparable Companies"). Like Apple, the Apple Comparable Companies
own a substantial amount of multifamily real estate and for the purposes of
analysis may be considered similar to Apple. All of the trading multiples of the
Apple Comparable Companies were based on closing stock prices on March 24, 1999,
and all funds from operations per share estimates were published by First Call
Corporation. The estimates published by First Call Corporation were not prepared
in connection with the merger or at the request of Bowles Hollowell Conner.
Based upon the Advisor's estimate of 1999 FFO per Apple common share, the
trading multiples of the companies listed above yielded a mean implied public
value per Apple common share of $7.27. The trading multiples of those companies
without significant California exposure yielded a mean implied public value per
Apple common share of $6.73; the trading multiples of those companies without
significant California exposure or development activity yielded a mean implied
public value per Apple common share of $6.79; and the trading multiples of those
companies with a market capitalization of less than $1 billion yielded a mean
implied public value per Apple common share of $5.77. In addition, the implied
public value per Apple common share based upon Cornerstone's 1999 FFO trading
multiple was $7.28.
Public Merger Premiums Analysis. Bowles Hollowell Conner analyzed certain
information relating to selected merger transactions in the public multifamily
sector of the REIT industry since 1996, including (acquiror/target): Equity
Residential/Merry Land & Investment Co.; Healthcare Realty Trust/Capstone
Capital Corporation; Security Capital Atlantic/Security Capital Pacific; Bay
Apartment Communities/Avalon Properties; Camden Property Trust/Oasis
Residential; Equity Residential/Evans Withycombe; Equity Residential/Wellsford
Residential; Post Properties/Columbus Realty; Camden Property Trust/Paragon
Group; and United Dominion Realty/South West Properties Trust. Specifically,
Bowles Hollowell Conner observed the range of consideration premiums over the
target closing price one day prior to the merger announcement of -1.4% to 21%
for the selected transactions. Bowles Hollowell Conner compared the range of
mean implied public values per Apple share derived in the previously discussed
comparable companies analysis to the mean value of the Series A Convertible
Preferred Shares and observed the following consideration premium to the
estimated Apple public value. Based upon the range of implied public values per
Apple common share and the value of the Series A Convertible Preferred received
for each Apple common share as determined above, Bowles Hollowell Conner
observed a range of implied premiums of 16% to 47%.
Accretion Analysis. For those selected transactions, Bowles Hollowell
Conner observed a range of accretion (expressed as a percentage increase over
projected FFO per share in the first year
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following the transaction) of 1% to 5.2%. Based upon the Advisor's estimate of
FFO per share for the combined company, Bowles Hollowell Conner observed 3.2%
accretion over First Call consensus estimates of Cornerstone FFO per share for
1999.
No company or transaction used in the comparable company analysis, the
accretion analysis or the premiums paid analysis is identical or directly
comparable to Apple or the pro forma combined company. Accordingly, an analysis
of the results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which Apple and the combined company is being
compared.
Dividend Analysis. Based on the Advisor's projections, Bowles Hollowell
Conner analyzed projected dividend payments per Apple common share compared to
the preferred dividend to be received by Apple shareholders in the combined
company. Bowles Hollowell Conner observed the following in 1999 - 2003. For each
of the years projected by the Advisor, Bowles Hollowell Conner observed that the
annual dividend to be paid on each Series A Preferred Share exceeded the
dividends projected to be paid on 2.5 shares of Apple common stock. In addition,
Bowles Hollowell Conner considered the coverage of the Apple shareholder's
dividend in Apple compared to the combined company. Bowles Hollowell Conner
compared the dividend coverage ratio (defined as cash available for distribution
per share divided by dividends per share) of Apple compared to the coverage of
the preferred dividend (measured as the sum of cash available for distribution
and the preferred dividend per share, divided by the preferred dividend per
share) in Cornerstone, post-merger. For each of the years projected by the
Advisor, Bowles Hollowell Conner observed that the coverage ratio of the Series
A Preferred dividend in the combined company exceeded the coverage ratio of the
projected common dividend for Apple on a stand-alone basis by no less than 2x.
Funds From Operations Contribution Analysis. Bowles Hollowell Conner
reviewed estimated future financial information for Apple, Cornerstone and the
pro forma combined entity resulting from the merger including cost savings
projected by the Advisor resulting from the merger, including estimated 1999,
2000 and 2001 FFO.
This analysis indicated that the relative percentages of Apple's and
Cornerstone's respective stand-alone contributions to the projected FFO for the
combined company, without regard to projected cost savings, were each within 3.7
percentage points of the relative ownership of the combined company on a
fully-diluted basis.
The summary set forth above does not purport to be a complete description
of the analyses performed by Bowles Hollowell Conner in arriving at its opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Bowles Hollowell Conner's opinion. In arriving at its fairness
determination, Bowles Hollowell Conner considered the results of all such
analyses. No company or transaction used in the above analyses as a comparison
is directly comparable to Apple or Cornerstone or the merger. The analyses were
prepared solely for purposes of Bowles Hollowell Conner providing its opinion to
the Apple Special Committee as to the fairness, from a financial point of view,
of the consideration to be received in the merger to the holders of Apple common
shares and do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Analyses based upon
forecasts or future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of Apple, Cornerstone, Bowles Hollowell Conner
or any other person assumes responsibility if future results are materially
different from those forecast. As described above, Bowles Hollowell Conner's
opinion to the Apple Special Committee was one of many factors taken into
consideration by the Apple Board of Directors in making its determination to
approve the merger agreement and the merger. The foregoing summary does not
purport to be a complete
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description of the analysis performed by Bowles Hollowell Conner and is
qualified by reference to the written opinion of Bowles Hollowell Conner set
forth in Annex C hereto.
Bowles Hollowell Conner, a division of First Union Capital Markets Corp.,
is an investment banking firm and an affiliate of First Union Corporation.
Bowles Hollowell Conner and its affiliates, as part of their investment banking
activities, are regularly engaged in the valuation of businesses and their
securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. The Apple Special Committee selected Bowles Hollowell Conner as its
financial advisor on the basis of Bowles Hollowell Conner's experience and
expertise in transactions similar to the Merger and its reputation in the REIT
industry. Bowles Hollowell Conner or its affiliates have in the past provided
investment banking and financial advisory services to Cornerstone unrelated to
the Merger, for which services it has received compensation. In addition, First
Union National Bank, an affiliate of Bowles Hollowell Conner, is the agent and a
lender of various unsecured credit facilities to Cornerstone. Bowles Hollowell
Conner and its affiliates may in the future maintain business relationships with
Cornerstone.
In the ordinary course of business, Bowles Hollowell Conner or its
affiliates may actively trade the debt and equity securities of the Company for
its or any such affiliate's own account or for the account of customers and,
accordingly, may hold a long or short position in such securities
Apple has agreed to pay Bowles Hollowell Conner a fee of $75,000 (the
"Advisory Fee") upon Apple's engaging Bowles Hollowell Conner and a fee of
$250,000 (the "Opinion Fee") upon the delivery of the written opinion to the
Board that is described above. The Opinion Fee was not conditioned on the
outcome of Bowles Hollowell Conner's opinion or whether Apple or its Board
deemed such opinion favorable or unfavorable. In addition, if the merger is
effected on the terms set forth in the merger agreement, Apple has agreed to pay
Bowles Hollowell Conner a fee of $750,000 (the "Transaction Fee"), with the
Advisory Fee and the Opinion Fee credited against the Transaction Fee. Apple
will be obligated to pay the Transaction Fee only if the merger (or another
transaction) is consummated. Accordingly, the payment of a substantial majority
of Bowles Hollowell Conner's total fee is subject to the consummation of the
merger. Apple has also agreed to reimburse Bowles Hollowell Conner for its
reasonable out-of-pocket expenses and to indemnify Bowles Hollowell Conner, its
affiliates, and their respective directors, agents, employees and controlling
persons against certain liabilities, including liabilities under the federal
securities laws, relating to or arising out of Bowles Hollowell Conner's
engagement.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Cornerstone and Apple Boards with
respect to the merger, holders of Cornerstone and Apple common shares should be
aware that Glade M. Knight, Debra A. Jones and Stanley J. Olander, Jr. hold
170,000, 15,000 and 15,000 Apple Class B Convertible Shares, respectively,
representing all of the Apple Class B Convertible Shares outstanding. Pursuant
to their terms, the 200,000 Class B Convertible Shares outstanding will convert
into 1,600,000 Apple common shares, which will immediately be exchanged for
640,000 Cornerstone Series A Convertible Preferred Shares, or one Cornerstone
Series A Convertible Preferred Share for each 2.5 Apple common shares, the same
exchange ratio applicable to all other Apple common shareholders. As a result of
the merger, Glade M. Knight, Debra A. Jones and Stanley J. Olander, Jr. will
receive 544,000, 48,000 and 48,000 Cornerstone Series A Convertible Preferred
Shares, respectively.
The Cornerstone Board is comprised of seven members: Glenn W. Bunting,
Jr., Leslie A. Grandis, Glade M. Knight, Penelope W. Kyle, Stanley J. Olander,
Jr., Harry S. Taubenfeld and Martin Zuckerbrod. Two of the Cornerstone
directors also serve on the Apple Board, which is comprised of four members:
Lisa B. Kern, Glade M. Knight, Penelope W. Kyle, and Bruce H. Matson. As of
June ___, 1999, each of the above named individuals owned the following number
of Apple or Cornerstone common shares, respectively, and held options to
purchase that number of Apple or Cornerstone common shares, respectively,
listed below, the weighted average exercise price of which in the case of Apple
was $__________ and in the case of Cornerstone was $ :
<TABLE>
<CAPTION>
APPLE COMMON CORNERSTONE CORNERSTONE
APPLE COMMON SHARES SUBJECT COMMON COMMON SHARES
SHARES OWNED TO OPTION SHARES OWNED SUBJECT TO OPTION
-------------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
Glenn W. Bunting, Jr. ...........
Leslie A. Grandis ...............
Glade M. Knight .................
Penelope W. Kyle ................
Stanley J. Olander, Jr. .........
Harry S. Taubenfeld .............
Martin Zuckerbrod ...............
Lisa B. Kern ....................
Bruce H. Matson .................
</TABLE>
In addition, the Cornerstone and Apple executive officers named below owned
the following number of Apple and Cornerstone common shares, respectively, and
held options to purchase that number of Apple and Cornerstone common shares,
respectively, listed below, the weighted average exercise price of which in the
case of Apple was $__________ and in the case of Cornerstone was $__________:
<TABLE>
<CAPTION>
APPLE COMMON APPLE COMMON
APPLE COMMON SHARES SUBJECT APPLE COMMON SHARES SUBJECT
SHARES OWNED TO OPTION SHARES OWNED TO OPTION
-------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
[NAMES] .........
</TABLE>
Apple's executive officers and directors are to receive the same
consideration for their Apple common shares as the other Apple shareholders are
to receive. Except for the option of Glade M. Knight to acquire Apple common
shares discussed below, after the merger, all outstanding options to
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purchase Apple common shares will automatically represent options to acquire
that number of Cornerstone Series A Convertible Preferred Shares that the
holders of such options would have been entitled to receive if they had
exercised their options immediately prior to the merger.
Glade M. Knight, Chairman and Chief Executive Officer of both Apple and
Cornerstone, holds an option dated November 9, 1998 granted by Apple to acquire
up to 348,771 Apple common shares. Such option provides that upon the sale of
substantially all of Apple's assets, stock or business (such as through the
merger with Cornerstone), Mr. Knight is entitled to receive cash payments
approximating $3.5 million. In connection with the merger, Mr. Knight has waived
his right to receive such cash payments. In return, Cornerstone has agreed to
grant Mr. Knight a comparable option to acquire Cornerstone common shares on
substantially the same terms and conditions, including the right to receive cash
payments upon a future sale, if any, of substantially all of Cornerstone's
assets, stock or business, as are set forth in his option with Apple.
The Cornerstone and Apple Boards and the Cornerstone Special Committee and
the Apple Special Committee were aware of the interests of the directors and
executive officers in the merger and considered them, among other matters, in
approving the merger agreement and the transactions contemplated thereby,
including the merger, the related issuance of Series A Convertible Preferred
Shares and the related bylaw amendments.
DIRECTORS AND OFFICERS INSURANCE; LIMITATION OF LIABILITY OF DIRECTORS AND
OFFICERS; INDEMNIFICATION
Virginia law and our Articles of Incorporation provide that our directors
and officers will have no liability to Cornerstone or its shareholders in
certain actions by or in the right of Cornerstone 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. Generally, claimants
must look solely to Cornerstone's property for satisfaction of claims arising in
connection with the affairs of Cornerstone.
Cornerstone has obtained, and pays the cost of, directors' and officers'
liability insurance coverage in the amount of $5 million (subject to a retention
or "deductible" of $250,000 for securities related claims and of $100,000 for
any claim relating to management malfeasance). Directors' and officers'
insurance insures (i) the directors and officers of Cornerstone from any claim
arising out of an alleged wrongful act by the directors and officers of
Cornerstone in their respective capacities as directors and officers of
Cornerstone, and (ii) Cornerstone to the extent that Cornerstone has indemnified
the directors and officers for such loss.
The Virginia Stock Corporation Act permits, and Cornerstone's Articles of
Incorporation require, indemnification of Cornerstone'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 Stock Corporation
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. Cornerstone's Articles of Incorporation require indemnification of
officers and directors with respect to any action if the directors (other than
the indemnified party) determine in good faith that the indemnified party's
course of conduct was undertaken in good faith within what the indemnified party
reasonably believed to be the scope of his authority and for a purpose he
reasonably believed to be in the best interests of Cornerstone or its
shareholders, except in the case of misconduct, bad faith, negligence, reckless
disregard of duties or violation of the criminal law. Cornerstone's Articles of
Incorporation, as permitted by the Virginia Stock Corporation Act, eliminate the
damages that may be assessed against a director or officer of Cornerstone 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.
CERTAIN REGULATORY MATTERS
Cornerstone and Apple believe that there are no material regulatory
approvals required in connection with the merger other than regulatory approvals
that they expect to be able to obtain in the ordinary course.
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ACCOUNTING TREATMENT
The merger is expected to be accounted for by Cornerstone using the
purchase method of accounting in accordance with generally accepted accounting
principals.
APPRAISAL RIGHTS
Under Article 15 of the Virginia Stock Corporation Act, holders of Apple
common shares will have the right to dissent from the merger and to obtain
payment of the fair value of their Apple common shares. Holders of Cornerstone
common shares, however, will not have the right to dissent from the merger. A
copy of Article 15 of the Virginia Stock Corporation Act is attached to this
Joint Proxy Statement/Prospectus as Annex D.
STOCK EXCHANGE LISTING OF CORNERSTONE SERIES A CONVERTIBLE PREFERRED SHARES;
DEREGISTRATION OF APPLE STOCK
The merger agreement provides that Cornerstone will use its best efforts to
have the New York Stock Exchange approve for listing the Series A Convertible
Preferred Shares issued in the merger on or before the second anniversary of the
effective day of the merger, and in such regard will prepare and submit to the
New York Stock Exchange a listing application covering the Preferred Shares at a
prudent time. Notwithstanding the foregoing, management expects to have the
Series A Convertible Preferred Shares listed on the NYSE one year after the
closing of the merger, although there can be no assurance that listing will
occur at that time. Upon consummation of the merger, Apple common shares will be
deregistered under the Exchange Act of 1934, as amended.
DISTRIBUTIONS
Cornerstone expects that after the merger, subject to approval and
declaration by the Cornerstone Board, it will declare regularly scheduled
quarterly distributions on its capital stock, including those distributions
necessary for Cornerstone to maintain its status as a REIT. The current
annualized rate of distributions on the Cornerstone common shares is $1.08 per
share. The current annualized rate of distributions on the Apple common shares
is $.82 per share. After the merger, subject to approval and declaration by the
Cornerstone Board, Cornerstone expects that it will pay quarterly distributions
to holders of Series A Convertible Preferred Shares at an annualized rate of
$2.125 (8.5%) during the first year after the merger, increasing to $2.25 (9.0%)
during the second year after the merger and to $2.375 (9.5%) in the third year
after the merger and thereafter. Distributions to the holders of the Series A
Convertible Preferred Shares are to be made prior to any distributions being
made to holders of Cornerstone's common shares. After the merger, subject to
approval and declaration by the Cornerstone Board, Cornerstone expects that it
will pay quarterly distributions to Cornerstone common shareholders at an
annualized rate of $1.08 per Cornerstone common share.
Apple expects to continue to declare distributions on the Apple common
shares until the effective time of the merger. The right of holders of Apple
common shares to receive distributions will end at the effective time of the
merger when the separate corporate existence of Apple will terminate. See
"Comparative Per Share Market Price and Dividend Information."
THE MERGER AGREEMENT
This description of the merger agreement is not complete and is qualified
in its entirety by reference to the merger agreement. A copy of the merger
agreement is attached to this Joint Proxy Statement/Prospectus as Annex A. All
shareholders of Apple and Cornerstone are urged to read the entire merger
agreement for a complete description of the terms and conditions of the merger.
GENERAL
The merger agreement provides for the merger of Apple with and into
Cornerstone Acquisition Company, a subsidiary of Cornerstone. At the effective
time of the merger, the separate corporate existence of Apple will cease to
exist and Cornerstone Acquisition will be the surviving corporation.
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MERGER CONSIDERATION
In the merger, Apple shareholders will receive Series A Convertible
Preferred Shares as described below.
Outstanding Apple Common Shares. Each Apple common share, issued and
outstanding immediately prior to the effective time of the merger will be
converted into the right to receive 0.400 Series A Convertible Preferred Shares
(i.e. holders of Apple common shares will have the right to receive one Series A
Convertible Preferred Share for each 2.5 Apple common shares they own).
Outstanding Apple Class B Convertible Shares. In conjunction with the
merger, each Class B Convertible Share outstanding shall convert into eight
Apple common shares, which shares will be converted into Series A Convertible
Preferred Shares on the basis of one Series A Convertible Preferred Share for
each 2.5 Apple common shares, the same conversion ratio applicable to all other
Apple common shareholders. As a consequence, each Class B Convertible Share of
Apple issued and outstanding immediately prior to the effective time of the
merger will be converted into the right to receive 3.2 Series A Convertible
Preferred Shares.
Rights of Holders of Apple Shares; Apple Stock Transfers After the Merger.
At the effective time of the merger, holders of Apple common shares and Apple
Class B Convertible Shares will cease to be, and will have no rights as,
shareholders of Apple, other than the right to receive any distribution or other
distribution with respect to Apple common shares or Class B Convertible Shares
with a record date occurring prior to or at the effective time of the merger and
to receive the applicable consideration in the merger.
EXCHANGE PROCEDURES
At or prior to the effective time of the merger, Cornerstone will deposit
with an exchange agent, for the benefit of the holders of Apple common shares,
sufficient Series A Convertible Preferred Shares issuable in exchange for the
issued and outstanding Apple common shares. As soon as reasonably practicable
after the effective time of the merger, the exchange agent will mail to each
holder of outstanding Apple common shares which were converted into the right to
receive merger consideration pursuant to the merger agreement, a letter of
notification describing the merger consideration issued to each such holder as a
consequence of the merger. In addition, as soon as reasonably practicable after
the effective time of the merger, the exchange agent will mail to each holder of
Apple Class B Convertible Shares a letter of notification describing the Series
A Convertible Preferred Shares to be issued to them pursuant to the merger
agreement. Fractional Series A Convertible Preferred Shares, rounded to the
nearest thousandth of a share, will be issued to holders of Apple common shares,
if necessary.
Cornerstone or the exchange agent will be entitled to deduct and withhold
from the merger consideration otherwise payable pursuant to the merger agreement
to any holder of Apple common shares or preferred shares such amounts as
Cornerstone or the exchange agent is required to deduct and withhold with
respect to the making of such payment under the Internal Revenue Code, or any
provisions of state, local or foreign tax law. To the extent that amounts are so
withheld by Cornerstone or the exchange agent, such withheld amount will be
treated for all purposes of the merger agreement as having been paid to the
holder of Apple common shares or Apple Class B Convertible Shares.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains reciprocal representations and warranties,
subject to identified exceptions, made by Cornerstone and Apple relating to,
among other things: (i) due organization, corporate power and good standing;
(ii) subsidiaries; (iii) capital structure; (iv) corporate authority to enter
into the merger agreement; (v) required consents and noncontravention of certain
organizational documents, agreements or governmental orders; (vi) reports and
other documents filed with the SEC, the accuracy of the information contained in
such documents and undisclosed liabilities; (vii) absence of certain material
changes and events; (viii) litigation; (ix) employee benefit
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plans and ERISA compliance; (x) tax matters; (xi) loans or payments to insiders;
(xii) brokers; (xiii) compliance with laws; (xiv) defaults under contracts and
debt instruments; (xv) environmental matters; (xvi) real property; (xvii) books
and records; (xviii) the vote required to approve the merger; (xix) labor
matters and (xvii) the opinion of their financial advisors. In addition to these
representations and warranties, the merger agreement contains representations
and warranties specific to Apple regarding: (i) information for inclusion within
the registration statement; and (ii) solicitation of transactions.
CERTAIN COVENANTS
The merger agreement contains various covenants and agreements that govern
Apple's and Cornerstone's actions prior to the effective time of the merger,
except as expressly contemplated by the merger agreement, including the
following:
Conduct of Business. Apple and Cornerstone have each agreed to conduct
their respective businesses in the ordinary and usual course and to use
reasonable efforts to preserve intact their business organizations and assets,
and to maintain their respective status as a REIT within the meaning of the
Internal Revenue Code. In connection therewith, Apple and Cornerstone further
agreed to restrict:
(i) the declaration of dividends or other distributions;
(ii) stock splits and other reclassifications of their capital stock;
(iii) the repurchase or redemption of their capital stock;
(iv) the amendment of their charter, by-laws or other organizational
documents unless otherwise contemplated by the merger agreement;
(v) the issuance, delivery or sale of any option or right in respect of
capital stock;
(vi) the merger or consolidation of either party with any person;
(vii) the making or rescinding of any tax election (unless necessary to
maintain REIT status);
(vii) material changes in accounting methods;
(viii)the settlement of any claims, actions, suits, litigation or other
type of proceeding relating to taxes exceeding $250,000 individually
or in the aggregate, or changing methods of reporting income or
deductions for tax purposes;
(ix) the settlement of any shareholder derivative or class action claims
arising out of the merger without the other's consent;
(x) the entering into, or amendment or modification of, material
agreements with officers, directors, employees or their affiliates;
and
(xi) the entering into any transaction or series of transactions with
respect to which required financial statements could not be included
or incorporated into the applicable registration statement for the
merger within 30 days after such requirement arises.
The merger agreement contains various other covenants, including the
following:
Best Efforts; Notification. Apple and Cornerstone have each agreed to use
their best efforts to assist and cooperate with each other to fulfill the
conditions of the merger agreement. The tasks which Apple and Cornerstone have
agreed to cooperate in accomplishing include (i) the obtaining of all necessary
actions, nonactions, waivers, consents and approvals, etc. from governmental
authorities; (ii) obtaining all necessary consents, approvals, waivers or
exemptions from non-governmental third parties; (iii) the defending of lawsuits
or other legal proceedings challenging the merger; and (iv) the execution and
delivery of any additional instruments necessary to consummate the transactions
contemplated by and to fully carry out the purposes of the merger agreement.
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Affiliates. Apple has agreed to deliver to Cornerstone, a list identifying
all persons who are affiliates of Apple for the purposes of Rule 145 under the
Securities Act and Apple also has agreed to use its best efforts to cause each
such affiliate to deliver written agreements stating that they will not offer,
sell, assign, transfer or otherwise dispose of any Series A Convertible
Preferred Shares issued to them in the merger in violation of the Securities Act
or the rules and regulations thereunder.
Tax Treatment. Each of Apple and Cornerstone have agreed to use its best
efforts to (i) cause the merger to qualify as a tax-free reorganization under
Section 368 (a) (1)(A) of the Code and (ii) to obtain an opinion of counsel
which supports the qualification of the merger under this status.
Solicitation of Transactions. Apple has agreed that it will not directly or
indirectly, through any officer, director, employee, agent, investment banker,
financial advisor, accountant, broker, finder, or other representative, initiate
or solicit any inquiries or the making of any proposal that constitutes or may
reasonably be expected to lead to any competing transaction. Apple has agreed to
notify Cornerstone in writing of any such inquires or proposals. However, the
merger agreement provides that Board of Directors of Apple may, in good faith
based on the advice of outside counsel, respond to and approve an unsolicited
offer which it determines in good faith (based on the advice of its investment
banking firm) to be superior to the merger.
New York Stock Exchange Listing. Cornerstone has agreed to use its best
efforts to have the New York Stock Exchange approve for listing the Series A
Preferred Shares issued in the merger on or before the second anniversary of the
merger, and to prepare and submit to the NYSE a listing application covering the
Series A Convertible Preferred Shares at a prudent time.
Transfer and Gains Taxes. Cornerstone and Apple have agreed to cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding real property transfer, gains, sales,
use, transfer, value added stock transfer and stamp taxes and other fees or
similar taxes which become payable in connection with the merger.
Employee Matters. Apple and Cornerstone have agreed as follows:
(i) Cornerstone will have no liability or obligation to Apple or its
employees to employ or offer employment to any employee of Apple or
any group of employees of Apple, but may, in its sole discretion,
offer employment to such employees after the merger;
(ii) All outstanding options to acquire Apple common shares (except the
option in favor of Glade M. Knight described in (iii) below) will be
deemed to constitute an option to acquire that number of Series A
Convertible Preferred Shares that the holders of such options would
have been entitled to receive if they had exercised their options
immediately prior to the merger; and
(iii)Glade M. Knight has agreed to relinquish his right to receive cash as
a result of certain change of control provisions in an option granted
by Apple dated November 9, 1998 in exchange for a comparable option
from Cornerstone to purchase Cornerstone common shares;
Indemnification. The merger agreement provides that, for a period of six
years from and after the effective time of the merger, Cornerstone will
indemnify, defend and hold harmless each individual who was, at any time prior
to the effective time of the merger, an officer, director, employee or agent of
Apple who at any time prior to the effective time of the merger was entitled to
indemnification under the Articles of Incorporation or bylaws of Apple or
employment agreements between Apple and its officer existing on the date of the
merger agreement to the same extent such persons were entitled to
indemnification prior to the effective time of the merger.
Cornerstone also has agreed to use its reasonable best efforts to cause the
persons serving as officers and directors of Apple immediately prior to the
effective time of the merger to be covered by "run-off" or "tail" directors and
officers liability insurance coverage, without a reduction of existing coverage
for a period of six years after the effective time of the merger.
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The indemnity provisions of the merger agreement are intended to be for the
benefit of, and will be enforceable by, each indemnified party, his or her heirs
and his or her personal representatives and will be binding on all successors
and assigns of Cornerstone and Apple.
Certain Other Covenants. The merger agreement contains certain other
covenants of the parties relating to, among other things: (i) the preparation
and distribution of this Joint Proxy Statement/Prospectus; (ii) the respective
Cornerstone and Apple shareholders meetings and the recommendations of the
respective Boards of Directors; (iii) cooperation in issuing public
announcements; (iv) qualification of the merger as a reorganization under
Section 368 of the Code; (v) access to information; (vi) confidentiality; (vii)
obtaining comfort letters from their respective independent public accountants;
and (viii) the fulfilment of conditions precedent to obligations found in the
merger agreement
CONDITIONS TO CONSUMMATE THE MERGER
The obligations of each party to consummate the merger are subject to the
satisfaction or waiver of certain conditions, including: (i) obtaining the
requisite votes of the respective shareholders of Apple and Cornerstone; (ii)
the effectiveness of the registration statement on Form S-4 and the absence of
any stop order or proceedings seeking a stop order; (iii) the absence of
injunctions, decrees, orders, laws, statutes or regulations enjoining,
preventing or making illegal the consummation of the merger; (iv) obtaining all
governmental approvals required to consummate the transactions contemplated in
the merger agreement; and (v) completion of all material action by or in respect
of any governmental entity required for the consummation of the merger or any of
the other transaction contemplated by the merger agreement.
The obligations of Cornerstone to consummate the merger are further subject
to satisfaction or waiver of the following conditions: (i) each of the
representations and warranties of Apple in the merger agreement will be true and
correct as of the effective date of the merger (except for representations and
warranties made as of a specified date which will be true and correct as of such
specified date) except that this condition will be deemed to be satisfied if the
aggregate losses as a result of a failure to meet any representations or
warranties does not and would not reasonably be expected to equal or exceed
$2,000,000; (ii) all of the obligations of Apple under the merger agreement
shall have been performed in all material aspects and Cornerstone shall have
received a certificate signed on behalf of Apple by the Chief Executive Officer
or Chief Financial Officer to such effect; (iii) all consents and waivers from
third parties pursuant to the merger agreement shall have been obtained, other
than consents from third parties, which if not obtained would not result,
individually or in the aggregate, in economic losses of $2,000,000 or more; (iv)
from the date of the merger agreement through the effective time of the merger,
there shall not have occurred any change in the financial condition, business or
operations of Apple and its subsidiaries, taken as a whole, that would have or
would be reasonably likely to have a material adverse effect; (v) PaineWebber
Incorporated shall have addressed to the Cornerstone Special Committee an
opinion which states that the consideration to be paid by Cornerstone pursuant
to the merger is fair, from a financial point of view, to Cornerstone and this
opinion shall not have been withdrawn or materially modified; and (vi) the
holders of no more that 5% of the outstanding Apple common shares shall have
indicated their intention to exercise their dissenters rights under the Virginia
Stock Corporation Act.
The obligations of Apple to consummate the merger are further subject to
satisfaction or waiver of the following conditions: (i) each of the
representations and warranties of Cornerstone in the merger agreement shall be
true and correct as of the effective date of the merger (except for
representations and warranties made as of a specified date which will be true
and correct as of such specified date) except that this condition will be deemed
to be satisfied if the aggregate losses as a result of a failure to meet any
representations or warranties does not and would not reasonably be expected to
equal or exceed $2,000,000; (ii) all of the obligations of Cornerstone under the
merger agreement shall have been performed in all material aspects and
Cornerstone shall have received a certificate signed on behalf of Cornerstone by
the Chief Executive Officer or Chief Financial Officer to such effect; (iii)
Apple shall have received an opinion dated as of the closing date from McGuire,
Woods, Battle & Boothe LLP, subject to certificates, letters and assumptions
reasonably satisfactory
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to Apple that the merger qualifies as a tax-free reorganization under Section
368 of the Internal Revenue Code; (iv) all consents and waivers from third
parties pursuant to the merger agreement shall have been obtained, other than
consents from third parties, which if not obtained would not result,
individually or in the aggregate, in economic losses of $ 2,000,000 or more; (v)
from the date of the merger agreement through the effective time of the merger,
there shall not have occurred any change in the financial condition, business or
operations of Cornerstone and its subsidiaries, taken as a whole, that would
have or would be reasonably likely to a material adverse effect; and (vi) Bowles
Hollowell Conner shall have addressed to the Apple Special Committee an opinion
stating that the merger consideration is fair, from a financial point of view,
to the holders of Apple common shares (other than Cornerstone and its
affiliates) and this opinion shall not have been withdrawn or materially
modified.
TERMINATION; FEES AND EXPENSES
Termination. The merger agreement may be terminated at any time prior to
the filing of the Articles of Merger for the merger with the State Corporation
Commission of the Commonwealth of Virginia, whether before or after the approval
by the Apple common shareholders or the Cornerstone common shareholders: (i) by
mutual written consent of Cornerstone and Apple duly authorized by the
respective boards of directors of Cornerstone and Apple; (ii) by Cornerstone (A)
upon a breach of any representation, warranty or covenant or agreement on the
part of Apple in the merger agreement, or (B) if any representation or warranty
of Apple shall have become untrue, such that any of the conditions stated above
would be incapable of being satisfied by September 30, 1999 (as otherwise
extended); (iii) by Apple (A) upon a breach of any representation, warranty or
covenant or agreement on the part of Cornerstone in the merger agreement, or (B)
if any representation or warranty of Cornerstone shall have become untrue, such
that any of the conditions stated above would be incapable of being satisfied by
September 30, 1999 (as otherwise extended); (iv) by either Cornerstone or Apple
if any judgment, injunction, order or decree or action by a governmental
authority of competent authority preventing the consummation of the merger shall
have become final and nonappealable; (v) by either Cornerstone or Apple, if the
merger shall have not been consummated by September 30, 1999; provided however
that a party that has willfully and materially breached a representation will
not be entitled to exercise this right to terminate under this provision; (vi)
by either Cornerstone or Apple if (A) upon a vote at a duly held Apple common
shareholders meeting or adjournment thereof, the approval of the Apple
shareholders has not been obtained or (B) upon a vote at a duly held Cornerstone
common shareholders meeting or adjournment thereof, the approval by the
Cornerstone common shareholders has not been obtained; (vii) by Apple upon prior
notice to Cornerstone, if prior to the Apple common shareholders meeting the
Board of Directors shall have withdrawn or modified in any manner adverse to
Cornerstone its recommendation or approval of the merger in accordance with
Section 7.1 of the merger agreement; (viii) by Cornerstone if (A) if prior to
the Apple common shareholders meeting, the Board of Directors of Apple shall
have withdrawn in any manner adverse to Cornerstone its approval or
recommendation of the merger in connection with a competing transaction, (B)
Apple shall have entered into any agreement with respect to any competing
transaction (other than a confidentiality agreement contemplated in Section 7.1
of the merger agreement), (C) the Board of Directors of Apple or any committee
of Apple shall have resolved to carry out any action found in (A) or (B) of this
provision; and (ix) by Apple if on any date after the date of the merger
agreement, but on or prior to the Effective Date the average daily closing price
of a Cornerstone common share on the NYSE over the consecutive 10-trading day
period ending on such date is less than $8.50 per share, provided, however, to
be effective, notice of termination shall be given by Apple to Cornerstone
within three business days after the date that such right of termination arises.
Expenses. Apple and Cornerstone will each bear all of their own expenses
incurred in connection with the merger agreement except in the following
circumstances: (i) if the merger and the transactions contemplated by the merger
agreement are consummated in accordance with the merger agreement, all
out-of-pocket costs will be paid by Cornerstone; or (ii) if either party is
required to pay Break Up Expenses (as discussed below).
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Termination Fee and Break Up Expenses.
If the merger agreement is terminated (i) by either Apple or Cornerstone
because the holders of Apple common shares do not approve the merger; (ii) by
Apple, if in connection with a competing transaction, the Apple Board withdraws
or adversely changes its recommendation to the Apple common shareholders that
they vote in favor of the merger or (iii) by Cornerstone if, in connection with
a competing transaction, the Apple Board withdraws or adversely changes its
recommendation to Apple common shareholders that they vote in favor of the
merger, and Apple shall have entered into such competing transaction, then Apple
will pay to Cornerstone Break Up Expenses equal to the lesser of $750,000 or
Cornerstone's actual expenses in connection with the merger agreement and the
transactions contemplated thereby. If the merger agreement is terminated (i) by
Apple because the Apple Board, in connection with a competing transaction,
withdraws or adversely changes its recommendation to the Apple common
shareholders that they vote in favor of the merger or (ii) by Cornerstone if, in
connection with a competing transaction, the Apple Board withdraws or adversely
changes its recommendation to the Apple common shareholders that they vote in
favor of the merger, and Apple shall have entered into such competing
transaction, then Apple will, in lieu of other existing contractual termination
arrangements, pay to Cornerstone a Break Up Fee equal to the lesser of
$7,250,000 or the maximum amount which can be paid by Apple without causing
Cornerstone to lose its REIT status.
If the merger agreement is terminated (i) by Cornerstone because Apple has
breached a representation or warranty or such shall have become untrue; (ii) by
Apple because Cornerstone has breached a representation or warranty or such
shall have become untrue or (iii) by either Apple or Cornerstone because the
holders of Cornerstone common shares do not approve the merger, then Cornerstone
will pay to Apple Break Up Expenses equal to the lesser of $750,000 or the
actual expenses incurred by Apple on or after January 1, 1999 in connection with
the merger agreement and the transactions contemplated thereby.
AMENDMENT; EXTENSION; WAIVER
Subject to compliance with applicable law, prior to the effective time of
the merger, any provision of the merger agreement may (i) be waived by the party
benefited by the provision; (ii) be amended or modified at any time, by an
agreement in writing between the parties, if approved by their respective Boards
of Directors and executed in the same manner as the merger agreement or (iii)
have the respective time required for the performance of any of the obligations
or other acts of the party.
SURVIVAL OF CERTAIN PROVISIONS
If the Merger Agreement is Terminated Before the Effective Time of the
Merger. If the merger agreement is terminated before the effective time of the
merger, certain provisions of the merger agreement will survive and remain
effective, including provisions regarding: (i) confidentiality of information
obtained in connection with the merger agreement and (ii) liability of the
companies to each other as a result of the termination of the merger agreement;
except that if any termination results from a willful breach by a party or any
of its representations, warranties, covenants or agreements set forth in the
merger agreement then other provisions of the merger agreement would apply to
claims asserted in response to such a breach.
If the Merger Agreement Becomes Effective. After the effective time of the
merger, none of the representations in the merger agreement will survive,
however any covenant or agreement which contemplates performance after the
effective time of the merger will survive.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of material United States federal income
tax consequences of the merger to Cornerstone and Apple and their respective
U.S. Shareholders (as defined below in "--Taxation of Taxable U.S.
Shareholders") as well as certain other tax considerations for U.S. holders of
Cornerstone stock. The following discussion is based upon current provisions of
the Internal Revenue Code of 1986, as amended, existing temporary and final
regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change, possibly on a retroactive basis. No attempt
has been made to comment on all United States federal income tax consequences of
the merger that may be relevant to shareholders of Cornerstone and Apple. The
tax discussion set forth below is included for general information only. It is
not intended to be, nor should it be construed to be, legal or tax advice to a
particular shareholder of Cornerstone or Apple.
THE FOLLOWING DISCUSSION MAY NOT APPLY TO PARTICULAR CATEGORIES OF HOLDERS
OF SHARES OF CORNERSTONE CAPITAL STOCK OR APPLE CAPITAL STOCK SUBJECT TO SPECIAL
TREATMENT UNDER THE INTERNAL REVENUE CODE, SUCH AS INSURANCE COMPANIES,
FINANCIAL INSTITUTIONS, BROKER-DEALERS, TAX-EXEMPT ORGANIZATIONS, NON-U.S.
SHAREHOLDERS AND HOLDERS WHOSE SHARES WERE ACQUIRED PURSUANT TO THE EXERCISE OF
AN EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION. SHAREHOLDERS OF
CORNERSTONE AND APPLE ARE URGED TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING ANY STATE, LOCAL, FOREIGN OR
OTHER TAX CONSEQUENCES OF THE MERGER.
TAX CONSEQUENCES OF THE MERGER
It is a condition to consummation of the merger that prior to the closing,
McGuire, Woods, Battle & Boothe LLP, counsel to Cornerstone, will deliver an
opinion to Apple to the effect that, based on certificates, letters and
assumptions reasonably satisfactory to Apple, the merger will be treated for
United States federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code. The following discussion assumes
the merger will be treated as a reorganization.
As a consequence of reorganization treatment, neither Cornerstone nor Apple
will recognize gain or loss as a result of the merger. The shareholders of
Cornerstone will not recognize gain or loss as a result of the merger.
Shareholders of Apple who exchange all of their Apple common shares solely for
Series A Convertible Preferred Shares pursuant to the merger will not recognize
gain or loss (subject to the discussion below regarding "nonqualified preferred
stock").
The aggregate tax basis of the Series A Convertible Preferred Shares
received by shareholders who exchange all of their Apple common shares solely
for Series A Convertible Preferred Shares in the merger will be the same as the
aggregate tax basis of the Apple common shares surrendered. Finally, provided
the shares of Apple capital stock were held as a capital asset at the effective
time of the merger, the holding period for shares of Cornerstone capital stock
received by a shareholder in exchange will include the period that such shares
of Apple capital stock were held.
Under a recently enacted provision of the Internal Revenue Code,
"nonqualified preferred stock" may be treated as taxable "boot" in a
reorganization. McGuire, Woods, Battle & Boothe LLP has advised Cornerstone that
the Series A Convertible Preferred Shares should not be treated as nonqualified
preferred stock for purposes of this provision. Nonetheless, implementing
regulations have not yet been promulgated, and the Internal Revenue Service
could take a contrary position. If the Internal Revenue Service were successful
in taking such a position, holders of Apple common shares generally would
recognize gain or loss on the receipt of the Series A Convertible Preferred
Shares, in an amount equal to the difference between the fair market value of
the Series A Convertible Preferred Shares received and the adjusted tax basis of
the Apple common shares surrendered in exchange therefor.
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PRE-MERGER DISTRIBUTIONS
Pursuant to the merger agreement, Apple has the right to pay a dividend to
the holders of Apple common shares immediately prior to the merger in an amount
equal to up to $.07 per share per month (prorated for partial months) for each
month between the most recent regular Apple distribution date and the effective
date of the merger. Pursuant to the merger agreement, Cornerstone may pay
regular quarterly dividends not in excess of $.30 per share prior to the
effective date of the merger. The actual amount of dividends paid by Apple or
Cornerstone will be determined by the Apple Board and the Cornerstone Board, as
the case may be (or their respective audit committees), and may not equal the
maximum dividends that could be paid under the merger agreement.
REIT QUALIFICATION
Under the Code, if certain requirements are met in a taxable year, a REIT
generally is not subject to federal income tax with respect to income that it
distributes to its shareholders. Prior to the consummation of the merger,
Cornerstone has been operated in a manner intended to allow it to qualify as a
REIT. It is intended that Cornerstone will continue to operate in a manner so
that it will continue to qualify as a REIT. Similarly, Apple has been operated
in a manner intended to allow it to qualify as a REIT and will continue to be so
operated through the date of the merger. Further, it is intended that
Cornerstone Acquisition Company, the company into which Apple is to be merged,
will operate following the merger in a manner so that it will qualify as a REIT.
If any of Cornerstone, Apple or Cornerstone Acquisition fails to qualify as a
REIT in any taxable year, it would be subject to federal income taxation as a
corporation, and its shareholders will be taxed in the same manner as
shareholders of ordinary corporations. In this event, Cornerstone, Apple or
Cornerstone Acquisition could be subject to potentially significant tax
liabilities, and the amount of cash available for distribution to shareholders
would be reduced and possibly eliminated. Unless entitled to relief under
certain Code provisions, Cornerstone, Cornerstone Acquisition and Apple also
would be disqualified from re-electing REIT status for the four taxable years
following the year during which qualification was lost. Failure of either
Cornerstone or Apple to have qualified as a REIT prior to the merger could
disqualify Cornerstone or Cornerstone Acquisition as a REIT and could subject
them to significant tax liabilities.
To qualify as a REIT, a company must comply with a number of annual
requirements regarding its income, assets and distributions. These requirements
impose a number of restrictions on the company's operations. For example, a REIT
may not lease property if the lease has the effect of giving the company a share
of the net income of the lessee. The amount of personal property that may be
included under a lease may not exceed a defined, low level, and the company may
not provide services to its tenants, other than customary services and de
minimis non-customary services. A REIT's ability to acquire non-real estate
assets is restricted, and a 100% tax is imposed on any gain that a REIT realizes
from sales of property to customers in the ordinary course of business (other
than property acquired by reason of certain foreclosures), effectively
preventing REITs from participating directly in condominium projects and other
projects involving the development of property for resale. Minimum distribution
requirements also generally require REITs to distribute at least 95% of their
taxable income each year (excluding any net capital gain).
The qualification of Cornerstone, Apple and Cornerstone Acquisition as
REITs depends on their having met or meeting, as the case may be, through actual
operating results, the various requirements for qualification as a REIT under
the Code. Qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations and involves the determination of various factual
matters and circumstances not entirely within the companies' control.
Accordingly, no assurance can be given that either Cornerstone or Cornerstone
Acquisition will satisfy such tests on a continuing basis following the merger
and no assurance can be given that the IRS will not challenge the status of
Cornerstone or Apple as a REIT prior to the merger or the status of Cornerstone
or Cornerstone Acquisition as a REIT following the merger. See "Risk Factors--
Failure to Qualify as a REIT."
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TAXATION OF TAXABLE U.S. SHAREHOLDERS
As used herein, the term "U.S. Shareholder" means a holder of Cornerstone
capital stock or Apple capital stock that for United States federal income tax
purposes (A) is (i) a citizen or resident of the United States, (ii) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate,
the income of which is subject to United States federal income taxation
regardless of its source or (iv) a trust, if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States persons (i.e., a person described in clause (i), (ii)
or (iii) of this sentence) have the authority to control all substantial
decisions of the trust and (B) is not an entity that has a special status under
the Internal Revenue Code (such as a tax-exempt organization or a dealer in
securities).
Dividends and Other Distributions. As long as Cornerstone qualifies as a
REIT, distributions made to its U.S. Shareholders (including holders of Series A
Convertible Preferred Shares) out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
them as ordinary income. Dividends paid to corporate shareholders of Cornerstone
will not be eligible for the dividends received deduction generally available to
corporations. For purposes of determining whether distributions on the Series A
Convertible Preferred Shares are out of current or accumulated earnings and
profits, the earnings and profits of Cornerstone will be allocated first to the
outstanding Series A Convertible Preferred Shares and then allocated to
Cornerstone's common shares. However, corporate holders may be required to treat
up to 20% of certain capital gain dividends as ordinary income. Distributions in
excess of current and accumulated earnings and profits will not be taxable to a
holder to the extent that they do not exceed the adjusted tax basis of the
holder's shares, but rather will reduce the adjusted basis of such shares. To
the extent that such distributions exceed the adjusted basis of a holder's
shares they will be included in income as long-term capital gain if the shares
are capital assets in the hands of the holder and have been held for more than
one year. In addition, any distribution declared by Cornerstone in October,
November or December of any year payable to a shareholder of record on a
specified date in any such month will be treated as both paid by Cornerstone and
received by the shareholder on December 31 of such year, provided that the
distribution is actually paid by Cornerstone on or before January 31 of the
following calendar year. Shareholders may not include in their individual income
tax returns any net operating losses or capital losses of Cornerstone.
Distributions that are designated as capital gain dividends generally will
be taxed as long-term capital gains (to the extent they do not exceed
Cornerstone's actual net capital gain for the taxable year) without regard to
the period for which the holder has held its capital stock. Individuals, trusts
and estates be taxed at a maximum long-term capital gain rate of 20% on the sale
or exchange of certain capital assets held for more than one year. A maximum
rate of 25% applies to "unrecaptured Section 1250 gain" realized by individuals,
trusts and estates and special rules apply to "qualified 5-year gain." IRS
Notice 97-64 provides, among other things, that a REIT may designate a capital
gains dividend as a 20% rate gain distribution, an unrecaptured Section 1250
gain distribution or a 28% rate gain distribution. Absent any such designation,
a capital gains dividend will be treated as a 28% rate gain distribution. In
general, the Notice provides that a REIT must determine the maximum amounts
which may be designated in each class of capital gain distributions as if the
REIT were an individual whose ordinary income is subject to a marginal tax rate
of at least 28 percent. Cornerstone will notify shareholders after the close of
Cornerstone's taxable year as to the portions of the distributions attributable
to that year that constitute ordinary income, return of capital, and capital
gain (and, with respect to capital gain dividends, the portions constituting 20%
rate gain distributions, unrecaptured Section 1250 gain distributions, and 28%
rate gain dividends), as well as the amounts of any designated retained capital
gains (including the amounts thereof constituting 20% rate gain and unrecaptured
Section 1250 gain, and Cornerstone's taxes with respect to any designated
retained capital gains.
Cornerstone may elect to retain and pay income tax on its net long-term
capital gains recognized during the taxable year. If Cornerstone were to make
such an election, its shareholders would include in income as capital gain their
proportionate share of such portion of its net capital gains as it may
64
<PAGE>
designate. Such retained capital gains may be further designated by Cornerstone
as 20% rate gain, unrecaptured Section 1250 gain, or 28% rate gain, as discussed
above. Shareholders must account for their share of such retained capital gains
in accordance with such further designations by Cornerstone; if no such further
designation is made, the retained capital gains are treated as 28% rate gain. A
shareholder would be deemed to have paid its share of the tax paid by
Cornerstone, which would be credited or refunded to the shareholder. The
shareholder's basis in its shares of the Cornerstone capital stock would be
increased by the amount of undistributed capital gains (less the capital gains
tax paid by Cornerstone ) included in the shareholder's income.
Final regulations when issued may alter the rules for taxation of REITs
capital gain distributions (including deemed distributions to its shareholders).
In addition, the IRS has not prescribed regulations or other guidance regarding
the application of the new rates to sale of interests in REITs such as
Cornerstone, and it remains unclear how the new rules will affect such sales (if
at all). Investors are urged to consult their own tax advisors with respect to
the application of these rules to them.
Conversion of Series A Convertible Preferred Shares. In general, a holder
of Series A Convertible Preferred Shares will not recognize taxable gain or loss
on the exercise of the right to convert Series A Convertible Preferred Shares
into Cornerstone common shares. The holder's tax basis in the Cornerstone common
shares will be equal to the basis in the Series A Convertible Preferred Shares
surrendered in the conversion, and the holder's holding period in the
Cornerstone common shares received in the conversion will include the holding
period of the converted Series A Convertible Preferred Shares (assuming such
shares were held as a capital asset at the time of the conversion).
Sale or Redemption of Series A Convertible Preferred Shares. On the sale of
shares of Series A Convertible Preferred Shares, gain or loss will be recognized
by the holder in an amount equal to the difference between (i) the amount of
cash and fair market value of any property received on such sale, and (ii) the
holder's adjusted basis in the Series A Convertible Preferred Shares. Such gain
or loss will be capital gain or loss if the shares are held as capital assets,
and will be treated as long-term gain or loss if the holding period for the
shares exceeds one year. In general, any loss upon a sale or exchange of shares
by a holder who has held such shares for six months or less (after applying
certain holding period rules), will be treated as a long-term capital loss to
the extent of distributions from Cornerstone required to be treated by such
holder as long-term capital gain.
A redemption of Series A Convertible Preferred Shares will be treated as a
dividend that is taxable at ordinary income tax rates (to the extent of
Cornerstone's current or accumulated earnings and profits), unless the
redemption satisfies certain tests set forth in Section 302(b) of the Code
enabling the redemption to be treated as a sale of the Series A Convertible
Preferred Shares. The redemption will satisfy such tests if it (i) is
"substantially disproportionate" with respect to the holder (which will not be
the case if only Series A Convertible Preferred Shares are redeemed, since such
preferred stock generally does not have voting rights), (ii) results in a
"complete termination" of the holder's stock interest in Cornerstone, or (iii)
is "not essentially equivalent to a distribution" with respect to the holder,
all within the meaning of Section 302(b) of the Code. In determining whether any
of these tests have been met, shares considered to be owned by the holder by
reason of certain constructive ownership rules set forth in the Code, as well as
shares actually owned, must generally be taken into account. Because the
determination as to whether any of the alternative tests of Section 302(b) of
the Code will be satisfied with respect to any particular holder of Series A
Convertible Preferred Shares depends upon the facts and circumstances at the
time that the determination must be made, prospective investors are advised to
consult their own tax advisors to determine such tax treatment.
If a redemption of Series A Convertible Preferred Shares were treated as a
distribution that is taxable as a dividend, the amount of the distribution would
be measured by the amount of cash and the fair market value of any property
received by the shareholder. The shareholder's adjusted tax basis in such
redeemed Cornerstone Series A Convertible Preferred Shares would be transferred
to the holder's remaining stockholdings in Cornerstone. If, however, the
shareholder had no remaining stockholdings in Cornerstone, such basis could be
transferred to a related person or it may be lost.
65
<PAGE>
BACKUP WITHHOLDING
Cornerstone will report to its domestic shareholders and the IRS the amount
of distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a shareholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid and
redemptions unless such holder (a) is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact, or (b)
provides a taxpayer identification number, certifies that the holder is not
subject to backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A shareholder that does not
provide Cornerstone with his or her correct taxpayer identification number may
also be subject to penalties imposed by the IRS. In addition, Cornerstone may be
required to withhold a portion of capital gain dividends to any shareholders who
fail to certify their nonforeign status to Cornerstone. Any amount paid as
backup withholding will be creditable against the shareholder's income tax
liability.
TAXATION OF CERTAIN TAX-EXEMPT SHAREHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account or a Section 401(k) plan, that
holds Cornerstone's capital stock as an investment will not be subject to tax on
distributions paid by Cornerstone. However, if such tax-exempt investor is
treated as having purchased its capital stock with borrowed funds, some or all
of its distributions will be subject to tax. In addition, under some
circumstances certain pension plans (including Section 401(k) plans but not, for
example, IRAs) that own more than 10% (by value) of Cornerstone's outstanding
capital stock, including common stock, could be subject to tax on a portion of
their preferred stock distributions even if their preferred stock is held for
investment and is not treated as acquired with borrowed funds. Furthermore,
social clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts, and qualified group legal services plans that are exempt from
taxation under paragraphs (7), (9), (17), and (20), respectively, of Section
501(c) of the Code are subject to different rules, which generally will require
them to characterize distributions from Cornerstone as taxable.
OTHER TAX CONSEQUENCES
Cornerstone and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they own
property, transact business or reside. The state and local tax treatment of
Cornerstone and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in Cornerstone.
66
<PAGE>
PRINCIPAL AND MANAGEMENT SHAREHOLDERS OF CORNERSTONE
The following table presents certain information as to (i) each of
Cornerstone's directors, (ii) each of Cornerstone's executive officers, (iii)
all of Cornerstone's directors and executive officers as a group and (iv) each
person or entity known to Cornerstone to have beneficially owned more than five
percent of Cornerstone common shares as of June ___, 1999 or thereafter based
upon copies of filings received by Cornerstone on Schedules 13D and Schedule 13G
under the Exchange Act. Unless otherwise noted, all information concerning
directors and officers was provided by the shareholders listed and reflects
their beneficial ownership as of June ___, 1999, and is based on ____________
Cornerstone common shares outstanding at the close of business on such date.
Each person named in the table and included in the director/officer group has
sole voting and investment powers as to such common shares, or shares such
powers with his or her spouse or minor children, if any.
<TABLE>
<CAPTION>
NAME AND BUSINESS NO. OF SHARES PERCENT
ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OF CLASS
- --------------------------------------------------------- ------------------------ ---------
<S> <C> <C>
PaineWebber Group, Inc. ................................. 2,122,320 (2) 5.39%
1285 Avenue of the Americas
New York, New York 10019
Glenn W. Bunting, Jr. ................................... 27,762 *
Leslie A. Grandis ....................................... 27,820 *
Glade M. Knight ......................................... 1,650,096 4.16%
Penelope W. Kyle ........................................ 27,800 *
Stanley J. Olander, Jr. ................................. 260,901 *
Harry S. Taubenfeld ..................................... 67,307 *
Martin Zuckerbrod ....................................... 66,319 *
Debra A. Jones .......................................... 259,901 *
All directors and executive officers as a group ......... 2,387,906 5.95%
</TABLE>
- ----------
* Less than one percent of outstanding Cornerstone common shares.
(1) Includes common shares that may be acquired upon the exercise of stock
options, as follows: Messrs. Bunting and Grandis and Ms. Kyle -- 26,329
Common Shares each; Mr. Knight -- 280,440 common shares; Mr. Olander and
Ms. Jones --144,310 common shares each; and Messrs. Taubenfeld and
Zuckerbrod -- 52,410 common shares each.
(2) Based on a Report on Schedule 13G filed February 16, 1998, which states
that the reporting person shares the power to dispose or to direct the
disposition of 2,122,320 common shares and the sole power to vote or direct
the vote of 2,117,442 common shares. Information in the table is based on
the Report on Schedule 13G and is not necessarily the same at the date of
this Proxy Statement.
67
<PAGE>
PRINCIPAL AND MANAGEMENT SHAREHOLDERS OF APPLE
The following table presents certain information as to (i) each of Apple's
directors, (ii) each of Apple's executive officers, (iii) all of Apple's
directors and executive officers as a group and (iv) each person or entity known
to Apple to have beneficially owned more than five percent of Apple common
shares as of June ___, 1999 or thereafter based upon copies of filings received
by Apple on Schedules 13D and Schedule 13G under the Exchange Act. Unless
otherwise noted, all information concerning directors and officers was provided
by the shareholders listed and reflects their beneficial ownership as of June
___, 1999, and is based on ____________ Apple common shares outstanding and
____________ shares of Apple Class B Convertible Shares outstanding at the close
of business on such date. Each person named in the table and included in the
director/officer group has sole voting and investment powers as to such common
shares, or shares such powers with his or her spouse or minor children, if any.
<TABLE>
<CAPTION>
NO. OF SHARES PERCENT
BENEFICIALLY OWNED(1) OF CLASS
---------------------- -------------------
NAME AND BUSINESS
ADDRESS OF BENEFICIAL OWNER COMMON CLASS B COMMON CLASS B
- ----------------------------------------- ---------- --------- -------- --------
<S> <C> <C> <C> <C>
Lisa B. Kern ............................ 10,642 *
Glade M. Knight ......................... 361,228 170,000 * 85%
Penelope W. Kyle ........................ 11,142 *
Bruce H. Matson ......................... 10,642 *
All directors and executive officers as a
group .................................. 393,654 *
</TABLE>
- ----------
* Less than one percent of outstanding Apple common shares.
(1) Debra A. Jones and Stanley J. Olander, Jr., each a director or executive
officer of Cornerstone, each holds 15,000 Apple Class B Convertible Shares,
corresponding in each case to 7.5% of the total number of such shares
outstanding.
COMPARATIVE PER SHARE MARKET PRICE AND DISTRIBUTION INFORMATION
Cornerstone common shares are listed, and after the merger will continue to
be listed, on the NYSE under the ticker symbol "TCR." There is currently no
established public market in which Apple's common shares are traded. No shares
of Series A Convertible Preferred Shares are currently outstanding. The merger
agreement provides that Cornerstone will use its best efforts to have the New
York Stock Exchange approve for listing the Series A Convertible Preferred
Shares to be issued in the merger on or before the second anniversary of the
effective day of the merger, and in such regard will prepare and submit to the
New York Stock Exchange a listing application covering the Series A Convertible
Preferred Shares at a prudent time. Notwithstanding the foregoing, management
expects to have the Series A Convertible Preferred Shares listed on the NYSE one
year after the closing of the merger although there can be no assurance that
listing will occur at that time.
68
<PAGE>
The following table sets forth, for the fiscal quarters indicated, (i) the
range of high and low closing sale prices of Cornerstone common shares on the
NYSE and (ii) the amount of cash distributions declared per share:
<TABLE>
<CAPTION>
APPLE
CORNERSTONE COMMON
COMMON SHARES(1)(2) SHARES(1)(3)
----------------------------- --------------
MARKET PRICE CASH MARKET PRICE CASH
----------------------------- DISTRIBUTIONS -------------- DISTRIBUTIONS
HIGH LOW DECLARED HIGH LOW DECLARED
------------- ------------- --------------- ------ ----- --------------
<S> <C> <C> <C> <C> <C> <C>
1997
1st Quarter ............. -- -- $ .250 -- -- --
2nd Quarter ............. $ 11.1250 $ 10.2500 .250 -- -- $ .200
3rd Quarter ............. 12.5000 10.6250 .250 -- -- .201
4th Quarter ............. 12.4375 10.1250 .250 -- -- .202
1998
1st Quarter ............. 13.2500 11.8750 .250 -- -- .203
2nd Quarter ............. 12.6875 11.1250 .260 -- -- .204
3rd Quarter ............. 12.1250 10.2500 .260 -- -- .205
4th Quarter ............. 11.2500 10.2500 .260 -- -- .206
1999
1st Quarter ............. 11.1250 9.0000 .260 -- -- .207
2nd Quarter (through
June 1, 1998) ......... .270 -- -- .207
</TABLE>
- ----------
(1) On March 30, 1999, the last full trading day prior to the public
announcement of the signing of the merger agreement, Cornerstone common
shares closed at $11.00 per share. On June ___, 1999, the most recent
practicable date prior to the printing of this Joint Proxy
Statement/Prospectus, Cornerstone common shares closed at $_____ per share.
Shareholders are urged to obtain current market quotations prior to making
any decisions with respect to the merger.
(2) Cornerstone common shares first began trading on the NYSE on April 18,
1997.
(3) There is currently no established public market in which Apple's common
shares are traded.
As of June ___, 1999, there were __________ holders of record of
Cornerstone common shares and __________ holders of record of Apple common
shares. As of June ___, 1999, all 200,000 shares of Apple Class B Convertible
Shares outstanding were held of record by three individuals, all officers or
directors of Cornerstone.
69
<PAGE>
CORNERSTONE SELECTED FINANCIAL INFORMATION
The following table presents selected consolidated financial information
for Cornerstone and should be read in conjunction with the consolidated
financial statements and related notes of Cornerstone incorporated by reference
into this Joint Proxy Statement/Prospectus and the other financial, pro forma
and statistical information included or incorporated by reference in this Joint
Proxy Statement/Prospectus. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996
<S> <C> <C> <C>
OPERATING DATA:
Rental income .......................................... $ 8,158,994 $16,266,610 $ 40,261,674
Property operating expense (a) ......................... $ 5,901,759 $11,005,558 $ 17,198,882
Interest income (expense) .............................. $ 110,486 $ (65,548) $ (1,140,667)
Net income (loss) ...................................... $ 2,386,303 $ 5,229,715 $ (4,169,849)
Distributions declared and paid common shareholders..... $ 2,977,136 $ 6,316,185 $ 15,934,901
- --------------------------------------------------------- ------------ ----------- ------------
PER SHARE:
Net income (loss) ...................................... $ 0.60 $ 0.64 $ (0.21)
Distributions to commons shareholders .................. $ 0.89 $ 0.96 $ 0.99
Distributions representing return of capital ........... $ 0.21 $ 0.17 $ 0.14
Weighted average shares outstanding-basic .............. 4,000,558 8,176,803 20,210,432
- --------------------------------------------------------- ------------ ----------- ------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
PRO FORMA(E)
COMBINED
1997 1998 1998
<S> <C> <C> <C>
OPERATING DATA:
Rental income .......................................... $ 70,115,678 $ 88,752,254 $ 138,612,871
Property operating expense (a) ......................... $ 27,339,955 $ 33,797,439 $ 56,991,318
Interest income (expense) .............................. $ (7,230,205) $ (12,175,940) $ (16,082,530)
Net income (loss) ...................................... $ 19,225,553 $ 23,210,642 $ 33,407,342
Distributions declared and paid common shareholders..... $ 31,324,870 $ 38,317,602 $ 39,078,676
- ---------------------------------------------------------- ------------ ------------- -------------
PER SHARE:
Net income (loss) ...................................... $ 0.59 $ 0.62 $ 0.26
Distributions to commons shareholders .................. $ 1.00 $ 1.03 $ 1.03
Distributions representing return of capital ........... $ 0.23 $ 0.20 --
Weighted average shares outstanding-basic .............. 32,617,823 37,630,546 37,940,463
- ---------------------------------------------------------- ------------ ------------- -------------
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31,
--------------------------------------------------
PRO FORMA(E)
COMBINED
1998 1999 1999
<S> <C> <C> <C>
OPERATING DATA:
Rental income .......................................... $ 20,120,435 $ 23,467,091 $ 34,883,374
Property operating expense (a) ......................... $ 7,535,693 $ 8,710,621 $ 13,347,567
Interest income (expense) .............................. $ (2,727,908) $ (3,324,574) $ (3,501,748)
Net income (loss) ...................................... $ 5,236,048 $ 5,832,410 $ 9,269,657
Distributions declared and paid common shareholders..... $ 8,879,092 $ 10,169,836 $ 10,222,147
- ---------------------------------------------------------- ------------ ------------ ------------
PER SHARE:
Net income (loss) ...................................... $ 0.15 $ 0.15 $ 0.26
Distributions to commons shareholders .................. $ 0.26 $ 0.26 $ 0.26
Distributions representing return of capital ........... -- -- --
Weighted average shares outstanding-basic .............. 35,758,411 39,315,952 39,315,952
- ---------------------------------------------------------- ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in rental property ....... $54,107,358 $129,696,447 $329,715,853 $487,575,196 $587,438,358
Total assets ........................ $57,257,950 $133,181,032 $322,870,574 $474,186,450 $552,347,608
Notes payable ....................... $ 5,000,000 $ 8,300,000 $ 55,403,000 $151,569,147 $201,892,999
Shareholders' equity ................ $51,436,863 $122,154,420 $254,569,705 $315,328,252 $339,171,496
Shares outstanding .................. 5,458,648 12,754,331 28,141,509 35,510,327 39,113,917
- -------------------------------------- ----------- ------------ ------------ ------------ ------------
<CAPTION>
AS OF MARCH 31,
-------------------------------
PRO FORMA
COMBINED
1999 1999
<S> <C> <C>
BALANCE SHEET DATA:
Investment in rental property ....... $589,198,018 $848,785,615
Total assets ........................ $553,118,097 $853,399,814
Notes payable ....................... $205,503,092 $237,541,421
Shareholders' equity ................ $337,377,662 $600,417,906
Shares outstanding .................. 39,370,146 39,370,146
- --------------------------------------- ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995
<S> <C> <C>
OTHER DATA:
Cash Flow from:
Operating activities .................................... $ 3,718,086 $ 9,618,956
Investing activities .................................... $ (28,557,568) $ (75,589,089)
Financing activities .................................... $ 25,519,648 $ 68,754,842
Number of properties owned at period-end ................ 9 19
- ---------------------------------------------------------- ------------- -------------
Ratio of earnings to combined fixed charges and
preferred stock distributions ........................... 188.36 17.77
- ---------------------------------------------------------- -------------- --------------
FUNDS FROM OPERATIONS CALCULATION:
Net income (loss) before minority interest in operating
partnership ............................................. $ 2,386,303 $ 5,229,715
Depreciation of real estate ............................. 1,210,818 2,788,818
Distributions to preferred shareholders ................. -- --
Imputed interest on increasing rate preferred stock ..... -- --
Write off of start-up costs ............................. -- --
Management contract termination (b) ..................... -- --
- ---------------------------------------------------------- -------------- --------------
Funds from operations (c) ............................... $ 3,597,121 $ 8,018,533
- ---------------------------------------------------------- -------------- --------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
OTHER DATA:
Cash Flow from:
Operating activities .................................... $ 20,162,776 $ 34,973,533 $ 45,027,655
Investing activities .................................... $(194,519,406) $ (161,969,343) $ (97,863,162)
Financing activities .................................... $ 170,466,134 $ 128,327,145 $ 50,911,886
Number of properties owned at period-end ................ 40 51 58
- ----------------------------------------------------------- ------------- -------------- -------------
Ratio of earnings to combined fixed charges and
preferred stock distributions ........................... (d) 3.51 2.82
- ----------------------------------------------------------- ---------------- --------------- --------------
FUNDS FROM OPERATIONS CALCULATION:
Net income (loss) before minority interest in operating
partnership ............................................. $ (4,169,849) $ 19,225,553 $ 23,225,335
Depreciation of real estate ............................. 8,068,063 15,163,593 20,741,130
Distributions to preferred shareholders ................. -- -- --
Imputed interest on increasing rate preferred stock ..... -- -- --
Write off of start-up costs ............................. -- -- --
Management contract termination (b) ..................... 16,526,012 402,907 --
- ----------------------------------------------------------- ------------- --------------- --------------
Funds from operations (c) ............................... $ 20,424,226 $ 34,792,053 $ 43,966,465
- ----------------------------------------------------------- ------------- --------------- --------------
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTH PERIOD ENDED MARCH 31,
----------------------- --------------------------------------------------
PRO FORMA(E) PRO FORMA(E)
COMBINED COMBINED
1998 1998 1999 1999
<S> <C> <C> <C> <C>
OTHER DATA:
Cash Flow from:
Operating activities .................................... $ 61,129,885 $ 9,825,996 $ 10,211,096 $ 15,722,313
Investing activities .................................... $ (116,559,973) $ (32,979,468) $ (1,759,660) $ (14,082,291)
Financing activities .................................... $ 172,082,542 $ 22,401,192 $ (4,076,005) $ (1,035,519)
Number of properties owned at period-end ................ 84 53 58 84
- ----------------------------------------------------------- -------------- ------------- ------------ -------------
Ratio of earnings to combined fixed charges and
preferred stock distributions ........................... 1.24 -- 2.69 1.20
- ----------------------------------------------------------- --------------- ------------- ------------- --------------
FUNDS FROM OPERATIONS CALCULATION:
Net income (loss) before minority interest in operating
partnership ............................................. $ 33,513,094 $ 5,236,048 $ 5,883,111 $ 9,320,358
Depreciation of real estate ............................. 30,144,024 4,683,384 5,802,371 8,171,407
Distributions to preferred shareholders ................. (23,673,643) -- -- (7,099,029)
Imputed interest on increasing rate preferred stock ..... 2,172,386 -- -- 630,429
Write off of start-up costs ............................. -- -- 55,657 55,657
Management contract termination (b) ..................... -- -- -- --
- ----------------------------------------------------------- --------------- ------------- ------------- --------------
Funds from operations (c) ............................... $ 42,155,861 $ 9,919,432 $ 11,741,139 $ 11,078,821
- ----------------------------------------------------------- --------------- ------------- ------------- --------------
</TABLE>
70
<PAGE>
(a) Property operating expenses include property and maintenance expense, taxes
and insurance expense, and property management expense.
(b) Included in the 1997 and 1996 operating results are $402,907 and
$16,526,012, respectively, of management contract termination expense
resulting from the Company's conversion to "self-administered" and
"self-managed" status. See Note 6 to the consolidated financial statements.
(c) Funds from operations is defined as income before gains (losses) on
investments, minority interest of unitholders in operating partnership, and
extraordinary items (computed in accordance with generally accepted
accounting principles) plus real estate depreciation and after adjustment
for significant nonrecurring items, if any. This definition conforms to the
recommendations set forth in a White Paper adopted by the National
Association of Real Estate Investment Trusts (NAREIT). Cornerstone
considers funds from operations in evaluating property acquisitions and its
operating performance, and believes that funds from operations should be
considered along with, but not as an alternative to, net income and cash
flows as a measure of Cornerstone's operating performance and liquidity.
Funds from operations, which may not be comparable to other similarly
titled measures of other REITs, does not represent cash generated from
operating activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available to fund cash
needs.
(d) Earnings for the year ended December 31, 1996 were inadequate to cover
fixed charges due to management contract termination expense resulting from
Cornerstone's conversion to "self-administered" and "self-managed" status.
See Note 6 to the consolidated financial statements. The amount of coverage
deficiency was $4,169,849 for the year ended December 31, 1996.
(e) To give effect to the merger with Apple and the operations of property
acquisitions made during 1998 and 1999 by Apple and seven property
acquisitions made by Cornerstone during 1998. (See Unaudited Pro Forma
Condensed Combined Financial Statements.)
71
<PAGE>
APPLE SELECTED FINANCIAL INFORMATION
The following table presents selected consolidated financial information
for and should be read in conjunction with the financial statements and related
notes of Apple incorporated by reference into this Joint Proxy
Statement/Prospectus and the other financial, pro forma and statistical
information included or incorporated by reference in this Joint Proxy
Statement/Prospectus. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------- ------------------------------
1996(C) 1997 1998 1998 1999
----------- -------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental income .......................... -- $12,005,968 $ 30,764,904 $ 4,928,751 $11,416,283
Property operating expenses (a) ........ -- $ 5,993,492 $ 14,958,699 $ 2,232,017 $ 5,116,362
Interest income (expense) .............. -- $ (235,708) $ 900,669 $ 323,886 $ (14,874)
Net income (loss) ...................... -- $ 3,499,194 $ 10,079,908 $ 1,959,718 $ 3,640,682
Distributions declared and paid ........ -- $ 3,249,098 $ 13,040,936 $ 2,038,051 $ 5,432,882
- ----------------------------------------- -- ----------- ------------ ------------ -----------
PER SHARE:
Net income (loss) ...................... -- $ 0.54 $ 0.51 $ 0.14 $ 0.12
Distributions .......................... -- $ 0.60 $ 0.82 $ 0.20 $ 0.21
Distributions representing return
of capital ........................... -- -- -- -- --
Weighted average shares
outstanding-basic .................... -- 6,493,114 19,910,408 13,882,117 29,243,930
- ----------------------------------------- -- ----------- ------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
AS OF DECEMBER 31, 1999
--------------------------------------- ----------------
1996 1997 1998
-------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in rental property ........ -- $ 89,634,348 $241,759,925 $262,999,579
Total assets ......................... $100 $112,485,520 $281,847,152 $304,168,956
Notes payable ........................ -- -- $ 25,165,861 $ 32,038,329
Shareholders' equity ................. $100 $109,340,555 $249,199,621 $266,800,244
Shares outstanding ................... 10 12,371,829 28,331,274 30,495,187
- --------------------------------------- ---- ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------------- -----------------------------------
1996 1997 1998 1998 1999
-------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Cash Flow from:
Operating activities ................ -- $ 7,075,025 $ 17,122,276 $ 2,274,018 $ 5,937,504
Investing activities ................ -- $ (88,753,814) $ (130,842,627) $ (26,755,525) $ (14,196,810)
Financing activities ................ -- $ 105,841,261 $ 129,630,977 $ 36,920,045 $ 13,891,854
Number of properties owned at
period-end ........................ -- 11 25 14 26
- -------------------------------------- -- ------------- -------------- ------------- -------------
FUNDS FROM OPERATIONS CALCULATION:
Net income .......................... -- $ 3,499,194 $ 10,079,908 $ 1,959,718 $ 3,640,682
Depreciation of real estate ......... -- 1,898,003 5,788,476 889,545 2,330,543
Write-off of start-up cost .......... -- -- -- -- 126,544
- -------------------------------------- -- ------------- -------------- ------------- -------------
Funds from operations(b) ............ -- $ 5,397,197 $ 15,868,384 $ 2,849,263 $ 6,097,769
- -------------------------------------- -- ------------- -------------- ------------- -------------
</TABLE>
(a) Property operating expenses include property and maintenance expenses,
taxes and insurance expenses, and property management fees.
(b) Funds from operations is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. This definition
conforms to the recommendations set forth in a White Paper adopted by the
National Association of Real Estate Investment Trusts (NAREIT). Apple
considers funds from operations in evaluating property acquisitions and its
operating performance, and believes that funds from operations should be
considered along with, but not as an alternative to, net income and cash
flows as a measure of Apple's operating performance and liquidity. Funds
from operations, which may not be comparable to other similarly titled
measures of other REITs, does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to fund cash needs.
(c) Apple commenced operations in January 1997.
72
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1999
BASIS OF PRESENTATION
The Unaudited Pro Forma Condensed Combined Balance Sheet gives effect to
the merger of Cornerstone Realty Income Trust, Inc. and Apple Residential Income
Trust, Inc. as if the merger had occurred on March 31, 1999. The Unaudited Pro
Forma Condensed Combined Balance Sheet gives effect to the merger under the
purchase method of accounting in accordance with Accounting Standards Board
Opinion No. 16. In the opinion of management, all significant adjustments
necessary to reflect the effects of the merger have been made.
The Unaudited Pro Forma Condensed Combined Balance Sheet is presented for
comparative purposes only and is not necessarily indicative of what the actual
combined financial position of Cornerstone and Apple would have been at March
31, 1999, nor does it purport to represent the future combined financial
position of Cornerstone and Apple. This Unaudited Pro Forma Condensed Combined
Balance Sheet should be read in conjunction with, and is qualified in its
entirety by, the respective historical financial statements and notes thereto of
Cornerstone and Apple incorporated by reference into this Joint Proxy Statement
/ Prospectus.
<TABLE>
<CAPTION>
CORNERSTONE
CORNERSTONE APPLE MERGER PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS (A) COMBINED
----------------- ----------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Investment in rental property ...................... $ 589,198,018 $ 262,999,579 $ (3,411,982)(B) $ 848,785,615
Less: accumulated depreciation ..................... (54,030,131) (9,999,170) 9,999,170 (B) (54,030,131)
------------- ------------- --------------- -------------
535,167,887 253,000,409 6,587,188 (B) 794,755,484
Cash and cash equivalents .......................... 6,965,795 45,705,746 (6,300,000)(A) 46,371,541
Prepaid expenses ................................... 1,213,358 198,152 -- 1,411,510
Other assets ....................................... 9,771,057 5,264,649 (3,760,000)(C) 10,861,279
(287,188)(D)
(127,239)(E)
------------- ------------- --------------- -------------
TOTAL ASSETS ....................................... $ 553,118,097 $ 304,168,956 $ (3,887,239) $ 853,399,814
============= ============= =============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable ...................................... $ 205,503,092 $ 32,038,329 -- $ 237,541,421
Accounts payable ................................... 749,001 2,445,788 -- 3,194,789
Accrued expenses ................................... 5,714,954 1,956,577 $ (127,239)(E) 7,544,292
Rents received in advance .......................... 164,752 50,922 -- 215,674
Tenant security deposits ........................... 1,591,572 877,096 -- 2,468,668
------------- ------------- --------------- -------------
Total Liabilities .................................. 213,723,371 37,368,712 (127,239) 250,964,844
Minority interest of unitholders in operating
partnership ....................................... 2,017,064 -- -- 2,017,064
SHAREHOLDERS' EQUITY
Preferred stock -- Series A ........................ -- -- 263,040,244 (F) 263,040,244
Common stock ....................................... 390,663,581 271,283,376 (280,809,776)(H) 390,663,581
13,286,400 (G)
(3,760,000)(C)
Class B convertible stock .......................... -- 20,000 (20,000)(G) --
Deferred compensation .............................. (97,382) -- -- (97,382)
Distributions greater than net income .............. (53,188,537) (4,503,132) (13,266,400)(G) (53,188,537)
17,769,532 (H)
------------- ------------- --------------- -------------
Total Shareholders' Equity ......................... 337,377,662 266,800,244 (3,760,000) 600,417,906
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $ 553,118,097 $ 304,168,956 $ (3,887,239) $ 853,399,814
============= ============= =============== =============
</TABLE>
See accompanying notes.
73
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1999
(A) The merger will be accounted for in accordance with the purchase
method of accounting. The following represents the purchase price of
Apple's common shares at fair value, which approximates Apple's net
book value, plus assumption of liabilities at fair value and estimated
transaction costs associated with the merger:
<TABLE>
<S> <C>
Purchase price for Apple common shares (see below) .......... $266,800,244
Mortgage notes assumed-at estimated fair value .............. 32,038,329
Other liabilities assumed-at estimated fair value ........... 5,330,383
------------
Sub-total ................................................... 304,168,956
Purchase of Apple brokerage contract by Cornerstone ......... 287,188
Transaction costs (see below) ............................... 6,300,000
------------
Total purchase price ........................................ $310,756,144
============
</TABLE>
The purchase price for Apple common shares is comprised of the following:
<TABLE>
<S> <C>
Issuance of Series A Convertible Preferred Shares - at estimated
fair value (see Note F) ....................................... $263,040,244
Prior purchase of 417,778 common shares of Apple ............... 3,760,000
------------
Purchase price for Apple common shares ......................... $266,800,244
============
</TABLE>
The following is an estimate of the fees and other expenses related to the
merger:
<TABLE>
<S> <C>
Advisory fees .................................. $3,750,000
Legal and accounting fees ...................... 500,000
Printing ....................................... 350,000
Proxy solicitation and consulting fees ......... 550,000
Other .......................................... 1,150,000
----------
Total adjustment for transaction costs ......... $6,300,000
==========
</TABLE>
(B) Increase of $6,587,188 in the net book value of Apple's real estate
assets based upon Cornerstone's purchase price and the adjustment to
eliminate Apple's historical accumulated depreciation of $9,999,170,
as follows:
<TABLE>
<S> <C>
Purchase price (See Note A) ...................................... $ 310,756,144
Less:
Purchase price allocated to cash and cash equivalents ........... (45,705,746)
Other assets and prepaid expenses ............................... (5,462,801)
-------------
Amount allocated to investment in rental property ................ 259,587,597
Net book value of Apple's investment in real estate .............. 253,000,409
-------------
Net increase in book value of Apple's investment in real estate... 6,587,188
Eliminate accumulated depreciation ............................... (9,999,170)
-------------
Adjustment to reflect new cost basis of rental property .......... $ (3,441,982)
=============
Amount allocated to investment in rental property ................ $ 259,587,597
Less: Amount allocated to land ................................... (44,973,783)
-------------
Depreciable basis of rental property ............................. $ 214,613,814
=============
</TABLE>
74
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1999
(C) To eliminate Cornerstone's investment of $3,760,000 in 417,778 of
Apple common shares.
(D) To eliminate Cornerstone's investment in the Apple Realty Group, Inc.
brokerage contract previously acquired.
(E) To eliminate due from Apple and due to Cornerstone accounts.
(F) To adjust Apple's shareholder equity to reflect the issuance of
12,670,964 shares of Cornerstone Series A Convertible Preferred Shares
at an estimated fair value of $20.76 per share in exchange for all of
Apple's outstanding common shares and Class B Convertible Shares at
March 31, 1999, as follows:
<TABLE>
<S> <C>
Apple common shares outstanding at March 31, 1999 .............. 30,495,187
Plus conversion of Class B Convertible Shares to Apple common
shares (see Note G) ........................................... 1,600,000
------------
32,095,187
Less: Apple's common shares owned by Cornerstone ............... (417,778)
------------
Adjusted Apple common shares outstanding at March 31, 1999...... 31,677,409
Exchange ratio ................................................. .4
------------
12,670,964
Estimated fair market value per share .......................... $ 20.76
------------
Estimated fair value of Series A Convertible Preferred Shares to
be issued ..................................................... $263,040,244
============
</TABLE>
(G) The Apple Class B Convertible Shares are convertible into Apple common
shares and then into Cornerstone Series A Convertible Preferred Shares
upon the merger of Apple. The expense that results upon conversion is
estimated to be $13,266,400 and will be reflected in Apple's statement
of operations upon approval of the merger. The Class B Convertible
Shares will be converted and exchanged as follows:
<TABLE>
<S> <C>
Class B Convertible Shares ........................................ 200,000
Conversion ratio to Apple common stock ............................ 8
-----------
1,600,000
Exchange Ratio .................................................... .4
-----------
640,000
Estimated fair value of preferred (see Note F) .................... $ 20.76
-----------
13,286,400
Less: Amount originally paid for Class B Convertible Shares ....... (20,000)
-----------
$13,266,400
===========
</TABLE>
75
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1999
(H) To adjust Apple's historical shareholders' equity to reflect the
issuance of Series A Convertible Preferred Shares of Cornerstone at an
assumed price of $20.76 per share, in exchange for all of Apples
outstanding common shares not already owned by Cornerstone, and to
reflect the conversion of Apple Class B Convertible Shares to Apple
common shares and subsequent exchange for Cornerstone Series A
Convertible Preferred Shares as follows:
<TABLE>
<CAPTION>
SERIES A DISTRIBUTIONS IN
CLASS B CONVERTIBLE EXCESS OF
COMMON SHARES CONVERTIBLE SHARES PREFERRED SHARES EARNINGS
----------------- -------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Issuance of Cornerstone Series A Convertible
Preferred Shares for Apple common
shares not already owned by Cornerstone (See
Note F) ........................................ $ 263,040,244
Conversion of Apple Class B Convertible
Shares to Cornerstone Series A Convertible
Preferred Shares (See Note G) .................. $ (13,286,400) $ 20,000 $ 13,266,400
Elimination of Apple historical shareholders'
equity ......................................... (271,283,376) (20,000) 4,503,132
Cornerstone investment in Apple common
shares already eliminated (See Note C) ......... 3,760,000
-------------- --------- ------------- ------------
Pro Forma adjustments ........................... $ (280,809,776) $ -- $ 263,040,244 $ 17,769,532
============== ========= ============= ============
</TABLE>
76
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999
BASIS OF PRESENTATION
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1998, and the three month period ended March 31, 1999,
are presented as if the merger had occurred at the beginning of each period
presented. In addition to the merger, the Unaudited Pro Forma Condensed Combined
Statements of Operations give effect to seven property acquisitions made by
Cornerstone during 1998 and 16 and 2 property acquisitions made by Apple in 1998
and 1999, respectively, as if these property acquisitions were made on January
1, 1998. The Unaudited Pro Forma Condensed Combined Statements of Operations
give effect to the merger under the purchase method of accounting in accordance
with Accounting Standards Board Opinion No. 16, and the combined entity
qualifying as a REIT, distributing at least 95% of its taxable income, and
therefore, incurring no federal income tax liability for the periods presented.
The Unaudited Pro Forma Condensed Combined Statements of Operations are
presented for comparative purposes only and are not necessarily indicative of
what the actual combined results of Cornerstone and Apple would have been for
the year ended December 31, 1998 and the three month period ended March 31,
1999, if the merger and/or the property acquisitions had occurred on January 1,
1998, or January 1, 1999, nor do they purport to be indicative of the results of
operations in future periods. The Unaudited Pro Forma Condensed Combined
Statements of Operations should be read in conjunction with, and are qualified
in their entirety by, the respective historical financial statements and notes
thereto of Cornerstone and Apple incorporated by reference in this Joint Proxy
Statement / Prospectus.
77
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
CORNERSTONE
CORNERSTONE APPLE MERGER PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
--------------- -------------- ---------------------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Rental income .................................. $ 23,467,091 $11,416,283 -- $ 34,883,374
Other income ................................... 1,061,287 -- $ (1,061,287)(K) --
EXPENSES:
Property and maintenance ....................... 6,098,887 2,812,974 -- 8,911,861
Taxes and insurance ............................ 2,062,366 1,680,693 -- 3,743,059
Property management ............................ 549,368 -- 143,279 (L) 692,647
Property management fee ........................ -- 622,695 (622,695)(K) --
General and administrative ..................... 448,596 187,278 (112,108)(K) 461,266
(62,500)(M)
Amortization expense and other
depreciation ................................. 61,399 126,544 (126,544)(N) 61,399
Depreciation of rental property ................ 5,802,371 2,330,543 38,493 (O) 8,171,407
Other .......................................... 297,706 -- (134,798)(P) 19,629
(143,279)(L)
------------ ----------- ------------- ------------
Total expenses .................................. 15,320,693 7,760,727 (1,020,152) 22,061,268
------------ ----------- ------------- ------------
Income before interest income (expense) and
minority interest in operating partnership ..... 9,207,685 3,655,556 (41,135) 12,822,106
Interest and investment income .................. 90,874 388,121 (83,550)(R) 316,695
(78,750)(S)
Interest expense ................................ (3,415,448) (402,995) -- (3,818,443)
------------ ----------- ------------- ------------
Income before minority interest in operating
partnership .................................... 5,883,111 3,640,682 (203,435) 9,320,358
Minority interest of unitholders in operating
partnership .................................... (50,701) -- -- (50,701)
------------ ----------- ------------- ------------
Net income ...................................... 5,832,410 3,640,882 (203,435) 9,269,657
Distributions to preferred
shareholders ................................... -- -- (7,099,029)(T) (7,099,029)
------------ ----------- ------------- ------------
Net income available to common shareholders...... $ 5,832,410 $ 3,640,682 $ (7,302,464) $ 2,170,628
============ =========== ============= ============
Earnings per common share:
Basic and Diluted .............................. $ 0.15 $ 0.06
Weighted average common shares outstanding
-- Basic and Diluted ........................... 39,315,952 39,315,952
</TABLE>
See accompanying notes
78
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998
1998 CORNERSTONE
CORNERSTONE CORNERSTONE ACQUISITION
HISTORICAL (A) ACQUISITIONS ADJUSTMENTS
---------------- ------------------ ---------------------
<S> <C> <C> <C>
Revenue:
Rental income ........................ $ 88,752,254 $4,281,696 --
Other income ......................... 4,885,694 -- --
Expenses:
Property and maintenance ............. 24,641,642 1,809,238 --
Taxes and insurance .................. 6,986,245 281,848 --
Property management .................. 2,169,552 -- --
Property management fee .............. -- -- --
General and administrative ........... 1,681,810 -- --
Amortization expenses and
other depreciation ................... 47,703 -- --
Depreciation of rental
property ............................. 20,741,130 -- $ 873,029 (B)
Other ................................ 1,968,591 -- --
-------------- ---------- --------------
Total expenses ........................ 58,236,673 2,091,086 873,029
-------------- ---------- --------------
Income before interest and
investment income (expense)
and minority interest in
operating partnership ................ 35,401,275 2,190,609 (873,029)
Interest and investment income ........ 411,957 -- --
Interest expense ...................... (12,587,897) -- (1,526,024)(C)
-------------- ---------- --------------
Income before minority interest in
operating partnership ................ 23,225,335 2,190,609 (2,399,052)
Minority interest of unitholders in
operating partnership ................ (14,693) -- (91,059)(D)
-------------- ---------- --------------
Net income ............................ 23,210,642 2,190,609 (2,490,111)
Distributions to preferred
shareholders ......................... -- -- --
-------------- ---------- --------------
Net income available to common
shareholders ......................... $ 23,210,642 $2,190,609 $ (2,490,111)
============== ========== ==============
Earnings per common share:
Basic and Diluted .................... $ 0.62
Weighted average common shares
outstanding -- Basic and
Diluted .............................. 37,630,546 309,917 (E)
<CAPTION>
1998 AND 1999
1998 AND 1999 APPLE
CORNERSTONE APPLE APPLE ACQUISITION APPLE
PRO FORMA HISTORICAL (F) ACQUISITIONS ADJUSTMENTS PRO FORMA
---------------- ---------------- ------------------ --------------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue:
Rental income ........................ $ 93,033,950 $ 30,764,904 $14,814,117 -- $ 45,579,021
Other income ......................... 4,885,694 -- -- -- --
Expenses:
Property and maintenance ............. 26,450,880 8,819,809 5,155,130 -- 13,974,939
Taxes and insurance .................. 7,268,093 4,453,177 1,927,148 -- 6,380,325
Property management .................. 2,169,552 -- -- -- --
Property management fee .............. -- 1,685,713 -- $ 810,748 (G) 2,496,461
General and administrative ........... 1,681,810 799,732 -- 159,693 (H) 959,425
Amortization expenses and
other depreciation ................... 47,703 38,758 -- -- 38,758
Depreciation of rental
property ............................. 21,614,159 5,788,476 -- 2,587,415 (B) 8,375,891
Other ................................ 1,968,591 -- -- -- --
-------------- ---------- --------------
Total expenses ........................ 61,200,788 21,585,665 7,082,277 3,557,857 32,225,799
-------------- ---------- --------------
Income before interest and
investment income (expense)
and minority interest in
operating partnership ................ 36,718,855 9,179,239 7,731,840 (3,557,857) 13,353,222
Interest and investment income ........ 411,957 1,638.544 -- (1,323,544)(I) 315,000
Interest expense ...................... (14,113,921) (737,875) -- (1,302,208)(J) (2,040,083)
-------------- ------------- ----------- -------------- ------------
Income before minority interest in
operating partnership ................ 23,016,892 10,079,908 7,731,840 (6,183,609) 11,628,139
Minority interest of unitholders in
operating partnership ................ (105,752) -- -- -- --
-------------- ------------- ----------- -------------- ------------
Net income ............................ 22,911,140 10,079,908 7,731,840 (6,183,609) 11,628,139
Distributions to preferred
shareholders ......................... -- -- -- -- --
-------------- ------------- ----------- -------------- ------------
Net income available to common
shareholders ......................... $ 22,911,140 $ 10,079,908 $ 7,731,840 $ (6,183,609) $ 11,628,139
============== ============= =========== ============== ============
Earnings per common share:
Basic and Diluted .................... $ 0.60
Weighted average common shares
outstanding -- Basic and
Diluted .............................. 37,940,463
<CAPTION>
CORNERSTONE
MERGER PRO FORMA
ADJUSTMENTS COMBINED
---------------------- ---------------
<S> <C> <C>
Revenue:
Rental income ........................ -- $ 138,612,971
Other income ......................... $ (4,885,694)(K) --
Expenses:
Property and maintenance ............. -- 40,425,819
Taxes and insurance .................. -- 13,648,418
Property management .................. 747,529 (L) 2,917,081
Property management fee .............. (2,496,461)(K) --
General and administrative ........... (685,491)(K) 1,705,744
(250,000)(M)
Amortization expenses and
other depreciation ................... (38,758)(N) 47,703
Depreciation of rental
property ............................. 153,974 (O) 30,144,024
Other ................................ (1,054,470)(P) 128,559
(747,529)(L)
(38,033)(Q)
--------------
Total expenses ........................ (4,409,240) 89,017,347
-------------- -------------
Income before interest and
investment income (expense)
and minority interest in
operating partnership ................ (476,454) 49,595,623
Interest and investment income ........ (340,483)(R) 71,474
(315,000)(S)
Interest expense ...................... -- (16,154,004)
-------------- -------------
Income before minority interest in
operating partnership ................ (1,131,937) 33,513,094
Minority interest of unitholders in
operating partnership ................ -- (105,752)
-------------- -------------
Net income ............................ (1,131,937) 33,407,342
Distributions to preferred
shareholders ......................... (23,673,643)(T) (23,673,643)
-------------- -------------
Net income available to common
shareholders ......................... $ (24,805,580) $ 9,733,699
============== =============
Earnings per common share:
Basic and Diluted .................... $ 0.26
Weighted average common shares
outstanding -- Basic and
Diluted .............................. 37,940,463
</TABLE>
See accompanying notes.
79
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE THREE MONTH PERIOD ENDED MARCH 31, 1999
PROPERTY ACQUISITIONS ADJUSTMENTS:
The following adjustments record the operations of the properties acquired
by Cornerstone and Apple from the beginning of the respective periods to the
date acquired adjusted for the Companies' bases in the properties.
(A) Represents the income and expenses of the six properties Cornerstone
acquired during 1998 for a total purchase price of approximately $64
million for the respective periods in 1998 prior to acquisition. (see
detail at Note U).
(B) Represents the depreciation expense of the properties acquired by
Cornerstone and Apple based on the purchase price, excluding amounts
allocated to land, for the period of time not owned by the companies.
The weighted average life of the property depreciated was 27.5 years.
(C) Represents the interest expense for 6 of the 7 properties purchased
using Cornerstone's line of credit for the period in which the
properties were not owned. Interest was computed under Cornerstone's
line of credit in effect at the time of the respective acquisitions
(interest rates range from 6.6% -- 7.0%).
(D) Represents income applicable to minority interest based on 185,874
operating partnership units of Cornerstone's operating partnership
issued in connection with the acquisition of Cape Landing.
(E) Represents additional common shares used to purchase property at a
cost of $8,100,000.
(F) Represents the income and expenses of the 16 properties acquired in
1998 and 2 in 1999 by Apple for a total purchase price of
approximately $148 million for the respective periods in 1998 prior to
acquisition. (see detail at Note V). Apple's 1999 acquisitions were
not included in the three month period ended March 31, 1999 pro forma
condensed combined statement of operations as their effects were
immaterial.
(G) Represents property management fees based on 5% of rental income and
processing costs equal to $2.50 per apartment per month charged by
Cornerstone for management of the properties for the period not owned
by Apple.
(H) Represents advisory fees of .25% of accumulated capital contributions
invested in properties under the "best efforts" offering for the
period of time the properties were not owned by Apple.
(I) Represents reduction of interest income recorded by Apple assuming
$30.1 million of cash which was used to purchase properties at an
interest rate of 5%.
(J) Represents additional interest expense for 5 of the 1998 property
acquisitions and 1 of the 1999 property acquisitions of Apple for the
period in which the properties were not owned, interest was computed
based on market interest rates of 6.5% on the mortgage debt of $31.2
million that was assumed at acquisition.
80
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE THREE MONTH PERIOD ENDED MARCH 31, 1999
MERGER ADJUSTMENTS:
The following adjustments reflect the operations of Apple, previously
adjusted for properties acquired from the beginning of the respective periods,
based on the purchase of Apple by Cornerstone from the beginning of the
respective periods.
(K) Represents the elimination of property management and advisory fees
Cornerstone received for services provided to Apple as follows:
<TABLE>
<CAPTION>
THREE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1998 MARCH 31, 1999
------------------- ---------------
<S> <C> <C>
Fee income earned by Cornerstone ............................. $ 4,885,694 $ 1,061,287
Property management fee incurred by Apple .................... 2,496,461 622,695
Advisory fee incurred by Apple ............................... 685,491 112,108
The balance represents broker fee income capitalized by Apple as investment in
rental property and the effects of other pro forma fees.
</TABLE>
(L) Represents Cornerstone's expenses incurred related to providing
property management services to Apple. The expenses have been
reclassified from other property management.
(M) Reduction of Apple expenses to operate as a public company eliminated
as a result of the merger.
(N) Represents the elimination of the amortization of Apple's organization
costs that would be written off as a result of the merger.
(O) Represents additional depreciation expense on the increased fair
market value of Apple's depreciable real estate using a weighted
average life of 27.5 years.
(P) Represents the elimination of Cornerstone's amortization of the
acquired Apple brokerage contract.
(Q) Represents other expenses incurred by Cornerstone to provide services
to Apple which will be eliminated as a result of the merger.
(R) Represents the elimination of Cornerstone investment income previously
recognized on Apple common shares owned by Cornerstone.
(S) Represents a reduction to interest income resulting from the use of
cash for the payment of transaction costs as a result of the merger at
an interest rate of 5%.
81
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE THREE MONTH PERIOD ENDED MARCH 31, 1999
(T) Represents distributions on Series A Convertible Preferred Shares
including imputed distributions on the increasing rate preferred stock
as follows:
<TABLE>
<CAPTION>
THREE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, MARCH 31,
1998 1999
---------------- ---------------
<S> <C> <C>
Apple historical weighted average shares outstanding at end of
respective period .................................................. 19,910,408 29,243,930
Pro forma Apple common shares added for acquisitions made
with proceeds from the sale of common stock for the period
not owned during the respective period ............................. 4,202,967 --
Less: Apple shares owned by Cornerstone ............................. (417,778) (417,778)
------------ -----------
Adjusted pro forma Apple common shares prior to conversion. 23,695,597 28,826,152
Conversion ratio (1) ................................................ .4 .4
------------ -----------
Cornerstone Series A Convertible Preferred Shares issued for
adjusted pro forma Apple common shares ............................. 9,478,239 11,530,460
Add: Preferred shares issued for Apple Class B Convertible
Shares (2) ......................................................... 640,000 640,000
------------ -----------
10,118,239 12,170,460
Distribution rate (3) ............................................... $ 2.125 $ .5315
------------ -----------
Cash distributions .................................................. 21,501,257 6,468,600
Imputed distribution on increasing rate preferred stock (4) ......... 2,172,386 630,429
------------ -----------
Total distributions ................................................. $ 23,673,643 $ 7,099,029
============ ===========
</TABLE>
- ----------
(1) Computed based on the exchange ratio under the terms of the merger of 2.5
Apple common shares converting to 1 share of Cornerstone Series A
Convertible Preferred Shares.
(2) See Note G to the unaudited pro forma condensed combined balance sheet.
(3) Equals stated distribution rate for each share of Cornerstone preferred
stock for the first year after the merger.
(4) Imputed dividends calculated as the present value of the difference between
the perpetual preferred stock distribution and the stated distribution
rate.
82
<PAGE>
NOTE U
1998 CORNERSTONE ACQUISITIONS
The following schedule provides detail of 1998 acquisitions by property
included in the Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1998 as previously reported on Form 8-K's
incorporated by reference into this Joint Proxy Statement / Prospectus.
<TABLE>
<CAPTION>
STONE PINNACLE HAMPTON
POINT RIDGE POINTE
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- -------------
DATE OF ACQUISITIONS 1/15/98 3/31/98 3/31/98
- --------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Rental income ................................................ $ 56,094 $214,941 $495,061
Other income ................................................. -- -- --
Expenses:
Property and maintenance ..................................... 15,821 73,178 157,479
Taxes and insurance .......................................... 4,154 15,411 54,874
Property management .......................................... -- -- --
Property management fee ...................................... -- -- --
General and administrative ................................... -- -- --
Amortization expense and other depreciation .................. -- -- --
Depreciation of rental property .............................. -- -- --
Other ........................................................ -- -- --
-------- -------- --------
19,975 88,589 212,353
Income before interest income (expense) and minority
interest in operation partnership ............................ 36,119 126,352 282,708
Interest income ............................................... -- -- --
Interest expense .............................................. -- -- --
-------- -------- --------
Income before minority interest in operating partnership ...... 36,119 126,352 282,708
Minority interest of unitholders in operating partnership ..... -- -- --
-------- -------- --------
Net income .................................................... $ 36,119 $126,352 $282,708
======== ======== ========
<CAPTION>
CAPE
THE TIMBERS THE GABLES LANDING 1998
PRO FORMA PRO FORMA PRO FORMA CORNERSTONE
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ACQUISITIONS
------------- ------------- ------------- -------------
DATE OF ACQUISITIONS 6/4/98 7/2/98 10/16/98 --
- --------------------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Rental income ................................................ $ 494,369 $ 752,765 $ 2,268,466 $ 4,281,696
Other income ................................................. -- -- -- --
Expenses:
Property and maintenance ..................................... 169,870 221,388 1,171,502 1,809,238
Taxes and insurance .......................................... 31,692 49,381 126,336 281,848
Property management .......................................... -- -- -- --
Property management fee ...................................... -- -- -- --
General and administrative ................................... -- -- -- --
Amortization expense and other depreciation .................. -- -- -- --
Depreciation of rental property .............................. -- -- -- --
Other ........................................................ -- -- -- --
--------- --------- ----------- -----------
201,562 270,769 1,297,838 2,091,086
Income before interest income (expense) and minority
interest in operation partnership ............................ 292,807 481,996 970,627 2,190,609
Interest income ............................................... -- -- -- --
Interest expense .............................................. -- -- -- --
--------- --------- ----------- -----------
Income before minority interest in operating partnership ...... 292,807 481,996 970,627 2,190,609
Minority interest of unitholders in operating partnership ..... -- -- -- --
--------- --------- ----------- -----------
Net income .................................................... $ 292,807 $ 481,996 $ 970,627 $ 2,190,609
========= ========= =========== ===========
</TABLE>
83
<PAGE>
NOTE V
1998 AND 1999 APPLE ACQUISITIONS
The following schedule provides detail of 1998 and 1999 acquisitions by
property included in the Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1998 as previously reported on Form
8-K's incorporated by reference into this Joint Proxy Statement / Prospectus.
<TABLE>
<CAPTION>
COPPER
MAIN PARK TIMBERGLEN CROSSING
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- -------------
DATE OF ACQUISITION 2/4/98 2/13/98 3/31/98
- -------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenue
Rental income ............................. $ 122,458 $ 162,912 $ 228,612
Other income .............................. -- -- --
Expenses:
Property and maintenance .................. 44,674 39,814 147,405
Taxes and insurance ....................... 18,797 21,513 29,927
Property management ....................... -- -- --
Property management fee ................... -- -- --
General and administrative ................ -- -- --
Amortization expense and other
depreciation ............................. -- -- --
Depreciation of rental property ........... -- -- --
Other ..................................... -- -- --
--------- --------- ---------
63,471 61,327 177,332
--------- --------- ---------
Income before interest income (expense)
and minority interest in operation
partnership .............................. 58,987 101,585 51,280
Interest income ........................... -- -- --
Interest expense .......................... -- -- --
Income before minority interest in
operating partnership .................... $ 58,987 $ 101,585 $ 51,280
Minority interest of unitholders in
operating partnertship ................... -- -- --
--------- --------- ---------
Net income ................................ $ 58,987 $ 101,585 $ 51,280
========= ========= =========
<CAPTION>
SUMMER PARK COTTONWOOD
SILVERBROOK I TREE VILLAGE CROSSING SILVERBROOK II
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
--------------- ------------- ------------- ------------- ---------------
DATE OF ACQUISITION 5/8/98 6/1/98 7/1/98 7/9/98 7/24/98
- -------------------------------------------- --------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue
Rental income ............................. $ 876,661 $ 505,033 $ 641,049 $ 565,147 $ 536,970
Other income .............................. -- -- -- -- --
Expenses:
Property and maintenance .................. 308,738 202,428 224,466 216,861 188,406
Taxes and insurance ....................... 98,600 63,114 79,850 74,067 61,559
Property management ....................... -- -- -- -- --
Property management fee ................... -- -- -- -- --
General and administrative ................ -- -- -- -- --
Amortization expense and other
depreciation ............................. -- -- -- -- --
Depreciation of rental property ........... -- -- -- -- --
Other ..................................... -- -- -- -- --
--------- --------- --------- --------- ---------
407,338 265,542 304,316 290,928 249,965
--------- --------- --------- --------- ---------
Income before interest income (expense)
and minority interest in operation
partnership .............................. 469,323 239,491 336,733 274,219 287,005
Interest income ........................... -- -- -- -- --
Interest expense .......................... -- -- -- -- --
Income before minority interest in
operating partnership .................... $ 469,323 $ 239,491 $ 336,733 $ 274,219 $ 287,005
Minority interest of unitholders in
operating partnertship ................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income ................................ $ 469,323 $ 239,491 $ 336,733 $ 274,219 $ 287,005
========= ========= ========= ========= =========
</TABLE>
(Continued)
84
<PAGE>
NOTE V (CONTINUED)
1998 AND 1999 APPLE ACQUISITIONS
<TABLE>
<CAPTION>
PACE'S EMERALD ESTRADA
POINT DEVONSHIRE NEWPORT OAKS OAKS
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- ------------- -------------
DATE OF ACQUISITIONS 7/17/98 7/17/98 7/24/98 7/24/98 7/27/98
- ------------------------------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue
Rental income ..................... $1,167,372 $534,027 $686,911 $1,046,462 $962,727
Other income ...................... -- -- -- -- --
Expenses:
Property and maintenance .......... 349,407 156,111 235,111 284,868 281,613
Taxes and insurance ............... 143,119 75,941 109,875 133,916 124,830
Property management ............... -- -- -- -- --
Property management fee ........... -- -- -- -- --
General and administrative ........ -- -- -- -- --
Amortization expense and
other depreciation ............... -- -- -- -- --
Depreciation of rental
property ......................... -- -- -- -- --
Other ............................. -- -- -- -- --
---------- -------- -------- ---------- --------
492,526 232,052 344,986 418,784 406,443
Income before interest income
(expense) and minority
interest in operation part-
nership ........................... 674,846 301,975 341,925 627,678 556,284
Interest income .................... -- -- -- -- --
Interest expense ................... -- -- -- -- --
---------- -------- -------- ---------- --------
Income before minority
interest in operating
partnership ....................... 674,846 301,975 341,925 627,678 556,284
Minority interest of unitholders
in operating partnership .......... -- -- -- -- --
---------- -------- -------- ---------- --------
Net income ......................... $ 674,846 $301,975 $341,925 $ 627,678 $556,284
========== ======== ======== ========== ========
<CAPTION>
CUTTER'S BURNEY COURTS ON SIERRA GRAYSON
POINT OAKS PEAR RIDGE RIDGE SQUARE APPLE
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA 1998 AND 1999
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ACQUISITIONS
------------- ------------- ------------- ------------- ------------- --------------
DATE OF ACQUISITIONS 10/29/98 10/28/98 11/17/98 1/5/99 2/1/99 --
- ------------------------------------ ------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Rental income ..................... $1,217,238 $1,309,756 $1,543,739 $1,192,111 $1,514,932 $14,814,117
Other income ...................... -- -- -- -- -- --
Expenses:
Property and maintenance .......... 430,131 472,141 519,372 534,083 519,501 5,155,130
Taxes and insurance ............... 146,572 180,438 224,297 148,050 192,683 1,927,148
Property management ............... -- -- -- -- -- --
Property management fee ........... -- -- -- -- -- --
General and administrative ........ -- -- -- -- -- --
Amortization expense and
other depreciation ............... -- -- -- -- -- --
Depreciation of rental
property ......................... -- -- -- -- -- --
Other ............................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -----------
576,703 652,579 743,669 682,133 712,184 7,082,277
Income before interest income
(expense) and minority
interest in operation part-
nership ........................... 640,536 657,177 800,070 509,978 802,748 7,731,840
Interest income .................... -- --
Interest expense ................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -----------
Income before minority
interest in operating
partnership ....................... 640,536 657,177 800,070 509,978 802,748 7,731,840
Minority interest of unitholders
in operating partnership .......... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -----------
Net income ......................... $ 640,536 $ 657,177 $ 800,070 $ 509,978 $ 802,748 $ 7,731,840
========== ========== ========== ========== ========== ===========
</TABLE>
85
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF CORNERSTONE
COMMON STOCK
Cornerstone has 100,000,000 authorized common shares, no par value, of
which 39,370,147 were issued and outstanding as of March 31, 1999. Each common
share is fully paid and nonassessable upon payment therefor and issuance.
Distribution Rights. The holders of common shares are entitled to receive
such distributions as are declared by our Board of Directors.
Voting Rights. Except as described below under "Series A Convertible
Preferred Shares-Voting Rights," common shares will have the sole voting power
to elect directors. Each common share is entitled to one vote on all matters
submitted to a vote of common shareholders, including the election of directors.
There is no cumulative voting. Currently, the Board of Directors is divided into
three classes, as nearly equal in size as possible. The terms of one class of
directors expire each year.
Liquidation Rights. Upon any dissolution, liquidation or winding up of
Cornerstone, the holders of common shares are entitled to receive pro rata all
of Cornerstone's assets and funds remaining after payment of, or provision for,
creditors and after provision for any preferred shares which are superior to the
common shares.
Preemptive Rights. Holders of common shares have no preemptive right to
purchase or subscribe for any shares of capital stock of Cornerstone.
Repurchase of Common Shares and Restrictions on Transfer. In order that we
may meet certain requirements under the Internal Revenue Code applicable to real
estate investment trusts, Cornerstone's bylaws prohibit any person from
acquiring or holding, directly or indirectly, ownership of a number of common
shares in excess of 9.8% of all the outstanding common shares. Common shares
owned by a person in excess of such amounts are referred to in the bylaws as
"Excess Shares." For this purpose the term "Ownership" is defined in accordance
with certain ownership rules of the Internal Revenue Code. Accordingly, common
shares owned or deemed to be owned by a person who individually owns less than
9.8% of the common shares outstanding nevertheless may be Excess Shares.
Holders of Excess Shares are not entitled to voting rights, dividends or
distributions with respect to the Excess Shares. If, after the purported
transfer or other event resulting in an exchange of common shares for Excess
Shares and before discovery by us of such exchange, dividends or distributions
are paid with respect to common shares that were exchanged for Excess Shares,
then such dividends or distributions are to be repaid to Cornerstone upon
demand.
The bylaws also provide that in the event any person acquires Excess
Shares, such Excess Shares may be redeemed by us at the discretion of the Board
of Directors. Except as set forth below, the redemption price for redeemed
Excess Shares will be the lesser of (i) the price paid for the Excess Shares (or
if no notice of such purchase price is given, at a price to be determined by the
Board of Directors, in its sole discretion, but no lower than the lowest market
price for the common shares during the year prior to the date Cornerstone
exercises its purchase option) and (ii) the fair market value of such Excess
Shares, which will be the fair market value of the common shares as determined
in good faith by the Board of Directors or, if the common shares are listed on a
national securities exchange, the closing price (average of closing bid and
asked prices if the common shares are quoted on the NASDAQ National Market
System) on the last business day prior to the redemption date. To redeem Excess
Shares, the Board of Directors must give a notice of redemption to the holder of
the Excess Shares not less than one week prior to the date fixed by the Board of
Directors for redemption. The holder may sell such Excess Shares before the date
fixed for redemption. If he does not, the redemption price for such Excess
Shares will be paid on the redemption date fixed by the Board of Directors and
included in such notice.
86
<PAGE>
Under the bylaws, any acquisition of common shares of Cornerstone that
would result in Cornerstone's disqualification as a REIT under the Internal
Revenue Code is void to the fullest extent permitted by law, and the Board of
Directors is authorized to refuse to transfer common shares to a person if, as a
result of the acquisition, that person would own Excess Shares.
The ownership limitations described above may have the effect of precluding
changes in control of Cornerstone, or preventing a transaction in which some or
all common shareholders might receive a premium for sale of a large or control
block of common shares.
Transfer Agent and Registrar. The transfer agent and registrar for the
common shares is First Union National Bank of North Carolina, Charlotte, North
Carolina.
SERIES A CONVERTIBLE PREFERRED SHARES
Designation, Number and Rank. The Series A Convertible Preferred Shares
shall, with respect to distribution rights and rights upon voluntary or
involuntary liquidation, dissolution or winding up of Cornerstone, rank (a)
senior to all common shares and to all equity securities ranking junior to the
Series A Convertible Preferred Shares; (b) on parity with all equity securities
issued by Cornerstone the terms of which specifically provide that such equity
securities rank on a parity with the Series A Convertible Preferred Shares, and
(c) junior to all other equity securities issued by Cornerstone. Cornerstone
retains the power and authority to issue preferred shares which rank senior to
or on parity with the Series A Convertible Preferred Shares as to distributions
or as to rights in liquidation, but only if, at the time of and, after giving
effect to the issuance of such shares that the sum of (i) the aggregate
liquidation preferences of all preferred shares which rank senior to the Series
A Convertible Preferred Shares, and (ii) the aggregate liquidation preference of
the Series A Convertible Preferred Shares does not exceed 20% of Cornerstone's
total assets, as disclosed on the balance sheet of Cornerstone most recently
filed with the SEC.
Distributions. Holders of outstanding Series A Convertible Preferred Shares
will be entitled to receive, if, when and as declared by the Cornerstone Board,
quarterly cash distributions at an annual rate per share of $2.125 during the
first year following the merger, increasing to $2.25 during the second year
after the merger and to $2.375 during the third year after the merger and
thereafter. Dividends will be cumulative and will accrue from and after the date
of issue thereof, whether or not such distributions are declared or there are
funds of Cornerstone legally available for payment of such distributions for any
given distribution period.
When distributions for the Series A Convertible Preferred Shares and any
other preferred shares ranking on parity with the Series A Convertible Preferred
Shares are not paid in full (or a sum sufficient for such full payment is not so
set apart), such distributions will be declared pro rata so that the amount of
distributions declared per share will in all cases bear to each other the same
ratio that accrued distributions per share on the Series A Convertible Preferred
Shares and other preferred shares bear to each other.
Unless full cumulative distributions on all outstanding Series A
Convertible Preferred Shares and all preferred shares on parity with such shares
have been paid and all mandatory sinking fund payments required pursuant to the
terms of any outstanding preferred shares ranking senior to or on parity with
the Series A Convertible Preferred Shares as to rights in liquidation shall have
been paid then (i) no distribution (other than distributions payable solely in
shares ranking junior to the Series A Convertible Preferred Shares) will be
declared or paid upon or any sum set apart for the payment of distributions
upon, any shares ranking junior to the Series A Convertible Preferred Shares as
to distributions; (ii) no other distribution will be made with respect to any
shares of Cornerstone ranking junior to the Series A Convertible Preferred
Shares as to rights in liquidation; (iii) no shares of Cornerstone ranking
junior to the Series A Convertible Preferred Shares as to distributions or
rights in liquidation will be purchased, redeemed or otherwise acquired for
value by Cornerstone or by any subsidiary of Cornerstone; and (iv) no monies
will be paid into, set apart or made available for a sinking or other like fund
for the purchase, redemption or other acquisition for value by Cornerstone or
any of its subsidiaries of any shares of Cornerstone ranking junior to the
Series A Convertible Preferred Shares as to distributions or rights in
liquidation.
87
<PAGE>
Dividends accrued but unpaid will bear no interest and holders of Series A
Convertible Preferred Shares will not be entitled to distributions in excess of
the full cumulative distributions to which they are entitled.
No distributions on the Series A Convertible Preferred Shares will be
declared or funds set apart for the payment thereof if at such time Cornerstone
is party to any agreement related to its indebtedness which prohibits such
declaration, payment or setting apart for payment or such action would
constitute a default under any such agreement or if such declaration is
restricted or prohibited by law.
Voting Rights. Except as described below or to the extent provided by law,
holders of Series A Convertible Preferred Shares will not be entitled to (i)
vote at any meeting of shareholders for election of directors or for any other
purpose, or (ii) receive notice of, or otherwise participate, in any meeting of
shareholders of Cornerstone at which they are not entitled to vote.
Whenever distributions due to the holders of Series A Convertible Preferred
Shares or to any class or series of preferred shares which ranks on parity
therewith as to distributions are six or more quarters in arrears, then the
Cornerstone Board will automatically be increased by two and at any annual
meeting or properly called special meeting, holders of Series A Convertible
Preferred Shares will have the right to nominate and elect these two additional
directors. These two directors will continue to serve until all current
distributions and all distributions in arrears have been paid in full or
declared and set aside for payment. The right of the holders of Series A
Convertible Preferred Shares to nominate and elect these two directors will
cease when all current distributions and all distributions in arrears have been
paid in full or declared and set aside for payment.
The affirmative vote of a majority of the outstanding Series A Convertible
Preferred Shares, voting as separate group, will be required (i) whenever such a
vote is required under the Virginia Stock Corporation Act or (ii) for the
adoption of any amendment, alteration or repeal of any provision of the Series A
Convertible Preferred Shares or of any provision of the Articles of
Incorporation that adversely changes any preferences, limitations, privileges,
voting power or relative rights of the Series A Convertible Preferred Shares or
the holders thereof; provided, however that the authorization of, or the
increase in the authorized number of shares of, any class of shares ranking
senior to or on a parity with the Series A Preferred Shares is not such an
adverse change.
Redemption. Series A Convertible Preferred Shares will not be redeemable by
Cornerstone for five years after the first issuance of such shares. At any time
after the fifth anniversary of such issuance Cornerstone may, at its option,
redeem all or any portion of the outstanding Series A Convertible Preferred
Shares for an amount equal to, at the election of Cornerstone, (i) the
liquidation payment owed as described below plus accrued but unpaid
distributions or (ii) such number of common shares of Cornerstone equal to (A)
the liquidation price described below plus accrued but unpaid distributions,
divided by (B) the conversion price as described below. Notice of any such
redemption must be provided not less than 30 nor more than 60 days before the
redemption date. If fewer than all of the Series A Convertible Preferred Shares
outstanding are to be redeemed, the redemption will be pro rated among the
holders of Series A Convertible Preferred Shares as to the number of such shares
registered in their names must take place on a pro rata basis as to each record
holders. Cornerstone may not redeem any of the Series A Convertible Preferred
Shares if the full cumulative distributions to holders of such shares have not
been paid.
Cornerstone may also acquire shares of Series A Convertible Preferred
Shares other than by redemption for such consideration as is acceptable to the
holders thereof, provided that if all past and current distributions on the
Series A Convertible Preferred Shares have not been paid in full or declared and
set aside for payment, Cornerstone may not acquire any Series A Convertible
Preferred Shares except in accordance with a purchase or exchange offer made on
the same terms to all holders of outstanding Series A Convertible Preferred
Shares.
LIQUIDATION
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of Cornerstone, the holders of outstanding Series A Convertible
Preferred Shares will be entitled to be paid $25 per share in cash, plus an
amount equal to all unpaid distributions accrued thereon, after
88
<PAGE>
which payment the holders of the Series A Convertible Preferred Shares will have
no right or claim to the remaining assets of Cornerstone. Neither the
consolidation nor merger of Cornerstone with or into any other entity, nor the
sale, lease or other disposition of substantially all of Cornerstone's
properties and assets, will, without further corporate action, be deemed a
liquidation, dissolution or winding up of the affairs of Cornerstone.
If the assets of Cornerstone legally available for distribution to its
shareholders are insufficient to pay the holders of the Series A Convertible
Preferred Shares the full amounts to which they are entitled, such assets will
be distributed ratably to the holders of Series A Convertible Shares and the
holders of preferred shares, if any, ranking on a parity with the Series A
Convertible Preferred Shares as to rights in liquidation in proportion to the
full amount to which they are respectively entitled.
Cornerstone will give written notice of any liquidation, dissolution or
winding up of Cornerstone not less than 30 nor more than 60 days before the
payment date related thereto.
CONVERSION
Each holder of outstanding Series A Convertible Preferred Shares will have
the right, upon notice properly given to Cornerstone, to convert any or all such
shares into such number of Cornerstone common shares equal to $25 divided by the
conversion price times the number of Series A Convertible Preferred Shares
converted. The initial conversion price will be $15.80, subject to adjustment
described below. Any holder of Series A Convertible Preferred Shares called for
redemption may convert such shares at any time prior to the close of business on
the last full business day prior to the redemption date. Common shares issued
upon conversion will be rounded to the nearest thousandth of a share, and no
cash will be paid in lieu of fractional shares.
The issuance of common shares in exchange of Series A Convertible Preferred
Shares will be done by Cornerstone without charge for expenses or for any tax in
respect of the issuance of such common shares, but Cornerstone will 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 Cornerstone of the Series A Convertible
Preferred Shares converted.
Holders of Series A Convertible Preferred Shares on any distribution record
date will still be entitled to receive all previously accrued distributions
payable on such shares notwithstanding the conversion of such shares after any
such distribution record date.
If Cornerstone will (i) pay a distribution on its outstanding common shares
in common shares or subdivide or otherwise split its outstanding common shares
into a larger number of shares, (ii) combine its outstanding shares into a
smaller number of shares, or (iii) reclassify its common shares, the Conversion
Price will be adjusted so that the holder of any Series A Convertible Preferred
Shares surrendered for conversion after the applicable record date will be
entitled to receive the same aggregate number of common shares that such holder
would have owned or have been entitled to receive after the happening of such
event had the Series A Convertible Preferred Shares been converted immediately
prior to such record date.
If Cornerstone shall issue rights, warrants or options to all holders of
common shares entitling them to subscribe for or purchase common shares at a
price which is less than the current market value of common shares, the
Conversion Price will be adjusted to a price determined by multiplying (i) the
current conversion price and (ii) a fraction, the numerator of which will be the
sum of (w) the number of common shares outstanding and (x) the number of common
shares which the aggregate purchase price of all such rights, warrants and
options would purchase at the then current market value, and the denominator of
which will be the sum of (y) the number of common shares outstanding and (z) the
number of additional shares offered for subscription pursuant to such rights,
warrants or options.
89
<PAGE>
COMPARISON OF SHAREHOLDER RIGHTS
At the effective time of the merger, holders of Apple common shares will
become holders of the Series A Convertible Preferred Shares. Upon conversion of
such shares, they will become holders of Cornerstone common shares. Cornerstone
and Apple are both incorporated under the laws of the Commonwealth of Virginia.
As Virginia corporations, both Cornerstone and Apple are subject to the Virginia
Stock Corporation Act, which is a general corporation statute. Certain
differences between the Cornerstone Amended and Restated Articles of
Incorporation and bylaws and the Apple Articles of Incorporation and bylaws are
discussed below. However, the comparative rights of holders of Series A
Convertible Preferred Shares and holders of Apple common shares set forth below
does not purport to be complete and is subject to and qualified in its entirety
by reference to the Cornerstone Articles and bylaws and to the Apple Articles
and bylaws.
AUTHORIZED SHARES
The Cornerstone Articles authorize the issuance of one hundred million
(100,000,000) shares of Cornerstone common stock and twenty-five million
(25,000,000) shares of Cornerstone preferred stock. The Cornerstone Board may,
by adoption of an amendment of the Cornerstone Articles, 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. Any increase in the aggregate
number of shares which Cornerstone has the authority to issue would require an
amendment to the Cornerstone Articles which must first be approved by a majority
of the holders of the outstanding common shares of Cornerstone.
The Apple Articles authorize the issuance of 50,000,000 Apple common shares
and 200,000 Apple Class B Convertible Shares.
DISTRIBUTION RIGHTS
The holders of Apple common shares are entitled to receive such
distributions as are declared by the Apple Board.
The holders of outstanding Series A Convertible Preferred Shares will be
entitled to receive, if, when and as declared by the Cornerstone Board,
quarterly cash distributions at a maximum annual rate per share of $2.125 (8.5%)
during the first twelve months following the merger, increasing to $2.25 (9.0%)
during the second twelve months and to $2.375 (9.5%) thereafter. Dividends will
be cumulative and will accrue from and after the date of issue thereof, whether
or not such distributions are declared or there are funds of Cornerstone legally
available for payment of such distributions for any given distribution period.
Unless all cumulative distributions on the Series A Convertible Preferred
Shares and on capital stock on parity therewith have been paid or set aside in
full, then (i) no distribution (other than any payable solely in shares ranking
junior to the Series A Convertible Preferred Shares) may be declared or paid on
any shares ranking junior to the Series A Convertible Preferred Shares as to
distributions or as to liquidation; (ii) no shares of Cornerstone ranking junior
to the Series A Convertible Preferred Shares as to distributions or as to
liquidation can be purchased, redeemed or otherwise acquired by Cornerstone or
by any subsidiary of Cornerstone; and (iv) no shares of Cornerstone ranking
junior to the Series A Convertible Preferred Shares may be purchased, redeemed
or otherwise acquired for value by Cornerstone.
The holders of Cornerstone common shares are entitled to receive such
distributions as are declared by the Cornerstone Board.
Accordingly, following the merger, the Apple common shareholders will have
the right to receive payment of distributions which, unlike their current
distributions, will accrue even if not authorized, declared or paid. The amount
of their dividend will be fixed and therefore unable to be either increased or
decreased in the discretion of the Cornerstone Board in the future. Following
conversion into Cornerstone common shares, the holders will have rights only to
such distributions as are authorized and declared by the Cornerstone Board in
its discretion.
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VOTING RIGHTS
Holders of Apple common shares have the sole power to vote for the election
of Apple directors and for all other purposes without limitation, except as may
be required by law. Apple's shareholders, by vote of a majority of the
outstanding Apple common shares, may vote to approve a plan of merger or share
exchange, or to sell, lease, exchange, or otherwise dispose of all, or
substantially all, of Apple's property otherwise than in the usual and regular
course of business.
Except when distributions on the Series A Preferred Shares are six or more
quarters in arrears, holders of such shares will not be entitled to vote for the
election of Cornerstone directors or for any other purpose. Whenever
distributions on the Series A Convertible Preferred Shares are six or more
quarters in arrears, then the size of the Cornerstone Board will automatically
increase by two and holders of Series A Convertible Preferred Shares will have
the right to nominate and elect these two additional directors. These two
directors will continue to serve until all current distributions and all
distributions in arrears on the Series A Convertible Preferred Shares have been
paid in full or declared and set aside for payment. The rights of the holders of
the Series A Convertible Preferred Shares to nominate and elect directors will
cease when all current distributions and all distributions in arrears on the
Series A Convertible Preferred Shares have been paid in full or declared and set
aside for payment.
Holders of the Series A Convertible Preferred Shares will be entitled to
vote separately as a class when required under applicable Virginia law and with
respect to any amendment, alteration or repeal of any provision of the Series A
Convertible Preferred Shares or of the Cornerstone Articles that adversely
effects the Series A Convertible Preferred Shares.
Except as noted above, Cornerstone common shares have the sole voting power
to elect Cornerstone directors. Currently, the Cornerstone Board is divided into
three classes, as nearly equal in size as possible. The terms of one of the
three classes of Cornerstone directors expire each year.
Accordingly, following the merger and until conversion of the Series A
Convertible Preferred Shares, the Apple common shareholders will no longer have
the right to vote for the election of directors unless their preferential
distributions are substantially in and remain in arrears. Following conversion
into Cornerstone common shares, the holders will again have the right to vote
for the election of directors, subject to the rights of the holders of Series A
Convertible Preferred Shares who have not converted to elect directors as
described above.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of Apple, holders of Apple
common shares are entitled to be paid the balance of Apple's assets, if any,
remaining after payment of the $0.10 per share liquidation payment to the
holders of Apple Class B Convertible Shares.
Upon a liquidation, dissolution or winding up of Cornerstone, holders of
Series A Convertible Preferred Shares will be entitled to be paid $25 per share
in cash, plus all accrued but unpaid distributions thereon, and if the assets of
Cornerstone are insufficient to pay such amounts, payments shall be made to the
holders of Series A Convertible Preferred Shares on a pro rata basis. After
payments in full to the Series A Convertible Preferred Shares, holders of
Cornerstone common shares are entitled to be paid pro rata the balance of
Cornerstone assets remaining.
Accordingly, following the merger and until conversion of the Series A
Convertible Preferred Shares, the Apple common shareholders will have a
preference with respect to liquidation payments made by Cornerstone. Following
conversion into Cornerstone common shares, the holders will lose their right to
preferential liquidation payments and will again have liquidation rights similar
to those they had as holders of Apple common shares.
CONVERSION
Apple common shares and Cornerstone common shares are not convertible into
any other class of capital stock.
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Series A Convertible Preferred Shares are convertible into such number of
Cornerstone common shares equal to $25 divided by the conversion price times the
number of Series A Convertible Preferred Shares converted. The initial
conversion price is $15.80, is subject to adjustment as described below and
provides for the conversion of each Series A Convertible Preferred Share into
1.582 Cornerstone common shares. Common shares issued upon conversion will be
rounded to the nearest thousandth of a share, and no cash will be paid in lieu
of fractional shares.
If Cornerstone (i) distributes common shares as a distribution on
Cornerstone common shares or (ii) combines or reclassifies its outstanding
common shares, the conversion price will be adjusted so that the holder of any
Series A Convertible Preferred Shares surrendered for conversion after such
event will be entitled to receive the same aggregate number of common shares
that such holder would have owned or have been entitled to receive after the
happening of such event had the Series A Convertible Preferred Shares been
converted immediately prior to such event. Similarly, if Cornerstone issues
warrants or options to acquire Cornerstone common shares at below market prices,
the conversion price will also be adjusted to increase the number of Cornerstone
common shares to be received upon conversion.
REDEMPTION
Apple common shares and Cornerstone common shares are not redeemable by
Apple and Cornerstone respectively. Apple Class B Convertible Shares are also
not redeemable by Apple.
Series A Convertible Preferred Shares may be redeemed by Cornerstone after
the fifth anniversary of their issuance. At that time, Cornerstone may, at its
option, redeem all or any portion of the outstanding Series A Convertible
Preferred Shares for (i) an amount equal to, at its election, either the
liquidation payment (including accrued but unpaid distributions) to which
holders of the Series A Convertible Preferred Shares would be entitled or (ii)
the number of common shares of Cornerstone equal to (A) the liquidation price
described above plus accrued but unpaid distributions, divided by (B) the
conversion price as described above. Redemption of less than all outstanding
Series A Convertible Preferred Shares shall be done on a pro rata basis.
Cornerstone may also acquire Series A Convertible Preferred Shares for such
consideration as is acceptable to the holders thereof. If however, accrued but
unpaid distributions remain outstanding, Cornerstone can only acquire such
shares except in accordance with a purchase or exchange offer made on the same
terms to all holders of outstanding Series A Convertible Preferred Shares.
OTHER MATTERS
SHAREHOLDER PROPOSALS FOR ANNUAL MEETING
Any qualified Cornerstone shareholder wishing to make a proposal to be
acted upon at Cornerstone's Annual Meeting of Shareholders in 2000 must submit
such proposal, to be considered by Cornerstone for inclusion in the Proxy
Statement, to Cornerstone Realty Income Trust, Inc., 306 East Main Street,
Richmond, Virginia 23219, Attention: Secretary, no later than December 15, 1999.
With respect to shareholder proposals not included in Cornerstone's Proxy
Statement for the 2000 annual meeting, the persons named in the Board of
Directors' proxy for such meeting will be entitled to exercise the discretionary
voting power conferred by such proxy under the circumstances specified in Rule
14a-4(c) under the Securities Exchange Act of 1934, including with respect to
proposals received by Cornerstone after March 1, 2000.
If the merger is consummated, there will be no 1999 Annual Meeting of Apple
shareholders.
SEC rules set forth standards as to what shareholder proposals are required
to be included in a proxy statement for an annual meeting.
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OTHER
As of the date of this Joint Proxy Statement/Prospectus, the Cornerstone
Board knows of no matters other than as described in this Joint Proxy
Statement/Prospectus that are likely to be brought before the Cornerstone
Special Meeting. However, if any matters not now known come before the
Cornerstone Special Meeting, the persons named in the enclosed Proxy are
expected to vote the Cornerstone capital stock represented by such Proxy on such
matters in accordance with their best judgment.
As of the date of this Joint Proxy Statement/Prospectus, the Apple Board
knows of no matters other than as described in this Joint Proxy
Statement/Prospectus that are likely to be brought before the Apple Special
Meeting. However, if any matters not now known come before the Apple Special
Meeting, the persons named in the enclosed Proxy are expected to vote the Apple
capital stock represented by such Proxy on such matters in accordance with their
best judgment.
LEGAL MATTERS
The validity of the Series A Convertible Preferred Shares to be issued in
connection with the merger will be passed upon by McGuire, Woods, Battle &
Boothe LLP, counsel to Cornerstone. In addition, McGuire, Woods, Battle & Boothe
LLP will also pass on certain federal income tax consequences of the merger.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the Cornerstone
consolidated financial statements and schedule included in its Annual Report on
Form 10-K for the year ended December 31, 1998, as set forth in their report,
which is incorporated by reference in this prospectus and elsewhere in the
registration statement. The Cornerstone financial statements and schedule are
incorporated by reference in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the Apple
consolidated financial statements and schedule included in its Annual Report on
Form 10-K for the year ended December 31, 1998, as set forth in their report,
which is incorporated by reference in this prospectus and elsewhere in the
registration statement. The Apple financial statements and schedule are
incorporated by reference in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
The Statements of Income and Direct Operating Expenses of properties
purchased by Cornerstone referred to below, incorporated herein by reference in
this prospectus and registration statement, have been incorporated herein in
reliance on the following reports of L.P. Martin & Company, P.C., independent
certified public accountants, also incorporated herein by reference, and upon
the authority of that firm as experts in accounting and auditing: (1) a report
dated February 5, 1998 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Sterling Point Apartments for the twelve-month period
ended December 31, 1997; (2) a report dated April 8, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Hampton Pointe
Apartments for the twelve-month period ended February 28, 1998, (3) a report
dated April 8, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Edgewood Knoll Apartments for the twelve-month period ended
February 28, 1998, (4) a report dated June 25, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property The Timbers
Apartments for the twelve-month period ended April 30, 1998, (5) a report dated
August 6, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property The Gables Apartments for the twelve-month period ended May 31,
1998, and (6) a report dated November 5, 1998 with respect to the statement of
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income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Cape Landing Apartments for the
twelve-month period ended September 30, 1998.
The Statements of Income and Direct Operating Expenses of properties
purchased by Apple referred to below, incorporated herein by reference in this
prospectus and registration statement, have been incorporated herein in reliance
on following the reports of L.P. Martin & Company, P.C., independent certified
public accountants, also incorporated herein by reference, and upon the
authority of that firm as experts in accounting and auditing: (1) a report dated
March 25, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Main Park Apartments for the twelve-month period ended December 31,
1997, (2) a report dated April 6, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Timberglen Apartments for the twelve-month
period ended December 31, 1997, (3) a report dated April 14, 1998 with respect
to the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Copper Ridge
Apartments for the twelve-month period ended February 28, 1998, (4) a report
dated May 14, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Bitter Creek Apartments for the twelve-month period ended March 31,
1998, (5) a report dated July 16, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Summer Tree Apartments for the twelve-month
period ended May 31, 1998, (6) a report dated July 17, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Park Village
Apartments for the twelve-month period ended May 31, 1998, (7) a report dated
July 21, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Cottonwood Crossing Apartments for the twelve-month period ended
May 31, 1998, (8) a report dated May 14, 1998 with respect to the statement of
income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Pace's Point Apartments for the
twelve-month period ended March 31, 1998, (9) a report dated May 14, 1998 with
respect to the statement of income and direct operating expenses exclusive of
items not comparable to the proposed future operations of the property Pepper
Square Apartments for the twelve-month period ended March 31, 1998, (10) a
report dated May 14, 1998 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Emerald Oaks Apartments for the twelve-month period
ended March 31, 1998, (11) a report dated May 14, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Hayden's Crossing
Apartments for the twelve-month period ended March 31, 1998, (12) a report dated
May 14, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Newport Apartments for the twelve-month period ended March 31,
1998, (13) a report dated July 15, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Estrada Oaks Apartments for the twelve-month
period ended June 30, 1998, (14) report dated December 22, 1998 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Burney Oaks
Apartments for the twelve-month period ended September 30, 1998, (15) a report
dated November 23, 1998 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Brandywine Park Apartments for the twelve-month
period ended September 30, 1998, (16) a report dated January 21, 1999 with
respect to the statement of income and direct operating expenses exclusive of
items not comparable to the proposed future operations of the property The
Courts on Pear Ridge Apartments for the twelve-month period ended October 31,
1998, (17) a report dated January 22, 1999 with respect to the statement of
income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Sierra Ridge Apartments for
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the twelve-month period dated December 15, 1998 and (18) a report dated February
23, 1999 with respect to the statement of income and direct operating expenses
exclusive of items not comparable to the proposed future operations of the
property Grayson Square Apartments for the twelve-month period ended December
31, 1998.
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WHERE YOU CAN FIND MORE INFORMATION
Cornerstone and Apple file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Our SEC filings are also available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
"http://www.sec.gov." In addition, Cornerstone's SEC filings may be read and
copied at the NYSE, 20 Broad Street, New York, New York 10005. Cornerstone has
filed a Registration Statement on Form S-4 to register with the SEC the
Cornerstone Series A Convertible Preferred Shares to be issued to the
shareholders of Apple in the merger. This Joint Proxy Statement/Prospectus is a
part of that Registration Statement and constitutes a prospectus of Cornerstone
in addition to being a proxy statement of Cornerstone and Apple for the
Cornerstone meeting and the Apple meeting. As allowed by SEC rules, this Joint
Proxy Statement/Prospectus does not contain all the information you can find in
the Registration Statement or the exhibits to the Registration Statement.
The SEC allows us to "incorporate by reference" information into this Joint
Proxy Statement/Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
Joint Proxy Statement/Prospectus, except for any information superseded by
information in this Joint Proxy Statement/Prospectus. This Joint Proxy
Statement/Prospectus incorporates by reference the documents set forth below
that we have previously filed with the SEC. These documents contain important
information about Apple and Cornerstone.
CORNERSTONE REALTY INCOME TRUST, INC. SEC FILINGS (FILE NO. 1-12875)
o Current Report on Form 8-K, filed January 29, 1998, relating to a
property acquisition.
o Current Report on Form 8-K/A, filed March 30, 1998, containing
financial statements relating to a property acquisition.
o Current Report on Form 8-K, filed June 12, 1998, relating to two
property acquisitions and containing financial statements relating to
the two property acquisitions.
o Current Report on Form 8-K, filed June 17, 1998, relating to a
property acquisition.
o Current Report on Form 8-K, filed July 17, 1998, relating to a
property acquisition.
o Current Report on Form 8-K/A, filed August 13, 1998, containing
financial statement relating to a property acquisition.
o Current Report on Form 8-K, filed August 26, 1998, relating to a
property acquisition.
o Current Report on Form 8-K/A, filed September 14, 1998, containing
financial statements relating to a property acquisition.
o Current Report on Form 8-K, filed December 28, 1998, relating to a
property acquisition and containing financial statements relating to
the property acquisition.
o Annual Report on Form 10-K for the Year ended December 31, 1998 and
Amendment No. 1 on Form 10-K/A filed April 26, 1999.
o Quarterly Report on Form 10-Q for the three months ended March 31,
1999.
o Current Report on Form 8-K, filed on April 5, 1999, relating to the
merger.
o Current Report on Form 8-K, filed on April 9, 1999, relating to
certain property acquisitions.
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APPLE RESIDENTIAL INCOME TRUST, INC. SEC FILINGS (FILE NO. 0-23983)
o Current Report on Form 8-K, filed February 18, 1998, relating to a
property acquisition.
o Current Report on Form 8-K, filed February 23, 1998, relating to a
property acquisition.
o Current Report on Form 8-K, filed April 15, 1998, relating to a
property acquisition.
o Current Report on Form 8-K/A, filed April 17, 1998, containing
financial statements relating to a property acquisition.
o Current Report on Form 8-K/A, filed April 22, 1998, containing
financial statements relating to a property acquisition.
o Current Report on Form 8-K/A, filed May 4, 1998, containing financial
statements relating to a property acquisition.
o Current Report on Form 8-K/A, filed May 13, 1998, containing financial
statements relating to a property acquisition.
o Current Report on Form 8-K, filed May 22, 1998, relating to a property
acquisition.
o Current Report on Form 8-K, filed June 10, 1998, relating to a
property acquisition.
o Current Report on Form 8-K/A, filed July 7, 1998, containing financial
statements relating to a property acquisition.
o Current Report on Form 8-K, filed July 16, 1998, relating to a
property acquisition.
o Current Report on Form 8-K, filed August 3, 1998, relating to seven
property acquisitions and containing financial statements relating to
the seven property acquisitions.
o Current Report on Form 8-K/A, filed August 4, 1998, containing
financial statements relating to a property acquisition.
o Current Report on Form 8-K/A, filed August 4, 1998, containing
financial statements relating to a property acquisition.
o Current Report on Form 8-K, filed November 12, 1998, relating to a
property acquisition.
o Current Report on Form 8-K, filed December 2, 1998, relating to a
property acquisition.
o Current Report on Form 8-K/A, filed on January 8, 1999, containing
certain financial statements relating to two property acquisitions.
o Current Report on Form 8-K, filed on January 20, 1999, relating to a
property acquisition.
o Current Report on Form 8-K/A, filed on January 29, 1999, containing
certain financial statements relating to a property acquisition.
o Current Report on Form 8-K, filed on February 16, 1999, relating to a
property acquisition.
o Current Report on Form 8-K/A, filed on March 8, 1999, containing
certain financial statements relating to a property acquisition.
o Annual Report on Form 10-K for the Year ended December 31, 1998.
o Quarterly Report on Form 10-Q for the three months ended March 31,
1999.
o Current Report on Form 8-K, filed on April 5, 1999, relating to the
merger.
o Current Report on Form 8-K/A filed April 14, 1999, containing certain
financial statements relating to a property acquisition.
o Current Report on Form 8-K, filed April 26, 1999, relating to a
property acquisition.
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We are also incorporating by reference additional documents that we file
with the SEC between the date of this Joint Proxy Statement/Prospectus and the
dates of the meetings of our shareholders.
Cornerstone has supplied all information contained or incorporated by
reference in this Joint Proxy Statement/Prospectus relating to Cornerstone, and
Apple has supplied all such information relating to Apple.
If you are a shareholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through us or the SEC.
Documents incorporated by reference are available from us without charge,
excluding all exhibits unless we have specifically incorporated by reference an
exhibit in this Joint Proxy Statement/Prospectus. Shareholders may obtain
documents incorporated by reference in this Joint Proxy Statement/Prospectus by
requesting them in writing or by telephone from the appropriate party at the
following address:
Cornerstone Realty Income Trust, Inc. Apple Residential Income Trust, Inc.
306 East Main Street 306 East Main Street
Richmond, Virginia 23219 Richmond, Virginia 23219
Attention: Secretary Attention: Secretary
Telephone: (804) 643-1761 Telephone: (804) 643-1761
If you would like to request documents from us, please do so by June ___,
1999 to receive them prior to the Cornerstone and Apple shareholder meetings.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER
AGREEMENT, THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS
JOINT PROXY STATEMENT/PROSPECTUS IS DATED JUNE ___, 1999. YOU SHOULD NOT ASSUME
THAT THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THIS
JOINT PROXY STATEMENT/PROSPECTUS TO SHAREHOLDERS NOR THE ISSUANCE OF SHARES OF
CORNERSTONE SERIES A CONVERTIBLE PREFERRED SHARES IN THE MERGER SHALL CREATE ANY
IMPLICATION TO THE CONTRARY.
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ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF MARCH 30, 1999
AMONG
CORNERSTONE REALTY INCOME TRUST, INC.,
APPLE RESIDENTIAL INCOME TRUST, INC.,
AND
CORNERSTONE ACQUISITION COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE I ...................................................................... 1
SECTION 1.1 The Merger. ...................................................... 1
SECTION 1.2 Closing. ......................................................... 1
SECTION 1.3 Effective Time. .................................................. 1
SECTION 1.4 Effects of the Merger. ........................................... 1
SECTION 1.5 Articles and By-Laws. ............................................ 2
SECTION 1.6 Status of Cornerstone Sub. ....................................... 2
ARTICLE II ..................................................................... 2
SECTION 2.1 Effect on Capital Stock. ......................................... 2
SECTION 2.2 Exchange Procedures. ............................................. 3
ARTICLE III .................................................................... 4
SECTION 3.1 Representations and Warranties of Apple. ......................... 4
SECTION 3.2 Representations and Warranties of the Company. ................... 11
ARTICLE IV ..................................................................... 18
SECTION 4.1 Conduct of Business by Apple. .................................... 18
SECTION 4.2 Conduct of Business by the Company. .............................. 19
SECTION 4.3 Other Actions. ................................................... 20
ARTICLE V ...................................................................... 20
SECTION 5.1 Preparation of the Registration Statement and the Proxy Statement;
Shareholders Meetings. ..................................................... 20
SECTION 5.2 Access to Information; Confidentiality. .......................... 21
SECTION 5.3 Best Efforts; Notification. ...................................... 22
SECTION 5.4 Affiliates. ...................................................... 23
SECTION 5.5 Tax Treatment. ................................................... 23
SECTION 5.6 No Solicitation of Transactions. ................................. 23
SECTION 5.7 Public Announcements. ............................................ 24
SECTION 5.8 Listing. ......................................................... 24
SECTION 5.9 Transfer and Gains Taxes. ........................................ 24
SECTION 5.10 Employee Matters. ............................................... 24
SECTION 5.11 Indemnification. ................................................ 25
SECTION 5.12 Comfort Letter. ................................................. 25
SECTION 5.13 Efforts to Fulfill Conditions. .................................. 26
SECTION 5.14 Cooperation of the Parties. ..................................... 26
ARTICLE VI ..................................................................... 26
SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger. ...... 26
SECTION 6.2 Conditions to Obligations of the Company. ........................ 26
SECTION 6.3 Conditions to Obligation of Apple. ............................... 27
</TABLE>
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<TABLE>
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ARTICLE VII .............................................................. 28
SECTION 7.1 Apple Board Actions. ....................................... 28
ARTICLE VIII ............................................................. 29
SECTION 8.1 Termination. ............................................... 29
SECTION 8.2 Expenses. .................................................. 30
SECTION 8.3 Effect of Termination. ..................................... 31
SECTION 8.4 Amendment. ................................................. 31
SECTION 8.5 Extension; Waiver. ......................................... 31
ARTICLE IX ............................................................... 31
SECTION 9.1 Nonsurvival of Representations and Warranties. ............. 31
SECTION 9.2 Notices. ................................................... 32
SECTION 9.3 Interpretation. ............................................ 33
SECTION 9.4 Counterparts. .............................................. 33
SECTION 9.5 Entire Agreement; No Third-Party Beneficiaries. ............ 33
SECTION 9.6 Governing Law. ............................................. 33
SECTION 9.7 Assignment. ................................................ 33
SECTION 9.8 Enforcement. ............................................... 33
SECTION 9.9 Incorporation. ............................................. 33
SECTION 9.10 Non-Recourse. ............................................. 33
ARTICLE X ................................................................ 34
SECTION 10.1 Certain Definitions. For purposes of this Agreement: ...... 34
EXHIBIT A FORM OF ARTICLES OF AMENDMENT TO THE AMENDED AND
RESTATED ARTICLES OF INCORPORATION OF THE COMPANY
DESIGNATING THE PREFERRED SHARES (SECTION 2.1(A)(i))
</TABLE>
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AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of March 30, 1999,
among CORNERSTONE REALTY INCOME TRUST, INC., a Virginia corporation (the
"Company"), APPLE RESIDENTIAL INCOME TRUST, INC., a Virginia corporation
("Apple"), and CORNERSTONE ACQUISITION COMPANY, a Virginia corporation
("Cornerstone Sub").
RECITALS
(a) The Boards of Directors of the Company and Apple have determined that
it is advisable and in the best interest of their respective companies and their
shareholders to consummate the strategic business combination involving Apple
and the Company described herein, pursuant to which Apple will merge with
Cornerstone Sub and Cornerstone Sub will be the surviving corporation in such
merger (the "Merger") and each issued and outstanding common share, no par
value, of Apple (the "Apple Common Shares") will be converted into the right to
receive the Merger Consideration (as defined below); and
(b) For federal income tax purposes, it is intended that the Merger qualify
as a tax-free reorganization under Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that this Agreement constitutes a plan of
reorganization under Section 368 of the Code; and
(c) Certain terms used herein shall have the meanings assigned to them in
Article X.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Virginia Stock Corporation
Act (the "VSCA"), Apple shall be merged with Cornerstone Sub at the Effective
Time (as defined herein) in accordance with this Agreement and a Plan of Merger
(the "Plan of Merger) reflecting the terms of, and consistent with, this
Agreement, and in a form required by the VSCA, with such completions, additions
and substitutions conforming to the terms of this Agreement as the parties shall
approve, such approval to be conclusively evidenced by their causing the Plan of
Merger containing such completions, additions or substitutions to be filed in
accordance with law. Following the Merger, the separate corporate existence of
Apple shall cease and Cornerstone Sub shall continue as the surviving
corporation and shall succeed to and assume all the rights and obligations of
Apple in accordance with the VSCA.
SECTION 1.2 Closing. The closing of the Merger will take place at a
mutually agreeable time and place and on a date to be specified by the parties,
which (subject to satisfaction or waiver of the conditions set forth in Sections
6.2 and 6.3) shall be no later than the second business day after satisfaction
or waiver of the conditions set forth in Section 6.1 (the "Closing Date").
SECTION 1.3 Effective Time. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article VI, the parties
shall file the articles of merger or other appropriate documents for the Merger
(the "Articles of Merger") executed in accordance with Section 13.1 -720 of the
VSCA and shall make all other filings or recordings required under the VSCA to
effect the Merger. The Merger shall become effective at such time as the
Articles of Merger have been duly filed with the State Corporation Commission of
the Commonwealth of Virginia, or at such later time as the Company and Apple
shall specify in the Articles of Merger (the time and the day the Merger becomes
effective being, respectively, the "Effective Time" and the "Effective Day"), it
being understood that the parties shall cause the Effective Time to occur on the
Closing Date.
SECTION 1.4 Effects of the Merger. The Merger shall have the effects set
forth in the VSCA.
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SECTION 1.5 Articles and By-Laws. On the Closing Date, the Articles of
Incorporation and By-Laws of Cornerstone Sub and the Articles of Incorporation
of the Company (the "Company Charter") and the By-Laws of the Company (the
"Company By-Laws"), in each case as in effect immediately prior to the Effective
Time, shall not be affected by the Merger
SECTION 1.6 Status of Cornerstone Sub. It is understood that Cornerstone
Sub will elect to be taxed as a REIT (as defined herein) under the Code and that
in order to satisfy certain share ownership requirements imposed upon REITs by
the Code, up to 0.01% of the outstanding common shares of Cornerstone Sub may be
owned by Persons other than the Company, and the balance of such common shares
shall be owned by the Company.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS
SECTION 2.1 Effect on Capital Stock. By virtue of the Merger and without
any action on the part of the holder of any Apple Common Shares:
(a) Conversion of Apple Common Shares.
(i) At the Effective Time, each issued and outstanding Apple
Common Share shall be converted (the "Exchange Ratio") into the right
to receive from the Company 0.400 fully paid and nonassessable Series
A Convertible Preferred Shares of the Company, no par value (the
"Preferred Shares"). The Preferred Shares shall have such
characteristics and rights as are set forth in the form of Articles of
Amendment to the Articles of Incorporation of the Company attached
hereto as Exhibit A (the "Articles of Amendment"). The Articles of
Amendment shall be duly filed with the State Corporation Commission of
the Commonwealth of Virginia before the issuance of the Preferred
Shares.
(ii) At the Effective Time, all such Apple Common Shares shall no
longer be outstanding and shall automatically be cancelled and retired
and all rights with respect thereto shall cease to exist, and each
holder of any such Apple Common Shares shall cease to have any rights
with respect thereto, except the right to receive, in accordance with
Section 2.2(c), the Preferred Shares required to be issued under this
Section 2.1(a) (the "Merger Consideration") and any dividends or other
distributions to which such holder is entitled pursuant to Section
2.2(d), in each case, without interest and less any required
withholding taxes.
(b) Provision for Class B Convertible Shares.
(i) At the Effective Time, each issued and outstanding Apple
Class B Convertible Share (as defined herein) shall be converted into
the right to receive from the Company 3.2 fully paid and nonassessable
Preferred Shares.
(ii) At the Effective Time, all such Apple Class B Convertible
Shares shall no longer be outstanding and shall automatically be
canceled and retired and all rights with respect thereto shall cease
to exist, and each holder of any such Apple Class B Convertible Shares
shall cease to have any rights with respect thereto, except the right
to receive, in accordance with Section 2.2(c), the Preferred Shares
required to be issued pursuant to Section 2.1(b)(i).
(c) Uncertificated Shares. The Preferred Shares shall be
uncertificated.
(d) Global Certificated Shares. At such time as the Preferred Shares
are listed on the New York Stock Exchange ("NYSE") in accordance with
Section 5.8, the Preferred Shares will be issued as fully registered
securities, represented by one or more global certificates (each a "Global
Certificate") that will be deposited with and registered in the name of The
Depository Trust Company, New York, New York ("DTC") or its nominee, in
conformance with the rules of the NYSE relating to securities listed on the
NYSE. DTC holds securities that its participants
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("Participants") deposit with DTC. DTC also facilitates the settlement
among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct Participants include
securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC
is owned by a number of its Direct Participants and by the NYSE, the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others, such as
securities brokers and dealers, banks and trust companies that clear
transactions through or maintain a direct or indirect custodial
relationship with a Direct Participant ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Securities and
Exchange Commission. DTC's records will reflect ownership of the Preferred
Shares as represented by the Direct or Indirect Participants. The ownership
interest of each actual owner of each Preferred Share ("Beneficial Owner")
will in turn be recorded on the Direct and Indirect Participants' records.
Transfers of ownership interests in the Preferred Shares will be
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners of the Preferred Shares, in accordance with the
procedures of DTC. The Preferred Shares deposited with DTC will be
registered in the name of DTC's nominee, Cede & Co. The deposit of the
Preferred Shares with DTC and their registration in the name of Cede & Co.
will effect no change in the beneficial ownership of the Preferred Shares.
DTC's records reflect only the identity of the Direct Participants to whose
accounts such Preferred Shares are credited, which may or may not be the
Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
(e) Certain Ownership Limits. Notwithstanding the foregoing, the
parties understand that the rights of each shareholder of the Company under
this Section 2.1 will be subject to the ownership limitations and other
related provisions contained in the Company By-Laws.
SECTION 2.2 Exchange Procedures.
(a) Exchange Agent. Prior to the Effective Time, the Company shall appoint
a bank or trust company to act as exchange agent (the "Exchange Agent") for the
exchange of the Merger Consideration for the issued and outstanding Apple Common
Shares.
(b) Provision of Shares. The Company shall provide to the Exchange Agent on
or before the Effective Time, for the benefit of the holders of Apple Common
Shares, sufficient Preferred Shares issuable in exchange for the issued and
outstanding Apple Common Shares pursuant to Section 2.1 .
(c) Exchange of Apple Common Shares for Preferred Shares. As soon as
reasonably practicable after the Effective Time, the Exchange Agent shall mail
to each holder of record of outstanding Apple Common Shares which were converted
into the right to receive the Merger Consideration pursuant to Section 2.1a
letter of notification (which shall be in a form and have such other provisions
as the Company may reasonably specify) describing the Merger Consideration
issued to each such holder as a consequence of the Merger. In addition, as soon
as reasonably practicable after the Effective Time, the Exchange Agent shall
mail to each holder of record of outstanding Apple Class B Convertible Shares a
letter of notification (which shall be in a form and have such other provisions
as the Company may reasonably specify) describing the Preferred Shares issued
pursuant to Section 2.1(b)(i).
(d) Distributions with Respect to Apple Common Shares. On any regular
dividend date and at the Effective Time, Apple may, at the election of its Board
of Directors or its Audit Committee, if the Board of Directors or Audit
Committee deems such action to be prudent, appropriate or otherwise advisable,
declare, set aside and pay to the holders of Apple Common Shares a cash dividend
at a rate equal to not more than $0.07 per Apple Common Share per month for each
month (with a pro rated amount being paid for partial months based on the actual
number of days elapsed during the month) between the most recent regular
dividend date and the Effective Day.
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(e) No Further Ownership Rights in Apple Common Shares. All Merger
Consideration issued upon exchange of Apple Common Shares in accordance with the
terms of this Article II shall be deemed to have been issued in full
satisfaction of all rights pertaining to the Apple Common Shares, subject,
however, to the obligation of the Company to pay, without interest and not more
than 60 days following the Effective Time, any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by Apple on such shares in accordance with the terms of this
Agreement or prior to the date of this Agreement and which remain unpaid at the
Effective Time and have not been paid prior to such exchange, and there shall be
no further registration of transfers on the stock transfer books of Apple of the
Apple Common Shares which were outstanding immediately prior to the Effective
Time.
(f) No Liability. None of the Company, Cornerstone Sub, Apple or the
Exchange Agent shall be liable to any person in respect of any Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. Any portion of the Merger
Consideration delivered to the Exchange Agent pursuant to this Agreement that
remains unclaimed for six months after the Effective Time shall be redelivered
by the Exchange Agent to the Company, upon demand, and any holders of Apple
Common Shares which have not been exchanged as contemplated by Section 2.2(c)
shall thereafter look only to the Company for delivery of the Merger
Consideration, subject to applicable abandoned property, escheat and other
similar laws.
(g) Fractional Shares. Fractional Preferred Shares, rounded to the nearest
one one-thousandth (1/1000) of a Preferred Share, shall be issued as necessary
upon the exchange of Apple Common Shares.
(h) Withholding Rights. The Company or the Exchange Agent shall be entitled
to deduct and withhold from the Merger Consideration otherwise payable pursuant
to this Agreement to any holder of Apple Common Shares or Preferred Shares such
amounts as the Company or the Exchange Agent is required to deduct and withhold
with respect to the making of such payment under the Code, or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld by
the Company or the Exchange Agent, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the holder of Apple Common
Shares or Preferred Shares, as the case may be, in respect of which such
deduction and withholding was made by the Company or the Exchange Agent.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of Apple. Apple represents and
warrants to the Company as follows:
(a) Organization, Standing and Corporate Power of Apple. Apple is a
corporation duly organized and validly existing under the laws of Virginia
and has the requisite corporate power and authority to carry on its
business as now being conducted. Apple is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature
of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed, individually or in the
aggregate, would not have a material adverse effect on the business,
properties, assets, financial condition or results of operations of Apple
and the Apple Subsidiaries (as defined below) taken as a whole (an "Apple
Material Adverse Effect"). As used herein, "Apple Subsidiary" shall mean
any corporation, partnership, limited liability company, joint venture or
other legal entity of which Apple (either directly or through or together
with another Apple Subsidiary) owns any capital stock or other equity
interests of such entity.
(b) Apple Subsidiaries. Schedule 3.1(b) to the Apple Disclosure Letter
(as defined herein) sets forth each Apple Subsidiary and the ownership
interest therein of Apple. Except as set forth in Schedule 3.1(b) to the
Apple Disclosure Letter, (i) all the outstanding shares of capital stock
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of each Apple Subsidiary that is a corporation have been validly issued,
are fully paid and nonassessable and are owned by Apple, by another Apple
Subsidiary or by Apple and another Apple Subsidiary, free and clear of all
pledges, claims, liens, charges, encumbrances and security interests of any
kind or nature whatsoever (collectively, "Liens") and (ii) all equity
interests in each Apple Subsidiary that is a partnership or limited
liability company are owned by Apple, by another Apple Subsidiary or by
Apple and another Apple Subsidiary, free and clear of all Liens. Each Apple
Subsidiary that is a corporation is duly incorporated and validly existing
under the laws of its jurisdiction of incorporation and has the requisite
corporate power and authority to carry on its business as now being
conducted and each Apple Subsidiary that is a partnership or limited
liability company is duly organized and validly existing under the laws of
its jurisdiction of organization and has the requisite power and authority
to carry on its business as now being conducted. Each Apple Subsidiary is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary,
other than in such jurisdictions where the failure to be so qualified or
licensed, individually or in the aggregate, would not have an Apple
Material Adverse Effect. Except for interests in the Apple Subsidiaries,
neither Apple nor any Apple Subsidiary owns directly or indirectly any
interest or investment (whether equity or debt) in any corporation,
partnership, joint venture, business, trust or entity (other than
investments in short-term investment securities).
(c) Capital Structure. The authorized capital stock of Apple consists
of 50,000,000 Apple Common Shares and 200,000 Class B Convertible Shares,
no par value (the "Apple Class B Convertible Shares"). On the date hereof,
(i) 30,510,275 Apple Common Shares and 200,000 Apple Class B Convertible
Shares were issued and outstanding, (ii) 1,895,277 Apple Common Shares were
available for issuance under Apple 's stock option plans (the "Apple Share
Plans"), and (iii) 396,037 Apple Common Shares were reserved for issuance
upon exercise of outstanding stock options to purchase Apple Common Shares
granted under the Apple Share Plans or otherwise (the "Apple Common Shares
Options"). On the date of this Agreement, except as set forth above in this
Section 3.1(c), no shares of capital stock or other voting securities of
Apple were issued, reserved for issuance or outstanding. All outstanding
shares of capital stock of Apple are duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights. Except (A) for
the Apple Class B Convertible Shares and the Apple Common Shares Options,
(B) as set forth in Schedule 3.1(c) to the Apple Disclosure Letter, and (C)
as otherwise permitted under Section 4.1, there are no outstanding
securities, options, stock appreciation rights, warrants, calls, rights,
commitments, agreements, arrangements or undertakings of any kind to which
Apple or any Apple Subsidiary is a party or by which such entity is bound,
obligating Apple or any Apple Subsidiary to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock,
voting securities or other ownership interests of Apple or any Apple
Subsidiary or obligating Apple or any Apple Subsidiary to issue, grant,
extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking.
(d) Authority; Noncontravention; Consents. Apple has the requisite
corporate power and authority to enter into this Agreement and, subject to
approval of the Merger, this Agreement and the other transactions
contemplated hereby by the requisite vote of the holders of the Apple
Common Shares (the "Apple Common Shareholder Approvals"), to consummate the
Merger and the other transactions contemplated by this Agreement. The
execution and delivery of this Agreement by Apple and the consummation by
Apple of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of Apple, subject to receipt of
the Apple Common Shareholder Approvals. This Agreement has been duly
executed and delivered by Apple and constitutes valid and binding
obligations of Apple, enforceable against Apple in accordance with its
terms, subject to applicable bankruptcy, insolvency, moratorium or other
similar laws relating to creditors' rights and general principles of
equity. Except as set forth in Schedule 3.1(d) to the Apple Disclosure
Letter, the execution and delivery of this Agreement by Apple do not, and
the consummation of the transactions contemplated
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hereby and compliance by Apple with the provisions of this Agreement will
not, conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of a
material benefit under, or result in the creation of any Lien upon any of
the properties or assets of Apple or any Apple Subsidiary under, (i) the
charter or by-laws of Apple or the comparable charter or organizational
documents or partnership or similar agreement (as the case may be) of any
Apple Subsidiary, each as amended or supplemented to the date of this
Agreement, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, reciprocal easement agreement, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Apple or
any Apple Subsidiary or their respective properties or assets or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance,
rule or regulation (collectively, "Laws") applicable to Apple or any Apple
Subsidiary, or their respective properties or assets, other than, in the
case of clause (ii) or (iii), any such conflicts, violations, defaults,
rights or Liens that individually or in the aggregate would not (x) have an
Apple Material Adverse Effect or (y) prevent the consummation of the Merger
or the other transactions contemplated hereby. No consent, approval, order
or authorization of, or registration, declaration or filing with, any
federal, state or local government or any court, administrative or
regulatory agency or commission or other governmental authority or agency
(a "Governmental Entity"), is required by or with respect to Apple or any
Apple Subsidiary in connection with the execution and delivery of this
Agreement by Apple or the consummation by Apple of any of the transactions
contemplated hereby and thereby, except for (i) the filing with the
Securities and Exchange Commission (the "SEC") of (x) a proxy statement
relating to the approval by Apple shareholders of the Merger and the other
transactions contemplated hereby (as amended or supplemented from time to
time, the "Proxy Statement"), (y) the registration statement on Form S-4 of
the Company, of which the Proxy Statement shall be a part (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") relating to the issuance of the Merger Consideration, and
(z) such reports under Section 13(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as may be required in connection
with this Agreement, the Merger and the other transactions contemplated by
this Agreement, (ii) such filings as may be required in connection with the
payment of any Transfer and Gains Taxes (as defined herein), and (iii) such
other consents, approvals, orders, authorizations, registrations,
declarations and filings (A) as are set forth in Schedule 3.1(d) to the
Apple Disclosure Letter or (B) as may be required under federal, state,
local or foreign Environmental Laws (as defined herein) or (C) which, if
not obtained or made, would not prevent or delay in any material respect
the consummation of the Merger or the other transactions contemplated
hereby or otherwise prevent Apple from performing its obligations under
this Agreement in any material respect or have, individually or in the
aggregate, an Apple Material Adverse Effect.
(e) SEC Documents; Financial Statements; Undisclosed Liabilities.
Apple has filed all required reports, schedules, forms, statements and
other documents with the SEC since January 1, 1997 (the "Apple SEC
Documents"). All of the Apple SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Apple SEC Documents. None of the Apple SEC
Documents at the time of filing contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, except to the
extent such statements have been modified or superseded by later filed
Apple SEC Documents. Other than as set forth in Schedule 3.1(e) to the
Apple Disclosure Letter, there is no unresolved violation, criticism or
exception by any Governmental Entity of which Apple has received written
notice with respect to any Apple report or statement which, if resolved in
a manner unfavorable to Apple, could have an Apple Material Adverse Effect.
The consolidated financial statements of Apple included in the Apple SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations
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of the SEC with respect thereto, have been prepared in accordance with
generally accepted accounting principles ("GAAP") (except, in the case of
interim financial statements, as permitted by Forms 10-Q or 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with
the applicable requirements of GAAP, the consolidated financial position of
Apple and the Apple Subsidiaries taken as a whole, as of the dates thereof
and the consolidated results of operations and cash flows for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments). Apple has no Apple Subsidiaries which are not
consolidated for accounting purposes.
(f) Absence of Certain Changes or Events. Except as disclosed in the
Apple SEC Documents or in Schedule 3.1(f) to the Apple Disclosure Letter,
since the date of the most recent financial statements included in the
Apple SEC Documents (the "Apple Financial Statement Date") and to the date
of this Agreement, but not thereafter with respect to clause (a) of this
Section 3.1(f), Apple and the Apple Subsidiaries have conducted their
business only in the ordinary course and there has not been (a) any
material adverse change in the business, financial condition or results of
operations of Apple and the Apple Subsidiaries taken as a whole, that has
resulted or would result, individually or in the aggregate, in Apple
Economic Losses (as defined in Section 6.2 below) of $2,000,000 or more (an
"Apple Material Adverse Change"), nor has there been any occurrence or
circumstance that with the passage of time would reasonably be expected to
result in an Apple Material Adverse Change, (b) except for regular
quarterly distributions (in the case of Apple) not in excess of $0.30 per
Apple Common Share with customary record and payment dates, any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the Apple Common
Shares, (c) any split, combination or reclassification of any Apple Common
Shares or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for, or giving the
right to acquire by exchange or exercise, shares of its beneficial interest
or any issuance of an ownership interest in, any Apple Subsidiary except as
contemplated by this Agreement, (d) any damage, destruction or loss,
whether or not covered by insurance, that has or would have an Apple
Material Adverse Effect, (e) any change in accounting methods, principles
or practices by Apple or any Apple Subsidiary materially affecting its
assets, liabilities or business, except insofar as may have been disclosed
in Apple SEC Documents or required by a change in GAAP or (f) any amendment
of any employment, consulting, severance, retention or any other agreement
between Apple and any officer or director of Apple.
(g) Litigation. Except as disclosed in the Apple SEC Documents or in
Schedule 3.1(g) to the Apple Disclosure Letter, and other than personal
injury and other routine tort litigation arising from the ordinary course
of operations of Apple and the Apple Subsidiaries which is covered by
adequate insurance, there is no suit, action or proceeding pending or, to
the knowledge of Apple, threatened against or affecting Apple or any Apple
Subsidiary that, individually or in the aggregate, could reasonably be
expected to (i) have an Apple Material Adverse Effect or (ii) prevent the
consummation of the Merger or any of the other transactions contemplated
hereby, nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against Apple or any Apple
Subsidiary having, or which, insofar as reasonably can be foreseen, in the
future would have, any such effect.
(h) Benefit Plans; ERISA Compliance.
(i) All employee benefits plans and other benefit arrangements
covering employees of Apple and the Apple Subsidiaries will be listed
in the Apple Disclosure Letter. True and complete copies of the Apple
Benefit Plans (as defined herein) have been made available to the
Company. Except as disclosed in the Apple SEC Documents or in Schedule
3.1(h)(i) to the Apple Disclosure Letter, since the date of the most
recent audited financial statements included in the Apple SEC
Documents, there has not been any adoption or amendment in any
material respect by Apple or any Apple Subsidiary of any bonus,
pension, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock
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option, phantom stock, retirement, vacation, severance, disability,
death benefit, hospitalization, medical or other employee benefit
plan, arrangement or understanding (whether or not legally binding)
providing benefits to any current or former employee, officer or
director of Apple or any Apple Subsidiary or any person affiliated
with Apple under Section 414(b), (c), (m) or (o) of the Code
(collectively, " Apple Benefit Plans").
(ii) Except as described in the Apple SEC Documents or in
Schedule 3.1(h)(ii) to the Apple Disclosure Letter or as would not
have an Apple Material Adverse Effect, (A) all Apple Benefit Plans,
including any such plan that is an "employee benefit plan" as defined
in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), are in compliance with all applicable
requirements of law, including ERISA and the Code, and (B) neither
Apple nor any Apple Subsidiary has any liabilities or obligations with
respect to any such Apple Benefit Plan, whether accrued, contingent or
otherwise (other than obligations to make contributions and pay
benefits and administrative costs incurred in the ordinary course),
nor to the knowledge of Apple are any such liabilities or obligations
expected to be incurred. Except as set forth in Schedule 3.1(h)(ii) to
the Apple Disclosure Letter, the execution of, and performance of the
transactions contemplated in, this Agreement will not (either alone or
together with the occurrence of any additional or subsequent events)
constitute an event under any Apple Benefit Plan, policy, arrangement
or agreement, trust or loan that will or may result in any payment
(whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee or director.
The only severance agreements or severance policies applicable to
Apple or the Apple Subsidiaries are the agreement and policies
specifically referred to in Schedule 3.1(h)(ii) to the Apple
Disclosure Letter.
(iii) Except as may be set forth in Schedule 3.1(h)(iii) to the
Apple Disclosure Letter, there are no pending or, to the Knowledge of
Apple, threatened claims against or otherwise involving any of the
Apple Benefit Plans and no suit, action or other litigation (excluding
claims for benefits incurred in the ordinary course of Apple Benefit
Plan activities) has been brought against or with respect to any such
Apple Benefit Plan, except for any of the foregoing which would not
have an Apple Material Adverse Effect.
(i) Taxes.
(i) Each of Apple and each Apple Subsidiary has timely filed all
material Tax Returns (as defined herein) and reports required to be
filed by it (after giving effect to any filing extension properly
granted by a Governmental Entity having authority to do so). Each such
Tax Return is true, correct and complete in all material respects.
Apple and each Apple Subsidiary have paid (or Apple has paid on their
behalf), within the time and manner prescribed by law, all material
Taxes (as defined herein) that are due and payable. As used in this
Agreement, "Taxes" shall mean any federal, state, local or foreign
income, gross receipts, license, payroll, employment withholding,
property, sales, excise or other tax or governmental charges of any
nature whatsoever, together with any penalties, interest or additions
thereto and "Tax Return" shall mean any return, declaration, report,
claim for refund, or information return or statement relating to
Taxes, including any schedule or attachment thereto, and including any
amendment thereof.
(ii) Apple (A) for all of its taxable years commencing with the
year ending December 31, 1997 through the most recent December 31, has
been subject to taxation as a real estate investment trust under the
Code ("REIT") within the meaning of Section 856 of the Code and has
satisfied the requirements to qualify as a REIT for such years, (B)
has operated, and intends to continue to operate, in such a manner as
to qualify as a REIT for its tax year ending December 31, 1999, and
(C) has not taken or omitted to take any action which could reasonably
be expected to result in a challenge to its status as a REIT, and, to
Apple 's Knowledge, no such challenge is pending or threatened. Each
Apple Subsidiary which is a
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partnership or files Tax Returns as a partnership for federal income
tax purposes has since its inception been classified for federal
income tax purposes as a partnership and not as a corporation or as an
association taxable as a corporation.
(iii) Except as may be set forth in Schedule 3.1(i)(iii) to the
Apple Disclosure Letter, neither Apple nor any of its Subsidiaries is
a party to any pending action or proceeding by any governmental
authority for assessment or collection of taxes, and no claim for
assessment or collection of taxes has been asserted against it.
(j) No Loans or Payments to Employees, Officers or Directors. Except
as set forth in the Apple SEC Documents, or Schedule 3.1(h)(ii) or 3.1(j)
to the Apple Disclosure Letter or as otherwise specifically provided for in
this Agreement there is no (i) loan outstanding from or to any employee,
officer or director of Apple, (ii) employment or severance contract or
other arrangement with respect to severance with respect to any employee,
officer or director of Apple or any Apple Subsidiary, (iii) other agreement
requiring payments to be made on a change of control or otherwise as a
result of the consummation of the Merger or any of the other transactions
contemplated hereby with respect to any employee, officer or director of
Apple or any Apple Subsidiary or (iv) any agreement to appoint or nominate
any person as a director of Apple or the Company.
(k) Brokers; Schedule of Fees and Expenses. No broker, investment
banker, financial advisor or other person, other than Bowles Holowell
Conner & Co. ("BHC"), the fees and expenses of which, as set forth in a
letter agreement between the Apple Special Committee (as defined in Section
5.1(b) below) and BHC (a true and complete copy of which has been provided
by the Apple Special Committee to the Company), have previously been
disclosed to the Company and will be paid by Apple, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission
in connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of Apple or any Apple Subsidiary.
(l) Compliance with Laws. Except as disclosed in the Apple SEC
Documents and except as set forth in Schedule 3.1(l) to the Apple
Disclosure Letter, neither Apple nor any of the Apple Subsidiaries has
violated or failed to comply with any statute, law, ordinance, regulation,
rule, judgment, decree or order of any Governmental Entity applicable to
its business, properties or operations, except for violations and failures
to comply that would not, individually or in the aggregate, reasonably be
expected to result in an Apple Material Adverse Effect.
(m) Contracts; Debt Instruments. Neither Apple nor any Apple
Subsidiary is in violation of or in default under, in any material respect
(nor does there exist any condition which upon the passage of time or the
giving of notice or both would cause such a violation of or default under),
any material loan or credit agreement, note, bond, mortgage, indenture,
lease, or any agreement to acquire real property, or any other material
contract, agreement, arrangement or understanding, to which it is a party
or by which it or any of its properties or assets is bound, except as set
forth in Schedule 3.1(m) to the Apple Disclosure Letter and except for
violations or defaults that would not, individually or in the aggregate,
result in an Apple Material Adverse Effect.
(n) Environmental Matters. Except as disclosed in Schedule 3.1(n) to
the Apple Disclosure Letter or in the environmental audits/reports listed
therein, each of Apple and each Apple Subsidiary has obtained all licenses,
permits, authorizations, approvals and consents from Governmental Entities
which are required in respect of its business, operations, assets or
properties under any applicable Environmental Law (as defined below) and
each of Apple and each Apple Subsidiary is in compliance in all material
respects with the terms and conditions of all such licenses, permits,
authorizations, approvals and consents and with any applicable Law of any
Governmental Entity relating to human health, safety or protection of the
environment ("Environmental Laws"), except for violations and failures to
comply which would not, individually or in the aggregate, have an Apple
Material Adverse Effect.
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(o) Apple Properties. Except as listed in Schedule 3.1(o) to the Apple
Disclosure Letter or except as listed in the title insurance policies,
reports or the surveys, copies of which were made available for review to
the Company: (i) Apple or an Apple Subsidiary owns fee simple title to each
of the real properties reflected on the most recent balance sheet of Apple
included in the Apple SEC Documents or as identified in Schedule 3.1(o) to
the Apple Disclosure Letter (the "Apple Properties"), which are all of the
real estate properties owned by them, free and clear of liens, mortgages or
deeds of trust, claims against title, charges which are liens, security
interests or other encumbrances on title ("Encumbrances"); (ii) the Apple
Properties are not subject to any rights of way, written agreements, laws,
ordinances and regulations affecting building use or occupancy, or
reservations of an interest in title (collectively, "Property
Restrictions"), except for (a) Property Restrictions imposed or promulgated
by law or any Governmental Entity with respect to real property, including
zoning regulations, provided they do not materially adversely affect the
current use of the Apple Properties, (b) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions and other
limitations of any kind, if any, which have heretofore been bonded or which
individually or in the aggregate do not exceed $100,000, do not materially
detract from the value of or materially interfere with the present use of
any of the Apple Properties subject thereto or affected thereby, and do not
otherwise materially impair business operations conducted by Apple and the
Apple Subsidiaries and which have arisen or been incurred only in its
construction or renovation activities or in the ordinary course of
business; (iii) valid policies of title insurance have been issued insuring
Apple 's or an Apple Subsidiary's fee simple title to the Apple Properties
except as noted therein, and such policies are, at the date hereof, in full
force and effect and no claim has been made against any such policy; (iv)
there is no certificate, permit or license from any Governmental Entity
having jurisdiction over any of the Apple Properties or any agreement,
easement or any other right which is necessary to permit the lawful use and
operation of the buildings and improvements on any of the Apple Properties
or which is necessary to permit the lawful use and operation of all
driveways, roads and other means of egress and ingress to and from any of
the Apple Properties that has not been obtained and is not in full force
and effect, or any pending threat of modification or cancellation of any of
same; (v) neither Apple nor an Apple Subsidiary has received written notice
of any violation of any federal, state or municipal law, ordinance, order,
regulation or requirement affecting any portion of any of the Apple
Properties issued by any Governmental Entity; (vi) neither Apple nor an
Apple Subsidiary has received notice to the effect that there are (a)
condemnation or rezoning proceedings that are pending or threatened with
respect to any of the Apple Properties or (b) zoning, building or similar
laws, codes, ordinances, orders or regulations that are or will be violated
by the continued maintenance, operation or use of any buildings or other
improvements on any of the Apple Properties or by the continued
maintenance, operation or use of the parking areas.
(p) Books and Records.
(i) The books of account and other financial records of Apple and
each Apple Subsidiary are in all material respects true, complete and
correct, have been maintained in accordance with good business
practices, and are accurately reflected in all material respects in
the financial statements included in the Apple SEC Documents.
(ii) Apple has previously delivered or made available to the
Company true and correct copies of the charter and by-laws of Apple,
as amended to date, and the charter, by-laws, organization documents
and partnership agreements of the Apple Subsidiaries, and all
amendments thereto. Apple has also delivered to the Company evidence
of its director and officer liability insurance policy.
(iii) The minute books and other records of corporate or
partnership proceedings of Apple and each Apple Subsidiary that have
previously been made available to the Company, contain in all material
respects accurate records of all meetings and accurately reflect in
all material respects all other corporate action of the shareholders
and directors and any committees of the Board of Directors of Apple
and the Apple Subsidiaries which are corporations.
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(q) Opinion of Financial Advisor. Apple has received the opinion of
BHC, satisfactory to Apple, with regard to the fairness, from a financial
point of view, to the holders of Apple Common Shares (excluding the Company
or any affiliate thereof) of the consideration to be paid to such
shareholders by the Company pursuant to the Merger. Apple or BHC will
provide to the Company a photocopy of the written version of the opinion
described in this Section 3.1(q) as soon as it is available.
(r) Registration Statement. The information furnished by Apple to the
Company for inclusion in the Registration Statement will not, as of the
effective date of the Registration Statement, 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.
(s) Vote Required. Except as set forth in the following sentence, the
affirmative vote of at least a majority of the outstanding Apple Common
Shares is the only vote of the holders of any class or series of Apple 's
capital stock necessary (under applicable law or otherwise) to approve the
Merger, this Agreement and the other transactions contemplated hereby. By
executing this Agreement, Glade M. Knight, Debra A. Jones and Stanley J.
Olander, Jr. (the "Additional Signatories") represent that they
collectively own all of the Apple Class B Convertible Shares, and they
hereby consent to and approve the Merger, this Agreement and the other
transactions contemplated hereby.
(t) Labor Matters. Neither Apple nor any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor union
organization. There is no unfair labor practice or labor arbitration
proceeding pending or, to the Knowledge of Apple threatened against Apple
or its Subsidiaries relating to their business, except for any such
proceeding as would not have an Apple Material Adverse Effect. To the
Knowledge of Apple, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or
threatened involving employees of Apple or any of its Subsidiaries.
(u) Solicitation of Transactions. As of the date of this Agreement,
Apple has not directly or indirectly, through any officer, director,
employee, agent, investment banker, financial advisor, attorney,
accountant, broker, finder or other representative, initiated or solicited
(including by way of furnishing nonpublic information or assistance) any
inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Competing Transaction (as defined in Section
5.6), or authorized or permitted any of its officers, directors, employees,
agents, attorneys, investment bankers, financial advisors, accountants,
brokers, finders or other representatives to take any such action.
SECTION 3.2 Representations and Warranties of the Company. The Company
represents and warrants to Apple as follows:
(a) Organization, Standing and Corporate Power of the Company. The
Company is a corporation duly organized and validly existing under the laws
of Virginia and has the requisite corporate power and authority to carry on
its business as now being conducted. The Company is duly qualified or
licensed to do business and is in good standing in each jurisdiction in
which the nature of its business or the ownership or leasing of its
properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not have a material adverse effect
on the business, properties, assets, financial condition or results of
operations of the Company and the Company Subsidiaries (as defined below),
taken as a whole (a "Company Material Adverse Effect"). As used herein,
"Company Subsidiary" shall mean any corporation, partnership, limited
liability company, joint venture or other legal entity of which the Company
(either directly or through or together with another Company Subsidiary)
owns any capital stock or other equity interests of such entity.
(b) The Company Subsidiaries. Schedule 3.2(b) to the Company
Disclosure Letter (as defined herein) sets forth each Company Subsidiary
and the ownership interest therein of the Company. Except as set forth in
Schedule 3.2(b) to the Company Disclosure Letter, (i) all the
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outstanding shares of capital stock of each Company Subsidiary that is a
corporation have been validly issued and are fully paid and nonassessable
and are owned by the Company, by another Company Subsidiary or by the
Company and another Company Subsidiary, free and clear of all Liens and
(ii) all equity interests in each Company Subsidiary that is a partnership
or limited liability company are owned by the Company or by the Company and
another Company Subsidiary free and clear of all Liens. Each Company
Subsidiary that is a corporation is duly incorporated and validly existing
under the laws of its jurisdiction of incorporation and has the requisite
corporate power and authority to carry on its business as now being
conducted and each Company Subsidiary that is a partnership or limited
liability company is duly organized and validly existing under the laws of
its jurisdiction of organization and has the requisite power and authority
to carry on its business as now being conducted. Each Company Subsidiary is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary,
other than in such jurisdictions where the failure to be so qualified or
licensed individually or in the aggregate, would not have a Company
Material Adverse Effect. Except as will be disclosed in the Company
Disclosure Letter and except for interests in the Company Subsidiaries,
neither the Company nor any Company Subsidiary owns directly or indirectly
any interest or investment (whether equity or debt) in any corporation,
partnership, joint venture, business, trust or entity (other than
investments in short-term investment securities).
(c) Capital Structure. The authorized capital stock of the Company
consists of 100,000,000 Common Shares, no par value (the "Company Common
Shares"), and 25,000,000 Preferred Shares, no par value (the "Company
Preferred Shares"). On the date hereof, (i) 39,370,147 Company Common
Shares and no Company Preferred Shares were issued and outstanding, (ii)
2,363,223 Company Common Shares were available for issuance under the
Company's stock option and dividend reinvestment and share purchase plans
(the "Company Plans"), and (iii) 903,557 Company Common Shares were
reserved for issuance upon exercise of outstanding stock options to
purchase Company Common Shares granted under the Company Plans (the
"Company Share Options"). On the date of this Agreement, except as set
forth in this Section 3.2(c), no shares of capital stock or other voting
securities of the Company were issued, reserved for issuance or
outstanding. All outstanding shares of capital stock of the Company are,
and all shares which may be issued pursuant to this Agreement will be when
issued, duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights. Except (A) for the Company Share Options,
(B) as set forth in Schedule 3.2(c) to the Company Disclosure Letter and
(C) as otherwise permitted under Section 4.2, as of the date of this
Agreement there are no outstanding securities, options, stock appreciation
rights, warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which the Company or any Company Subsidiary is
a party or by which such entity is bound, obligating the Company or any
Company Subsidiary to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock, voting securities or
other ownership interests of the Company or of any Company Subsidiary or
obligating the Company or any Company Subsidiary to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking.
(d) Authority; Noncontravention; Consents. The Company has the
requisite corporate power and authority to enter into this Agreement and,
subject to approval of the Merger, this Agreement and the other
transactions contemplated hereby by the requisite vote of the holders of
the Company Common Shares (the "Company Common Shareholder Approvals") to
consummate the transactions contemplated by this Agreement to which the
Company is a party. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions
contemplated hereby to which the Company is a party have been duly
authorized by all necessary corporate action on the part of the Company,
including the approval of the Company's Board of Directors. This Agreement
has been duly executed and delivered by the Company and constitutes valid
and binding obligations of the Company,
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enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity. Except as
set forth in Schedule 3.2(d) to the Company Disclosure Letter, the
execution and delivery of this Agreement by the Company does not, and the
consummation of the transactions contemplated hereby to which the Company
is a party and compliance by the Company with the provisions of this
Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any
obligation or to loss of a material benefit under, or result in the
creation of any Lien upon any of the properties or assets of the Company or
any Company Subsidiary under, (i) the Company Charter or Company By-Laws or
the comparable charter or organizational documents or partnership or
similar agreement (as the case may be) of any Company Subsidiary, each as
amended or supplemented to the date of this Agreement, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, reciprocal easement
agreement, lease or other agreement, instrument, permit, concession,
franchise or license applicable to the Company or any Company Subsidiary or
their respective properties or assets or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any Laws
applicable to the Company or any Company Subsidiary or their respective
properties or assets, other than, in the case of clause (ii) or (iii), any
such conflicts, violations, defaults, rights or Liens that individually or
in the aggregate would not (x) have a Company Material Adverse Effect or
(y) prevent the consummation of the Merger or the other transactions
contemplated hereby. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to the Company or any Company Subsidiary in
connection with the execution and delivery of this Agreement by the Company
or the consummation by the Company of any of the transactions contemplated
hereby and thereby, except for (i) the filing with the SEC of (x) a proxy
statement relating to the approval by Company shareholders of the Merger
and the other transactions contemplated hereby (as amended or supplemented
from time to time, the "Proxy Statement"), (y) the Registration Statement
relating to the issuance of the Merger Consideration and (z) such reports
under Section 13(a) of the Exchange Act as may be required in connection
with this Agreement and the other transactions contemplated by this
Agreement, (ii) the filing of the Articles of Merger for the Merger with
the State Corporation Commission of the Commonwealth of Virginia, (iii)
such filings as may be required in connection with the payment of any
Transfer and Gains Taxes and (iv) such other consents, approvals, orders,
authorizations, registrations, declarations and filings (A) as are set
forth in Schedule 3.2(d) to the Company Disclosure Letter or (B) as may be
required under federal, state or local Environmental Laws or (C) which, if
not obtained or made, would not prevent or delay in any material respect
the consummation of any of the transactions contemplated by this Agreement
or otherwise prevent the Company from performing its obligations under this
Agreement in any material respect or have, individually or in the
aggregate, a Company Material Adverse Effect.
(e) SEC Documents; Financial Statements; Undisclosed Liabilities. The
Company has filed all required reports, schedules, forms, statements and
other documents with the SEC since January 1, 1993 (the "Company SEC
Documents"). All of the Company SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Company SEC Documents. None of the Company
SEC Documents at the time of filing contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, except to the
extent such statements have been modified or superseded by later filed
Company SEC Documents. Other than as set forth in Schedule 3.2(e) to the
Company Disclosure Letter, there is no unresolved violation, criticism or
exception by any Governmental Entity of which the Company has received
written notice with respect to the Company report or statement which, if
resolved in a manner unfavorable to the Company, could have a Company
Material Adverse Effect. The consolidated financial statements of the
Company included in the
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Company SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with GAAP
(except, in the case of interim financial statements, as permitted by Forms
10-Q and 8-K of the SEC) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly
presented, in accordance with the applicable requirements of GAAP, the
consolidated financial position of the Company and the Company
Subsidiaries, taken as a whole, as of the dates thereof and the
consolidated results of operations and cash flows for the periods then
ended (subject, in the case of interim financial statements, to normal
year-end adjustments). Other than as set forth in Schedule 3.2(e) to the
Company Disclosure Letter, the Company has no Company Subsidiaries which
are not consolidated for accounting purposes.
(f) Absence of Certain Changes or Events. Except as disclosed in the
Company SEC Documents or in Schedule 3.2(f) to the Company Disclosure
Letter, since the date of the most recent financial statements included in
the Company SEC Documents (the "Company Financial Statement Date") and to
the date of this Agreement, but not thereafter with respect to clause (a)
of this Section 3.2(f), the Company and the Company Subsidiaries have
conducted their business only in the ordinary course and there has not been
(a) any material adverse change in the business, financial condition or
results of operations of the Company and the Company Subsidiaries taken as
a whole, that has resulted or would result, individually or in the
aggregate, in Company Economic Losses (as defined in Section 6.3 below) of
$2,000,000 or more (a "Company Material Adverse Change"), nor has there
been any occurrence or circumstance that with the passage of time would
reasonably be expected to result in a Company Material Adverse Change, (b)
except for regular quarterly distributions not in excess of $.30 per
Company Common Share with customary record and payment dates, any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of the Company
Common Shares, (c) any split, combination or reclassification of any
Company Common Shares or any issuance or the authorization of any issuance
of any other securities in respect of, in lieu of or in substitution for,
or giving the right to acquire by exchange or exercise, Company Common
Shares or any issuance of an ownership interest in, any Company Subsidiary
except as contemplated by this Agreement, (d) any damage, destruction or
loss, whether or not covered by insurance, that has or would have a Company
Material Adverse Effect, (e) any change in accounting methods, principles
or practices by the Company or any Company Subsidiary materially affecting
its assets, liabilities or business, except insofar as may have been
disclosed in Company SEC Documents or required by a change in GAAP or (f)
any amendment of any employment, consulting, severance, retention or any
other agreement between the Company and any officer or director of the
Company.
(g) Litigation. Except as disclosed in the Company SEC Documents or in
Schedule 3.2(g) of the Company Disclosure Letter, and other than personal
injury and other routine tort litigation arising from the ordinary course
of operations of the Company or the Company Subsidiaries which is covered
by adequate insurance, there is no suit, action or proceeding pending or,
to the knowledge of the Company, threatened against or affecting the
Company or any Company Subsidiary that, individually or in the aggregate,
could reasonably be expected to (i) have a Company Material Adverse Effect
or (ii) prevent the consummation of the Merger or any of the other
transactions contemplated hereby, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against the Company or any Company Subsidiary having, or which,
insofar as reasonably can be foreseen, in the future would have, any such
effect.
(h) Absence of Changes in Benefit Plans; ERISA Compliance.
(i) All employee benefits plans and other benefit arrangements
covering employees of the Company and the Company Subsidiaries will be
listed in the Company Disclosure Letter. True and complete copies of
the Company Benefit Plans (as defined herein) have been made available
to Apple. Except as disclosed in the Company SEC Documents or in
Schedule
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3.2(h)(i) to the Company Disclosure Letter, since the date of the most
recent audited financial statements included in the Company SEC
Documents, there has not been any adoption or amendment in any
material respect by the Company or any Company Subsidiary of any
bonus, pension, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, medical or other employee benefit plan, arrangement
or understanding (whether or not legally binding) providing benefits
to any current or former employee, officer or director of the Company
or any Company Subsidiary or any person affiliated with the Company
under Section 414(b), (c), (m) or (o) of the Code (collectively,
"Company Benefit Plans").
(ii) Except as described in the Company SEC Documents or in
Schedule 3.2(h)(ii) to the Company Disclosure Letter or as would not
have a Company Material Adverse Effect, (A) all Company Benefit Plans,
including any such plan that is an "employee benefit plan" as defined
in Section 3(3) of ERISA, are in compliance with all applicable
requirements of law, including ERISA and the Code, and (B) neither the
Company nor any Company Subsidiary has any liabilities or obligations
with respect to any such Company Benefit Plans, whether accrued,
contingent or otherwise (other than obligations to make contributions
and pay benefits and administrative costs incurred in the ordinary
course), nor to the knowledge of the Company are any such liabilities
or obligations expected to be incurred. Except as set forth in
Schedule 3.2(h)(ii) to the Company Disclosure Letter, the execution
of, and performance of the transactions contemplated in, this
Agreement will not (either alone or together with the occurrence of
any additional or subsequent events) constitute an event under any
Company Benefit Plan, policy, arrangement or agreement, trust or loan
that will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with
respect to any employee or director. The only severance agreements or
severance policies applicable to the Company or the Company
Subsidiaries are the agreements and policies specifically referred to
in Schedule 3.2(h)(ii) to the Company Disclosure Letter.
(iii) Except as may be set forth in Schedule 3.2(h)(iii) to the
Company Disclosure Letter, there are no pending or, to the Knowledge
of the Company, threatened claims against or otherwise involving any
of the Company Benefit Plans and no suit, action or other litigation
(excluding claims for benefits incurred in the ordinary course of the
Company Benefit Plan activities) has been brought against or with
respect to any such Company Benefit Plan, except for any of the
foregoing which would not have a Company Material Adverse Effect.
(i) Taxes.
(i) Each of the Company and each Company Subsidiary has timely
filed with the appropriate taxing authority all material Tax Returns
and reports required to be filed by it (after giving effect to any
filing extension properly granted by a Governmental Entity having
authority to do so). Each such Tax Return is true, correct and
complete in all material respects. The Company and each Company
Subsidiary have paid (or the Company has paid on their behalf), within
the time and manner prescribed by law, all material Taxes that are due
and payable.
(ii) The Company (A) for all of its taxable years commencing with
the year ended December 31, 1993 through the most recent December 31,
has been subject to taxation as a REIT within the meaning of Section
856 of the Code and has satisfied the requirements to qualify as a
REIT for such years, (B) has operated, and intends to continue to
operate, in such a manner as to qualify as a REIT for its tax year
ending December 31, 1999, and (C) has not taken or omitted to take any
action which could reasonably be expected to result in a challenge to
its status as a REIT, and, to the Company's knowledge, no such
challenge is pending or threatened.
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(iii) Except as may be set forth in Schedule 3.2(i)(iii) to the
Company Disclosure Letter, neither the Company nor any of its
Subsidiaries is a party to any pending action or proceeding by any
governmental authority for assessment or collection of taxes, and no
claim for assessment or collection of taxes has been asserted against
it.
(j) No Loans or Payments to Employees, Officers or Directors. Except
as set forth in Schedule 3.2(h)(ii) or 3.2(j) to the Company Disclosure
Letter or as otherwise specifically provided for in this Agreement, there
is no (i) loan outstanding from or to any employee, officer or director of
the Company, (ii) employment or severance contract or other arrangement
with respect to severance with respect to any employee, officer or director
of the Company or any Company Subsidiary, (iii) other agreement requiring
payments to be made on a change of control or otherwise as a result of the
consummation of the Merger or the other transactions contemplated hereby
with respect to any employee, officer or director of the Company or any
Company Subsidiary or (iv) any agreement to appoint or nominate any person
as a director of the Company or any Company Subsidiary.
(k) Brokers; Opinion of Financial Advisor. No broker, investment
banker, financial advisor or other person, other than PaineWebber
Incorporated ("PaineWebber"), the fees and expenses of which will be paid
by the Company, is entitled to any broker's, finder's, financial advisor's
or other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of the
Company or any Company Subsidiary. The Company has received the opinion of
PaineWebber Incorporated, satisfactory to the Company, with regard to the
fairness to the Company, from a financial point of view, of the
consideration to be paid by the Company pursuant to the Merger.
(l) Compliance with Laws. Except as disclosed in the Company SEC
Documents and except as set forth in Schedule 3.2(l) to the Company
Disclosure Letter, neither the Company nor any of the Company Subsidiaries
has violated or failed to comply with any Laws of any Governmental Entity
applicable to its business, properties or operations, except for violations
and failures to comply that would not, individually or in the aggregate,
reasonably be expected to result in a Company Material Adverse Effect.
(m) Contracts; Debt Instruments. Neither the Company nor any Company
Subsidiary is in violation of or in default under, in any material respect
(nor does there exist any condition which upon the passage of time or the
giving of notice or both would cause such a violation of or default under),
any material loan or credit agreement, note, bond, mortgage, indenture,
lease or any agreement to acquire real property, or any other material
contract, agreement, arrangement or understanding, to which it is a party
or by which it or any of its properties or assets is bound, except as set
forth in Schedule 3.2(m) to the Company Disclosure Letter and except for
violations or defaults that would not, individually or in the aggregate,
result in a Company Material Adverse Effect.
(n) Environmental Matters. Except as disclosed in Schedule 3.2(n) to
the Company Disclosure Letter or in the environmental audits/reports listed
thereon, each of the Company and each Company Subsidiary has obtained all
licenses, permits, authorizations, approvals and consents from Governmental
Entities which are required in respect of its business, operations, assets
or properties under any applicable Environmental Law, and each of the
Company and each Company Subsidiary is in compliance in all material
respects with the terms and conditions of all such licenses, permits,
authorizations, approvals and consents and with any applicable
Environmental Law, except for violations and failures to comply which would
not, individually or in the aggregate, have a Company Material Adverse
Effect.
(o) Company Properties. Except as listed in Schedule 3.2(o) to the
Company Disclosure Letter or except as listed on the title insurance
policies, reports or the surveys, copies of which were made available for
review to Apple: (i) the Company or a Company Subsidiary owns fee simple
title to each of the real properties reflected on the most recent balance
sheet of the Company included in the Company SEC Documents or as identified
in Schedule 3.2(o) to the
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Company Disclosure Letter (the "Company Properties"), which are all of the
real estate properties owned by them, free and clear of Encumbrances, (ii)
the Company Properties are not subject to any Property Restrictions, except
for (a) Property Restrictions imposed or promulgated by law or any
Governmental Entity with respect to real property, including zoning
regulations, provided they do not materially adversely affect the current
use of the Company Properties, (b) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions and other
limitations of any kind, if any, which have heretofore been bonded or which
individually or in the aggregate do not exceed $100,000, do not materially
detract from the value of or materially interfere with the present use of
any of the Company Properties subject thereto or affected thereby, and do
not otherwise materially impair business operations conducted by the
Company and the Company Subsidiaries and which have arisen or been incurred
only in its construction or renovation activities or in the ordinary course
of business; (iii) valid policies of title insurance have been issued
insuring the Company's or a Company Subsidiary's fee simple title to the
Company Properties except as noted therein, and such policies are, at the
date hereof, in full force and effect and no claim has been made against
any such policy; (iv) there is no certificate, permit or license from any
Governmental Entity having jurisdiction over any of the Company Properties
or any agreement, easement or any other rights which is necessary to permit
the lawful use and operation of the buildings and improvements on any of
the Company properties or which is necessary to permit the lawful use and
operation of all driveways, roads and other means of egress and ingress to
and from any of the Company Properties that has not been obtained and is
not in full force and effect, or any pending threat of modification or
cancellation of any of same; (v) neither the Company nor a Company
Subsidiary has received written notice of any violation of any federal,
state or municipal law, ordinance, order, regulation or requirement
affecting any portion of any of the Company Properties issued by any
Governmental Entity; (vi) neither the Company nor a Company Subsidiary has
received notice to the effect that there are (a) condemnation or rezoning
proceedings that are pending or threatened with respect to any of the
Company Properties or (b) zoning, building or similar laws, codes,
ordinances, orders or regulations that are or will be violated by the
continued maintenance, operation or use of any buildings or other
improvements on any of the Company Properties or by the continued
maintenance, operation or use of the parking areas.
(p) Books and Records.
(i) The books of account and other financial records of the
Company and each Company Subsidiary are in all material respects true,
complete and correct, have been maintained in accordance with good
business practices, and are accurately reflected in all material
respects in the financial statements included in the Company SEC
Documents.
(ii) The Company has previously delivered or made available to
Apple true and correct copies of the Company Charter and Company
By-Laws, as amended to date, and the charter, by-laws, organizational
documents, partnership agreement and operating agreement of its
Subsidiaries, and all amendments thereto. The Company has also
delivered to Apple evidence of its director and officer liability
insurance policy.
(iii) The minute books and other records of corporate,
partnership or limited liability proceedings of the Company and each
Company Subsidiary that have previously been made available to Apple,
contain in all material respects accurate records of all meetings and
accurately reflect in all material respects all other corporate action
of the shareholders and directors and any committees of the Boards of
Directors of the Company and the Company Subsidiaries which are
corporations.
(q) Vote Required. The affirmative vote of at least a majority of the
outstanding Company Common Shares is the only vote of the holders of any
class or series of the Company's capital stock necessary (under applicable
law or otherwise) to approve the Merger, this Agreement and the other
transactions contemplated hereby.
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(r) Labor Matters. Neither the Company nor any of its Subsidiaries is
a party to, or bound by, any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor union
organization. There is no unfair labor practice or labor arbitration
proceeding pending or, to the Knowledge of the Company, threatened against
the Company or its Subsidiaries relating to their business, except for any
such proceeding as would not have a Company Material Adverse Effect. To the
Knowledge of the Company, there are no organizational efforts with respect
to the formation of a collective bargaining unit presently being made or
threatened involving employees of the Company or any of its Subsidiaries.
ARTICLE IV
COVENANTS
SECTION 4.1 Conduct of Business by Apple. During the period from the date
of this Agreement to the Effective Time, Apple shall, and shall cause the Apple
Subsidiaries to, carry on its businesses in the usual, regular and ordinary
course in substantially the same manner as heretofore conducted and, to the
extent consistent therewith, use commercially reasonable efforts to preserve
intact its current business organization, goodwill, ongoing businesses and its
status as a REIT within the meaning of the Code. Without limiting the generality
of the foregoing, the following additional restrictions shall apply: During the
period from the date of this Agreement to the Effective Time, except as set
forth in Schedule 4.1 to the Apple Disclosure Letter or as otherwise
contemplated by this Agreement, Apple shall not and shall cause the Apple
Subsidiaries not to (and not to authorize or commit or agree to):
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of Apple's capital shares or interests in
any Apple Subsidiary that is not directly or indirectly wholly owned by
Apple, except that Apple may declare, set aside and pay the dividends and
distributions permitted under Section 2.2(d) hereof, (ii) split, combine or
reclassify any capital stock or partnership interests or issue or authorize
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of such capital stock or partnership interests or
(iii) purchase, redeem or otherwise acquire any shares of capital stock of
Apple;
(b) except as otherwise contemplated by this Agreement or in Schedule
4.1(b) of the Apple Disclosure Letter, amend the charter, by-laws,
partnership agreement or other comparable organizational documents of Apple
or any Apple Subsidiary;
(c) issue, deliver or sell, or grant any option or other right in
respect of, any shares of capital stock or debt securities, any other
voting or redeemable securities of Apple or any Apple Subsidiary or any
securities convertible into, or any rights, warrants or options to acquire,
any such shares, voting securities or convertible or redeemable securities
except to Apple or an Apple Subsidiary;
(d) merge or consolidate with any Person;
(e) make or rescind any tax election (unless required by law or
necessary to preserve Apple's status as a REIT or the status of any Apple
Subsidiary that is a partnership as a partnership for federal tax
purposes);
(f) (i) change in any material manner any of its methods, principles
or practices of accounting in effect at the Apple Financial Statement Date,
or (ii) settle or compromise any claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to
taxes, except in the case of settlements or compromises in an amount not to
exceed, individually or in the aggregate, $250,000, or change any of its
methods of reporting income or deductions for federal income tax purposes
from those employed in the preparation of its federal income tax return for
the taxable year ending December 31, 1998, except, in the case of clause
(i), as may be required by the SEC, applicable law or GAAP and with notice
thereof to the Company;
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(g) without the Company's consent, which shall not be unreasonably
withheld, settle any stockholder derivative or class action claims arising
out of or in connection with the Merger or the other transactions
contemplated hereby;
(h) without the consent of the Company, enter into or amend or
otherwise modify any material agreement or arrangement with Persons that
are affiliates or, as of the date hereof, are officers, directors or
employees of Apple or any Apple Subsidiary;
(i) during the period from the date of this Agreement to the date of
the Proxy Statement, Apple shall not enter into or permit any Apple
Subsidiary to enter into any transaction or series of transactions
including the acquisition of a property or properties unless (i) Apple is
able to satisfy and does satisfy any applicable requirement to include or
incorporate by reference into the Registration Statement financial
statements relating to all such transactions not later than 30 days after
such requirement first arises, or (ii) the Company shall otherwise consent.
SECTION 4.2 Conduct of Business by the Company. During the period from the
date of this Agreement to the Effective Time, the Company shall, and shall cause
each of the Company Subsidiaries to, carry on its businesses in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted and, to the extent consistent therewith, use commercially reasonable
efforts to preserve intact its current business organization, goodwill, ongoing
businesses and its status as a REIT within the meaning of the Code. Without
limiting the generality of the foregoing, the following additional restrictions
shall apply: During the period from the date of this Agreement to the Effective
Time, except as set forth in Schedule 4.2 to the Company Disclosure Letter or as
otherwise contemplated by this Agreement, the Company shall not:
(a) (i) except for regular quarterly dividends (and corresponding
partnership distributions by Cornerstone REIT Limited Partnership) not in
excess of $.30 per Common Share, with customary record and payment dates,
declare, set aside or pay any dividends on, or make any other distributions
in respect of, the Common Shares; (ii) split, combine or reclassify the
Common Shares or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for the Common Shares or (iii)
purchase, redeem or otherwise acquire any shares of Common Shares;
(b) except as otherwise contemplated by this Agreement, or in Schedule
4.2(b) of the Company Disclosure Letter, amend the Company Charter or
Company By-Laws;
(c) merge or consolidate with any Person;
(d) issue, deliver or sell, or grant any option or other right in
respect of, any Company Common Shares or any preferred shares of the
Company, any other voting or redeemable securities of the Company or any
securities convertible into, or any rights, warrants or options to acquire,
any such shares, voting securities or redeemable or convertible securities;
(e) make or rescind any tax election (unless required by law or
necessary to preserve the Company's status as a REIT or the status of any
Company Subsidiary that is a partnership for federal tax purposes);
(f) (i) change in any material manner any of its methods, principles
or practices of accounting in effect at the Company Financial Statement
Date, or (ii) settle or compromise any claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to
taxes, except in the case of settlements or compromises in an amount not to
exceed, individually or in the aggregate, $250,000, or change any of its
methods of reporting income or deductions for federal income tax purposes
from those employed in the preparation of its federal income tax return for
the taxable year ending December 31, 1996, except, in the case of clause
(i), as may be required by the SEC, applicable law or GAAP and with notice
thereof to Apple;
(g) without Apple's consent, which shall not be unreasonably withheld,
settle any stockholder derivative or class action claims arising out of or
in connection with the Merger or the other transactions contemplated
hereby;
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(h) without the consent of Apple, enter into or amend or otherwise
modify any material agreement or arrangement with Persons that are
affiliates or, as of the date hereof, are officers, directors or employees
of the Company or any Company Subsidiary not approved by a majority of the
"independent" directors of the Board of Directors of the Company;
(i) during the period from the date of this Agreement to the date of
the Proxy Statement, the Company shall not enter into or permit any Company
Subsidiary to enter into any transaction or series of transactions
involving the acquisition of a property or properties unless (a) the
Company is able to satisfy and does satisfy any applicable requirement to
include or incorporate by reference into the Registration Statement
financial statements relating to all such transactions not later than 30
days after such requirement first arises, or (b) Apple shall otherwise
consent.
SECTION 4.3 Other Actions. Each of Apple and the Company shall not and
shall cause its respective Subsidiaries not to take any action that would result
in (i) any of the representations and warranties of such party (without giving
effect to any "Knowledge" qualification) set forth in this Agreement that are
qualified as to materiality becoming untrue in any material respect, (ii) any of
such representations and warranties (without giving effect to any "Knowledge"
qualification) that are not so qualified becoming untrue in any respect or (iii)
except as contemplated by Section 7.1, any of the conditions to the Merger set
forth in Article VI not being satisfied.
SECTION V
ADDITIONAL COVENANTS
SECTION 5.1 Preparation of the Registration Statement and the Proxy
Statement; Shareholders Meetings.
(a) The Company and Apple shall cooperate and promptly prepare and the
Company shall file with the SEC as soon as practicable a Registration Statement
on Form S-4 (the "Form S-4") under the Securities Act, with respect to the
Preferred Shares issuable in the Merger, a portion of which Registration
Statement shall also serve as the joint proxy statement with respect to the
meetings of the shareholders of Apple and of the Company in connection with the
Merger (the "Proxy Statement/Prospectus"). The respective parties will cause the
Proxy Statement/Prospectus and the Form S-4 to comply as to form in all material
respects with the applicable provisions of the Securities Act, the Exchange Act
and the rules and regulations promulgated thereunder. The Company shall use all
reasonable efforts, and Apple will cooperate with the Company to have the Form
S-4 declared effective by the SEC as promptly as practicable. The Company shall
use its best efforts to obtain, prior to the effective date of the Form S-4, all
necessary state securities law or "Blue Sky" permits or approvals required to
carry out the transactions contemplated by this Agreement and will pay all
expenses incident thereto. The Company agrees that the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the respective meetings of shareholders of
the Company and Apple, or, in the case of the Form S-4 and each amendment or
supplement thereto, at the time it is filed or becomes effective, will not
include 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, in
light of the circumstances under which they were made, not misleading. Apple
agrees that the written information provided by it specifically for inclusion in
the Proxy Statement/Prospectus and each amendment or supplement thereto, at the
time of mailing thereof and at the time of the respective meetings of
shareholders of the Company and Apple, or, in the case of written information
provided by Apple specifically for inclusion in the Form S-4 or any amendments
or supplements thereto, at the time it is filed or becomes effective, will not
include 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, in
light of the circumstances under which they were made, not misleading. The
Company will advise Apple, promptly after it receives notice thereof, of the
time when the Form S-4 has become effective or any supplement or amendment has
been filed, the issuance of any stop order, the suspension of the qualification
of the Preferred Shares issuable in connection with the Merger for offering or
sale in any jurisdiction, or any request by the SEC for additional information.
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(b) Apple covenants that the Proxy Statement shall include the
recommendation of the Board of Directors of Apple and of the special committee
of independent directors of the Board of Directors of Apple (which as of the
date of this Agreement consists of Bruce H. Matson and Lisa B. Kern) (the "Apple
Special Committee") in favor of the approval of the Merger, this Agreement and
the other transactions contemplated hereby; provided, that such recommendations
may not be included or may be withdrawn, modified or amended if Apple shall
approve or recommend a Superior Competing Transaction (as defined herein) or
enter into an agreement with respect to such Superior Competing Transaction and
the Board of Directors of Apple determines in good faith that it is in
compliance with Section 7.1. In connection with the preparation of the Proxy
Statement and the Registration Statement, the Company shall cause to be
delivered to Apple, prior to the mailing of such Proxy Statement, the opinion
dated the date of the Proxy Statement of McGuire, Woods, Battle & Boothe LLP,
("MWBB"), counsel to the Company, subject to certificates, letters and
assumptions, reasonably satisfactory to Apple, that the Merger will qualify as a
tax-free reorganization for the Apple shareholders under Section 368(a) of the
Code
(c) Each of the Company and Apple will take all action necessary in
accordance with applicable law and its Articles of Incorporation and Bylaws to
convene a meeting of its shareholders (respectively, the "Company Common
Shareholders Meeting" and the "Apple Common Shareholders Meeting") as promptly
as practicable to consider and vote upon or otherwise to obtain the consent of
its shareholders, as required, to the transactions contemplated hereby. Subject
to Section 5.1(b), the Board of Directors of the Company and the Board of
Directors of Apple shall each take all lawful action to solicit such consent,
including, without limitation, timely mailing the Proxy Statement/Prospectus.
The Company and Apple shall coordinate and cooperate with respect to the timing
of such meetings and shall use their best efforts to hold such meetings on the
same day.
SECTION 5.2 Access to Information; Confidentiality.
(a) Subject to the requirements of confidentiality agreements with third
parties, each of Apple and the Company shall, and shall cause each of its
respective Subsidiaries to, afford to the other party and to the special
committees of the Boards of Directors, officers, employees, accountants,
counsel, financial advisors and other representatives of such other party,
reasonable access during normal business hours during the period prior to the
Effective Time to all their respective properties, books, contracts,
commitments, personnel and records and, during such period, each of Apple and
the Company shall, and shall cause each of its respective Subsidiaries to,
furnish promptly to the other party (a) a copy of each report, schedule,
registration statement and other document filed by it during such period
pursuant to the requirements of federal or state securities laws and (b)all
other information concerning its business, properties and personnel as such
other party may reasonably request.
(b) As used herein, "Confidential Material" means, with respect to either
party hereto (the "Providing Party"), all information (written or oral)
furnished (whether before or after the date hereof) by the Providing Party and
its directors, officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors (collectively, the "Providing
Party Representatives") to the other party hereto (the "Receiving Party") or
such Receiving Party's directors, officers, employees, affiliates or
representative of advisors, including counsel, lenders and financial advisors
(collectively "the Receiving Party Representatives") and all analyses,
compilations, forecasts and other studies or other documents prepared by the
Providing Party or the Providing Party Representatives in connection with its or
their review of the transactions contemplated by this Agreement which contain or
reflect such information. The term "Confidential Material" does not include,
however, information which (i) at the time of disclosure or thereafter is
generally available to and known by the public other than as a result of a
disclosure directly or indirectly by the Receiving Party or the Receiving Party
Representatives in violation of this Agreement, (ii) at the time of disclosure
was available on a nonconfidential basis from a source other than the Providing
Party or the Providing Party Representatives, providing that such source is not
and was not bound by a confidentiality agreement with the Providing Party, (iii)
was known by the Receiving Party prior to receiving the Confidential Material
from the Providing Party or has been independently acquired or
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developed by the Receiving Party without violating any of its obligations under
this Agreement, or (iv) is contained in any Apple SEC Documents or Company SEC
Documents.
(c) Subject to paragraph (d) below or except as required by law, the
Confidential Material will be kept confidential and will not, without the prior
written consent of the Providing Party, be disclosed by the Receiving Party or
its Representatives, in whole or in part and will not be used by the Receiving
Party or its Representatives, directly or indirectly, for any purpose other than
in connection with this Agreement, the Merger or the evaluating, negotiating or
advising with respect to a transaction contemplated herein. Moreover, each
Receiving Party agrees to transmit Confidential Material to its Representatives
only if and to the extent that such Representatives need to know the
Confidential Material for purposes of such transaction and are informed by such
Receiving Party of the confidential nature of the Confidential Material and of
the terms of this Section.
(d) In the event that either Receiving Party, its Representatives or anyone
to whom such Receiving Party or its Representatives supply the Confidential
Material, are requested or required (by oral questions, interrogatories,
requests for information or documents, subpoena, civil investigative demand, any
informal or formal investigation by any government or governmental agency or
authority or otherwise in connection with legal processes) to disclose any
Confidential Material, such Receiving Party agrees (i) immediately to notify the
Providing Party of the existence, terms and circumstances surrounding such a
request, (ii) to consult with the Providing Party on the advisability of taking
legally available steps to resist or narrow such request and (iii) if disclosure
of such information is required, to furnish only that portion of the
Confidential Material which, in the opinion of such Receiving Party's counsel,
such Receiving Party is legally compelled to disclose and to cooperate with any
action by the Providing Party to obtain an appropriate protective order or
otherwise reliable assurances that confidential treatment will be accorded the
Confidential Material (it being agreed that the Providing Party shall reimburse
the Receiving Party for all reasonable out-of-pocket expenses incurred by the
Receiving Party in connection with such cooperation).
(e) In the event of the termination of this Agreement in accordance with
its terms, promptly upon request from either Providing Party, the Receiving
Party shall, except to the extent prevented by law, redeliver to the Providing
Party or destroy all tangible Confidential Material and will not retain any
copies, extracts or other reproductions thereof in whole or in part. Any such
destruction shall be certified in writing to the Providing Party by an
authorized officer of the Receiving Party supervising the same. Notwithstanding
the foregoing, each Receiving Party and one Representative designated by each
Receiving Party shall be permitted to retain one permanent file copy of each
document constituting Confidential Material.
SECTION 5.3 Best Efforts; Notification.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the Company and Apple agrees to use its best efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other in doing, all things necessary, proper or advisable
to fulfill all conditions applicable to such party pursuant to this Agreement
and to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated hereby,
including (i) the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from Governmental Entities and the making of all
necessary registrations and filings and the taking of all reasonable steps as
may be necessary to obtain an approval, waiver or exemption from, or to avoid an
action or proceeding by, any Governmental Entity, (ii) the obtaining of all
necessary consents, approvals, waivers or exemption from non-governmental third
parties; provided, however, that if either party is obliged to make
expenditures, or incur costs, expenses or other liabilities to obtain the
consent of any non-governmental party, it shall consult reasonably with the
other party upon reasonable notice prior to making payment of any such amount,
and in no event shall either Apple or the Company make payment or payments of
any such amount in obtaining such consents in excess of $250,000 in the
aggregate without obtaining the prior written consent of the other, which
consent shall not unreasonably be withheld or delayed, (iii) the defending of
any lawsuits or other legal proceedings,
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whether judicial or administrative, challenging the Merger, this Agreement or
the consummation of any of the other transactions contemplated hereby, including
seeking to have any stay or temporary restraining order entered by any court or
other Governmental Entity vacated or reversed, and (iv) the execution and
delivery of any additional instruments necessary to consummate the transactions
contemplated by and to fully carry out the purposes of, this Agreement;
provided, however, that a party shall not be obligated to take any action
pursuant to the foregoing if the taking of such action or the obtaining of any
waiver, consent, approval or exemption is reasonably likely to result in the
imposition of a condition or restriction of the type referred to in Section
6.1(d). In connection with and without limiting the foregoing, Apple, the
Company and their respective Boards of Directors shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti- takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation (a "Takeover Statute")is or becomes applicable to the
Merger, this Agreement or any of the other transactions contemplated hereby and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement,
or any of the other transactions contemplated hereby, take all action necessary
so that the Merger may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise to minimize the effect of such
Takeover Statute on the Merger or the consummation of any of the other
transactions contemplated hereby.
(b) Apple shall give prompt notice to the Company, and the Company shall
give prompt notice to Apple, if (i) any representation or warranty made by it
contained in this Agreement that is qualified as to materiality becomes untrue
or inaccurate in any material respect or any such representation or warranty
that is not so qualified becomes untrue or inaccurate in any respect or (ii) it
fails to comply with or satisfy in any material respect any covenant, condition
or agreement to be complied with or satisfied by it under this Agreement;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
SECTION 5.4 Affiliates. Prior to the Closing Date, Apple shall deliver to
the Company a list identifying all persons who are, at the time this Agreement
is submitted for approval to the shareholders of Apple, an "affiliate" of Apple
for purposes of Rule 145 under the Securities Act. Apple shall use its best
efforts to cause each such affiliate to deliver on or prior to the Closing Date
written agreements stating that they will not offer, sell, assign, transfer or
otherwise dispose of any of the Preferred Shares issued to them in the Merger in
violation of the Securities Act or the rules and regulations thereunder.
SECTION 5.5 Tax Treatment. Each of the Company and Apple shall use its best
efforts to (a) cause the Merger to qualify as a tax-free reorganization under
Section 368(a) of the Code and (b) to obtain the opinion of counsel referred to
in Section 6.3(c) From and after the date of this Agreement and until the
Effective Time, neither the Company nor Apple nor any of their respective
Subsidiaries or other affiliates shall (i) knowingly take any action, or
knowingly fail to take any action, that would jeopardize qualification of the
Merger as a reorganization within the meaning of Section 368(a) (1) (A) of the
Code; or (ii) enter into any contract, agreement, commitment or arrangement with
respect to the foregoing. Following the Effective Time, the Company shall use
its best efforts to conduct its business in a manner that would not jeopardize
the characterization of the Merger as a reorganization within the meaning of
Section 368(a) (1) (A) of the Code.
SECTION 5.6 No Solicitation of Transactions. Subject to Section 7.1, Apple
shall not directly or indirectly, through any officer, director, employee,
agent, investment banker, financial advisor, attorney, accountant, broker,
finder or other representative, initiate or solicit (including by way of
furnishing nonpublic information or assistance) any inquiries or the making of
any proposal that constitutes, or may reasonably be expected to lead to, any
Competing Transaction (as defined herein), or authorize or permit any of its
officers, directors, employees, agents, attorneys, investment bankers, financial
advisors, accountants, brokers, finders or other representatives to take any
such action. Apple shall notify the Company in writing (as promptly as
practicable) of all of the material details relating to all inquiries and
proposals which it or any such officer, director, employee, agent,
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investment banker, financial advisor, attorney, accountant, broker, finder or
other representative may receive relating to any transaction that constitutes,
or may reasonably be expected to lead to, any Competing Transaction (as defined
herein) and if such inquiry or proposal is in writing, Apple shall deliver to
the Company a copy of such inquiry or proposal. For purposes of this Agreement,
"Competing Transaction" shall mean any of the following (other than the
transactions contemplated by this Agreement): (i) any merger, consolidation,
share exchange, business combination, or similar transaction involving Apple (or
any of its Subsidiaries); (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other dispositio of 5% or more (based upon the depreciated carrying
cost of the assets on the books of Apple) of the assets of Apple and its
Subsidiaries taken as a whole in a single transaction or series of related
transactions, excluding any bona fide financing transactions which do not,
individually or in the aggregate, have as a purpose or effect the sale or
transfer of control of such assets; (iii)any tender offer or exchange offer for
5% or more of the outstanding shares of capital stock of Apple (or any of its
Subsidiaries) or the filing of a registration statement under the Securities Act
in connection therewith; or (iv) any public announcements of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing. Subject only to Section 7.1 of this Agreement, the Company and Apple
acknowledge and affirm that they intend this Agreement to be an exclusive
agreement, and accordingly, nothing in this Agreement is intended to constitute
a solicitation of an offer or proposal for a business combination involving any
other Person, it being acknowledged and agreed that any such offer or proposal
would interfere with the strategic advantages and benefits that the Company and
Apple expect to derive from the Merger and the other transactions contemplated
hereby.
SECTION 5.7 Public Announcements. The Company and Apple will consult with
each other before issuing, and provide the executive officers of each other the
opportunity to review and comment upon, any press release or other public
statements with respect to the Merger or the other transactions contemplated
hereby, and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by applicable
law, court process or by obligations pursuant to any listing agreement with any
national securities exchange. The parties agree that the initial press release
to be issued with respect to the execution of this Agreement will be in the form
agreed to by the parties hereto.
SECTION 5.8 Listing. The Company shall use its best efforts to have the New
York Stk Exchange approve for listing the Preferred Shares issued in the Merger
on or before the second anniversary of the Effective Day, and in such regard
shall prepare and submit to the New York Stock Exchange a listing application
covering the Preferred Shares at a prudent time.
SECTION 5.9 Transfer and Gains Taxes. The Company and Apple shall cooperate
in the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added stock transfer and stamp taxes, any transfer,
recording, registration and other fees and any similar taxes which become
payable in connection with the Merger (together with any related interests,
penalties or additions to tax, "Transfer and Gains Taxes").
SECTION 5.10 Employee Matters.
(a) Employees. The Company shall have no liability or obligation to Apple
or its employees to employ or offer employment to any employee of Apple or any
group of employees of Apple. It is understood, however, that on or after the
Closing Date, the Company may, in its sole and absolute discretion, offer
employment to those employees. Nothing in this Agreement shall limit the Company
from taking any action at any time after the Closing Date in respect of its
employees or the terms and conditions of their employment.
(b) Incentive Plans. At the Effective Time, each outstanding Apple Common
Shares Option (other than the options described in Section 5.10(c)) shall be
assumed by the Company and shall be deemed to constitute an option to acquire,
on the same terms and conditions as were applicable under such Apple Common
Shares Option, the same number of Preferred Shares as the holder of such Apple
Common Shares Option would have been entitled to receive pursuant to the Merger
had
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such holder exercised such Apple Common Shares Option in full immediately prior
to the Effective Time at a price per share equal to the aggregate exercise price
for the shares subject to such Apple Common Shares Option divided by the number
of Preferred Shares deemed to be purchasable pursuant to such Apple Common
Shares Option.
(c) Certain Options. By executing this Agreement, Glade M. Knight confirms
his agreements with Apple and the Company that: (i) neither the execution nor
the consummation of this Agreement or the Merger and other transactions
contemplated hereby shall permit Mr. Knight to receive those certain cash
payments referred to in Sections 8(c) and (d) of that certain Stock Option
Agreement dated November 9, 1998 (the "Knight Stock Option Agreement") between
Mr. Knight and the Company, Mr. Knight hereby acknowledging that he does
relinquish such cash payments under such conditions, (ii) at the Effective Time
the options granted by the Knight Stock Option Agreement shall be reissued as
options to acquire Company Common Shares, (iii) at the Effective Time, Mr.
Knight and the Company shall enter into a new Stock Option Agreement (the
"Replacement Stock Option Agreement") replacing in its entirety the Knight Stock
Option Agreement, which Replacement Stock Option Agreement shall be on
substantially the same terms as the Knight Stock Option Agreement, except that
the options referred to therein shall be options to purchase Company Common
Shares. The Replacement Stock Option Agreement shall be consistent with this
Section and reasonably acceptable to Mr. Knight and the compensation committee
of the Company.
(d) Termination of Benefit Plans. Except as otherwise provided in (b) and
(c) above, prior to the Closing Date, Apple shall terminate all Apple Benefit
Plans, and shall, to the extent permitted by law, discharge and terminate, or
cause to be discharged and terminated, all obligations, liabilities and
commitments of Apple, all Apple Subsidiaries and all participants in the Apple
Benefit Plans, including without limitation, stock appreciation rights and notes
given in payment of the exercise price of Apple Common Shares Options. All such
obligations, liabilities and commitments which may not be discharged and
terminated prior to the Closing Date are identified in Schedule 5.10(d) to the
Apple Disclosure Letter.
(e) Cooperation. Apple and the Company shall cooperate in good faith with
respect to the effectuation of the covenants described in subsections (a, (b),
(c) and (d) above.
SECTION 5.11 Indemnification.
(a) Indemnification Rights. For a period of six years from and after the
Effective Time, the Company shall indemnify the directors, officers, employees
or agents of Apple who at any time prior to the Effective Time were entitled to
indemnification under the Articles of Incorporation and Bylaws of Apple or
employment agreements between Apple and its officers existing on the date hereof
to the same extent as such directors, officers, employees or agents are entitled
to indemnification under such Articles of Incorporation and Bylaws or existing
employment agreements in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement).
(b) Liability Coverage. The Company shall use its reasonable best efforts
to provide "run-off" or "tail" director and officer liability coverage to the
existing directors and officers of Apple without reduction of existing coverage
for a period of six years after the Effective Time.
(c) Successors and Assigns. The provisions of this Section 5.11 are
intended to be for the benefit of, and shall be enforceable by, each indemnified
party, his or her heirs and his or her personal representatives and shall be
binding on all successors and assigns of the Company and Apple.
SECTION 5.12 Comfort Letter. The Company and Apple shall use their best
efforts to cause to be delivered to the Company and Apple "comfort" letters of
Ernst & Young LLP, independent public accountants for the Company and Apple,
dated and delivered the date on which the Registration Statement shall become
effective and as of the Effective Time, and addressed to the Company and Apple,
in form and substance reasonably satisfactory to the Company and Apple and
reasonably customary in scope and substance for letters delivered by independent
public accountants
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in connection with transactions such as those contemplated by this Agreement,
including a Statement on Auditing Standards Number 72 review of the audited
financial statements, and Statement on Auditing Standards Number 71 review of
the Company's and Apple 's interim unaudited financial statements, each
included, respectively, in the Company SEC Documents and the Apple SEC
Documents.
SECTION 5.13 Efforts to Fulfill Conditions. The Company and Apple each
shall use commercially reasonable efforts to insure that all conditions
precedent to its obligations hereunder are fulfilled at or prior to the Closing
Date.
SECTION 5.14 Cooperation of the Parties. The Company and Apple each shall
cooperate with the other in supplying such information as may be reasonably
requested by the other in connection with obtaining consents or approvals to the
transactions contemplated by this Agreement.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of Apple and the Company to effect the Merger and to
consummate the other transactions contemplated hereby is subject to the
satisfaction or waiver on or prior to the Effective Time of the following
conditions:
(a) Apple Common Shareholder Approval. The Apple Common Shareholder
Approval shall have been obtained.
(b) Company Common Shareholder Approval. The Company Common
Shareholder Approval shall have been obtained.
(c) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger or any of the other transactions
contemplated hereby shall be in effect.
(e) Certain Actions and Consents. All material actions by or in
respect of or filings with any Governmental Entity required for the
consummation of the Merger or any of the other transactions contemplated
hereby shall have been obtained or made.
SECTION 6.2 Conditions to Obligations of the Company. The obligations of
the Company to issue the Merger Consideration to the Apple Common Shareholders
and to consummate the other transactions contemplated hereby are further subject
to the following conditions, any one or more of which may be waived by the
Company:
(a) Representations and Warranties. The representations and warranties
of Apple set forth in this Agreement shall be true and correct as of the
Closing Date, as though made on and as of the Closing Date, except to the
extent the representation or warranty is expressly limited by its terms to
another date, and the Company shall have received a certificate (which
certificate may be qualified by knowledge to the same extent as such
representations and warranties are so qualified) signed on behalf of Apple
by the chief executive officer or the chief financial officer of Apple to
such effect. This condition shall be deemed satisfied notwithstanding any
failure of a representation or warranty of Apple to be true and correct as
of the Closing Date if the aggregate amount of Apple Economic Losses (as
defined herein) that would reasonably be expected to arise as a result of
the failures of such representations and warranties to be true and correct
as of the Closing Date does not exceed $2,000,000 (such amount to be
calculated by counting in all cases from the first dollar of such Apple
Economic Losses without giving effect to
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the $2,000,000 limitation set forth in Section 3.1(f)). "Apple Economic
Losses," as used in this Agreement, shall mean any and all net damage, net
loss, net liability or expense suffered by Apple and the Apple Subsidiaries
taken as a whole, but shall not include any claims, damages, loss, expense
or other liability resulting from any class action or shareholders'
derivative lawsuits relating to the Merger against Apple, if any, filed
subsequent to the date of this Agreement, any replacement, refinancing or
extension of the maturity date of any debt existing as of the date of this
Agreement to the extent such replacement, refinancing or extension does not
result in any additional net liability of Apple or the Apple Subsidiaries
taken as a whole, or any amounts paid or expenses or liabilities incurred
by Apple in fulfilling its obligations under, or taking any action required
or permitted by, this Agreement.
(b) Performance of Obligations of Apple. Apple shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Effective Time, and the Company shall
have received a certificate signed on behalf of Apple by the chief
executive officer or the chief financial officer of Apple to such effect.
(c) Consents. All consents and waivers from third parties necessary in
connection with the consummation of the Merger and the other transactions
contemplated hereby shall have been obtained, other than such consents and
waivers from third parties, which, if not obtained, would not result,
individually or in the aggregate, in Apple Economic Losses of $2,000,000 or
more.
(d) Absence of Changes. From the date of this Agreement through the
Effective Time, there shall not have occurred any change in the financial
condition, business or operations of Apple and its Subsidiaries, taken as a
whole, that would have or would be reasonably likely to have an Apple
Material Adverse Effect, other than any such change that affects both Apple
and the Company in a substantially similar manner.
(e) Fairness Opinion. The opinion of PaineWebber Incorporated
addressed to the special committee of the Board of Directors of the Company
that the consideration to be paid by the Company pursuant to the Merger is
fair, from a financial point of view, to the Company shall have been issued
and shall not have been withdrawn or materially modified.
(f) Dissenters' Rights. The holders of no more than 5% of the
outstanding Apple Common Shares as of the applicable record date shall have
indicated their intention to exercise their dissenters' rights under the
VSCA.
SECTION 6.3 Conditions to Obligation of Apple. The obligations of Apple to
effect the Merger and to consummate the other transactions contemplated hereby
is further subject to the following conditions, any one or more of which may be
waived by Apple:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement shall be true and correct as of
the Closing Date, as though made on and as of the Closing Date, except to
the extent the representation or warranty is expressly limited by its terms
to another date, and Apple shall have received a certificate (which
certificate may be qualified by knowledge to the same extent as such
representations and warranties are so qualified) signed on behalf of the
Company by the chief executive officer or the chief financial officer of
the Company to such effect. This condition shall be deemed satisfied
notwithstanding any failure of a representation or warranty of the Company
to be true and correct as of the Closing Date if the aggregate amount of
Company Economic Losses (as defined herein) that would reasonably be
expected to arise as a result of the failures of such representations and
warranties to be true and correct as of the Closing Date does not exceed
$2,000,000 (such amount to be calculated by counting in all cases from the
first dollar of such Company Economic Losses without giving effect to the
$2,000,000 limitation set forth in Section 3.2(f)). "Company Economic
Losses", as used in this Section 6.3, shall mean any and all net damage,
net loss, net liability or expense suffered by the Company or the Company
Subsidiaries taken as a whole, but shall not include any claims, damages,
loss, expense or other liability resulting from any class action or
shareholders' derivative lawsuits relating to the Merger or the other
transactions
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contemplated hereby against the Company, if any, filed subsequent to the
date of this Agreement, any replacement, refinancing or extension of the
maturity date of any debt existing as of the date of this Agreement to the
extent such replacement, refinancing or extension does not result in any
additional net liability of the Company or the Company Subsidiaries taken
as a whole, or any amounts paid or expenses or liabilities incurred by the
Company in fulfilling its obligations under, or taking any action required
or permitted by, this Agreement.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time, and Apple
shall have received a certificate of the Company signed on behalf of the
Company by the chief executive officer or the chief financial officer of
such party to such effect.
(c) Opinion Relating to the Merger. Apple shall have received an
opinion dated as of the Closing Date of MWBB, subject to certificates,
letters and assumptions reasonably satisfactory to Apple that the Merger
qualifies as a tax-free reorganization for the holders of Apple Common
Shares under Section 368(a) of the Code.
(d) Consents. All consents and waivers from third parties necessary in
connection with the consummation of the Merger and the other transactions
contemplated hereby shall have been obtained, other than such consents and
waivers from third parties, which, if not obtained, would not result,
individually or in the aggregate, in Company Economic Losses of $2,000,000
or more.
(e) Absence of Changes. From the date of the Agreement through the
Effective Time, there shall not have occurred any change in the financial
condition, business or operations of the Company and its Subsidiaries,
taken as a whole, that would have or would be reasonably likely to have a
Company Material Adverse Effect other than any such change that affects
both Apple and the Company in a substantially similar manner.
(f) Fairness Opinion. The opinion of BHC addressed to the Apple
Special Committee that the transaction contemplated by this Agreement is
fair, from a financial point of view, to the holders of the Common Shares
of Apple shall have been issued and shall not have been withdrawn or
materially modified.
ARTICLE VII
APPLE BOARD ACTIONS
SECTION 7.1 Apple Board Actions. Notwithstanding Section 5.6 or any other
provision of this Agreement to the contrary, to the extent required by the
fiduciary obligations of the Board of Directors of Apple, as determined in good
faith based on the advice of outside counsel, Apple may:
(a) disclose to its shareholders any information required to be
disclosed under applicable law;
(b) in response to an unsolicited request therefor, participate in
discussions or negotiations with, or furnish information with respect to
itself pursuant to a confidentiality agreement no less favorable to itself
than the provisions of Section 5.2 of this Agreement to, any person in
connection with a Competing Transaction proposed by such person; and
(c) approve or recommend (and in connection therewith withdraw or
modify its approval or recommendation of this Agreement and the Merger) a
Superior Competing Transaction (as defined below) or enter into an
agreement with respect to such Superior Competing Transaction (for purposes
of this Agreement, "Superior Competing Transaction" means a bona fide
proposal of a Competing Transaction made by a third party which a majority
of the members of the Board of Directors of Apple determines in good faith
(based on the advice of its investment banking firm) to be more favorable
to its shareholders than the Merger, provided that the Person making the
proposal has adequate sources of financing to consummate the transaction.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 Termination. This Agreement may be terminated at any time prior
to the filing of the Articles of Merger for the Merger with the State
Corporation Commission of the Commonwealth of Virginia, whether before or after
the Apple Common Shareholder Approval or the Company Common Shareholder Approval
is obtained:
(a) by mutual written consent duly authorized by the respective Boards
of Directors of the Company and Apple;
(b) by the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of Apple set forth in this Agreement, or
if any representation or warranty of Apple shall have become untrue, in
either case such that the conditions set forth in Section 6.2(a) or Section
6.2(b), as the case may be, would be incapable of being satisfied by
September 30, 1999 (as otherwise extended);
(c) by Apple, upon a breach of any representation, warranty, covenant
or agreement on the part of the Company set forth in this Agreement, or if
any representation or warranty of the Company shall have become untrue, in
either case such that the conditions set forth in Section 6.3(a) or Section
6.3(b), as the case may be, would be incapable of being satisfied by
September 30, 1999 (as otherwise extended);
(d) by either the Company or Apple, if any judgment, injunction,
order, decree or action by any Governmental Entity of competent authority
preventing the consummation of the Merger shall have become final and
nonappealable;
(e) by either the Company or Apple, if the Merger shall not have been
consummated before September 30, 1999; provided, however, that a party that
has willfully and materially breached a representation, warranty or
covenant of such party set forth in this Agreement shall not be entitled to
exercise its right to terminate under this Section 8.1(e);
(f) by either the Company or Apple (i) if, upon a vote at a duly held
Apple Common Shareholders Meeting or any adjournment thereof, the Apple
Common Shareholder Approval shall not have been obtained or (ii) if, upon a
vote at a duly held Company Common Shareholders Meeting or an adjournment
thereof, the Company Common Shareholder Approval shall not have been
obtained;
(g) by Apple, upon 10 days prior notice to the Company, if prior to
the Apple Common Shareholders Meeting, the Board of Directors of Apple
shall have withdrawn or modified in compliance with Section 7.1 hereof in
any manner adverse to the Company its approval or recommendation of the
Merger or this Agreement in connection with the approval and recommendation
of a Superior Competing Transaction;
(h) by the Company, if (i) prior to the Apple Common Shareholders
Meeting, the Board of Directors of Apple shall have withdrawn or modified
in any manner adverse to the Company its approval or recommendation of the
Merger or this Agreement in connection with, or approved or recommended,
any Superior Competing Transaction, (ii) Apple shall have entered into any
agreement with respect to any Competing Transaction (other than a
confidentiality agreement as contemplated by Section 7.1(b) or (iii) the
Board of Directors of Apple or any committee thereof shall have resolved to
do any of the foregoing;
(i) by Apple, if on any date after the date of this Agreement but on
or prior to the Effective Day, the average daily closing price of a Company
Common Share on the NYSE, reported as "New York Stock Exchange Composite
Transactions" by The Wall Street Journal, over the consecutive 10-trading
day period ending on such date is less than the lower of (i) $8.50 per
share or (ii) 85% of the average daily closing price per Company Common
Share (determined in the same manner) over the consecutive 10-trading day
period ending on the date
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of this Agreement; provided, however, to be effective, notice of
termination pursuant to this Section 8.1(i) shall be given by Apple to the
Company within three business days after the date that such right of
termination arises.
SECTION 8.2 Expenses.
(a) Except as otherwise specified in this Section 8.2 or agreed in writing
by the parties, all out-of-pocket costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such cost or expense.
(b) If the Merger and the transactions contemplated by this Agreement are
consummated in accordance with this Agreement, all out-of-pocket costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the Company.
(c) Apple agrees that if this Agreement shall be terminated pursuant to
Section 8.1(f)(i), (g) or (h), then Apple will pay to the Company an amount
equal to the Company Break-Up Expenses (as defined herein). Payment of any of
such amount shall be made, as directed by the Company, by wire transfer of
immediately available funds promptly, but in no event later than two business
days after the amount is due as provided herein. The "Company Break-Up Expenses"
shall be an amount equal to the lesser of (i) the Company's out-of-pocket
expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, all attorneys', accountants'
and investment bankers' fees and expenses) and (ii) $750,000. Apple further
agrees that if this Agreement shall be terminated pursuant to Section 8.1(g) or
(h), then Apple will pay to the Company an amount equal to the Company Break-Up
Fee (as defined herein). Payment of any of such amount shall be made, as
directed by the Company, by wire transfer of immediately available funds
promptly, but in no event later than two business days after the amount is due
as provided herein. The "Company Break-Up Fee" shall be an amount equal to the
lesser of (i) $7,250,000 (the "Company Base Amount") or (ii) the sum of (A) the
maximum amount that can be paid to the Company without causing it to fail to
meet the requirements of Sections 856(c)(2) and (3) of the Code determined as if
the payment of such amount did not constitute income described in Sections
856(c)(2) and (3) of the Code ("Qualifying Income"), as determined by
independent accountants to the Company, and (B) in the event the Company
receives an opinion of outside counsel (the "Company Break-Up Fee Tax Opinion")
to the effect that receipt of some or all of the Company Base Amount would
either constitute Qualifying Income as to the Company or would be excluded from
the Company's gross income for purposes of Sections 856(c)(2) and (3) of the
Code (the "REIT Requirements") or to the effect that the receipt of some or all
of the Company Base Amount would not cause the Company to cease to comply with
the REIT Requirements, the amount of the Company Base Amount that can be paid
under this clause (B) after taking into account the portion of the Company Base
Amount paid pursuant to clause (A) above. In the event that the Company is not
able to receive the full Company Base Amount, Apple shall place the unpaid
amount in escrow and shall not release any portion thereof to the Company unless
and until Apple receives any one or a combination of the following: (i) a
letter(s) from the Company's independent accountants indicating the maximum
amount that can be paid at that time to the Company without causing the Company
to fail to meet the REIT Requirements or (ii) a Company Break-Up Fee Tax
Opinion, in either of which event Apple shall pay to the Company the lesser of
the unpaid Company Base Amount or the maximum amount stated in the letter(s) or
opinion(s) from time to time. If the Company becomes entitled to the Company
Break-Up Fee under this Agreement, the Company Break-Up Fee shall be in lieu of
any fees or damages payable to the Company under the terms of that certain
Property Acquisition/Disposition Agreement between the Company and Apple and
that certain Right of First Refusal Agreement between the Company and Apple as a
result of the consummation within nine months after the date of termination of
this Agreement of another transaction with any party (the "Competing Third
Party"), if the Competing Third Party was identified by Apple to the Company at
the time of termination of this Agreement as proposing a Superior Competing
Transaction which permitted and resulted in the termination of this Agreement.
It is specifically affirmed and agreed that except to the limited extent
modified by the preceding
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sentence, the Property Acquisition/Disposition Agreement and the Right of First
Refusal Agreement shall remain in full force and effect according to their terms
and that the Company shall retain all of its rights thereunder.
(d) The Company agrees that if this Agreement shall be terminated pursuant
to Section 8.1(b), 8.1(c) or 8.1(f)(ii), then the Company will pay to Apple an
amount equal to the Apple Break-Up Expenses (as defined herein). Payment of any
of such amounts shall be made, as directed by Apple, by wire transfer of
immediately available funds promptly, but in no event later than two business
days after the amount is due as provided herein. The "Apple Break-Up Expenses"
shall be an amount equal to the lesser of (i) Apple's out-of-pocket expenses
incurred on or after January 1, 1999 in connection with this Agreement and the
transactions contemplated hereby (including, without limitation, all attorneys',
accountants' and investment bankers' fees and expenses) and (ii) $750,000.
(e) Apple and the Company agree that the agreements contained in Section
8.2(c) and (d) above are an integral part of the transactions contemplated by
this Agreement and constitute liquidated damages and not a penalty.
(f) In the event that the Company or Apple is required to file suit to seek
all or a portion of the amounts payable under this Section 8.2, and such party
prevails in such litigation, such party shall be entitled to receive, in
addition to all amounts that it is otherwise entitled to receive under this
Section 8.2 all expenses, including attorney's fees and expenses which it has
incurred in enforcing its rights hereunder.
SECTION 8.3 Effect of Termination. In the event of termination of this
Agreement by either Apple or the Company as provided in Section 8.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of the Company, or Apple, other than the last sentence
of Section 5.2, Section 8.2, this Section 8.3 and Article IX and except to the
extent that such termination results from a willful breach by a party of any of
its representations, warranties, covenants or agreements set forth in this
Agreement.
SECTION 8.4 Amendment. This Agreement may be amended by the parties in
writing by action of their respective Boards of Directors at any time before or
after the Apple Shareholder Approval and the Company Shareholder Approval are
obtained and prior to the filing of the Articles of Merger with the State
Corporation Commission of the Commonwealth of Virginia; provided, however, that,
after the Apple Shareholder Approval or the Company Shareholder Approval is
obtained, no such amendment, modification or supplement shall alter the amount
or change the form of the consideration to be delivered to Apple 's
shareholders.
SECTION 8.5 Extension; Waiver. At any time prior to the Effective Time,
each of Apple and the Company may (a) extend the time for the performance of any
of the obligations or other acts of the other party, (b) waive any inaccuracies
in the representations and warranties of the other party contained in this
Agreement or in any document delivered pursuant to this Agreement or (c) subject
to the proviso of Section 8.4, waive compliance with any of the agreements or
conditions of the other party contained in this Agreement. Any agreement on the
part of a party to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 9.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
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SECTION 9.2 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, sent by overnight courier (providing proof of
delivery) to the parties or sent by telecopy (providing confirmation of
transmission) at the following addresses or telecopy numbers (or at such other
address or telecopy number for a party as shall be specified by like notice):
(a) if to the Company or Cornerstone Sub, if prior to the Effective
Time, to:
Harry S. Taubenfeld
Chairman of the Special Committee of the Company
575 Chestnut Street
Cedarhurst, NY 11516
Fax: (516) 374-3490
with a copy to Glade M. Knight, Chief Executive Officer of the Company
(at the address set forth below), and after the Effective Time, to:
CORNERSTONE REALTY INCOME TRUST, INC.
306 East Main Street
Richmond, VA 23219
Attn: Glade M. Knight, Chief Executive Officer
Fax: (804) 782-9302
with a copy to:
MCGUIRE, WOODS, BATTLE & BOOTHE LLP
901 East Cary Street
One James Center
Richmond, VA 23219
Attn: Leslie A. Grandis, Esq.
Fax: (804) 775-1061
(b) if to Apple, prior to the Effective Time, to:
Chairman of the Special Committee of Apple
c/o Bruce H. Matson, Esq.
LeClair Ryan, A Professional Corporation
707 East Main Street
Richmond, VA 23219
Fax: (804) 783-2294
with a copy to:
MAYS & VALENTINE
NationsBank Center
1111 East Main Street
Richmond, VA 23219
Attn: Elizabeth G. Hester, Esq.
Fax: (804) 697-1339
and with a copy to Glade M. Knight, Chief Executive Officer of Apple (at
the address set forth below), and after the Effective Time, to:
APPLE RESIDENTIAL INCOME TRUST, INC.
306 East Main Street
Richmond, VA 23219
Attn: Glade M. Knight, Chief Executive Officer
Fax: (804) 782-9302
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SECTION 9.3 Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
SECTION 9.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 9.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement
and the other agreements entered into in connection with the transactions
contemplated hereby (a) constitute the entire agreement and supersedes all prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter of this Agreement and, (b) except for the
provisions of Article II, Section 5.11, Section 5.12, and Section 5.13 are not
intended to confer upon any person other than the parties hereto any rights or
remedies.
SECTION 9.6 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Virginia,
regardless of the laws that might otherwise govern under applicable principles
of conflict of laws thereof.
SECTION 9.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned or delegated, in
whole or in part, by operation of law or otherwise by any party without the
prior written consent of the other party. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by, the parties and their respective successors and assigns.
SECTION 9.8 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the Commonwealth of Virginia or in any Virginia state court, this
being in addition to any other remedy to which they are entitled at law or in
equity. In addition, each of the parties hereto (a) consents to submit itself
(without making such submission exclusive) to the personal jurisdiction of any
federal court located in the Commonwealth of Virginia or any Virginia state
court in the event any dispute arises out of this Agreement or any of the
transactions contemplated by this Agreement and (b) agrees that it will not
attempt to deny or defeat such personal jurisdiction by motion or other request
for leave from any such court.
SECTION 9.9 Incorporation. The Apple Disclosure Letter and the Company
Disclosure Letter and all Exhibits attached hereto and thereto and referred to
herein and therein are hereby incorporated herein and made a part hereof for all
purposes as if fully set forth herein.
SECTION 9.10 Non-Recourse. None of the officers, directors or shareholders
of the Company shall be personally bound or have any personal liability
hereunder. Apple shall look solely to the assets of the Company for satisfaction
of any liability of the Company with respect to this Agreement and any ancillary
agreements to which it is a party. Apple will not seek recourse or commence any
action against any of the shareholders of the Company or any of their personal
assets, and will not commence any action for money judgments against any of the
directors or officers of the Company or seek recourse against any of their
personal assets, for the performance or payment of any obligation of the Company
hereunder or thereunder. Neither the officers, directors nor shareholders of
Apple shall be personally bound or have any personal liability hereunder. The
Company shall look solely to the assets of Apple for satisfaction of any
liability of Apple with respect to this Agreement and any ancillary agreements
to which it is a party. The Company will not seek recourse or commence any
action against any of the shareholders of Apple or any of their personal assets,
and will not commence any action for money judgments against any of the
directors or officers of Apple or seek
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recourse against any of their personal assets, for the performance or payment of
any obligation of Apple hereunder or thereunder.
ARTICLE X
CERTAIN DEFINITIONS
SECTION 10.1 Certain Definitions. For purposes of this Agreement:
An "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person.
"Apple Disclosure Letter" means the letter dated March 30, 1999
previously delivered to the Company by Apple disclosing certain information
in connection with this Agreement.
"Company Disclosure Letter" means the letter dated March 30, 1999
previously delivered to Apple by the Company disclosing certain information
in connection with this Agreement.
"Knowledge" where used herein with respect to Apple shall mean the
actual knowledge of any of the persons named in Schedule 10 to the Apple
Disclosure Letter and where used with respect to the Company shall mean the
actual knowledge of any of the persons named in Schedule 10 to the Company
Disclosure Letter. "Knowledge" shall not include the "constructive" or
deemed knowledge of any such persons, or the existence of facts or
circumstances which might constitute "reason to know" by such person or
which might lead to the conclusion that such person "should have known"
unless, in any such case, such person has actual knowledge of the matter in
question.
"Person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity.
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IN WITNESS WHEREOF, the Company, Cornerstone Sub and Apple have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
CORNERSTONE REALTY INCOME TRUST, INC.
By: /s/ Glade M. Knight
---------------------------------------
Name: Glade M. Knight
Title: Chief Executive Officer
APPLE RESIDENTIAL INCOME TRUST, INC.
By: /s/ Glade M. Knight
---------------------------------------
Name: Glade M. Knight
Title: Chief Executive Officer
CORNERSTONE ACQUISITION COMPANY
By: /s/ Glade M. Knight
---------------------------------------
Name: Glade M. Knight
Title: Chief Executive Officer
Additional Signatories:
By executing below, the Additional
Signatories confirm and agree to the
provisions comprising the second
sentence of Section 3.1(s).
Mr. Knight further agrees to the matters
set forth in Section 5.10(c).
/s/ Glade M. Knight
- ----------------------------------------
Glade M. Knight
/s/ Debra A. Jones
- ----------------------------------------
Debra A. Jones
/s/ Stanley J. Olander, Jr.
- ----------------------------------------
Stanley J. Olander, Jr.
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EXHIBIT A
CORNERSTONE REALTY INCOME TRUST, INC.
ARTICLES OF AMENDMENT TO
THE AMENDED AND RESTATED ARTICLES OF INCORPORATION
DESIGNATING THE
SERIES A CONVERTIBLE PREFERRED SHARES
1. Name. The name of the Corporation is Cornerstone Realty Income Trust,
Inc.
2. The Amendment. The amendment, a copy of which is attached hereto, adds
Article IX to the Amended and Restated Articles of Incorporation which creates a
series of Preferred Shares (the Series A Convertible Preferred Shares), states
the designation and number of Shares in the series and fixes the preferences,
limitations and relative rights thereof.
3. Board Action. At a meeting held on the day of , 1999, the Board of
Directors of the Corporation found the amendment to the Amended and Restated
Articles of Incorporation to be in the best interests of the Corporation.
Shareholder approval is not required.
Dated: , 1999
CORNERSTONE REALTY INCOME TRUST, INC.
By:
------------------------------------------
Chairman
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ARTICLE IX
SERIES A CONVERTIBLE PREFERRED SHARES
9.1 Designation, Number and Rank.
( ) authorized but unissued Preferred Shares (no par value) are hereby
designated as a series of Preferred Shares to be called the Series A Convertible
Preferred Shares (the "Series A Preferred Shares"). The Series A Preferred
Shares shall, with respect to distribution rights and rights upon voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, rank (a)
senior to all classes or series of Common Shares and to all equity securities
issued by the Corporation the terms of which provide that such equity securities
shall rank junior to such Series A Preferred Shares; (b) on a parity with all
equity securities issued by the Corporation the terms of which provide that such
equity securities shall rank on a parity with the Series A Preferred Shares; and
(c) junior to all other equity securities issued by the Corporation. The
Corporation retains the power and authority to issue Preferred Shares which rank
senior to or on a parity with the Series A Preferred Shares as to dividends or
as to rights in liquidation, but only if, at the time of and after giving effect
to the issuance of Preferred Shares which rank senior to the Series A Preferred
Shares, the sum of (i) the aggregate liquidation preferences of all Preferred
Shares which rank senior to the Series A Preferred Shares, and (ii) the
aggregate liquidation preferences of all of the Series A Preferred Shares, does
not exceed 20% of the Corporation's Total Assets (as hereinafter defined), as
disclosed on the balance sheet of the Corporation most recently filed on a
report with the United States Securities and Exchange Commission. For the
purposes of this Section 9.1, "Total Assets" as of any date means the sum of (a)
Undepreciated Real Estate Assets and (b) all other assets of the Corporation
determined in accordance with generally accepted accounting principles (but
excluding intangibles). "Undepreciated Real Estate Assets" as of any date means
the cost (original cost plus capital improvements) of real estate assets of the
Corporation on such date, before depreciation and amortization, determined in
accordance with generally accepted accounting principles.
9.2 Dividends.
(a)The holders of the outstanding Series A Preferred Shares shall be
entitled to receive, if, when and as declared by the Board of Directors,
out of any funds legally available therefor, cash dividends at the
Specified Rate (as hereinafter defined), and no more, payable in quarterly
installments on the 20th day of January, April, July and October of each
year (each, a "Dividend Payment Date") commencing on the 20th day of
, 1999. The Specified Rate shall be the rate per annum per Series A
Preferred Share set forth in the following table:
DIVIDEND RATE PER ANNUM PERIOD FROM DATE OF ISSUANCE OF
PER SERIES A PREFERRED SHARE SERIES A PREFERRED SHARE
------------------------------ --------------------------------
$ 2.125..................... Year 1
$ 2.250..................... Year 2
$ 2.375 .................... Year 3 and thereafter
Dividends shall be cumulative and shall accrue on the Series A Preferred Shares
from and after the date of issue thereof, whether or not such dividends shall be
declared or there shall be funds of the Corporation legally available for the
payment of such dividends for any given dividend period. If any Dividend Payment
Date occurs on a day that is not a Business Day, any accrued dividends otherwise
payable on such Dividend Payment Date shall be paid on the next succeeding
Business Day. The amount of dividends payable on Series A Preferred Shares for
each full dividend period shall be calculated by dividing by four (4) the
Specified Rate set forth in this paragraph (a). Dividends payable in respect of
the first dividend period and any subsequent period which is less than a full
dividend period in length will be calculated on the basis of a 360-day year
consisting of twelve 30-day months. Dividends shall be paid to the holders of
record of the Series A Preferred Shares as their names appear on the stock
records of the Corporation at the close of business on the applicable record
date (the "Dividend Record Date"), which shall be the same day as the record
date for any
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dividend payable on the Common Shares with respect to the same period or, if no
such Common Shares dividend is payable, then the Dividend Record Date for such
Dividend Payment Date shall be the Friday occurring between the tenth and
sixteenth days of the calendar month in which the applicable Dividend Payment
Date falls or on such date as shall be fixed by the Board of Directors at the
time of declaration of the dividend, which shall be not less than 10 nor more
than 30 days prior to the Dividend Payment Date. "Business Day" shall mean any
day, other than a Saturday or Sunday, that is neither a legal holiday nor a day
on which banking institutions in New York City, New York are authorized or
required by law, regulation or executive order to close.
(b) When dividends are not paid in full (or a sum sufficient for such
full payment is not so set apart) upon the Series A Preferred Shares and
any other Preferred Shares ranking on a parity as to dividends with the
Series A Preferred Shares, all dividends declared on the Series A Preferred
Shares and any other Preferred Shares ranking on a parity with the Series A
Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share of Series A Preferred Shares and such other Preferred
Shares for the same or similar dividend period shall in all cases bear to
each other the same ratio that accrued dividends per share on the Series A
Preferred Shares and such other Preferred Shares bear to each other.
(c) Unless (i) Full Cumulative Dividends (as hereinafter defined in
Section 9.7) (to the extent that the amount thereof shall have become
determinable) on all outstanding Series A Preferred Shares and any
outstanding Preferred Shares ranking senior to or on a parity with the
Series A Preferred Shares as to dividends for all past dividend periods
shall have been declared and paid, or declared and a sum sufficient for the
payment thereof set apart, and (ii) unless all mandatory sinking fund
payments required pursuant to the terms of any outstanding Preferred Shares
ranking senior to or on a parity with the Series A Preferred Shares as to
rights in liquidation shall have been paid, then (i) no dividend (other
than a dividend payable solely in shares ranking junior to the Series A
Preferred Shares) shall be declared or paid upon, or any sum set apart for
the payment of dividends upon, any shares of the Corporation ranking junior
to the Series A Preferred Shares as to dividends; (ii) no other
distribution shall be made with respect to any shares of the Corporation
ranking junior to the Series A Preferred Shares as to rights in
liquidation; (iii) no shares of the Corporation ranking junior to the
Series A Preferred Shares as to dividends or rights in liquidation shall be
purchased, redeemed or otherwise acquired for value by the Corporation or
by any Subsidiary; and (iv) no monies shall be paid into or set apart or
made available for a sinking or other like fund for the purchase,
redemption or other acquisition for value of any shares of the Corporation
ranking junior to the Series A Preferred Shares as to dividends or rights
in liquidation by the Corporation or any Subsidiary.
(d) Dividends in respect of any past dividend periods that are in
arrears may be declared and paid at any time to holders of record of the
Series A Preferred Shares as of the applicable Dividend Record Date.
(e) Any dividend payment made on the Series A Preferred Shares shall
first be credited against the earliest accrued but unpaid dividend due with
respect to such shares which remains payable.
(f) Accrued but unpaid dividends on the Series A Preferred Shares will
not bear interest. Holders of the Series A Preferred Shares will not be
entitled to dividends in excess of Full Cumulative Dividends.
(g) No dividends on the Series A Preferred Shares shall be declared by
the Board of Directors or paid or funds set apart for the payment thereof
by the Corporation at such time as the terms and provisions of any
agreement of the Corporation, including any agreement relating to its
indebtedness, prohibits such declaration, payment or setting apart for
payment or provides that such declaration, payment or setting apart for
payment would constitute a breach thereof or a default thereunder, or if
such declaration or payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series A Preferred Shares
shall accrue whether or not they are declared or paid.
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9.3 Voting Rights.
(a) Except for the voting rights expressly conferred by this Section
9.3, and except to the extent provided by law, the holders of the
outstanding Series A Preferred Shares shall not be entitled (i) to vote at
any meeting of the shareholders for election of directors or for any other
purpose, or (ii) to receive notice of, or to otherwise participate in, any
meeting of shareholders of the Corporation at which they are not entitled
to vote.
(b) Whenever distributions payable on any Series A Preferred Shares,
or on any class or series of preferred shares which ranks on a parity with
the Series A Preferred Shares as to dividends ("Parity Stock"), are in
arrears for six or more quarterly periods (whether or not consecutive), the
number of directors then constituting the Board of Directors of the
Corporation will be automatically increased by two, and the holders of the
Series A Preferred Shares, voting together as a class with the holders of
shares of any other class or series of Parity Stock entitled to such voting
rights (collectively, the "Voting Preferred Stock"), will have the right to
elect at any annual meeting of shareholders or a properly called special
meeting of the holders of Voting Preferred Stock two additional directors
who are nominees of any holder of Voting Preferred Stock to serve on the
Corporation's Board of Directors until all such accrued but unpaid
dividends have been authorized and paid or declared with a sufficient sum
for payment thereof set aside for payment. Such right of the holders of the
Voting Preferred Stock to elect directors may be exercised until all
dividends to which the holders of Voting Preferred Stock shall have been
entitled for (i) all previous dividend periods and (ii) the current
dividend period shall have been paid in full or declared and a sum of money
sufficient for payment thereof set aside for payment, at which time the
right of the holders of Voting Preferred Stock to elect such two additional
directors shall cease, the term of such directors previously elected shall
thereupon terminate, and the authorized number of directors of the
Corporation shall thereupon return to the number of authorized directors
otherwise in effect, but subject always to the same provisions for the
renewal and divestment of such special voting rights in the case of any
such future dividend arrearages in six quarterly periods.
(c) At any time when such voting power shall have vested in the
holders of the Voting Preferred Stock and prior to the termination of such
voting power, the Secretary of the Corporation may, and upon the written
request of any holder of Voting Preferred Stock (addressed to the Secretary
at the principal office of the Corporation) shall, call a special meeting
of the holders of the Voting Preferred Stock for the election of the two
directors to be elected by them as herein provided; such call to be made by
notice similar to that provided in the Bylaws of the Corporation for a
special meeting of the shareholders or as required by law. If any such
special meeting required to be called as above provided shall not be called
by the Secretary within 20 days after receipt of any such request, then any
holder of Voting Preferred Stock may call such meeting, upon the notice
above provided, and for that purpose shall have access to the stock books
of the Corporation. The directors elected at any such special meeting shall
serve until the next annual meeting of the shareholders or special meeting
held in lieu thereof and until their respective successors are duly elected
and qualified, if such directorship shall not have previously terminated as
above provided. If any vacancy shall occur among the directors elected by
the holders of the Voting Preferred Stock, a successor shall be elected by
the Board of Directors upon the nomination of the then-remaining director
(or, if there is no such remaining director or successor thereto, by the
holders of the Voting Preferred Stock) to serve until the next annual
meeting of the shareholders or special meeting held in lieu thereof and
until the successor is duly elected and qualified if such directorship
shall not have previously been terminated as provided above.
(d) The affirmative vote of the holders of a majority of the
outstanding Series A Preferred Shares, voting as a separate voting group,
shall be required (i) on any matter with respect to which the holders of
the outstanding Series A Preferred Shares are entitled to vote as a
separate voting group as provided for under the Virginia Stock Corporation
Act (or any successor thereto) or (ii) for the adoption of any amendment,
alteration or repeal of any provision of these
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Articles of Amendment, or of any provision of the Articles of Incorporation
of the Corporation, whether by merger, consolidation or otherwise, that
adversely changes any preferences, limitations, privileges, voting power or
relative rights of the Series A Preferred Shares or the holders thereof, it
being understood that the authorization of, or the increase in the
authorized number of shares of, any class of shares ranking senior to or on
a parity with the Series A Preferred Shares as to dividends or rights in
liquidation and the designation of the preferences, limitations,
privileges, voting power and relative rights of any such class is not such
an adverse change.
(e) Whenever the holders of Series A Preferred Shares or Voting
Preferred Stock, respectively, are entitled to vote as a separate voting
group on any matter pursuant to the provisions of paragraphs (b), (c) or
(d) of this Section 9.3, the vote required to approve such matter shall be
the affirmative vote of a majority of all the votes entitled to be cast by
the respective voting group, with each share having one vote.
9.4 Redemption.
(a) The Series A Preferred Shares shall not be redeemable by the
Corporation for five years after the first issuance of the Series A
Preferred Shares. At any time and from time to time following the fifth
anniversary of the first issuance of the Series A Preferred Shares, the
Corporation may, at its option, redeem all or any portion of the
outstanding Series A Preferred Shares for the Redemption Consideration (as
hereinafter defined). The Redemption Consideration shall be either, or any
combination of, the following amounts, as selected by the Corporation: (i)
cash in the amount of the Liquidation Payment (as hereinafter defined) for
the Series A Preferred Shares to be redeemed together with an amount equal
to all unpaid Dividends Accrued (as hereinafter defined) thereon to the
date fixed for redemption (the "Redemption Date"), or (ii) such number of
Common Shares of the Corporation (rounded to the nearest one one-thousandth
(1/1000) of a Common Share) as is equal to (A) the Liquidation Payment for
the Series A Preferred Shares to be redeemed together with an amount equal
to all unpaid Dividends Accrued thereon to the Redemption Date, divided by
(B) the Conversion Price (as defined in Section 9.6); provided, that the
Corporation may exercise this option to deliver Common Shares upon
redemption only if for 20 trading days within the 30 consecutive trading
days immediately preceding the Redemption Notice Date (as defined in
paragraph (b) of this Section 9.3) the average closing price of the Common
Shares on the New York Stock Exchange equals or exceeds the Conversion
Price (as defined in Section 9.6).
(b) Notice of any redemption shall be given by the Corporation, by
first class mail, postage prepaid, not less than 30 nor more than 60 days
prior to the Redemption Date to each holder of record of Series A Preferred
Shares to be redeemed, notifying such holder of the Corporation's election
to redeem such shares. Such notice shall be mailed to such holder's address
as the same appears on the Corporation's stock records. The date such
notice is mailed shall be the "Redemption Notice Date." No failure to give
such notice or any defect therein or in the mailing thereof shall affect
the validity of the proceedings for the redemption of any Series A
Preferred Shares except as to the holder to whom notice was defective or
not given. In addition to any information required by law, such notice
shall state: (i) the Redemption Date; (ii) the Conversion Price and
Redemption Consideration per redeemed share; (iii) the total number of
Series A Preferred Shares to be redeemed; (iv) the place or places where
certificates for such shares, if any, are to be surrendered for payment of
the Redemption Consideration; (v) the amount per Series A Preferred Share
of unpaid Dividends Accrued to the Redemption Date; (vi) that dividends on
the shares to be redeemed will cease to accumulate on such Redemption Date;
and (vii) that each holder of Series A Preferred Shares may exercise the
conversion rights described in Section 9.6 for any such shares at any time
prior to the close of business on the last full Business Day preceding the
Redemption Date.
(c) If fewer than all of the outstanding Series A Preferred Shares are
to be redeemed, the Corporation shall prorate the total number of shares to
be so redeemed among the holders thereof in proportion, as nearly as may
be, to the number of shares registered in their respective
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names. In any such proration the Corporation may make such adjustments,
reallocations and eliminations as it shall deem proper by increasing,
decreasing or eliminating the number of shares to be redeemed otherwise
allocable to any one holder on the basis of exact proration by not more
than ten shares, to the end that the numbers of shares so prorated shall be
integral multiples of ten shares. If less than all of the Series A
Preferred Shares held by any holder are to be redeemed, the notice mailed
to such holder (pursuant to paragraph (b) above) shall also specify the
number of Series A Preferred Shares held by such holder to be redeemed. The
Corporation may not redeem less than all of the outstanding Series A
Preferred Shares unless Full Cumulative Dividends on all outstanding Series
A Preferred Shares for all dividend periods (whether full or partial) up to
and including the Redemption Date shall have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof
set apart.
(d) If notice of redemption of any outstanding Series A Preferred
Shares shall have been duly given as herein provided, then on or before the
Redemption Date the Corporation shall, as applicable, (i) cause to be
issued in the name of the record holder of Series A Preferred Shares being
redeemed Common Shares of the Corporation equal to the Redemption
Consideration due for such Series A Preferred Shares, or (ii) cause to be
paid to the record holder of Series A Preferred Shares being redeemed cash
equal to the Redemption Consideration due for such Series A Preferred
Shares or (iii) cause to be issued and paid some combination of (i) and
(ii) equal in the aggregate to the Redemption Consideration. From and after
the Redemption Date, such redeemed Series A Preferred Shares shall no
longer be deemed to be outstanding for any purpose, and all rights with
respect to such shares shall thereupon cease and terminate.
(e) The Corporation shall also have the right to acquire outstanding
Series A Preferred Shares, otherwise than by redemption (as provided in
this Section 9.4) from time to time for such consideration as may be
acceptable to the holders thereof; provided, however, that if Full
Cumulative Dividends on all outstanding Series A Preferred Shares for all
past dividend periods shall not have been declared and paid or declared and
a sum sufficient for the payment thereof set apart, and the dividend
payable thereon for the next following dividend period shall not have been
declared and a sum sufficient for the payment thereof set apart, neither
the Corporation nor any Subsidiary shall so acquire any Series A Preferred
Shares except in accordance with a purchase or exchange offer made on the
same terms to all the holders of the outstanding Series A Preferred Shares.
(f) At the close of business on the Redemption Date, each holder of
Series A Preferred Shares to be redeemed (unless the Corporation defaults
in the payment of the Common Shares portion of the Redemption
Consideration) shall be deemed to be the record holder of the number of
Common Shares into which such Series A Preferred Shares are to be so
redeemed.
(g) Series A Preferred Shares purchased, redeemed or otherwise
acquired by the Corporation shall not thereafter be disposed of as Series A
Preferred Shares but shall become authorized and unissued Preferred Shares
undesignated as to series. No additional Preferred Shares may be classified
as Series A Preferred Shares.
9.5 Liquidation.
In the event of the voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, the holders of the outstanding
Series A Preferred Shares shall be entitled to be paid in cash out of the assets
of the Corporation a liquidation payment of $25 per share (the "Liquidation
Payment") plus an amount equal to all unpaid Dividends Accrued thereon to the
date of payment, without interest, before any distribution or payment shall be
made to the holders of Common Shares or any other shares of the Corporation
ranking junior to the Series A Preferred Shares as to rights in liquidation.
After payment to the holders of the outstanding Series A Preferred Shares of the
full liquidation payment provided for in the preceding sentence, the holders of
the Series A Preferred Shares as such shall have no right or claim to any of the
remaining assets of the Corporation. For the purposes of the preceding two
sentences, neither the consolidation of the
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Corporation with nor the merger of the Corporation into any other corporation,
partnership, limited liability company, trust or other entity, 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
assets of the Corporation legally available for distribution to its shareholders
are insufficient to pay to the holders of the Series A Preferred Shares the full
amounts to which they are respectively entitled, such assets of the Corporation
shall be distributed ratably to the holders of the Series A Preferred Shares and
the holders of other Preferred Shares, if any, ranking on a parity with the
Series A Preferred Shares as to rights in liquidation in proportion to the full
amounts to which they are respectively entitled. Written notice of such
liquidation, dissolution or winding up of the Corporation, stating the payment
date or dates when, and the place or places where, the amounts distributable in
such circumstances shall be payable, shall be given by the Corporation by first
class mail, postage prepaid, not less than 30 days nor more than 60 days before
the payment date stated therein, to each holder of record of the Series A
Preferred Shares at such holder's address as the same appears on the
Corporation's stock records.
9.6 Conversion.
(a) Each holder of outstanding Series A Preferred Shares shall have
the right, at any time, to convert any of such shares into Common Shares of
the Corporation. The number of Common Shares into which each Series A
Preferred Share shall be convertible shall be equal to the number (rounded
to the nearest one one-thousandth (1/1000) of a Common Share) arrived at by
dividing $25.00 by the conversion price per Common Share fixed or
determined as hereinafter provided. The conversion price shall initially be
Fifteen Dollars and Eighty Cents ($15.80) per Common Share, subject to the
adjustments hereinafter provided (such price, as adjusted at any time,
being hereinafter called the "Conversion Price"). As to Series A Preferred
Shares called for redemption, each such holder shall have the right at any
time prior to the close of business on the last full Business Day preceding
the Redemption Date (unless default shall be made by the Corporation in the
payment of the Redemption Consideration, in which case such right of
conversion shall continue uninterrupted) to convert any of such Series A
Preferred Shares into Common Shares.
(b) Each holder of outstanding Series A Preferred 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, a
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 certificate or certificates
for 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 if
the notice is in the form required by the Corporation. As promptly as
practicable thereafter the Corporation shall issue and deliver to such
holder the number of Common Shares to which he is entitled. 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 Price shall
be that in effect on the Conversion Date.
(c) The Corporation shall issue fractional Common Shares, rounded to
the nearest one one-thousandth (1/1000) of a Common Share, upon conversion
of Series A Preferred Shares and will not pay cash with respect to any
fractional shares.
(d) The issuance of Common Shares on conversion of outstanding Series
A Preferred 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
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Common Shares in any name other than that of the holder of record on the
books of the Corporation of the outstanding Series A Preferred Shares
converted, and the Corporation shall not be required to issue any 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.
(e) Holders of Series A Preferred Shares at the close of business on a
Dividend Record Date shall be entitled to receive the dividend payable on
such shares on the corresponding Dividend Payment Date notwithstanding the
conversion of such shares following such Dividend Record Date and prior to
such Dividend Payment Date. Except as provided in the preceding sentence,
the Corporation shall make no payment or allowance for unpaid dividends,
whether or not in arrears, on converted shares or for dividends on the
Common Shares issued upon such conversion.
(f) The Conversion Price shall be subject to the following
adjustments:
(i) If the Corporation shall (A) pay a dividend on its
outstanding Common Shares in Common Shares or subdivide or otherwise
split its outstanding Common Shares into a larger number of shares,
(B) combine its outstanding Common Shares into a smaller number of
shares, or (C) reclassify its Common Shares, the Conversion Price in
effect at the time of the record date for the happening of such event
shall be adjusted so that the holder of any Series A Preferred Shares
surrendered for conversion after such record date shall be entitled to
receive the same aggregate number of Common Shares that such holder
would have owned or have been entitled to receive after the happening
of such event had such Series A Preferred Shares been converted
immediately prior to such record date. An adjustment made pursuant to
this subparagraph (i) shall become effective immediately upon the
opening of business on the day next following the record date in the
case of a dividend (except as provided in paragraph (h) of this
Section 9.6 below) and shall become effective immediately upon the
opening of business on the day next following the effective date in
the case of a subdivision, combination or reclassification.
(ii) If the Corporation shall issue rights, warrants or options
to all holders of its Common Shares entitling them (for a period
expiring within 90 days after the record date mentioned below) to
subscribe for or purchase Common Shares at a price per share which is
less than the Current Market Value per share (as hereinafter defined)
on the record date mentioned below, the Conversion Price shall be
adjusted to a price determined by multiplying (A) the Conversion Price
in effect immediately prior to the issuance of such rights, warrants
or options by (B) a fraction, the numerator of which shall be the sum
of (i) the number of Common Shares outstanding at the close of
business on the record date fixed for the determination of
shareholders entitled to receive such rights, warrants or options and
(ii) the number of Common Shares which the aggregate exercise price of
all such rights, warrants or options would purchase at such Current
Market Value, and the denominator of which shall be the sum of (i) the
number of Common Shares outstanding at the close of business on the
record date fixed for the determination of shareholders entitled to
receive such rights, warrants or options and (ii) the number of
additional Common Shares offered for subscription pursuant to such
rights, warrants or options. Such adjustment shall be effective
immediately upon the opening of business on the day next following the
record date for the determination of the shareholders entitled to
receive such rights, warrants or options (except as provided in
paragraph (h) of this Section 9.6 below). For the purposes of this
Section 9.6(f), the "Fair Market Value" of one Common Share 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, 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
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date, then the Fair Market Value shall be determined, in the manner as
just 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.
"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 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 this Section 9.6(f)) as of the date in question.
(iii) If the Corporation shall distribute to all holders of its
Common Shares any equity securities of the Corporation (other than
Common Shares) or 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
those referred to in subparagraph (ii) of this Section 9.6(f)), then
in each case the Conversion Price shall be adjusted so that it shall
equal the price determined by multiplying (A) the Conversion Price in
effect immediately prior to the close of business on the record date
fixed for the determination of shareholders entitled to receive such
distribution by (B) a fraction, the numerator of which shall be the
Current Market Value of one Common Share (as defined in subparagraph
(ii) of this Section 9.6(f)) on the record date fixed for the
determination of the shareholders entitled to receive 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 shares or evidences of
indebtedness or assets so distributed, or of such rights, warrants or
options applicable to one Common Share, and the denominator of which
shall be the Current Market Value of one Common Share on the record
date fixed for the determination of shareholders entitled to receive
such distribution. Such adjustment shall become effective immediately
upon the opening of business on the day next following such record
date (except as provided in paragraph (h) of this Section 9.6 below).
(g) Notwithstanding any of the foregoing provisions of this Section
9.6, no adjustment of the Conversion Price 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
before or after the approval of these Articles of Amendment, (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, or
(iii) if the Corporation shall issue rights, warrants or options to
purchase Common Shares or other shares convertible into Common Shares
pursuant to one or more plans ("Shareholder Rights Plans") which, in
connection with certain acquisitions of an equity interest in the
Corporation, may permit the holders of such rights, warrants or options to
subscribe for or to purchase Common Shares or such other shares at a price
per share which is less than the then Current Market Value thereof.
However, the Corporation shall not adopt any Shareholder Rights Plans
unless, in connection therewith, the Corporation provides that the holders
of Series A Preferred Shares will be entitled to receive substantially
similar rights, warrants or options upon conversion of their Series A
Preferred Shares.
(h) If any Series A Preferred 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 9.6(f) but before the happening
of such event, the Corporation may defer, until the happening of
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such event, issuing to the holder of Series A Preferred Shares so converted
the additional Common Shares to which he is entitled by reason of the
adjustment required pursuant to any such subparagraph.
(i) Anything in this Section 9.6 to the contrary notwithstanding, no
adjustment in the Conversion Price shall be required unless such adjustment
would require an increase or decrease of at least $0.10 in such price;
provided, however, that any adjustments which by reason of this Section 9.6
are not required to be made shall be carried forward and taken into account
in making subsequent adjustments. All calculations under this Section 9.6
shall be made to the nearest cent.
(j) Whenever the Conversion Price is adjusted pursuant to this Section
9.6, the Corporation shall (i) promptly place on file at its principal
office and at the office of each transfer agent for the Series A Preferred
Shares, if any, a statement, signed by the Chairman or President of the
Corporation and by its Treasurer, setting forth the Conversion Price after
such adjustment and setting forth in detail the facts requiring such
adjustment, and shall make such statement available for inspection by
shareholders of the Corporation, and (ii) as soon as practicable cause a
notice to be issued by press release or by announcement in a newspaper or
periodical with national distribution (such as the Wall Street Journal)
stating that such adjustment has been made and setting forth the adjusted
Conversion Price and the date on which such adjustment becomes effective.
(k) 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 from par value to no 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 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, in each case as a result of which
Common Shares generally shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof),
effective provision shall be made by the Corporation or by the successor or
purchasing business entity (i) that the holder of each Series A Preferred
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 Series A Preferred Shares might have been
converted immediately prior thereto, and (ii) that there shall be
subsequent adjustments of the Conversion Price which shall be equivalent,
as nearly as practicable, to the adjustments provided for in this Section
9.6. The provisions of this paragraph (k) of this Section 9.6 shall
similarly apply to successive reclassifications, recapitalizations,
consolidations, mergers, sales or conveyances.
(l) Common Shares issued on conversion of Series A Preferred 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
Series A Preferred Shares such number of its duly authorized but unissued
Common Shares as shall be sufficient to effect the conversion of all of the
outstanding Series A Preferred Shares.
(m) Series A Preferred Shares converted as provided herein shall
become authorized and unissued Preferred Shares which may be designated as
shares of any other series. No additional Preferred Shares, however, may be
classified as Series A Preferred Shares.
9.7 Definitions.
As used in these Articles of Amendment, unless the context otherwise
requires, the following terms shall have the following meanings:
"Dividends Accrued" means Full Cumulative Dividends to the date as of which
Dividends Accrued are to be computed, less the amount of all dividends paid with
respect to the relevant shares.
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<PAGE>
"Full Cumulative Dividends" with respect to any outstanding shares of the
Corporation which carry cumulative dividends (including, without limitation, the
Series A Preferred Shares) means an amount equal to the dividends accrued at the
full rate fixed for such shares from the date of issue to the date to which
reference is made, whether such amounts or any part thereof have been declared
and whether there shall be or have been any funds out of which such amount might
legally be paid.
"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 Corporation or by the Corporation and one or more
Subsidiaries of the Corporation.
For the purpose of these Articles of Amendment the shares of any class of
the Corporation of any class or series shall be deemed to rank as follows:
(a) senior to the Series A Preferred 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
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, as the case may be, in preference or priority
to the holders of Series A Preferred Shares;
(b) on a parity with the Series A Preferred 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 Series A Preferred Shares, if
the holders of Series A Preferred Shares shall be entitled to the receipt
of dividends or of amounts distributable upon the voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the 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 Series A Preferred Shares, either as to dividends or
as to rights in liquidation, if such shares shall be Common Shares or if
the holders of the Series A Preferred Shares shall be entitled to the
receipt of dividends or of amounts distributable upon the voluntary or
involuntary 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.
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<PAGE>
ANNEX B
[PAINEWEBBER LETTERHEAD]
March 30, 1999
CONFIDENTIAL
- ------------
Special Committee of the Board of Directors
Cornerstone Realty Income Trust, Inc.
306 East Main Street
Richmond, Virginia 23219
Gentlemen:
Cornerstone Realty Income Trust, Inc. (the "Company"), Apple Residential
Income Trust, Inc. ("Apple") and Cornerstone Acquisition Company ("Merger Sub"),
a 99.99% owned subsidiary of the Company, propose to enter into an Agreement and
Plan of Merger to be dated March 30, 1999 (the "Agreement"). Pursuant to the
Agreement, Apple will be merged with and into Merger Sub in a transaction (the
"Merger") in which each outstanding common share, no par value, of Apple (other
than those shares owned by the Company) will be converted into the right to
receive .400 of a Series A Convertible Preferred Share, no par value (the
"Series A Preferred"), of the Company.
You have asked us whether or not, in our opinion, the proposed
consideration to be issued by the Company in connection with the Merger is fair
to the Company from a financial point of view. In arriving at the opinion set
forth below, we have, among other things:
(1) Reviewed Apple's Annual Reports, Forms 10-K and related financial
information for the two fiscal years ended December 31, 1997 and
Apple's Form 10-Q and the related unaudited financial information for
the nine months ended September 30, 1998;
(2) Reviewed the Company's Annual Reports and Forms 10-K and related
financial information for the five fiscal years ended December 31,
1997, and the Company's Form 10-Q and the related unaudited financial
information for the nine months ended September 30, 1998;
(3) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets and prospects of Apple
and the Company, furnished to us by Apple and the Company,
respectively;
(4) Conducted discussions with members of senior management of Apple and
the Company concerning their respective businesses and prospects;
(5) Compared the results of operations of Apple and the Company with that
of certain companies which we deemed to be relevant;
(6) Compared the proposed financial terms of the transactions contemplated
by the Agreement with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
(7) Compared the terms of the Series A Preferred to the terms of other
securities which we deemed to be relevant;
(8) Participated in certain discussions relating to the Merger with
representatives of the Company and Apple and their financial and legal
advisors;
(9) Considered the potential pro forma impact of the Merger;
B-1
<PAGE>
(10) Reviewed a draft of the Agreement dated March 25, 1999;
(11) Reviewed a draft of the Articles of Amendment to the Amended and
Restated Articles of Incorporation of the Company designating the
Series A Preferred (the "Amended Articles") that was attached to the
March 25, 1999 draft of the Agreement; and
(12) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary.
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by Apple or the
Company, and we have not assumed any responsibility to independently verify such
information. With respect to the financial forecasts examined by us, we have
assumed that they were reasonably prepared and reflect the best currently
available estimates and good faith judgments of the management of the Company
and Apple, respectively, as to the future performance of the Company and Apple,
respectively. We have also relied upon assurances of the management of the
Company and Apple, respectively, that they are unaware of any facts that would
make the information or financial forecasts provided to us incomplete or
misleading. We have not made any independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of the Company or Apple nor have
we been furnished with any such evaluations or appraisals. We have assumed with
your consent that the Merger will be accounted for under the purchase method of
accounting and the Merger will be a tax-free reorganization.
This opinion is directed to the Special Committee of the Board of Directors
of the Company (the "Special Committee") and does not constitute a
recommendation to any shareholder of the Company as to how any such shareholder
should vote with respect to the issuance of the Series A Preferred in connection
with the Merger. This opinion does not address the relative merits of the Merger
and any other transactions or business strategies that might be available to the
Company or the decision of the Board of Directors of the Company to proceed with
the Merger. No opinion is expressed herein as to the price at which the
securities to be issued in connection with the Merger to the shareholders of
Apple or the common shares, no par value, of the Company may trade at any time.
Our opinion is based on economic, monetary and market conditions as they exist
and can be evaluated on, and the information made available to us as of, the
date hereof.
In the ordinary course of our business, we may trade in the securities of
the Company for our own account and for the accounts of our customers and,
accordingly, may at any time hold long or short positions in such securities.
PaineWebber Incorporated is currently acting as financial advisor to the
Special Committee in connection with the Merger and will be receiving a fee in
connection with the rendering of this opinion and upon consummation of the
Merger. In the past, PaineWebber Incorporated and its affiliates have provided
investment banking and other financial services to the Company and have received
fees for rendering these services.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed consideration to be issued by the Company in connection with the
Merger is fair to the Company from a financial point of view.
This opinion has been prepared for the information of the Special Committee
in connection with the Merger and shall not be reproduced, summarized, described
or referred to, provided to any person or otherwise made public or used for any
other purpose without the prior written consent of PaineWebber Incorporated,
provided, however, that this letter may be reproduced in full in the Proxy
Statement related to the Merger.
Very truly yours,
/s/ PAINEWEBBER INCORPORATED
----------------------------------------
PAINEWEBBER INCORPORATED
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<PAGE>
ANNEX C
[BOWLES HOLLOWELL CONNER
LETTERHEAD]
CONFIDENTIAL
- ------------
March 30, 1999
The Special Committee of the Board of Directors
Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Members of the Special Committee:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the stockholders of Apple Residential Income Trust,
Inc. ("Apple") of the consideration to be received by such stockholders pursuant
to the terms of the Agreement of Merger, dated as of March 30, 1999 (the "Merger
Agreement"), among Apple, Cornerstone Realty Income Trust, Inc. ("Cornerstone"),
and Cornerstone Acquisition Company, Inc., a wholly-owned subsidiary of
Cornerstone ("Cornerstone Sub"). As more fully described in the Merger
Agreement, (i) Apple will be merged with and into Cornerstone Sub (the "Merger")
and (ii) each outstanding share of the Common Stock, no par value, of Apple
("Apple Common Stock") will be converted into 0.40 shares of Series A
Convertible Preferred Shares of Cornerstone (the "Merger Consideration").
In arriving at our opinion, we have, among other things:
o Reviewed the financial terms of the Merger, as set forth in the Merger
Agreement;
o Reviewed certain historical business, financial and other information
regarding Apple and Cornerstone that was publicly available or furnished to
us by members of Cornerstone management;
o Reviewed certain financial forecasts and other data for Apple and
Cornerstone provided to us by members of Cornerstone management;
o Conducted site visits of 22 of the 27 properties owned by Apple;
o Conducted discussions with members of Cornerstone management with respect
to the business, prospects and financial forecasts of Cornerstone and
Apple, including various strategic and operating benefits anticipated from
the Merger;
o Reviewed independent market data and comparable sales information for
properties in Apple's respective markets;
o Reviewed certain financial terms of the Merger in relation to other similar
transactions we deemed relevant;
o Compared the financial position and operating results of Apple and
Cornerstone and the trading history of Cornerstone with those of publicly
traded companies we deemed relevant;
o Compared the consideration offered in the Merger to the historical price of
comparable securities;
o Conducted such other financial-studies, analyses and investigations as we
deemed appropriate.
In connection with our review, we have relied upon the accuracy and
completeness of the foregoing financial and other information, and we have not
assumed any responsibility for any independent verification of such information.
With respect to Apple and Cornerstone's financial projections, we have assumed
that they have been reasonably prepared and reflect the best current estimates
and judgment of Cornerstone's management as to the future financial performance
of Apple and Cornerstone. We have discussed Apple and Cornerstone's financial
projections with management of Cornerstone, but we assume no responsibility for
and express no view as to the
C-1
<PAGE>
The Special Committee of the Board of Directors
Apple Residential Income Trust, Inc.
Page 2
financial projections for Apple and Cornerstone or the assumptions upon which
they are based. In arriving at our opinion, we have not made or been provided
with any evaluations or appraisals of the assets or liabilities of Apple.
Our opinion is necessarily based on economic, market, financial and other
conditions and the information made available to us as of the date hereof. It
should be understood that, although subsequent developments may affect this
opinion, we do not have any obligation to update, revise or reaffirm this
opinion.
In rendering our opinion, we have assumed that the Merger will be
consummated on the terms described in the Merger Agreement that we reviewed,
without any waiver of any material terms Or conditions. Our opinion does not
address the relative merits of the Merger and the other business strategies
considered by Apple's Board of Directors, nor does it address Apple's Board of
Directors' decision to proceed with the Merger.
Bowles Hollowell Conner, a division of First Union Capital Markets Corp.,
is an investment banking firm and an affiliate of First Union Corporation. We
have been engaged to render financial advisory services to Apple in connection
with the Merger and will receive a fee upon the delivery of this opinion. In the
ordinary course of our business, we and our affiliates may actively trade or
hold the securities of Cornerstone for our own account or for the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities. We or our affiliates have in the past provided investment
banking and financial advisory services to Cornerstone unrelated to the Merger,
for which services we have received compensation. First Union Capital Markets
Corp., an affiliate of Bowles Hollowell Conner, is currently acting on behalf of
Cornerstone as a placement agent for a prospective mortgage financing. In
addition, First Union National Bank, an affiliate of Bowles Hollowell Conner, is
the agent and a lender of various unsecured credit facilities to Cornerstone.
Bowles Hollowell Conner and its affiliates (including First Union Corporation
and its affiliates) may in the future maintain relationships with Cornerstone.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Apple in its evaluation of the Merger
and do not constitute a recommendation to any holder of Apple Common Stock as to
how such holder should vote with respect to the Merger. Our opinion may not be
published or otherwise used or referred to, nor shall any public reference to
Bowles Hollowell Conner, First Union Capital Markets Corp. or First Union
Corporation be made, without our prior written consent.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Merger Consideration is
fair, from a financial point of view, to the holders of Apple Common Stock.
Very truly yours,
/s/ Bowles Hollowell Conner
----------------------------------------
BOWLES HOLLOWELL CONNER
C-2
<PAGE>
ANNEX D
ARTICLE FIFTEEN OF THE
VIRGINIA STOCK CORPORATION ACT
(section) 13.1-729
Definitions
In this article:
"Corporation" means the issuer of the shares held by a dissenter before the
corporate action, except that (i) with respect to a merger, "corporation" means
the surviving domestic or foreign corporation or limited liability company by
merger of that issuer, and (ii) with respect to a share exchange, "corporation"
means the acquiring corporation by share exchange, rather than the issuer, if
the plan of share exchange places the responsibility for dissenters' rights on
the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from corporate action
under (section) 13.1-730 and who exercises that right when and in the manner
required by (section)(section) 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate action until
the date of payment, at the average rate currently paid by the corporation on
its principal bank loans or, if none, at a rate that is fair and equitable under
all the circumstances.
"Record shareholder" means the person in whose name shares are registered in the
records of a corporation or the beneficial owner of shares to the extent of the
rights granted by a nominee certificate on file with a corporation.
"Beneficial shareholder" means the person who is a beneficial owner of shares
held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial shareholder.
(section) 13.1-730
Right to dissent
A. A shareholder is entitled to dissent from, and obtain payment of the fair
value of his shares in the event of, any of the following corporate actions:
1. Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by (section) 13.1-718
or the articles of incorporation and the shareholder is entitled to vote on
the merger or (ii) if the corporation is a subsidiary that is merged with its
parent under (section) 13.1-719;
2. Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation if the shareholder was entitled to vote on
the sale or exchange or if the sale or exchange was in furtherance of a
dissolution on which the shareholder was entitled to vote, provided that such
dissenter's rights shall not apply in the case of (i) a sale or exchange
pursuant to court order, or (ii) a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be distributed
to the shareholders within one year after the date of sale;
D-1
<PAGE>
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares under
this article may not challenge the corporate action creating his entitlement
unless the action is unlawful or fraudulent with respect to the shareholder or
the corporation.
C. Notwithstanding any other provision of this article, with respect to a plan
of merger or share exchange or a sale or exchange of property there shall be no
right of dissent in favor of holders of shares of any class or series which, at
the record date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting at which the plan of merger or share exchange or
the sale or exchange of property is to be acted on, were (i) listed on a
national securities exchange or on the National Association of Securities
Dealers Automated Quotation System (NASDAQ) or (ii) held by at least 2,000
record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares
provide otherwise;
2. In the case of a plan of merger or share exchange, the holders of the
class or series are required under the plan of merger or share exchange to
accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership interests
and cash in lieu of fractional shares (i) of the surviving or acquiring
corporation or limited liability company or (ii) of any other corporation
or limited liability company which, at the record date fixed to determine
the shareholders entitled to receive notice of and to vote at the meeting
at which the plan of merger or share exchange is to be acted on, were
either listed subject to notice of issuance on a national securities
exchange or held of record by at least 2,000 record shareholders or
members; or
c. A combination of cash and shares or membership interests as set
forth in subdivisions 2 a and 2 b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and is
not approved by a majority of "disinterested directors" as such terms are
defined in (section) 13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair value of
his shares shall terminate upon the occurrence of any one of the following
events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
(section) 13.1-731
Dissent by nominees and beneficial owners
A. A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares held on
his behalf only if:
1. He submits to the corporation the record shareholder's written consent
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
D-2
<PAGE>
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
(section) 13.1-732
Notice of dissenters' rights
A. If proposed corporate action creating dissenters' rights under (section)
13.1-730 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under (section) 13.1-730 is
taken without a vote of shareholders, the corporation, during the ten-day period
after the effectuation of such corporate action, shall notify in writing all
record shareholders entitled to assert dissenters' rights that the action was
taken and send them the dissenters' notice described in (section) 13.1-734.
(section) 13.1-733
Notice of intent to demand payment
A. If proposed corporate action creating dissenters' rights under (section)
13.1-730 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights (i) shall deliver to the corporation before
the vote is taken written notice of his intent to demand payment for his shares
if the proposed action is effectuated and (ii) shall not vote such shares in
favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A of this
section is not entitled to payment for his shares under this article.
(section) 13.1-734
Dissenters' notice
A. If proposed corporate action creating dissenters' rights under (section)
13.1-730 is authorized at a shareholders' meeting, the corporation, during the
ten-day period after the effectuation of such corporate action, shall deliver a
dissenters' notice in writing to all shareholders who satisfied the requirements
of (section) 13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not he acquired beneficial ownership of the shares
before or after that date;
4. Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the
date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
(section) 13.1-735
Duty to demand payment
A. A shareholder sent a dissenters' notice described in (section) 13.1-734 shall
demand payment, certify that he acquired beneficial ownership of the shares
before or after the date required to be set forth in the dissenters' notice
pursuant to subdivision 3 of subsection B of (section) 13.1-734, and, in the
case of certificated shares, deposit his certificates in accordance with the
terms of the notice.
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<PAGE>
B. The shareholder who deposits his shares pursuant to subsection A of this
section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share certificates
where required, each by the date set in the dissenters' notice, is not entitled
to payment for his shares under this article.
(section) 13.1-736
Share restrictions
A. The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received.
B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder except to the extent that these
rights are canceled or modified by the taking of the proposed corporate action.
(section) 13.1-737
Payment
A. Except as provided in (section) 13.1-738, within thirty days after receipt of
a payment demand made pursuant to (section) 13.1-735, the corporation shall pay
the dissenter the amount the corporation estimates to be the fair value of his
shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this Commonwealth,
where its registered office is located or (ii) at the election of any dissenter
residing or having its principal office in the Commonwealth, by the circuit
court in the city or county where the dissenter resides or has its principal
office. The court shall dispose of the complaint on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the effective date of the corporate
action creating dissenters' rights, an income statement for that year, a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of the
shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under
(section) 13.1-739; and
4. A copy of this article.
(section) 13.1-738
After-acquired shares
A. A corporation may elect to withhold payment required by (section) 13.1-737
from a dissenter unless he was the beneficial owner of the shares on the date of
the first publication by news media or the first announcement to shareholders
generally, whichever is earlier, of the terms of the proposed corporate action,
as set forth in the dissenters' notice.
B. To the extent the corporation elects to withhold payment under subsection A
of this section, after taking the proposed corporate action, it shall estimate
the fair value of the shares, plus accrued interest, and shall offer to pay this
amount to each dissenter who agrees to accept it in full satisfaction of his
demand. The corporation shall send with its offer an explanation of how it
estimated the fair value of the shares and of how the interest was calculated,
and a statement of the dissenter's right to demand payment under (section)
13.1-739.
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<PAGE>
(section) 13.1-739
Procedure if shareholder dissatisfied with payment or offer
A. A dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and amount of interest due, and demand payment of his
estimate (less any payment under (section) 13.1-737), or reject the
corporation's offer under (section) 13.1-738 and demand payment of the fair
value of his shares and interest due, if the dissenter believes that the amount
paid under (section) 13.1-737 or offered under (section) 13.1-738 is less than
the fair value of his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section unless he
notifies the corporation of his demand in writing under subsection A of this
section within thirty days after the corporation made or offered payment for his
shares.
(section) 13.1-740
Court action
A. If a demand for payment under (section) 13.1-739 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the circuit court in the city or county described in
subsection B of this section to determine the fair value of the shares and
accrued interest. If the corporation does not commence the proceeding within the
sixty-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
B. The corporation shall commence the proceeding in the city or county where its
principal office is located, or, if none in this Commonwealth, where its
registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents of this
Commonwealth, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties shall be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
D. The corporation may join as a party to the proceeding any shareholder who
claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this article. If the court determines that such
shareholder has not complied with the provisions of this article, he shall be
dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced under
subsection B of this section is plenary and exclusive. The court may appoint one
or more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to judgment (i) for
the amount, if any, by which the court finds the fair value of his shares, plus
interest, exceeds the amount paid by the corporation or (ii) for the fair value,
plus accrued interest, of his after-acquired shares for which the corporation
elected to withhold payment under (section) 13.1-738.
(section) 13.1-741
Court costs and counsel fees
A. The court in an appraisal proceeding commenced under (section) 13.1-740 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess costs against all or
some of the dissenters, in amounts the court finds equitable, to the extent the
court finds the dissenters did not act in good faith in demanding payment under
(section) 13.1-739.
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<PAGE>
B. The court may also assess the reasonable fees and expenses of experts,
excluding those of counsel, for the respective parties, in amounts the court
finds equitable:
1. Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of (section)(section) 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed did not act in good faith with respect to the rights provided by
this article.
C. If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, the court may award
to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
D. In a proceeding commenced under subsection A of (section) 13.1-737 the court
shall assess the costs against the corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
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<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
PROXY
CORNERSTONE REALTY INCOME TRUST, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Debra A. Jones and Martin B. Richards as
Proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote as designated below all the common
shares of Cornerstone Realty Income Trust, Inc. held of record by the
undersigned on June , 1999 at the Special Meeting of Shareholders to be held on
July ___, 1999 or any adjournment thereof.
1. To approve and adopt the Agreement and Plan of Merger, dated as of
March 30, 1999, by and between Cornerstone Realty Income Trust, Inc.,
Apple Residential Income Trust, Inc. and Cornerstone Acquisition
Company, a subsidiary of Cornerstone Realty Income Trust, Inc. (the
"Merger Agreement"), by which Apple Residential Income Trust, Inc. is
to merge with and into Cornerstone Acquisition Company, a subsidiary
of Cornerstone Realty Income Trust, Inc. (the "Merger"), the Merger
and the other transactions contemplated by the Merger Agreement.
FOR AGAINST ABSTAIN
======= ========= ========
[ ] [ ] [ ]
2. To approve the issuance of Series A Convertible Preferred Shares in
connection with the Merger.
FOR AGAINST ABSTAIN
======= ========= ========
[ ] [ ] [ ]
3. To approve certain amendments to Cornerstone's bylaws relating to the
issuance of the Series A Convertible Preferred Shares in connection
with the Merger.
FOR AGAINST ABSTAIN
======= ========= ========
[ ] [ ] [ ]
4. In their discretion, the Proxies are authorized to vote upon such
other matters as may properly come before the Special Meeting to the
extent such are matters (i) that the Board of Directors did not know,
a reasonable time before the solicitation of proxies, were to be
presented at the Special Meeting, or (ii) that are incident to the
conduct of the Special Meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR EACH OF THE PROPOSALS LISTED ABOVE.
(CONTINUED ON THE REVERSE SIDE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please indicate whether you plan to attend the Special Meeting in person: [ ]
Yes [ ] No
Dated: ________________, 1999
--------------------------------
Print Name
--------------------------------
Signature
--------------------------------
Signature if held jointly
Please print exact name(s) in which
shares are registered, and sign
exactly as name appears. When
shares are held by joint tenants,
both should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give
full title as such. If a
corporation, please sign in full
corporate name by President or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
Please mark, sign, date and return the Proxy Card
promptly using the enclosed envelope.
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX B
- --------------------------------------------------------------------------------
PROXY
APPLE RESIDENTIAL INCOME TRUST, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Stanley J. Olander and William G. Miller as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote as designated below all the common shares of Apple
Residential Income Trust, Inc. held of record by the undersigned on June , 1999
at the Special Meeting of Shareholders to be held on July , 1999 or any
adjournment thereof.
The Board of Directors recommends a vote "FOR" proposal 1 set forth below.
1. To approve and adopt the Agreement and Plan of Merger, dated as of
March 30, 1999, by and between Cornerstone Realty Income Trust, Inc.,
Apple Residential Income Trust, Inc. and Cornerstone Acquisition
Company, a subsidiary of Cornerstone Realty Income Trust, Inc. (the
"Merger Agreement"), by which Apple Residential Income Trust, Inc. is
to merge with and into Cornerstone Acquisition Company, a subsidiary
of Cornerstone Realty Income Trust, Inc. (the "Merger"), the Merger
and the other transactions contemplated by the Merger Agreement.
FOR AGAINST ABSTAIN
======= ========= ========
[ ] [ ] [ ]
2. In their discretion, the Proxies are authorized to vote upon such
other matters as may properly come before the Special Meeting to the
extent such are matters (i) that the Board of Directors did not know,
a reasonable time before the solicitation of proxies, were to be
presented at the Special Meeting, or (ii) that are incident to the
conduct of the Special Meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR EACH OF THE PROPOSALS LISTED ABOVE.
(CONTINUED ON THE REVERSE SIDE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please indicate whether you plan to attend the Special Meeting in person:
[ ] Yes [ ] No
Dated: ________________, 1999
--------------------------------
Print Name
--------------------------------
Signature
--------------------------------
Signature if held jointly
Please print exact name(s) in which
shares are registered, and sign
exactly as name appears. When
shares are held by joint tenants,
both should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give
full title as such. If a
corporation, please sign in full
corporate name by President or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
Please mark, sign, date and return the Proxy Card
promptly using the enclosed envelope.
- --------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Virginia law and our Articles of Incorporation provide that our directors
and officers shall have no liability to Cornerstone or its Shareholders in
certain actions by or in the right of Cornerstone 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. Generally, claimants
must look solely to Cornerstone's property for satisfaction of claims arising in
connection with the affairs of Cornerstone.
The Articles of Incorporation provide that Cornerstone shall indemnify any
present or former director or officer 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 or officer was acting in good
faith within what he reasonably believed to be the scope of his authority and
for a purpose which he reasonably believed to be in the best interests of
Cornerstone or its Shareholders, and that the liability was not the result of
misconduct, bad faith, negligence, reckless disregard of duties or violation of
the criminal law. Indemnification is not allowed for any liability imposed by
judgment, and associated costs, 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling
Cornerstone pursuant to the foregoing provisions, Cornerstone has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS.
(a) The following exhibits are filed as part of this Registration
Statement or incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ------------------------------------------------------------------------------------------
<S> <C>
2 Agreement and Plan of Merger, dated as of March 30, 1999 , by and
between Cornerstone Realty Income Trust, Inc., Apple Residential
Income Trust, Inc. and Cornerstone Acquisition Company (with Exhibit A
thereto) (included as Annex A to the Joint Proxy Statement/Prospectus
contained in this Registration Statement).
3.1 Amended and Restated Articles of Incorporation of Cornerstone Realty
Income Trust, Inc., as amended. (Incorporated herein by reference to
Exhibit 3.1 included in Cornerstone's Report on Form 8-K dated May 12,
1998; File No. 1-12875).
3.2 Bylaws of Cornerstone Realty Income Trust, Inc. (Amended Through May
12, 1998) (Incorporated herein by reference to Exhibit 3.2 included in
Cornerstone's Report on Form 8-K dated May 12, 1998; File No.
1-12875).
5 Opinion of McGuire, Woods, Battle & Boothe LLP as to the legality of
the securities being registered.*
8 Opinion of McGuire, Woods, Battle & Boothe LLP as to certain tax
matters relating to the merger.*
12 Ratio of Earnings to Combined Fixed Charges and Preferred
Distributions
23.1 Consent of McGuire, Woods, Battle & Boothe LLP (included in Exhibit 5).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
23.2 Consent of Ernst & Young LLP.
<S> <C>
23.3 Consent of Ernst & Young LLP.
23.4 Consent of L.P. Martin & Company, P.C.
23.5 Consent of L.P. Martin & Company, P.C.
24 Powers of Attorney (contained on signature page to this Registration
Statement).
99.1 Opinion of PaineWebber Incorporated as to the fairness of the merger to Cornerstone
(included as Annex B to the Joint Proxy Statement/Prospectus contained in this
Registration Statement).
99.2 Opinion of Bowles Hollowell Conner as to the fairness of the merger to Apple shareholders
(included as Annex C to the Joint Proxy Statement/Prospectus contained in this
Registration Statement).
</TABLE>
- ----------
* To be filed by amendment.
(b) No financial statement schedules are required to be filed herewith
pursuant to Item 21 (b) of this Form.
(c) The Opinion of PaineWebber Incorporated is included as Annex B to the
Joint Proxy Statement/Prospectus included in this Registration Statement.
The Opinion of Bowles Hollowell Conner & Co. is included as Annex C to the
Joint Proxy Statement/Prospectus included in this Registration Statement.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934, as amended) that is
incorporated by reference in the registration statement 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.
(b) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(c) The undersigned registrant undertakes that every prospectus: (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is used
in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes 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.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers 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
II-2
<PAGE>
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer 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 whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(e) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, CORNERSTONE
REALTY INCOME TRUST, INC. CERTIFIES THAT IT HAS DULY CAUSED THIS REGISTRATION
STATEMENT (THE "REGISTRATION STATEMENT") TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF RICHMOND, VIRGINIA, ON
THIS SIXTH DAY MAY, 1999.
Cornerstone Realty Income Trust, Inc.
By: /s/ GLADE M. KNIGHT
------------------------------------
Glade M. Knight
Chairman of the Board,
Chief Executive Officer
And President
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby severally constitutes and appoints Glade M. Knight and
Stanley J. Olander, Jr., and each of them singly, such person's true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for such person and in such person's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all
that any said attorney-in-fact and agent, or any substitute or substitutes of
any of them, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------- ----------------------------------- ------------
<S> <C> <C>
/s/ GLADE M. KNIGHT Director, Chief Executive May 6, 1999
- --------------------------- Officer and President
Glade M. Knight
/s/ STANLEY J. OLANDER, JR. Director, Chief Financial Officer May 5, 1999
- --------------------------- and Principal Accounting Officer
Stanley J. Olander, Jr.
/s/ HARRY S. TAUBENFELD Director May 4, 1999
- ---------------------------
Harry S. Taubenfeld
/s/ MARTIN ZUCKERBROD Director May 4, 1999
- ---------------------------
Martin Zuckerbrod
/s/ GLENN W. BUNTING, JR Director May 5, 1999
- ---------------------------
Glenn W. Bunting, Jr.
/s/ PENELOPE W. KYLE Director May 5, 1999
- ---------------------------
Penelope W. Kyle
/s/ LESILE A. GRANDIS Director May 5, 1999
- ---------------------------
Leslie A. Grandis
</TABLE>
II-4
EXHIBIT 12
CORNERSTONE REALTY INCOME TRUST, INC.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DISTRIBUTIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996
--------------- --------------- ------------------
<S> <C> <C> <C>
Net income available to common
shareholders ................................... $ 2,386,303 $ 5,229,715 $(4,169,849)
ADD:
Fixed charges ................................. 12,737 311,824 1,474,643
Preferred stock distributions ................. -- -- --
----------- ----------- -----------
Earnings ........................................ 2,399,040 5,541,539 (2,695,206)
Fixed charges and preferred stock
distributions:
Interest on indebtedness ...................... -- 248,120 1,336,419
Amortization of loan costs .................... -- 43,983 91,592
Portion of rents representative of interest
factor ........................................ 12,737 19,721 46,632
Capitalized interest .......................... -- -- --
----------- ----------- -----------
Fixed charges ................................. 12,737 311,824 1,474,643
Preferred stock distributions ................. -- -- --
----------- ----------- -----------
Combined fixed charges and preferred
distributions ................................. $ 12,737 $ 311,824 $ 1,474,643
=========== =========== ===========
Ratio of earnings to combined fixed
charges and preferred stock
distributions ................................. 188.36 17.77 (a)
<CAPTION>
SUPPLEMENTAL PRO
YEAR ENDED DECEMBER 31, FORMA(B)
--------------------------------- ----------------
THREE MONTHS YEAR
ENDED ENDED
1997 1998 3/31/99 12/31/98
---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net income available to common
shareholders ................................... $ 19,225,553 $ 23,225,335 $ 5,832,410 $ 9,733,699
ADD:
Fixed charges ................................. 7,657,173 12,752,799 3,447,206 16,329,831
Preferred stock distributions ................. -- -- -- 23,673,643
------------ ------------ ----------- ------------
Earnings ........................................ 26,882,726 35,978,134 9,279,616 49,737,173
Fixed charges and preferred stock
distributions:
Interest on indebtedness ...................... 7,348,517 12,370,102 3,358,823 15,936,209
Amortization of loan costs .................... 212,802 217,795 56,625 217,795
Portion of rents representative of interest
factor ........................................ 95,854 164,902 31,758 175,827
Capitalized interest .......................... -- -- -- --
------------ ------------ ----------- ------------
Fixed charges ................................. 7,657,173 12,752,799 3,447,206 16,329,831
Preferred stock distributions ................. -- -- -- 23,673,643
------------ ------------ ----------- ------------
Combined fixed charges and preferred
distributions ................................. $ 7,657,173 $ 12,752,799 $ 3,447,206 $ 40,003,474
============ ============ =========== ============
Ratio of earnings to combined fixed
charges and preferred stock
distributions ................................. 3.51 2.82 2.69 1.24
<CAPTION>
SUPPLEMENTAL PRO
FORMA(B)
----------------
THREE MONTH
ENDED
3/31/99
----------------
<S> <C>
Net income available to common
shareholders ................................... $ 2,170,628
ADD:
Fixed charges ................................. 3,856,599
Preferred stock distributions ................. 7,099,029
------------
Earnings ........................................ 13,126,256
Fixed charges and preferred stock
distributions:
Interest on indebtedness ...................... 3,761,818
Amortization of loan costs .................... 56,625
Portion of rents representative of interest
factor ........................................ 38,156
Capitalized interest .......................... --
------------
Fixed charges ................................. 3,856,599
Preferred stock distributions ................. 7,099,029
------------
Combined fixed charges and preferred
distributions ................................. $ 10,955,628
============
Ratio of earnings to combined fixed
charges and preferred stock
distributions ................................. 1.20
</TABLE>
- ------
(a) Earnings for the year ended December 31, 1996 were inadequate to cover fixed
charges due to management contract termination expense resulting from the
Company's conversion to "self-administered" and "self-managed" status. See
Note 6 to the consolidated financial statements. The amount of coverage
deficiency was $4,169,849 for the year ended December 31, 1996.
(b) To give effect to the merger with Apple and the operations of property
acquisitions made during 1998 and 1999 by Apple and seven property
acquisitions made by Cornerstone during 1998. The pro forma data includes
the historical results of operations for the periods indicated regardless of
when Cornerstone or Apple, as the case may be, acquired such properties. As
a result, the pro forma data may not be indicative of results of operations
in future periods.
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4 No. 333-00000) and related Prospectus of
Cornerstone Realty Income Trust, Inc. for the registration of 12,670,694 Series
A Convertible Preferred Shares and to the incorporation by reference therein of
our report dated January 25, 1999, with respect to the consolidated financial
statement and schedule of Cornerstone Realty Income Trust, Inc. included in its
Annual Report (Form 10-K) for the year ended December 31, 1998, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Richmond, Virginia
May 7, 1999
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the incorporation by reference of our report dated February 4, 1999, with
respect to the consolidated financial statements and schedule of Apple
Residential Income Trust, Inc. included in its Annual Report (Form 10-K) for the
year ended December 31, 1998, filed with the Securities and Exchange Commission,
in the Registration Statement (Form S-4 No. 333-00000) and related Prospectus of
Cornerstone Realty Income Trust, Inc. for the registration of 12,670,674 Series
A Convertible Preferred Shares.
/s/ Ernst & Young LLP
Richmond, Virginia
May 7, 1999
EXHIBIT 23.4
L.P. MARTIN & COMPANY, P.C.
4132 INNSLAKE DRIVE
GLEN ALLEN, VIRGINIA 23060
PHONE: 804-346-2626
FAX: 804-346-9311
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We hereby consent to the incorporation by reference of the following
reports prepared by us in the Registration Statement on Form S-4 (File No.
333-00000) of Cornerstone Realty Income Trust, Inc. filed with the Securities
and Exchange Commission by Cornerstone Realty Income Trust, Inc., and in the
Prospectus (including supplements thereto) included therein and to the
references to us under "Experts" therein:
(1) Our report dated March 25, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Main Park Apartments for the twelve-month
period ended December 31, 1997, (2) our report dated April 6, 1998 with respect
to the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Timberglen
Apartments for the twelve-month period ended December 31, 1997, (3) our report
dated April 14, 1998 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Copper Ridge Apartments for the twelve-month period
ended February 28, 1998, (4) our report dated May 14, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Bitter Creek
Apartments for the twelve-month period ended March 31, 1998, (5) our report
dated July 16, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Summer Tree Apartments for the twelve-month period ended May 31,
1998, (6) our report dated July 17, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Park Village Apartments for the twelve-month
period ended May 31, 1998, (7) our report dated July 21, 1998 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Cottonwood Crossing
Apartments for the twelve-month period ended May 31, 1998, (8) our report dated
May 14, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Pace's Point Apartments for the twelve-month period ended March 31,
1998, (9) our report dated May 14, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Pepper Square Apartments for the twelve-month
period ended March 31, 1998, (10) our report dated May 14, 1998 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Emerald Oaks
Apartments for the twelve-month period ended March 31, 1998, (11) our report
dated May 14, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Hayden's Crossing Apartments for the twelve-month period ended
March 31, 1998, (12) our report dated May 14, 1998 with respect to the statement
of income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Newport Apartments for the
twelve-month period ended March 31, 1998, (13) our report dated July 15, 1998
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property
Estrada Oaks Apartments for the twelve-month period ended June 30, 1998, (14)
our report dated December 22, 1998 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Burney Oaks Apartments for the twelve-month
period ended September 30, 1998, (15) our report dated November 23, 1998 with
respect to the
<PAGE>
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Brandywine Park
Apartments for the twelve-month period ended September 30, 1998, (16) our report
dated January 21, 1999 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property The Courts on Pear Ridge Apartments for the
twelve-month period ended October 31, 1998, (17) our report dated January 22,
1999 with respect to the statement of income and direct operating expenses
exclusive of items not comparable to the proposed future operations of the
property Sierra Ridge Apartments for the twelve-month period dated December 15,
1998 and (18) our report dated February 23, 1999 with respect to the statement
of income and direct operating expenses not comparable to the proposed future
operations of the property Grayson Square Apartments for the twelve-month period
ended December 31, 1998.
/s/ L. P. Martin & Co., P.C.
Richmond, Virginia
May 5, 1999
EXHIBIT 23.5
L.P. MARTIN & COMPANY, P.C.
4132 INNSLAKE DRIVE
GLEN ALLEN, VIRGINIA 23060
PHONE: 804-346-2626
FAX: 804-346-9311
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We hereby consent to the incorporation by reference of the following
reports prepared by us in the Registration Statement on Form S-4 (File No.
333-00000) of Cornerstone Realty Income Trust, Inc. filed with the Securities
and Exchange Commission by Cornerstone Realty Income Trust, Inc., and in the
Prospectus (including supplements thereto) included therein and to the
references to us under "Experts" therein:
(1) Our report dated February 5, 1998 with respect to the statement of
income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Sterling Point Apartments for the
twelve-month period ended December 31, 1997, (2) our report dated April 8, 1998
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property
Hampton Pointe Apartments for the twelve-month period ended February 28, 1998,
(3) our report dated April 8, 1998 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Edgewood Knoll Apartments for the twelve-month
period ended February 28, 1998, (4) our report dated June 25, 1998 with respect
to the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property The Timbers
Apartments for the twelve-month period ended April 30, 1998, (5) our report
dated August 6, 1998 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property The Gables Apartments for the twelve-month period
ended May 31, 1998, and (6) our report dated November 5, 1998 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Cape Landing
Apartments for the twelve-month period ended September 30, 1998.
/s/ L. P. Martin & Co., P.C.
Richmond, Virginia
May 5, 1999
