FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-10635
SUPPLEMENT NO. 12 DATED SEPTEMBER 22, 1998
TO PROSPECTUS DATED NOVEMBER 19, 1996
(TO BE USED TOGETHER WITH
SUPPLEMENT NO. 11 DATED JULY 31, 1998 AND
PROSPECTUS DATED NOVEMBER 19, 1996)
APPLE RESIDENTIAL INCOME TRUST, INC.
The following information supplements the Prospectus of Apple
Residential Income Trust, Inc. dated November 19, 1996 and Supplement No. 11
dated July 31, 1998, and is part of such Prospectus. PROSPECTIVE INVESTORS
SHOULD CAREFULLY REVIEW EACH OF THE PROSPECTUS, SUPPLEMENT NO. 11 AND THIS
SUPPLEMENT NO. 12.
TABLE OF CONTENTS TO SUPPLEMENT NO. 12
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Status of the Offering ............................................................... S-2
Recent Developments .................................................................. S-2
Selected Financial Data .............................................................. S-4
Management's Discussion and Analysis of Financial Condition and Results of Operations S-5
Index to Financial Statements ........................................................ F-1
</TABLE>
The Prospectus and Supplements thereto contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Such forward-looking statements
include, without limitation, statements as to anticipated renovations to Company
properties and anticipated improvements in property operations from completed
and planned property renovations, and the possible acquisition by Cornerstone
Realty Income Trust, Inc. of Shares in the Company or the business or assets of
the Company. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from the results of
operations or plans expressed or implied by such forward-looking statements.
Such factors include, among other things, unanticipated adverse business
developments affecting the Company, the properties or Cornerstone Realty Income
Trust, Inc., as the case may be, adverse changes in the real estate markets and
general and local economic and business conditions. Investors should review the
more detailed risks and uncertainties set forth under the caption "Risk Factors"
in the Prospectus. Although the Company believes that the assumptions underlying
the forward-looking statements contained in the Prospectus and the Supplements
are reasonable, any of the assumptions could be inaccurate, and therefore there
can be no assurance that the forward-looking statements included in the
Prospectus and Supplements will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included in
the Prospectus and the Supplements, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
results or conditions described in such forward-looking statements or the
objectives and plans of the Company will be achieved.
S-1
<PAGE>
STATUS OF THE OFFERING
As of September 15, 1998, the Company had closed the sale to investors
of 2,084,444 Shares at $9 per Share, and 21,308,630 Shares at $10 per Share,
representing aggregate gross proceeds to the Company of $231,846,301, and
proceeds net of selling commissions and marketing expense allowance of
$209,037,641. These totals include 417,778 Shares purchased by Cornerstone
Realty Income Trust, Inc. ("Cornerstone"), as described under "Developments
Involving Cornerstone Realty Income Trust, Inc. -- Authorization for Additional
Share Issuance" in Supplement No. 11.
RECENT DEVELOPMENTS
PLANNED ADDITIONAL OFFERING. On September 22, 1998, the Company filed
with the Securities and Exchange Commission a Registration Statement related to
a proposed offer to the public of 5,000,000 additional Shares at $10 per Share
(for an aggregate offering price of $50,000,000) (the "Additional Offering").
There is no assurance that the Registration Statement pertaining to the
Additional Offering will be declared effective or that the Additional Offering
will begin or terminate with any additional Shares being sold. The terms of
distribution of, and intended use of proceeds from, the Additional Offering are
substantially the same as those in this offering, except there is no minimum
number of Shares that must be sold in the Additional Offering.
EXTENSION REGARDING ADDITIONAL SHARE ISSUANCE. As described under
"Developments Involving Cornerstone Realty Income Trust, Inc. -- Authorization
for Additional Share Issuance," in Supplement No. 11, the Company has granted to
Cornerstone an ongoing right to purchase Shares in the Company on the terms and
for the price described therein. On September 17, 1998, the Company's Board of
Directors decided to extend this right through the term of the Additional
Offering on the same terms and conditions as previously authorized for the term
of the current offering.
AWARD AGREEMENT TO MR. KNIGHT. On September 17, 1998, the Company's
Board of Directors authorized the Company to grant and issue to Glade M. Knight
options to purchase certain Shares of the Company (the "Award Agreement"). This
grant was made apart from the Incentive Plan by special action of the Board of
Directors. The terms of the Award Agreement will provide Mr. Knight options to
purchase 355,111 Shares (the "Award Options"), but only if and as Shares are
sold in the Additional Offering. The Award Options will be issued in five equal
parts, if, as and when there is sold in the Additional Offering $10 million, $20
million, $30 million, $40 million and $50 million, respectively (each a break
point), in Shares. If the Additional Offering is terminated at any point other
than one of the break points, there will be issued at the time of termination a
pro rata portion of the Award Options corresponding to the sales in excess of
the break point previously achieved.
The Award Options are exercisable and transferable immediately upon
receipt but may not be exercised after ten years from the date of grant. The
Award Options may be exercised only so long as Mr. Knight is an executive
officer of the Company; provided that if he ceases to be an executive officer of
the Company other than by reason of disability or death at the time when he
holds an Award Option that is exercisable, he may exercise any or all of such
Award Options within 60 days after termination of such status. If Mr. Knight's
employment is terminated either by reason of his disability or by reason of his
death, at a time when he holds an Award Option that is exercisable, such Award
Option may be exercised within 180 days after the date of disability or death.
No Award Option will be exercisable by a person subject to Section 16(b) of the
Exchange Act in a manner not permitted by that Act and the rules thereunder.
The exercise price of the Award Options will be $10 per Share
acquired; provided, however, that if a "Triggering Event" (as defined below)
occurs, the exercise price will be $1.00 per Share. All of the Award Options
will become immediately exercisable upon and for 180 days following the
occurrence of a "Triggering Event." A Triggering Event means the occurrence of
either of the following events: (1) substantially all of the Company's assets,
stock or business is sold or otherwise transferred, whether through sale,
exchange, merger, consolidation, lease, share exchange or otherwise, or (2) the
Advisory Agreement between the Company and ARA (whether or not subject to a
subcontract arrangement) is terminated or not renewed, and the Company ceases to
use ARMG (whether or not subject to a sub-
S-2
<PAGE>
contract arrangement) to provide substantially all of its property management
services. These are the same events that permit the conversion of the Class B
Convertible Shares into Common Shares. See "Principal and Management
Stockholders" in the Prospectus.
If a Triggering Event occurs, and the holder of the Award Options
either elects not to, or fails to, exercise any exercisable Award Options within
the 180-day period, then the Company will pay to the holder of the Award Options
the difference between the exercise price and the value of the Shares that would
be obtained upon exercise of the Award Options. If the exercise of the Award
Options or the receipt of payment in lieu of such exercise subjects the holder
of the Award Options to an additioanl penalty tax under section 4999 of the
Code, the Company will pay to the Award Option holder an additional amount to
put such holder in the same position in which the holder would have been if such
penalty tax had not been imposed (but the holder will remain liable for the
ordinary income taxes payable thereon).
The exercise by Mr. Knight (or any other holders) of the Award Options
following a Triggering Event will result in dilution of the Shareholders'
interests. If all of the Common Shares covered by the Award Options were treated
as owned by Mr. Knight, as of September 17, 1998, Mr. Knight would own
approximately 1.54% of the Company's Shares.
PAYMENT OF CERTAIN ACQUISITION FEES. Under the Property
Acquisition/Disposition Agreement, Cornerstone acts as a real estate broker in
connection with the Company's purchases and sales of properties and is generally
entitled to a real estate commission equal to 2% of the gross purchase prices of
the Company's properties, payable by the Company in connection with each
purchase; provided that if indebtedness is assumed or incurred in connection
with the acquisition, the acquisition fee that would have been payable with
respect to the portion of the purchase price represented by such indebtedness
shall not be payable until such time, if ever, that such indebtedness is repaid
with the proceeds of this offering or other equity financing. On September 17,
1998, the Company's Board of Directors authorized the Company to agree to and
enter into an amendment to the Property Acquisition/Disposition Agreement
providing for the payment of the two percent (2%) fee on the indebtedness
assumed by the Company in connection with the purchase of Pace's Point
Apartments, Pepper Square Apartments, Emerald Oaks Apartments, Hayden's Crossing
Apartments and Newport Apartments. Such amendment to the Property
Acquisition/Disposition Agreement was in recognition and consideration of the
special circumstances associated with such indebtedness (including that the
indebtedness is not prepayable without penalty), and the special and
extraordinary services rendered by Cornerstone in connection with the
identification, review and closing on the acquisitions of such properties with
the assumption of such debt (including negotiations with the lenders and
obtaining the lenders' consent to such acquisitions, and proposing and
effectuating the organization of special purpose subsidiaries of the Company to
acquire and own such properties).
S-3
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company
and should be read in conjunction with the consolidated financial statements and
related notes of the Company included elsewhere in the Prospectus and the
Supplements.
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE
SIX MONTH PERIOD YEAR ENDED
ENDING JUNE 30, DECEMBER 31,
------------------ -------------------------
1998 1997 1996
------------------ ----------------- -------
<S> <C> <C> <C>
OPERATING RESULTS
Rental Income .................................... $ 11,035,129 $ 12,005,968 --
Net Income ....................................... $ 4,436,460 $ 3,499,194 --
Distributions Declared and Paid .................. $ 4,876,491 $ 3,249,098 --
PER SHARE
Net Income ....................................... $ .28 $ .54 --
Distributions .................................... $ .41 $ .60 --
Distributions Representing Return of Capital ..... not available 0% --
Weighted Average Shares Outstanding .............. 15,855,507 6,493,114
BALANCE SHEET DATA
Investment in Rental Property .................... $ 138,831,383 $ 89,634,348 --
Total Assets ..................................... $ 181,959,019 $ 112,485,520 $100
Shareholders' Equity ............................. $ 178,382,007 $ 109,340,555 $100
Shares Outstanding ............................... 20,109,698 12,371,829 10
OTHER DATA
Cash Flows from:
Operating Activities ........................... $ 5,904,337 $ 7,075,025 --
Investing Activities ........................... $ (48,794,629) $ (88,753,814) --
Financing Activities ........................... $ 64,604,992 $ 105,841,261 --
Number of Communities Owned at Period-End ........ 16 11 --
FUNDS FROM OPERATIONS CALCULATION
Net Income ..................................... $ 4,436,460 $ 3,499,194 --
Depreciation of Real Estate ................... $ 2,080,000 $ 1,898,003 --
--------------- ------------- ----
Funds from Operations ............................ $ 6,516,460 $ 5,397,197 --
</TABLE>
The Company was formed in 1996 and did not commence operations until January,
1997.
(a) "Funds from operations" is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. This definition
conforms to the recommendations set forth in a White Paper adopted by the
National Association of Real Estate Investment Trusts (NAREIT). The Company
considers funds from operations in evaluating property acquisitions and its
operating performance, and believes that funds from operations should be
considered along with, but not as an alternative to, net income and cash
flows as a measure of the Company's operating performance and liquidity.
Funds from operations, which may not be comparable to other similarly titled
measures of other REITs, does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to fund cash needs.
S-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is based upon the unaudited financial
statements of the Company as of June 30, 1998 and the financial statements of
the Company as of December 31, 1997. The information should be read in
conjunction with the Company's financial statements and notes thereto and the
pro forma financial statements and notes thereto of the Company included
elsewhere in the Prospectus and the Supplements. The Company is operated and has
elected to be treated as a REIT for federal income tax purposes.
FOR THE SIX MONTHS ENDED JUNE 30, 1998
RESULTS OF OPERATIONS
Income and occupancy
Substantially all of the Company's income is from the rental operation
of apartment communities. The Company's rental income for six months ended June
30, 1998 reflects the operations from the properties acquired before 1998 and
from the 5 properties acquired in 1998 from their respective acquisition dates.
Rental income for the first six months increased to $11,035,129 in 1998 from
$3,978,434 in 1997. For the second quarter of 1998 rental income increased to
$6,106,378 from $2,824,034 in 1997. The increase in rental income is primarily
due to the 1997 acquisition operations, as well as the incremental effect of the
1998 acquisition operations.
Rental income is expected to continue to increase from the impact of
planned improvements which are being made in an effort to improve the
properties' marketability, economic occupancies, and rental rates.
Overall economic occupancy for the Company's properties was 92% and
94% at the three months ended and six months ended June 30, 1998 and 1997.
Overall, the average rental rates for the portfolio increased 4% to $514 from
$493 per month for the six months ended June 30, 1998 and 1997, respectively.
For the second quarter of 1998 and 1997 average rental rates increased 14% to
$530 from $464 per month, respectively. The increase is primarily due to rental
increases combined with increases in average rental rates of properties
acquired.
The Company's other source of income is the investment of its cash and
cash reserves. Interest income for the six months ended June 30, 1998 and 1997
was $821,796 and $88,541, respectively. For the second quarter of 1998 and 1997,
interest income was $485,409 and $3,600, respectively. The increases are due to
the Company's investment balance held in liquid money market investments pending
use for acquisitions. The investment rate was 4.9% at June 30, 1998. It is
anticipated the interest income will decrease with future acquisitions.
Expenses
Total expenses for the first six months of 1998 increased to
$7,394,634 from $2,519,247 in 1997. For the second quarter of 1998, total
expenses increased to $4,101,715 from $1,840,334 for the same period in 1997.
The increases are due largely to the increase in the number of apartments. The
operating expense ratio (the ratio of rental expenses, excluding general and
administrative, amortization and depreciation expense, to rental income) was 45%
and 47% for the six months ended June 30, 1998 and 1997, respectively. For the
second quarter of 1998 and 1997, the operating expense ratio was 44% and 50%,
respectively. The decreases are primarily due to a full period of operation of
the 1997 acquisitions and increased efficiencies associated with economies of
scale.
General and administrative expenses totaled 3.2% of total rental
income for the six months ended June 30, 1998 and 4.6% for the same period in
1997. For the second quarter of 1998 and 1997, general and administrative
expense totaled 3.2% and 3.9%, respectively, of total income. This percentage is
expected to decrease as the Company's asset base and rental income grow. These
expenses represent the administrative expenses of the Company as distinguished
from the operations of the Company's properties.
S-5
<PAGE>
Depreciation expense for the six month period ended June 30 has
increased to $2,080,000 in 1998 from $443,341 in 1997. For the second quarter of
1998 depreciation expense was $1,190,455 in 1998 and $305,526 for 1997. The
increase is directly attributable to the acquisition of additional apartment
communities in 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
Equity
There was a significant change in the Company's liquidity during the
six months ended June 30, 1998, as the Company continued to acquire properties.
During the six months ended June 30, 1998, the Company closed the sale to
investors of 7,737,869 shares representing gross proceeds to the Company of
$77,378,698 and net proceeds after payment of brokerage fees and other
offering-related costs of $69,461,483.
Using proceeds from the sale of common shares, the Company acquired
1,400 apartment homes in five residential rental communities during first six
months of 1998. The following is information on these five acquisitions:
<TABLE>
<CAPTION>
APARTMENT
PROPERTY NAME DATE ACQUIRED HOMES PURCHASE PRICE LOCATION
- --------------------------------- --------------- ---------- ---------------- ------------------
<S> <C> <C> <C> <C>
Main Park Apartments ............ February 1998 192 $ 8,000,000 Duncanville, TX
Timberglen Apartments ........... February 1998 304 12,000,000 Dallas, TX
Copper Ridge Apartments ......... March 1998 200 4,525,000 Fort Worth, TX
Bitter Creek Apartments ......... May 1998 472 13,505,000 Grand Prairie, TX
Summer Tree Apartments .......... June 1998 232 5,700,000 Dallas, TX
</TABLE>
Notes payable
During July 1998, the Company purchased five properties through a
combination of using proceeds from the offering and assumption of mortgage
loans. The total of the mortgage loans assumed at acquisition was approximately
$24.1 million (see Note 5 to the consolidated financial statements).
Cash and cash equivalents
Cash and cash equivalents totaled $45,877,272 at June 30, 1998. During
the first six months of 1998, the Company distributed $4,876,491 to its
shareholders, of which $2,992,890 was reinvested in additional shares through
the Additional Share Option. The reinvested funds netted the Company $2,693,601
after payment of brokerage fees. During the six months of 1998, the Company
distributed $168,777 to Cornerstone on Shares that had been purchased by
Cornerstone.
Capital requirements
The Company has an ongoing capital expenditure commitment to fund its
renovation program for recently acquired properties. In addition, the Company is
always assessing potential acquisitions and intends to acquire additional
properties during 1998. During July 1998, the Company purchased eight properties
for approximately $60.6 million. The properties were purchased through a
combination of using approximately $36.4 million in proceeds from the offering
and assumption of mortgage loans totaling approximately $24.2 million. As of
August 1, 1998, no material definitive commitments existed for the purchase of
additional properties. The potential sources to fund the improvements and any
additional acquisitions include additional equity, cash reserves, and debt
provided by its line of credit.
The Company capitalized $3.9 million of improvements to its various
properties during the first six months of 1998. It is anticipated that some $11
million in additional capital improvements will be completed during the next
year on the current portfolio, which are expected to be funded through cash
reserves and dividend reinvestment.
S-6
<PAGE>
The Company has short-term cash flow needs in order to conduct the
operation of its properties. The rental income generated from the properties
supplies sufficient cash to provide for the payment of these operating expenses
and distributions.
Capital resources are expected to grow with the future sale of its
Shares and the cash flow from operations. Approximately 55% of 1998's first and
second quarter distributions, $2,693,601 (net of brokerage commissions), were
reinvested in additional Shares. In general, the Company's liquidity and capital
resources are expected to be adequate to meet its cash requirements in 1998.
FOR THE YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
Income and Occupancy
As operations of the Company commenced in January 1997, a comparison
of the years ended December 31, 1996 and December 31, 1997 is not possible. The
results of the Company's property operations for the year ended December 31,
1997 include the results of operations from the 11 properties acquired in 1997
from their respective acquisition dates. Substantially all of the Company's
revenue is from the rental operation of its apartment communities. Rental income
was $12,005,968 in 1997. Overall average economic occupancy was 93% in 1997. The
average rental rate for the portfolio was $555 at December 31, 1997.
Expenses
Total expenses were $8,271,066 in 1997. The operating expense ratio
(the ratio of expenses, excluding depreciation, amortization, and general and
administrative expenses, to rental income) was 50% in 1997. The Company
contracts its property management to a third party (see Note 6 to the
consolidated financial statements). General and administrative expenses totaled
3% of revenues in 1997. These expenses represent the administrative expenses of
the Company as distinguished from the operations of the Company's properties.
The percentage of general and administrative expenses is expected to decrease as
the Company's operations grow. Depreciation of real estate was $1,898,003.
Interest and Investment
The Company earned interest income of $222,676 in 1997 from the
investment of its cash and cash reserves. The weighted-average interest rate
earned on short-term investments was 4%. The Company incurred $458,384 of
interest expense in 1997, associated with short-term borrowings under its line
of credit to fund acquisitions. The weighted-average interest rate on the line
of credit during 1997 was 7.8%.
LIQUIDITY AND CAPITAL RESOURCES
Equity
There was a significant change in the Company's liquidity during the
year ended December 31, 1997 as the Company commenced operations and thereafter
continued to grow. During 1997, the Company sold 12,371,819 Shares to its
investors (including 417,778 Shares purchased by Cornerstone Realty Income
Trust, Inc. and 197,496 common shares sold through the Company's additional
share option), bringing the total number of shares outstanding to 12,371,829.
The total gross proceeds from the Shares sold were $121,633,733, which netted
$109,090,359 to the Company after the payment of brokerage fees and other
offering-related costs.
Using proceeds from the sale of Shares and supplemented by short-term
borrowings when necessary, the Company acquired 2,776 apartment units in 12
residential rental communities during 1997. Riverhill Apartments and Chaparosa
Apartments are adjoining properties and are operated as one apartment community
(subsequently renamed Remington Hills).
S-7
<PAGE>
During 1997, the Company made the following 12 acquisitions:
<TABLE>
<CAPTION>
INITIAL NUMBER DATE
DESCRIPTION LOCATION ACQUISITION COST OF UNITS ACQUIRED
- ---------------------------- ---------------- ------------------ ---------- --------------
<S> <C> <C> <C> <C>
Brookfield Dallas, TX $ 5,458,485 232 January 1997
Eagle Crest Irving, TX 15,650,000 484 January 1997
Tahoe Arlington, TX 5,690,560 240 January 1997
Mill Crossing Arlington, TX 4,544,121 184 February 1997
Wildwood Euless, TX 3,963,519 120 March 1997
Toscana Dallas, TX 5,854,531 192 March 1997
Polo Run Arlington, TX 6,858,974 224 March 1997
The Arbors on Forest Ridge Bedford, TX 7,748,907 210 April 1997
Pace's Cove Dallas, TX 9,277,355 328 June 1997
Chaparosa Irving, TX 5,825,000 170 August 1997
River Hill Irving, TX 7,275,000 192 August 1997
Copper Crossing Fort Worth, TX 4,750,000 200 November 1997
</TABLE>
Notes Payable
The Company seeks to hold all of its properties on an unsecured basis.
The Company obtained a $20 million unsecured line of credit with a commercial
bank. The line expired on March 31, 1998. The line bore interest at LIBOR plus
200 basis points. The line of credit was used to fund acquisitions on a
short-term basis and was sought to be repaid, generally within 60 days, with
proceeds from the offering. The Company may use its $20 million unsecured line
of credit to facilitate the timely acquisition of properties, if proceeds from
the Company's "best efforts" offering are unavailable at the time of a proposed
acquisition. It is anticipated that any borrowings will be curtailed through the
sale of additional Shares, although there can be no assurance that such sales
will be sufficient to repay such borrowings. If the future sale proceeds were
insufficient, the Company could seek to extend the maturity date or pay the
balance of the loan due from its rental operations or cash reserves.
At year-end, there were no outstanding balances on the acquisition
line of credit.
Cash and Cash Equivalents
Cash and cash equivalents totaled $24,162,572 at December 31, 1997.
During the year, the Company distributed $3,249,098 to its shareholders, of
which $1,974,949 was reinvested in additional Shares under the terms of the
Company's Additional Share Option. The reinvested funds netted the Company
$1,777,454 after payment of brokerage fees. During the year, the Company
distributed $168,364 to Cornerstone on shares that had been purchased by
Cornerstone.
Capital Requirements
The Company has an ongoing capital commitment to fund its renovation
program for acquired properties. In addition, the Company expects to acquire new
properties during the year. The Company anticipates that it will continue to
operate as it did in 1997 and fund these cash needs from a variety of sources
including equity, cash reserves, and debt provided by its line of credit.
The Company continues to renovate its properties. In connection with
these renovations, the Company capitalized improvements of $3.6 million in 1997.
Approximately $5 million of additional capital improvements are budgeted for
1998 on the existing property portfolio which are expected to be funded through
cash reserves and dividend reinvestment.
The Company has short-term cash flow needs in order to conduct the
operation of its properties. The rental income generated from the properties
supplies ample cash to provide for the payment of these operating expenses and
the payment of distributions to shareholders. The Company is operated as, and
annually elects to be taxed as, a real estate investment trust under the
Internal Revenue Code. As a result, the Company has no provision for taxes, and
thus there is no effect on the Company's liquidity.
S-8
<PAGE>
Capital resources are expected to grow with the future sale of its
shares and from cash flow from operations. Approximately 61% of all 1997
distributions were reinvested in additional common shares. In general, the
Company's liquidity and capital resources are believed to be more than adequate
to meet its cash requirements during 1998.
The Company is expecting to continue with significant growth during
1998. The Company plans to have monthly equity closings in 1998, until the
offering is fully funded, or until such time as the Company may opt to
discontinue it. It is anticipated that the equity funds will be invested in
additional apartment communities. Since year-end 1997, the Company purchased two
additional apartment properties, using share sale proceeds, and is evaluating
other potential acquisitions.
In addition to shares sold in the public offering, as of December 31,
1997, Cornerstone owned 417,778 Shares of the Company at a cost of $3,760,000
which represents approximately 3% of the Company's Shares outstanding at
December 31, 1997. These Shares are purchased outside of the above-referenced
offering. In 1997, the Company granted Cornerstone a continuing right to own up
to 9.8% of the Shares of Apple at the market price, net of selling commissions.
The Company also has granted Cornerstone a "first right of refusal" to
purchase the properties or business of Apple. Cornerstone has stated in its
public filings its intent to make periodic evaluations on the feasibility of
purchasing the Company.
IMPACT OF YEAR 2000
Some computer programs were written using two digits rather than four
to define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system miscalculation causing disruptions
of operations. The Company has completed an assessment of its programs and has
begun to modify or replace portions of its software, so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The total Year 2000 project cost will be expensed as incurred and is
not expected to have a material effect on the results of operations. This
project is estimated to be completed by December 31, 1998, which is prior to any
impact on the Company's systems.
IMPACT OF INFLATION
The Company does not believe that inflation had any significant impact
on the operation of the Company in 1997. Future inflation, if any, would likely
cause increased operating expenses, but the Company believes that increases in
expenses would be more than offset by increases in rental revenues. Continued
inflation may also cause capital appreciation of the Company's properties over
time, as rental rates and replacement costs increase.
S-9
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
COMPANY INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets -- June 30, 1998 and December 31, 1997 ...................... F-2
Consolidated Statements of Operations -- Three Months Ended June 30, 1998 and June 30,
1997 and Six Months Ended June 30, 1998 and June 30, 1997 ............................. F-3
Consolidated Statement of Shareholders' Equity -- Six Months Ended June 30, 1998 ........ F-4
Consolidated Statements of Cash Flows -- Six Months Ended June 30, 1998 and June 30,
1997 .................................................................................. F-5
Notes to Consolidated Financial Statements .............................................. F-6
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Consolidated Statement of Operations for the Six Months Ending June 30, 1998
(Unaudited) ........................................................................... F-9
Pro Forma Consolidated Balance Sheet as of June 30, 1998 (Unaudited) .................... F-10
</TABLE>
F-1
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------------- ---------------
<S> <C> <C>
ASSETS
Investment in rental property
Land ............................................................. $ 25,515,794 $ 15,396,823
Building and property improvements ............................... 111,419,576 73,113,886
Furniture and fixtures ........................................... 1,896,013 1,123,639
------------ ------------
138,831,383 89,634,348
Less accumulated depreciation ..................................... (3,978,003) (1,898,003)
------------ ------------
134,853,380 87,736,345
Cash and cash equivalents ......................................... 45,877,272 24,162,572
Prepaid expenses .................................................. 99,503 142,581
Other assets ...................................................... 1,128,864 444,022
------------ ------------
Total Assets ................................................... $181,959,019 $112,485,520
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable .................................................. $ 1,235,261 $ 536,324
Accrued expenses .................................................. 1,710,253 2,143,888
Rents received in advance ......................................... 42,745 70,051
Tenant security deposits .......................................... 588,753 394,702
------------ ------------
Total Liabilities .............................................. 3,577,012 3,144,965
Shareholders' Equity
Common stock, no par value, authorized 50,000,000 shares; issued and outstanding
20,109,698 shares and 12,371,829 shares, respec-
tively ........................................................... 178,551,942 109,090,459
Class B convertible stock, no par value, authorized 200,000 shares;
issued and outstanding 200,000 shares ............................ 20,000 20,000
Receivable from officer-shareholder ............................... -- (20,000)
Net income greater than distributions ............................. (189,935) 250,096
------------ ------------
Total Shareholders' Equity ..................................... 178,382,007 109,340,555
------------ ------------
Total Liabilities and Shareholders' Equity ..................... $181,959,019 $112,485,520
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUE:
Rental income .................................. $6,106,378 $2,824,034 $11,035,129 $3,978,434
EXPENSES:
Property and maintenance ....................... 1,634,846 808,237 2,871,674 1,100,889
Taxes and insurance ............................ 724,401 472,857 1,462,552 578,955
Property management ............................ 349,207 135,790 606,245 196,453
General and administrative ..................... 194,322 109,314 357,195 182,649
Amortization expense ........................... 8,484 8,484 16,968 16,960
Depreciation of rental property ................ 1,190,455 305,652 2,080,000 443,341
---------- ---------- ----------- ----------
Total expenses ............................... 4,101,715 1,840,334 7,394,634 2,519,247
---------- ---------- ----------- ----------
Income before interest income (expense) ......... 2,004,663 983,700 3,640,495 1,459,187
Interest income ................................ 485,409 3,606 821,796 88,541
Interest expense ............................... (13,330) (156,837) (25,831) (161,004)
---------- ---------- ----------- ----------
Net income ...................................... $2,476,742 $ 830,469 $ 4,436,460 $1,386,724
========== ========== =========== ==========
Basic and diluted earnings per common
share .......................................... $ 0.14 $ 0.15 $ 0.28 $ 0.31
========== ========== =========== ==========
Distributions per common share .................. $ 0.20 $ 0.20 $ 0.41 $ 0.20
========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE CLASS B
COMMON STOCK STOCK RECEIVABLE
---------------------------- ---------------------- FROM NET INCOME TOTAL
NUMBER NUMBER OFFICER- GREATER THAN SHAREHOLDERS'
OF SHARES AMOUNT OF SHARES AMOUNT SHAREHOLDER DISTRIBUTIONS EQUITY
------------ --------------- ----------- ---------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997 ...................... 12,371,829 $109,090,459 200,000 $20,000 $ (20,000) $ 250,096 $109,340,555
Net proceeds from the sale
of shares ................. 7,438,580 66,767,882 -- -- -- -- 66,767,882
Net income ................. -- -- -- -- -- 4,436,460 4,436,460
Cash distributions declared
to shareholders ($.41 per
share) .................... -- -- -- -- -- (4,876,491) (4,876,491)
Payment from officer-
shareholder ............... -- -- -- -- 20,000 -- 20,000
Shares issued through Ad-
ditional Share Option ..... 299,289 2,693,601 -- -- -- -- 2,693,601
---------- ------------ ------- ------- --------- ------------ ------------
Balance at June 30, 1998 ... 20,109,698 $178,551,942 200,000 $20,000 $ -- $ (189,935) $178,382,007
========== ============ ======= ======= ========= ============ ============
</TABLE>
See accompanying notes to consolidated financial statments.
F-4
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------
JUNE 30, JUNE 30,
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flow from operating activities:
Net income .......................................................... $ 4,436,460 $ 1,386,724
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization ..................................... 2,096,968 460,301
Amortization of deferred financing costs .......................... 25,831 16,668
Changes in operating assets and liabilities:
Prepaid expenses ................................................. 43,078 (144,540)
Other assets ..................................................... (727,641) (235,148)
Accounts payable ................................................. 698,937 276,966
Accrued expenses ................................................. (633,699) 644,150
Rent received in advance ......................................... (27,306) 3,772
Tenant security deposits ......................................... (8,291) 53,311
------------- -------------
Net cash provided by operating activities ...................... 5,904,337 2,462,204
Cash flow from investing activities:
Acquisitions of rental property, net of liabilities assumed ......... (44,875,121) (66,314,416)
Capital improvements ................................................ (3,919,508) (1,255,299)
------------- -------------
Net cash used in investing activities .......................... (48,794,629) (67,569,715)
Cash flow from financing activities:
Proceeds from short-term borrowings ................................. -- 26,540,000
Repayments of short-term borrowings ................................. -- (16,540,000)
Payment from officer-shareholder .................................... 20,000 --
Net proceeds from issuance of shares ................................ 69,461,483 56,720,606
Cash distributions paid to shareholders ............................. (4,876,491) (680,482)
------------- -------------
Net cash provided by financing activities ...................... 64,604,992 66,040,124
Increase in cash and cash equivalents .......................... 21,714,700 932,613
Cash and cash equivalents, beginning of year ......................... 24,162,572 --
------------- -------------
Cash and cash equivalents, end of period ............................. $ 45,877,272 $ 932,613
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information required by generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. These financial statements should
be read in conjunction with the Company's December 31, 1997 Annual Report on
Form 10-K.
All earnings per share amounts for all periods have been presented and where
appropriate, restated to conform to the Statement 128 requirements.
Certain previously reported amounts have been reclassified to conform with the
current financial statement presentation.
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. The Company does not currently have any items of comprehensive income
requiring separate reporting and disclosure.
The Company commenced operations in January 1997.
NOTE 2 -- INVESTMENT IN RENTAL PROPERTY
The Company purchased five properties located in the Dallas/ Fort Worth area of
Texas for $43,730,000 during the six months ended June 30, 1998. The following
is a summary of rental property acquired during the six months ended June 30,
1998:
<TABLE>
<CAPTION>
INITIAL DATE OF
DESCRIPTION ACQUISITION COST ACQUISITION
- ------------------------------------ ------------------ ---------------
<S> <C> <C>
Main Park .......................... $ 8,000,000 February, 1998
Timberglen ......................... 12,000,000 February, 1998
Copper Ridge ....................... 4,525,000 March, 1998
Silver Brook (formerly Bitter Creek) 13,505,000 May, 1998
Summer Tree ........................ 5,700,000 June, 1998
</TABLE>
NOTE 3 -- RELATED PARTIES
Prior to March 1, 1997, the Company had contracted with Apple Residential
Management Group, Inc. (the "Management Company") to manage the acquired
properties, Apple Residential Advisors, Inc. (the "Advisor") to advise and
provide the Company with day to day management, and Apple Realty Group, Inc. to
acquire and dispose of real estate assets held by the Company. The Company paid
the Management Company a management fee equal to 5% of rental income plus
reimbursement of certain expenses in the amount of $52,375. The Company paid the
Advisor a fee equal to .25% of total contributions received by the Company in
the amount of $14,894. The Company paid Apple Realty Group, Inc. a fee of 2% of
the purchase price of the acquired properties in the amount of $624,382.
F-6
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED )
Effective March 1, 1997, with the approval of the Company, Cornerstone Realty
Income Trust Inc. ("Cornerstone"), for which Glade M. Knight (Chief Executive
Officer and Chairman of the Board of the Company) also serves as Chief Executive
Officer and Chairman, entered into subcontract agreements with the Management
Company and Advisor whereby Cornerstone will provide advisory and property
management services to the Company in exchange for fees and expense
reimbursement per the same terms described above. For the six months ended June
30, 1998, the Company paid Cornerstone $817,954 under the agreements and $84,000
for certain reimbursable items.
During 1997, with the consent of the Company, Cornerstone acquired all the
assets of Apple Realty Group, Inc. The sole material asset of the company was
the acquisition/disposition agreement with the Company. Cornerstone paid
$350,000 in cash and issued 150,000 common shares (valued at $11 per common
share for a total of $1,650,000) in exchange for the assignment of the rights to
the acquisition/ disposition agreement. Cornerstone is entitled, under the terms
of the property acquisition/disposition agreement, to a real estate commission
equal to 2% of the gross purchase price of the Company's properties plus
reimbursement of certain expenses to the extent proceeds from the Company's
equity offering are used to purchase the property. For the six months ended June
30, 1998, the Company paid Cornerstone approximately $874,600 under the
agreement and $12,500 for expense reimbursement.
During the first quarter of 1997, the Company granted Cornerstone a continuing
right to acquire up to 9.8% of the common shares of the Company at the market
price, net of selling commissions, extending through the end of the Company's
initial public offering of its shares. In April 1997, Cornerstone purchased
417,778 common shares of the Company at $9 per share for approximately $3.76
million. Cornerstone owns approximately 2% of the total common shares of the
Company outstanding as of June 30, 1998. Cornerstone intends to make periodic
evaluations of the advisability of purchasing additional common shares of the
Company and may make such purchases, if such purchases are deemed by the
Cornerstone board of directors to be in the best interests of Cornerstone and
its shareholders.
NOTE 4 -- EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
6/30/98 6/30/98 6/30/97 6/30/97
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Net income ....................................... $ 2,476,742 $ 4,436,460 $ 830,469 $ 1,386,724
Numerator for basic and diluted earnings ......... 2,476,742 4,436,460 830,469 1,386,724
Denominator:
Denominator for basic earnings per share-
weighted- average shares ....................... 17,828,897 15,855,507 5,458,096 4,430,927
Effect of dilutive securities:
Stock options .................................... -- -- -- --
------------ ------------ ----------- -----------
Denominator for diluted earnings per share-
adjusted weighted- average shares and as-
sumed conversions .............................. 17,828,897 15,855,507 5,458,096 4,430,927
------------ ------------ ----------- -----------
Basic and diluted earnings per common share . $ .14 $ 0.28 $ .15 $ 0.31
------------ ------------ ----------- -----------
</TABLE>
F-7
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED )
NOTE 5 -- SUBSEQUENT EVENTS
During July 1998, the Company distributed to its shareholders approximately
$3,581,284 (20.5 cents per share) of which approximately $2,238,677 was
reinvested in the purchase of additional shares through the Additional Share
Option. During July 1998, the Company also closed the sale to investors of
1,440,433 shares at $10 per share representing net proceeds to the Company after
payment of brokerage fees of $12,963,897.
During July 1998, the Company purchased the following eight apartment
communities:
<TABLE>
<CAPTION>
CONTRACTUAL
PURCHASE MATURITY INTEREST
PROPERTY NAME UNITS PRICE DEBT ASSUMED DATE RATE LOCATION
- ---------------------------- ------- ------------- -------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Park Village ............... 238 $ 7,000,000 -- -- -- Bedford, TX
Cottonwood Crossing ........ 200 5,700,000 -- -- -- Arlington, TX
Pace's Point ............... 300 11,405,000 $7,713,617 7-1-2003 8.555% Lewisville, TX
Pepper Square............... 144 5,205,000 3,643,424 7-1-2006 8.575 North Dallas, TX
Emerald Oaks ............... 250 10,930,000 6,685,706 4-1-2007 6.75 Grapevine, TX
Hayden's Crossing .......... 170 4,705,000 3,072,399 4-1-2004 6.47 Grand Prairie, TX
Newport .................... 200 6,330,000 3,043,873 12-1-2005 6.675 Austin, TX
Estrada Oaks ............... 248 9,350,000 -- -- -- Irving, TX
</TABLE>
Park Village Apartments, Cottonwood Crossing Apartments, and Estrada Oaks
Apartments were purchased with proceeds from the equity offering. The remaining
properties were purchased through a combination of proceeds from the equity
offering and assumption of mortgage loans. The total of the mortgage loans
assumed at acquisition was $24,159,019.
NOTE 6 -- ACQUISITIONS (UNAUDITED)
The following unaudited pro forma information for the six months ended June 30,
1998 and 1997 assumes the property acquisitions made during the first six months
of 1998 and all of 1997 were made by the Company on January 1 of the respective
year and is presented as if (a) the Company had qualified as a REIT, distributed
at least 95% of its taxable income and, therefore incurred no federal income tax
expense during the period, and (b) the Company had used proceeds from its best
efforts offering to acquire the properties. The pro forma information does not
purport to represent what the Company's results of operations would actually
have been if such transactions, in fact, had occurred on January 1 of the
respective year, nor does it purport to represent the results of operations for
future periods.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
6/30/98 6/30/97
---------------- ----------------
<S> <C> <C>
Rental income ................ $ 12,930,805 $ 12,808,170
Net income ................... $ 4,968,966 $ 3,927,518
Net Income Per Share ......... $ .27 $ .26
</TABLE>
The pro forma information reflects adjustments for the actual rental income and
rental expenses of the 5 acquisitions made in 1998 and the 12 acquisitions made
in 1997 for the respective periods in 1998 and 1997 prior to their acquisition
by the Company. Net income has been adjusted as follows: (1) property management
and advisory expenses have been adjusted based on the Company's contractual
arrangements of 5% of revenues from rental income plus reimbursement of certain
monthly expenses estimated to be $2.50 per unit; (2) advisory expenses have been
adjusted based on the Company's contractual arrangement of .25% of annual gross
proceeds of common stock raised; (3) depreciation has been adjusted based on the
Company's allocation of purchase price to buildings over an estimated useful
life of 27.5 years; and (4) weighted average number of shares has been adjusted
assuming the properties were acquired with net proceeds from the Company's "best
efforts" offering of $10 per share (net $8.70 per share).
F-8
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDING JUNE
30, 1998 (UNAUDITED)
The Unaudited Pro Forma Consolidated Statement of Operations for the six month
period ended June 30, 1998 is presented as if the five property acquisitions
prior to June 30, 1998, and the eight property acquisitions after June 30, 1998,
had occurred on January 1, 1998. The Unaudited Pro Forma Consolidated Statement
of Operations assumes the Company qualifying as a REIT, distributing at least
95% of its taxable income, and, therefore, incurring no federal income tax
liability for the period presented. In the opinion of management, all
adjustments necessary to reflect the effects of these transactions have been
made.
The Unaudited Pro Forma Consolidated Statement of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
results of the Company would have been for the three month period ended June 30,
1998 if the acquisitions had occurred at the beginning of the period presented,
nor does it purport to be indicative of the results of operations in future
periods. The Unaudited Pro Forma Consolidated Statement of Operations should be
read in conjunction with, and is qualified in its entirety by, the Company's
respective historical financial statements and notes thereto.
<TABLE>
<CAPTION>
COPPER SILVER
HISTORICAL MAIN PARK TIMBERGLEN RIDGE BROOK
STATEMENT OF PRO FORMA PRO FORMA PRO FORMA PRO FORMA
OPERATIONS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
-------------- ------------- ------------- ------------- -------------
DATE OF ACQUISITION -- 2/4/98 2/13/98 3/31/98 5/8/98
- ---------------------------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental income .................... $11,035,129 $ 122,458 $ 162,912 $ 228,612 $ 876,661
Rental expenses:
Property and maintenance ........ 2,871,674 44,674 39,814 147,405 308,738
Taxes and insurance ............. 1,462,552 18,797 21,513 29,927 98,600
Property management ............. 606,245 -- -- -- --
General and administrative....... 357,195 -- -- -- --
Amortization .................... 16,968 -- -- -- --
Depreciation of rental
property ........................ 2,080,000 -- -- -- --
----------- --------- --------- --------- ---------
Total expenses ................... 7,394,634 63,471 61,327 177,332 407,338
Income before interest income
(expense) ....................... 3,640,495 58,987 101,585 51,280 469,323
Interest income .................. 821,796 -- -- -- --
Interest expense ................. (25,831) -- -- -- --
----------- --------- --------- --------- ---------
Net income ....................... $ 4,436,460 $ 58,987 $ 101,585 $ 51,280 $ 469,323
Basic and diluted earnings per
common share .................... $ 0.28
===========
Wgt. avg. number of common
shares outstanding .............. 15,855,507
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMER PARK HAYDEN'S PACE'S PEPPER
TREE VILLAGE COTTONWOOD CROSSING POINT SQUARE
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- ------------- ------------- -------------
DATE OF ACQUISITION 6/1/98 7/1/98 7/9/98 7/24/98 7/17/98 7/17/98
- ---------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental income .................... $ 505,033 $ 641,049 $ 565,147 $ 460,260 $ 1,000,605 $ 457,737
Rental expenses:
Property and maintenance ........ 202,428 224,466 216,861 161,491 299,492 133,809
Taxes and insurance ............. 63,114 79,850 74,067 52,765 122,674 65,093
Property management ............. -- -- -- -- -- --
General and administrative....... -- -- -- -- -- --
Amortization .................... -- -- -- -- -- --
Depreciation of rental
property ........................ -- -- -- -- -- --
--------- --------- --------- --------- ----------- ---------
Total expenses ................... 265,542 304,316 290,928 214,256 422,166 198,902
Income before interest income
(expense) ....................... 239,491 336,733 274,219 246,004 578,439 258,835
Interest income .................. -- -- -- -- -- --
Interest expense ................. -- -- -- -- -- --
--------- --------- --------- --------- ----------- ---------
Net income ....................... $ 239,491 $ 336,733 $ 274,219 $ 246,004 $ 578,439 $ 258,835
Basic and diluted earnings per
common share ....................
Wgt. avg. number of common
shares outstanding ..............
<CAPTION>
EMERALD
NEWPORT OAKS ESTRADA
PRO FORMA PRO FORMA PRO FORMA PRO FORMA TOTAL
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------- ------------- -------------------- --------------
DATE OF ACQUISITION 7/24/98 7/24/98 7/27/98 -- --
- ---------------------------------- ------------- ------------- ------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
Rental income .................... $ 588,781 $ 896,967 $ 825,195 -- $18,366,546
Rental expenses:
Property and maintenance ........ 201,524 244,173 241,383 -- 5,337,932
Taxes and insurance ............. 94,179 114,785 107,015 -- 2,404,931
Property management ............. -- -- -- $ 403,181 (A) 1,009,426
General and administrative....... -- -- -- 71,164 (B) 428,359
Amortization .................... -- -- -- -- 16,968
Depreciation of rental
property ........................ -- -- -- 1,214,034 (C) 3,294,034
--------- --------- --------- ----------- -----------
Total expenses ................... 295,703 358,958 348,398 1,688,379 12,491,650
Income before interest income
(expense) ....................... 293,078 538,009 476,797 (1,688,379) 5,874,896
Interest income .................. -- -- -- (750,000)(D) 71,796
Interest expense ................. -- -- -- (912,786)(E) (938,617)
--------- --------- --------- ----------- -----------
Net income ....................... $ 293,078 $ 538,009 $ 476,797 ($ 3,351,165) $ 5,008,075
Basic and diluted earnings per
common share .................... $ 0.26
===========
Wgt. avg. number of common
shares outstanding .............. 3,089,213 (F) 18,944,720
=========== ===========
</TABLE>
- ------
(A) Represents the property management fees of 5% of rental income and
processing costs equal to $2.50 per apartment per month charged by the
external management company for the period not owned by the Company.
(B) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company.
(C) Represents the depreciation expense of the properties acquired based on the
purchase price, excluding amounts allocated to land, for the period of time
not owned by the Company. The weighted average life of the property
depreciated was 27.5 years.
(D)Represents the reduction of interest to use of cash ($30 million) used to
purchase properties based on the Company's actual investment rate of 5%.
(E) Represents the interest expense for 5 of the 13 properties for the period in
which the properties were not owned for the three months period ended March
31, 1998, interest was computed based on interest rates of the debt assumed
in effect at the time of acquisition.
(F) Represents additional common shares, after consideration of cash, assuming
the properties were acquired on January 1, 1998 with the net proceeds from
the "best efforts" offering of $10 per share (net $8.70 per share) (Also see
note D).
F-9
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 (UNAUDITED)
The accompanying Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1998 is presented as if the Company had owned the properties included in the
table below as of June 30, 1998. In the opinion of management all adjustments
necessary to reflect the effects of the Offering have been made.
The Unaudited Pro Forma Consolidated Balance Sheet is presented for comparative
purposes only and is not necessarily indicative of what the actual financial
position of the Company would have been at June 30, 1998, nor does it purport to
represent the future financial position of the Company. This Unaudited Pro Forma
Consolidated Balance Sheet should be read in conjunction with, and is qualified
in its entirety by, the Company's respective historical financial statements and
notes thereto.
<TABLE>
<CAPTION>
PARK HAYDEN'S
HISTORICAL VILLAGE COTTONWOOD CROSSING
BALANCE PRO FORMA PRO FORMA PRO FORMA
SHEET ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
---------------- --------------- --------------- ---------------
DATE OF ACQUISITION 7/1/98 7/9/98 7/24/98
- ----------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Investment in rental property
Land ......................................... $ 25,515,794 $ 856,800 $ 465,120 $ 1,042,283
Building and improvements .................... 111,419,576 6,283,200 5,348,880 3,695,369
Furniture and fixtures ....................... 1,896,013 -- -- --
------------ ------------- ------------- -------------
138,831,383 7,140,000 5,814,000 4,737,652
Less accumulated depreciation ................ (3,978,003) -- -- --
------------ ------------- ------------- -------------
134,853,380 7,140,000 5,814,000 4,737,652
Cash and cash equivalents .................... 45,877,272 (7,140,000) (5,814,000) (1,665,253)
Prepaid expenses ............................. 99,503 -- -- --
Other assets ................................. 1,128,864 -- -- --
------------ ------------- ------------- -------------
47,105,639 (7,140,000) (5,814,000) (1,665,253)
------------ ------------- ------------- -------------
Total Assets .................................. $181,959,019 $ -- $ -- $ 3,072,399
============ ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable ....................... -- -- -- $ 3,072,399
Accounts payable ............................. $ 1,235,261 -- -- --
Accrued expenses ............................. 1,710,253 -- -- --
Rents received in advance .................... 42,745 -- -- --
Tenant security deposits ..................... 588,753 -- -- --
------------ ------------- ------------- -------------
3,577,012 -- -- 3,072,399
Shareholders' equity
Common stock ................................. 178,551,942 -- -- --
Class B convertible stock .................... 20,000 -- -- --
Receivable from officer-shareholder .......... -- -- -- --
Distributions greater than net income......... (189,935) -- -- --
------------ ------------- ------------- -------------
178,382,007 -- -- --
============ ============= ============= =============
Total Liabilities and Shareholders' Equity..... $181,959,019 $ -- $ -- $ 3,072,399
============ ============= ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PACE'S PEPPER EMERALD
POINT SQUARE NEWPORT OAKS ESTRADA
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
--------------- --------------- --------------- --------------- ---------------
DATE OF ACQUISITION 7/17/98 7/17/98 7/24/98 7/24/98 7/27/98
- ----------------------------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in rental property
Land ......................................... $ 1,951,401 $ 1,675,594 $ 511,658 $ 881,191 $ 1,812,030
Building and improvements .................... 9,527,427 3,560,637 5,884,065 10,133,695 7,724,970
Furniture and fixtures ....................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
11,478,828 5,236,231 6,395,723 11,014,886 9,537,000
Less accumulated depreciation ................ -- -- -- -- --
------------- ------------- ------------- ------------- -------------
11,478,828 5,236,231 6,395,723 11,014,886 9,537,000
Cash and cash equivalents .................... (3,765,211) (1,592,808) (3,351,850) (4,329,180) (9,537,000)
Prepaid expenses ............................. -- -- -- -- --
Other assets ................................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
(3,765,211) (1,592,808) (3,351,850) (4,329,180) (9,537,000)
------------- ------------- ------------- ------------- -------------
Total Assets .................................. $ 7,713,617 $ 3,643,423 $ 3,043,873 $ 6,685,706 $ --
============= ============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable ....................... $ 7,713,617 $ 3,643,423 $ 3,043,873 $ 6,685,706 --
Accounts payable ............................. -- -- -- -- --
Accrued expenses ............................. -- -- -- -- --
Rents received in advance .................... -- -- -- -- --
Tenant security deposits ..................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
7,713,617 3,643,423 3,043,873 6,685,706 --
Shareholders' equity
Common stock ................................. -- -- -- -- 0
Class B convertible stock .................... -- -- -- -- --
Receivable from officer-shareholder .......... -- -- -- -- --
Distributions greater than net income......... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
-- -- -- -- --
============= ============= ============= ============= =============
Total Liabilities and Shareholders' Equity..... $ 7,713,617 $ 3,643,423 $ 3,043,873 $ 6,685,706 $ --
============= ============= ============= ============= =============
<CAPTION>
TOTAL
PRO FORMA
----------------
DATE OF ACQUISITION
- -----------------------------------------------
<S> <C>
ASSETS
Investment in rental property
Land ......................................... $ 34,711,871
Building and improvements .................... 163,577,819
Furniture and fixtures ....................... 1,896,013
------------
200,185,703
Less accumulated depreciation ................ (3,978,003)
------------
196,207,700
Cash and cash equivalents .................... 8,681,970
Prepaid expenses ............................. 99,503
Other assets ................................. 1,128,864
------------
9,910,337
------------
Total Assets .................................. $206,118,037
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable ....................... $ 24,159,018
Accounts payable ............................. 1,235,261
Accrued expenses ............................. 1,710,253
Rents received in advance .................... 42,745
Tenant security deposits ..................... 588,753
------------
27,736,030
Shareholders' equity
Common stock ................................. 178,551,942
Class B convertible stock .................... 20,000
Receivable from officer-shareholder .......... --
Distributions greater than net income......... (189,935)
------------
178,382,007
============
Total Liabilities and Shareholders' Equity..... $206,118,037
============
</TABLE>
NOTES TO PRO FORMA BALANCE SHEET
Pro Forma adjustments represent the purchase price of the related property ,
including the 2% acquisition fee to Cornerstone Realty Income Trust, Inc.
allocated between land and building. Adjustments to cash reflect the use of net
proceeds from sales of common stock from the Company's continuous offering to
purchase properties. Adjustments to mortgage notes payable reflect the amounts
assumed on five property acquisitions.
F-10
