******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. *
* THIS PRELIMINARY PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN *
* OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL *
* THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION *
* OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED OCTOBER 1, 1996
PROSPECTUS SUPPLEMENT [LOGO]
(TO PROSPECTUS DATED MAY 14, 1996)
1,200,000 SHARES
MID-AMERICA APARTMENT COMMUNITIES, INC.
% SERIES A CUMULATIVE PREFERRED STOCK
LIQUIDATION PREFERENCE $25 PER SHARE
------------------------
Dividends on the % Series A Cumulative Preferred Stock, par value $.01
per share (the "Series A Preferred Stock"), of Mid-America Apartment
Communities, Inc. (the "Company") are cumulative from the date of original
issue and are payable monthly, commencing on November 15, 1996, to shareholders
of record on the first day of each month at the rate of % per annum of the
$25 liquidation preference (the "Liquidation Preference") per share
(equivalent to a fixed annual amount of $ per share). See "Description of
Series A Preferred Stock -- Dividends."
Except in certain circumstances relating to preservation of the Company's
qualification as a real estate investment trust (a "REIT"), the Series A
Preferred Stock is not redeemable prior to November 1, 2001. On and after such
date, the Series A Preferred Stock may be redeemed for cash at the option of the
Company, in whole or in part, at a redemption price of $25 per share, plus
accrued and unpaid dividends thereon, if any, up to the redemption date. The
Series A Preferred Stock has no stated maturity and will not be subject to any
sinking fund or mandatory redemption and will not be convertible into any other
securities of the Company. See "Description of Series A Preferred Stock --
Maturity" and " -- Redemption."
In order to ensure that the Company continues to meet the requirements for
qualification as a REIT for federal income tax purposes, shares of Series A
Preferred Stock shall be deemed "Excess Shares" pursuant to the Company's
charter (the "Charter") if a holder owns more than 9.9% in value of the
Company's outstanding capital stock, and the Company will have the right to
purchase Excess Shares from the holder. See "Description of Series A Preferred
Stock -- Restrictions on Ownership."
The Company has applied to list the Series A Preferred Stock on the New
York Stock Exchange ("NYSE") under the symbol "MAA PrA." If approved, trading of
the Series A Preferred Stock on the NYSE is expected to commence within a seven
day period after the initial delivery of the Series A Preferred Stock. See
"Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE S-9 OF THIS PROSPECTUS SUPPLEMENT FOR
A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SERIES A PREFERRED STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REP RESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2)
- -------------------------------------------------------------------------------
Per Share .... $ $ $
- -------------------------------------------------------------------------------
Total(3) ..... $ $ $
================================================================================
(1) The Company and its principal subsidiary, Mid-America Apartments, L.P. (the
"Operating Partnership"), have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $187,500.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 180,000 shares of Series A Preferred Stock on the same
terms set forth above solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively.
----------------------------
The shares of Series A Preferred Stock are offered by the several
Underwriters named herein, subject to prior sale, when, as and if accepted by
them and subject to certain conditions. It is expected that delivery of the
shares of Series A Preferred Stock will be made through the facilities of The
Depository Trust Company, New York, New York, on or about October , 1996.
MORGAN KEEGAN & COMPANY, INC. J.C. BRADFORD & CO.
OCTOBER , 1996
<PAGE>
[GRAPHICS OMMITTED]
[MAP SHOWING LOCATIONS OF COMMUNITIES]
[CHART SHOWING INVESTMENT IN REAL ESTATE BY STATE]
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WITH A VIEW TO STABILIZING OR MAINTAINING THE MARKET PRICE OF THE
SERIES A PREFERRED STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS OR INCORPORATED HEREIN AND THEREIN BY REFERENCE. AS USED
HEREIN, THE TERM "COMPANY" INCLUDES MID-AMERICA APARTMENT COMMUNITIES, INC., ITS
PREDECESSOR AND THOSE ENTITIES OWNED OR CONTROLLED THEREBY (THE "SUBSIDIARIES"),
INCLUDING THE OPERATING PARTNERSHIP. ALL INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT, UNLESS OTHERWISE INDICATED, ASSUMES THAT THE
UNDERWRITERS' OVERALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
The Company, a Tennessee corporation, is a self-administered and
self-managed equity REIT which invests in and operates multifamily residential
properties. As a self-managed REIT, the Company conducts the leasing, rent
collection, landscaping, maintenance and other functions required by ownership
of multifamily residential properties and, consequently, pays no management fees
to third parties. In February 1994, the Company completed its initial public
offering (the "Initial Offering") of approximately $97 million of Common Stock.
In August 1994, the Company completed a follow-on public offering of
approximately $84 million to finance the acquisition of additional apartments.
In June 1995, the Company merged with America First REIT, Inc., an equity REIT
which owned multifamily residential properties, in a stock-for-stock exchange
valued at approximately $58 million (the "AFRI Merger").
As of September 30, 1996, the Company owned 72 apartment communities
containing 18,992 units in 12 states (the "Properties"), and had grown by
13,412 units since the Initial Offering, an increase of approximately 240% over
the number of apartment units owned at the time of the Initial Offering.
The Properties are located primarily in the southeastern United States and
Texas, with additional units in Missouri and Ohio. Since the Initial Offering,
the Company has expanded geographically from owning apartment communities in 4
states to its current presence in 12 states. Of the Properties, 50 contain 200
or more units, with the largest apartment community containing 1,031 units. The
Properties are characterized by amenities which may include extensive
landscaping, swimming pools, tennis courts, fitness centers, saunas or hot tubs.
BUSINESS OBJECTIVES AND GROWTH STRATEGY
The Company seeks to increase earnings per share and operating cash flow to
maximize shareholder value by following a strategy that focuses on internal and
external growth.
INTERNAL GROWTH STRATEGY
Management's goal is to maximize the return on investment of each property
through increasing rental rates and reducing operating expenses while
maintaining high occupancy. The Company seeks to accomplish this goal by:
o ensuring that, through monthly inspections of all Properties by
senior management and prompt attention to maintenance and recurring
capital needs, the Properties are properly maintained;
o implementing programs to control expenses through investment in
cost-saving initiatives, such as the installation of
energy-efficient lighting and water meters, where appropriate;
o improving the market appeal of the Properties through aesthetic
upgrades, including investment in extensive landscaping and
exterior improvements and repositioning apartment communities from
time to time to maintain market leadership positions;
o investing heavily in training programs for its property-level
personnel;
o compensating all employees through performance-based compensation
programs and employee stock ownership programs;
S-1
<PAGE>
o empowering the Company's property managers to adjust rents in
response to market conditions and to manage the seasonality of each
apartment community to coordinate resident turnover with
prospective resident traffic; and
o maintaining a hands-on management style and "flat" organizational
structure that emphasizes senior management's close contact with
the market and employees.
The Company's occupancy rate was 95.3% as of both September 1, 1996 and
September 1, 1995. In addition, the Company's average monthly rental rate as of
September 1, 1996 was $524, an increase of 4.0% over such average at September
1, 1995.
EXTERNAL GROWTH STRATEGY
The Company's external growth strategy is to increase shareholder value
through the acquisition and selective development of additional apartment units
and the strategic disposition of existing Properties. Typical attributes of
apartment communities which the Company seeks to acquire are:
o well-constructed properties having attractive locations, potential
for increases in rental rates and occupancy, potential for
reductions in operating costs and acquisition prices below
estimated replacement cost;
o properties with opportunities for internal growth through (i)
market repositioning by means of property upgrades which typically
include landscaping, selective refurbishing and the addition of
amenities and (ii) economies of scale in management and purchasing;
and
o properties located in the Company's existing markets and mid-sized
metropolitan areas having market characteristics similar to the
Company's existing markets.
On June 29, 1995, upon completion of the AFRI Merger, the Company acquired
apartment communities containing 3,212 units, increasing the number of apartment
units owned by the Company and its market capitalization by 21.0%. Since the
consummation of the AFRI Merger, the Company has acquired four apartment
communities containing 1,232 units.
The Company develops new apartments when it believes it can achieve an
attractive return on investment. In the last 12 months, the Company has
completed the following development projects:
o 122 apartment units constructed at the Woods of Post House in
Jackson, Tennessee in close proximity to three apartment
communities owned by the Company;
o 24 additional apartment units at the Reflection Pointe apartment
community in Jackson, Mississippi; and
o 32 additional apartment units at the Park Haywood apartment
community in Greenville, South Carolina.
The Company recently commenced construction of a 234-unit expansion of the
384-unit Lincoln on the Green apartment community at the Tournament Players'
Club at Southwind in Memphis, Tennessee. Construction of that expansion is
expected to be complete in the fall of 1997. Several other expansion and new
development opportunities are currently being explored.
In pursuing its goal of maximizing its return on investment, the Company
regularly reviews the performance of its Properties and may strategically
dispose of Properties if the Board of Directors believes the Company can
redeploy the proceeds of a sale and obtain an improved return on investment.
S-2
<PAGE>
RECENT DEVELOPMENTS
COMPLETED ACQUISITIONS
On July 25, 1996, the Company acquired three apartment communities
containing an aggregate of 816 units in DeSoto County, Mississippi and Jackson,
Mississippi for an aggregate purchase price of approximately $32.2 million (the
"Completed Acquisitions"). The Company funded these acquisitions primarily
with borrowings under its $65 million unsecured line of credit (the "Credit
Line") and proceeds from the sale of Laguna Pointe Apartments in June 1996.
PROPOSED ACQUISITION
The Company has entered into a definitive agreement to purchase Napa Valley
Apartments containing 240 units in Little Rock, Arkansas for a purchase price of
approximately $9.7 million (the "Proposed Acquisition"). This apartment
community is located across the street from the Company's 260-unit Calais Forest
apartment community. The purchase agreement is subject to certain conditions
which may not be met, and there can be no assurance that this apartment
community will be acquired. The Company anticipates that the Proposed
Acquisition will be funded with the proceeds of the Offering and/or the Credit
Line. See "Use of Proceeds."
PROPERTIES UNDER NEGOTIATION
The Company is also negotiating with various sellers for the acquisition of
six additional apartment communities (the "Properties Under Negotiation")
containing an aggregate of 1,815 units for proposed purchase prices totaling
approximately $67.4 million. The purchase of the Properties Under Negotiation,
if consummated, will be funded through the assumption of existing bond and
mortgage indebtedness, with the net proceeds of the Offering and/or through
borrowings under the Credit Line. There can be no assurance that any of the
Properties Under Negotiation will be acquired.
DISPOSITIONS
On May 16, 1996, the Company disposed of the 100-unit apartment community
known as The Park at 58 II located in Chattanooga, Tennessee for $1.9 million
cash. The net proceeds were used to reduce amounts outstanding under the Credit
Line.
On June 4, 1996, the Company disposed of the 384-unit apartment community
known as Laguna Pointe located in Mesa, Arizona, for $7.6 million cash and the
purchaser's assumption of $7.7 million aggregate principal amount of multifamily
housing revenue bonds. The net proceeds from the sale were reinvested in the
Completed Acquisitions in compliance with rules permitting the disposition and
subsequent purchase to qualify as a like-kind exchange pursuant to Section 1031
of the Internal Revenue Code of 1986, as amended (the "Code").
S-3
<PAGE>
PROPERTIES
The following is a summary of the Company's Properties as of September 30,
1996:
# OF
PROPERTY LOCATION UNITS
- ------------------------------------- --------------------- ------
ARKANSAS
Calais Forest Little Rock 260
Whispering Oaks Little Rock 206
------
466
FLORIDA
Marsh Oaks Atlantic Beach 120
Anatole Daytona Beach 208
Coopers Hawk Jacksonville 208
Lakeside Jacksonville 416*
The St. Augustine Jacksonville 400
Woodbridge at the Lake Jacksonville 188
The Savannahs Melbourne 256
Belmere Tampa 210
Sailwinds at Lake Magdalene Tampa 798
------
2,804
GEORGIA
Shenandoah Ridge Augusta 272
Hollybrook Dalton 158
------
430
KENTUCKY
Lakepointe Lexington 118
The Mansion Lexington 184
The Village Lexington 252
Stonemill Village Louisville 384
------
938
MISSOURI
Canyon Creek St. Louis 320
MISSISSIPPI
Riverhills Grenada 96
Lakeshore Landing Jackson 196
Pear Orchard Jackson 389
Pine Trails Jackson 120
Reflection Pointe Jackson 296
Somerset Jackson 144
The Advantages Jackson 252
Woodridge Jackson 192
Crosswinds Jackson 360*
Savannah Creek Southaven 204*
Sutton Place Southaven 252*
------
2,501
NORTH CAROLINA
Summit Ridge Charlotte 240
Woodstream Greensboro 304
The Corners at
Crystal Lake Winston-Salem 240
------
784
OHIO
Fairways at
Royal Oak Cincinnati 214
SOUTH CAROLINA
Tanglewood Anderson 168
The Fairways Columbia 240
Highland Ridge Greenville 168
Park Haywood Greenville 208
Spring Creek Greenville 208
Runaway Bay Mt. Pleasant 208
------
1,200
TENNESSEE
Hamilton Pointe Chattanooga 361
Hidden Creek Chattanooga 300
Steeplechase Chattanooga 108
Post House Jackson Jackson 150
Post House North Jackson 144
The Oaks Jackson 100
Williamsburg Village Jackson 148
Woods at Post House Jackson 122
Cedar Mill Memphis 276
Clearbrook Village Memphis 176
Eastview Memphis 432
Greenbrook Memphis 1,031
Hickory Farm Memphis 200
Kirby Station Memphis 371
Lincoln on the Green Memphis 384
McKellar Woods Memphis 624
19th Green Memphis 184
The Crossings Memphis 80
The Park Estate Memphis 81
Winchester Square Memphis 252
Brentwood Downs Nashville 286
Park at Hermitage Nashville 440
------
6,251
TEXAS
Stassney Woods Austin 288
Travis Station Austin 304
Redford Park Conroe 212
Celery Stalk Dallas 410
The Lodge at Timberglen Dallas 260
MacArthur Ridge Irving 248
Westborough Crossing Katy 274
Lane at Towne Crossing Mesquite 384
Cypresswood Court Spring 208
Green Tree Place Spring 200
------
2,788
VIRGINIA
The Township Hampton 296
------
Total Apartment Units 18,992
======
* Acquired in 1996
S-4
<PAGE>
THE OFFERING
Securities Offered........ 1,200,000 shares of % Series A Cumulative
Preferred Stock (1,380,000 shares if the
Underwriters' overallotment option is exercised in
full). The Company has applied to list the Series A
Preferred Stock on the NYSE under the symbol "MAA
PrA." See "Underwriting."
Maturity.................. The Series A Preferred Stock has no stated maturity
and will not be subject to any sinking fund or
mandatory redemption. See "Description of Series A
Preferred Stock -- Maturity."
Use of Proceeds........... Of the net proceeds from the sale of the Series A
Preferred Stock, approximately $9.7 million will be
used to consummate the Proposed Acquisition and the
remainder will be used to reduce the outstanding
indebtedness owed under the Credit Line. Amounts
paid to reduce outstanding indebtedness under the
Credit Line subsequently may be re-borrowed (subject
to the terms and limits of the Credit Line) to
finance the acquisition of additional properties and
for other corporate purposes. See "Use of Proceeds."
Ranking................... With respect to the payment of dividends and amounts
upon liquidation, the Series A Preferred Stock will
rank senior to the Common Stock, which is the only
capital stock of the Company currently outstanding.
See "Description of Series A Preferred Stock --
Rank," " -- Dividends" and " -- Liquidation
Preference."
Dividends................. Dividends on the Series A Preferred Stock are
cumulative from the date of original issue and are
payable monthly on or before the 15th day of each
month to shareholders of record on the first day of
such month, commencing on November 15, 1996, at the
rate of % per annum of the Liquidation Preference.
See "Description of Series A Preferred Stock --
Dividends."
Liquidation Preference.... Equal to $25 per share of Series A Preferred Stock,
plus accrued and unpaid dividends (whether or not
declared). See "Description of Series A Preferred
Stock -- Liquidation Preference."
Redemption................ Except in certain circumstances relating to
preservation of the Company's status as a REIT, the
Series A Preferred Stock is not redeemable prior to
November 1, 2001. On and after such date, the Series
A Preferred Stock will be redeemable for cash at the
option of the Company, in whole or in part, at a
redemption price of $25 per share, plus dividends
accrued and unpaid to the redemption date (whether
or not declared) without interest. See "Description
of Series A Preferred Stock -- Redemption" and " --
Restrictions on Ownership."
Voting Rights............. Holders of Series A Preferred Stock generally will
have no voting rights except as required by law.
However, whenever dividends on any shares of Series
A Preferred Stock shall be in arrears for eighteen
or more months, the holders of such shares (voting
separately as a class with all other series of
parity preferred stock upon which like voting rights
have been conferred and are exercisable) will be
entitled to vote for the election of two additional
directors of the Company until all dividends
accumulated on such shares of Series A Preferred
Stock have been fully paid or declared and a sum
sufficient for the payment thereof set aside for
payment. In addition, certain changes to the terms
of the Series A Preferred Stock that would be
materially adverse to the rights of holders of the
Series A Preferred Stock cannot be made without the
affirmative vote of holders of at least two-thirds
of the outstanding Series A Preferred Stock. See
"Description of Series A Preferred Stock -- Voting
Rights."
Conversion................ The Series A Preferred Stock is not convertible into
or exchangeable for any other property or securities
of the Company.
S-5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth summary financial and operating information
on an historical basis for the Company and its predecessor. The following
information should be read in conjunction with all of the financial statements
and notes thereto included in the Quarterly Report on Form 10-Q for the quarter
and six-month period ended June 30, 1996, and the Annual Report on Form 10-K for
the year ended December 31, 1995, which are incorporated by reference into the
accompanying Prospectus. Also set forth below are summary unaudited pro forma
financial, operating and other data for the Company at and for the six months
ended June 30, 1996 and the year ended December 31, 1995. The unaudited pro
forma balance sheet data at June 30, 1996 have been prepared as if the Completed
Acquisitions, the Proposed Acquisition and the dispositions ("Dispositions")
described under "Recent Developments," and the consummation of the Offering
and the application of the net proceeds thereof had each occurred on June 30,
1996. The unaudited pro forma operating and other data for the six months ended
June 30, 1996 and the year ended December 31, 1995 have been prepared as if the
transactions described above and other property acquisitions since January 1,
1995 had occurred at the beginning of the period presented. The pro forma
interest expense reflects the $5.8 million incremental increase in total debt
incurred in connection with the above-described transactions based on the June
30, 1996 average 30-day London Interbank Offered Rate ("LIBOR") of 7.25% as if
such incremental debt had been incurred at the beginning of the period
presented. The pro forma general and administrative expense reflects increased
corporate expenses resulting from the transactions described above. The pro
forma financial and operating data are not necessarily indicative of what the
actual financial position or results of operations of the Company would have
been as of the date or for the periods indicated, nor do they purport to
represent the results of operations or financial position for future periods.
This data should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus Supplement. In the opinion of management, the operating data
for the periods presented include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein.
S-6
<PAGE>
MID-AMERICA APARTMENT COMMUNITIES, INC.
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND PROPERTY DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------- ------------------------------------------------------
HISTORICAL HISTORICAL
-------------------- ------------------------------------------
(UNAUDITED) (PREDECESSOR)
PRO FORMA -------------------- PRO FORMA --------------------
1996 1996 1995 1995 1995 1994(1) 1993 1992
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental............................. $ 56,463 $ 53,787 $ 40,748 $109,679 $ 93,509 $ 50,181 $ 25,687 $ 21,756
Other.............................. 637 639 658 1,542 1,310 1,026 608 438
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenue.................... 57,100 54,426 41,406 111,221 94,819 51,207 26,295 22,194
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses:
Property expenses(2)............... 21,530 20,624 16,267 44,294 37,810 19,484 11,316 9,682
General and administrative(3)...... 3,106 3,079 2,133 5,370 4,851 3,613 1,402 1,112
Interest........................... 13,000 12,789 10,436 25,034 22,684 10,233 7,448 7,524
Depreciation and amortization...... 10,857 10,351 7,131 20,041 16,574 8,803 3,521 3,235
Amortization of deferred financing
costs............................ 316 316 267 573 593 296 199 109
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before gain on
disposition of properties.......... 8,291 7,267 5,172 15,909 12,307 8,778 2,409 532
Gain on disposition of properties.... -- 1,966 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest and extraordinary item.... 8,291 9,233 5,172 15,909 12,307 8,778 2,409 532
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 6,901 $ 7,536 $ 3,997 $ 13,243 $ 9,810 $ 6,944 $ 2,542 $ 1,090
Preferred dividends(4)............... $ 1,425 -- -- $ 2,850 -- -- -- --
Net income available for common
shares............................. $ 5,476 $ 7,536 $ 3,997 $ 10,393 $ 9,810 $ 6,944 $ 2,542 $ 1,090
Net income per weighted average
common share outstanding........... $ 0.50 $ 0.69 $ 0.46 $ .95 $ 1.00 $ 1.01 -- --
Weighted average common shares
outstanding (fully diluted)........ 10,988 10,988 8,714 10,988 9,860 6,577 -- --
BALANCE SHEET DATA:
Real estate owned, at cost........... $629,711 $ 587,884 $ 565,044 $ 578,788 $ 434,460 $ 125,269 $ 111,686
Total assets......................... $608,685 $ 574,212 $ 570,998 $ 565,267 $ 439,233 $ 104,439 $ 93,252
Total debt........................... $327,568 $ 321,745 $ 306,882 $ 307,939 $ 232,766 $ 105,594 $ 95,036
Minority interest.................... $ 40,228 $ 40,228 $ 41,055 $ 41,049 $ 43,709 -- --
Shareholders' equity (owners'
deficit)........................... $227,446 $ 198,796 $ 202,232 $ 202,278 $ 152,385 $ (4,684) $ (4,493)
OTHER DATA (AT END OF PERIOD):
Funds from operations(5)............. $ 17,645 $ 17,548 $ 12,251 $ 32,944 $ 28,627 $ 17,525 $ 5,908 $ 3,747
Distributions declared per share and
unit............................... -- $ 1.02 $ 1.00 -- $ 2.01 $ 1.71 -- --
Weighted average common shares and
units outstanding (fully
diluted)........................... 13,433 13,433 11,172 -- 12,306 9,038 -- --
Ratio of earnings to combined debt
service and preferred stock
dividends(6)....................... 1.53 1.52x 1.45x 1.52x 1.49x 1.76x 1.27x 1.06x
Ratio of earnings to fixed
charges(7)......................... 1.55x 1.48x 1.52x 1.83x 1.32x 1.07x
Ratio of funds from operations to
combined debt service and preferred
stock dividends(8)................. 2.13x 2.25x 2.07x 2.08x 2.13x 2.51x 1.65x 1.40x
Ratio of total debt to total
capitalization(9).................. 47.0% 48.6% 47.8% -- 48.2% 44.1% -- --
Number of Properties................. 73 69 70 -- 70 54 22 19
Number of apartment units............ 19,232 18,176 18,094 -- 18,219 14,333 5,580 5,064
(Table continued below)
</TABLE>
YEAR ENDED
DECEMBER 31,
-------------
HISTORICAL
-------------
(PREDECESSOR)
-------------
1991
-------------
OPERATING DATA:
Revenue:
Rental............................. $ 19,288
Other.............................. 407
---------
Total revenue.................... 19,695
---------
Expenses:
Property expenses(2)............... 8,707
General and administrative(3)...... 849
Interest........................... 8,071
Depreciation and amortization...... 2,891
Amortization of deferred financing
costs............................ 83
---------
Income (loss) before gain on
disposition of properties.......... (906)
Gain on disposition of properties.... --
---------
Income (loss) before minority
interest and extraordinary item.... (906)
---------
Net income........................... $ 17
Preferred dividends(4)............... --
Net income available for common
shares............................. $ 17
Net income per weighted average
common share outstanding........... --
Weighted average common shares
outstanding (fully diluted)........ --
BALANCE SHEET DATA:
Real estate owned, at cost........... $ 103,455
Total assets......................... $ 88,032
Total debt........................... $ 90,834
Minority interest.................... --
Shareholders' equity (owners'
deficit)........................... $ (5,460)
OTHER DATA (AT END OF PERIOD):
Funds from operations(5)............. $ 1,967
Distributions declared per share and
unit............................... --
Weighted average common shares and
units outstanding (fully
diluted)........................... --
Ratio of earnings to combined debt
service and preferred stock
dividends(6)....................... .90x
Ratio of earnings to fixed
charges(7)......................... .89x
Ratio of funds from operations to
combined debt service and preferred
stock dividends(8)................. 1.22x
Ratio of total debt to total
capitalization(9).................. --
Number of Properties................. 18
Number of apartment units............ 4,702
(NOTES ON FOLLOWING PAGE)
S-7
<PAGE>
- ------------
(1) Operating data for 1994 includes 34 days of predecessor financial
information and per share data for 1994 is for the period February 4, 1994
through December 31, 1994.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Expenditures."
(3) Includes corporate expenses.
(4) Assuming an annual dividend rate of 9.5% on the Liquidation Preference of
the Series A Preferred Stock.
(5) Funds from Operations ("FFO") represents net income (computed in
accordance with GAAP) excluding extraordinary items, minority interest in
Operating Partnership income, gain or loss on disposition of real estate
assets, and certain non-cash items, primarily depreciation and amortization,
less preferred stock dividends. FFO is computed in accordance with the
definition adopted by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO should not be considered as an alternative to net
income or any other GAAP measurement of performance, as an indicator of
operating performance or as an alternative to cash flows from operating,
investing, and financing activities as a measure of liquidity. The Company
believes that FFO is helpful in understanding a property portfolio in that
such calculation reflects cash flow from operating activities and the
properties' ability to support interest payments and general operating
expenses before the impact of certain activitites such as changes in other
assets and accounts payable. In March 1995, NAREIT modified the definition
of FFO to eliminate amortization of deferred financing costs and
depreciation of non-real estate assets as items added back to net income
when computing FFO. The Company implemented the new method of calculating
FFO effective as of the NAREIT-suggested adoption date of January 1, 1996.
For the above schedule, FFO has been restated for the new method for all
periods.
(6) For purposes of these computations, earnings consist of net income (loss)
before gain on dispositions of Properties, extraordinary items and
allocation to minority interests, plus debt service. Debt service consists
of interest and recurring principal amortization (excluding maturities) and
excludes amortization of debt expense and discount related to indebtedness.
The historical earnings do not include preferred stock dividends as no
shares of preferred stock were outstanding for the periods presented.
(7) For purposes of these computations, earnings consist of net income (loss)
before gain on dispositions of Properties, extraordinary items and
allocation to minority interests, plus fixed charges. Fixed charges
principally consist of interest expense, capitalized interest and
amortization of deferred financing costs. The computation of the ratio of
earnings to fixed charges for 1991 indicates that earnings were inadequate
to cover fixed finance charges by approximately $906,000.
(8) For purposes of these computations, funds from operations includes debt
service and preferred stock dividend requirements. Debt service consists of
interest and recurring principal amortization (excluding maturities) and
excludes amortization of debt expense and discount related to indebtedness.
The historical funds from operations do not include preferred stock
dividends as no shares of preferred stock were outstanding for the periods
presented.
(9) Total capitalization as of the dates presented is total debt plus the
aggregate market value of the Company's Common Stock, Series A Preferred
Stock (on a pro forma basis, as adjusted) and units of limited partnership
interest ("Units") held by persons other than the Company, which are
redeemable for shares of Common Stock on a one-for-one basis.
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RISK FACTORS
AN INVESTMENT IN THE SERIES A PREFERRED STOCK INVOLVES VARIOUS RISKS,
INCLUDING THOSE DESCRIBED BELOW. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISK
FACTORS TOGETHER WITH ALL OF THE INFORMATION SET FORTH OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN
DETERMINING WHETHER TO PURCHASE SHARES OF SERIES A PREFERRED STOCK. INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR IN THE
ACCOMPANYING PROSPECTUS MAY CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH
STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS
"MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR
THE NEGATIVE THEREOF OR OTHER COMPARABLE TERMINOLOGY. THE FOLLOWING MATTERS AND
CERTAIN OTHER FACTORS NOTED THROUGHOUT THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, AND ANY DOCUMENTS INCORPORATED BY REFERENCE HEREIN OR
THEREIN AND EXHIBITS HERETO AND THERETO CONSTITUTE CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO ANY SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE THE
COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY SUCH
FORWARD-LOOKING STATEMENTS.
RISKS ASSOCIATED WITH DEBT FINANCING
The Company currently uses and intends to continue using debt financing for
new property acquisitions and development. Such debt financing may include
permanent mortgage financing and the use of the Credit Line. The Company is
currently negotiating with its lead bank to increase the Credit Line to $100
million. The Company's use of debt financing presents the risk to holders of the
Series A Preferred Stock that payments of principal and interest on borrowings
will leave the Company with insufficient cash resources to operate the
Properties or pay dividends required by the terms of the Series A Preferred
Stock or distributions in respect of capital stock required to be paid in order
for the Company to maintain its qualification as a REIT. The Company's Board of
Directors (the "Board of Directors") has adopted a policy limiting the
Company's indebtedness to 60% of adjusted gross assets (defined as the gross
tangible book value of the Company plus $10 million), but the organizational
documents of the Company do not contain any limitation on the amount or
percentage of indebtedness, funded or otherwise, that the Company may incur. The
Company's ratio of debt to adjusted gross assets was approximately 55% at August
31, 1996. However, the Board of Directors can, without shareholder approval,
amend or modify its current policy on borrowing. If this policy were changed,
the Company could become more highly leveraged, resulting in an increase in debt
service that could adversely affect the Company's Funds from Operations, cash
flow, ability to make distributions to its shareholders, the risk of default on
its obligations and the risk of foreclosure on property securing debt.
The Company had outstanding at August 31, 1996 approximately $350 million
of indebtedness, $292 million of which was secured by mortgages on certain
Properties. Of the Company's total mortgage indebtedness, $10.1 million bears
interest at variable rates presently equal to 62% of prime and $7 million bears
interest at rates that adjust annually. The Company has continued to use the
Credit Line to acquire new Properties. Borrowings under the Credit Line bear
interest at a floating rate equal to LIBOR plus 1.75%, and, to the extent such
borrowings remain outstanding, increases in interest rates will increase
periodic interest payments on such borrowings, which would adversely affect the
Company's Funds from Operations. At August 31, 1996, approximately $58 million
was outstanding under the Credit Line at an interest rate of 7.2% per annum.
Approximately $136 million of long-term fixed rate debt is recourse to the
Operating Partnership and the Company has agreed to maintain approximately $8.9
million of recourse debt in order to preserve the tax bases of certain limited
partners (other than Robert F. Fogelman, a member of the Company's Board of
Directors) (the "Taxable Partners") in their Units. Those partners have, in
return, agreed to indemnify the Company upon the liquidation and dissolution of
the Operating Partnership for any deficiency in the repayment of such debt and
contribute the amount of any such deficiency to the Operating Partnership as
additional capital. In addition, Mr. Fogelman has personally guaranteed $12.6
million of long-term fixed rate non-recourse indebtedness in order to preserve
his tax basis in his Units. The Company has agreed to maintain at least $12.6
million of such guaranteed non-recourse indebtedness for so long as Mr. Fogelman
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owns at least 285,250 Units. The Company has agreed to indemnify Mr. Fogelman
and the Taxable Partners for taxes, penalties and interest that may be incurred
due to inadvertent prepayment of debt by the Company. Because of the foregoing
agreements with Mr. Fogelman and the Taxable Partners, the Company will be
required to maintain at least $21.5 million of indebtedness unless the
appropriate partners consent to the prepayment of such indebtedness or dispose
of their Units, which could limit the Company's ability to control the terms of
its mortgage financing or the Credit Line. The Company might be forced to
dispose of certain Properties upon disadvantageous terms, which might result in
losses to the Company and might adversely affect cash flow available for
distribution to shareholders. Moreover, if a Property is mortgaged to secure
payment of indebtedness and the Company is unable to meet mortgage payments, the
Property could be foreclosed upon by or otherwise transferred to the mortgagee
with a consequent loss of income and asset value to the Company.
RISKS RELATED TO ISSUANCE OF ADDITIONAL PREFERRED STOCK
The Company's Charter does not limit the issuance of additional series of
preferred stock ranking in parity with the Series A Preferred Stock. The
issuance of additional preferred stock in parity with the Series A Preferred
Stock could have the effect of diluting the interests of holders of the Series A
Preferred Stock.
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS. Real property investments are subject to varying degrees of
risk. The Company's ability to make distributions to its shareholders, including
holders of the Series A Preferred Stock, is dependent on the ability of the
Company to generate Funds from Operations from its Properties in excess of its
debt service and capital expenditure requirements. Funds from Operations may be
adversely affected by the general economic climate, local conditions such as
oversupply of apartments or a reduction in demand for apartments in the
Company's markets, the attractiveness of the Properties to residents, the
quality and philosophy of management, competition from other available
apartments, the ability of the Company to provide adequate maintenance and
insurance, and increased operating costs (including real estate taxes).
Moreover, Funds from Operations and the values of the Properties may also be
affected by such factors as the cost of regulation and potential liability under
applicable laws, including changes in tax laws, housing laws, interest rate
levels, and the availability of financing. The Company's Funds from Operations
would be adversely affected if a significant number of residents were unable to
pay rent or apartments could not be rented on favorable terms. Certain
significant expenditures associated with each equity investment in a Property
(such as mortgage payments, if any, real estate taxes and maintenance costs)
generally are not reduced when circumstances cause a reduction in revenue from
the Property.
OPERATING RISKS. The Properties are subject to all operating risks common
to apartment communities in general. Such risks include: (i) competition from
other apartment communities and alternative housing; (ii) new construction of
comparable properties or increases in unemployment in the areas in which the
Properties are located, either of which might adversely affect apartment
occupancy or rental rates; (iii) increases in operating costs (including real
estate taxes) due to inflation and other factors, which increases may not
necessarily be offset by increased rents; (iv) inability or unwillingness of
residents to pay rent increases; (v) future enactment of rent control laws or
other laws regulating multifamily housing, including present and possible future
laws relating to access by disabled persons; and (vi) disagreements with joint
venture partners or real estate co-investors, if any. If operating expenses
increase, the local rental market may limit the extent to which rents may be
increased to meet increased expenses without decreasing occupancy rates.
Historically the Company has incurred increased operating expenses in the third
calendar quarter due to planned increases in apartment unit turnover during such
quarter. The Company's ability to make expected distributions to shareholders
could be adversely affected by any of the above-described events.
ILLIQUIDITY OF REAL ESTATE COULD ADVERSELY AFFECT THE PRICE AND TIMING OF
SALES OF PROPERTIES. Real estate investments are relatively illiquid and,
therefore, the Company's ability to vary its portfolio promptly in response to
changes in economic or other conditions may be limited. Moreover, the Code
places limits on the Company's ability to sell Properties held for fewer than
four years, which may affect the Company's
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ability to sell Properties on favorable terms. Finally, the Operating
Partnership has agreed that it will not sell or refinance Greenbrook Apartments,
a 1,031-unit apartment community transferred to the Company by Mr. Fogelman in
connection the Company's formation without the advance written consent of Mr.
Fogelman, so long as he continues to own at least 217,500 Units. The Company
also has agreed not to sell or refinance four other Properties without the
advance written consent of the Taxable Partners who continue to own in the
aggregate at least 50% of the Units received on account of the transfer of the
applicable Property in connection with the Company's formation. Such former
owners may withhold such consent in their sole discretion, precluding the sale
or refinancing of such Properties, which could adversely affect the Company's
liquidity or ability to take advantage of particular opportunities.
BOND COMPLIANCE REQUIREMENTS MAY LIMIT INCOME FROM CERTAIN
PROPERTIES. Nineteen of the Company's Properties have been financed with the
proceeds of the issuance of tax-exempt bonds or HUD guaranteed loans and are
subject to restrictive covenants or deed restrictions. The aggregate outstanding
principal amount of such financing as of August 31, 1996 was $93.2 million. The
tax-exempt bonds impose various restrictions, conditions and requirements
relating to the exclusion from gross income for federal income tax purposes of
interest on qualified bond obligations, including a requirement that not less
than 20% of the apartment units in each such Property be occupied by residents
whose income does not exceed 80% of the median income for the area at all times
during a particular period as set forth in the documentation for the applicable
bond financing. The bond compliance requirements may have the effect of limiting
the Company's income from affected Properties in the event the Company is
required to lower its rental rates to attract residents meeting the
qualification requirements. In the event that such requirements are not met,
interest on the bonds could become subject to federal and state income tax,
which would result in either an increase in the interest rate on such bonds or
an early redemption of the bonds (which redemption could be at a premium).
POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS. Under various
federal, state and local laws, ordinances and regulations, an owner or operator
of real property may become liable for the costs of removal or remediation of
certain hazardous substances released on or in its property. Such laws often
impose such liability without regard to whether the owner or operator knew of,
or was responsible for, the release of such hazardous substances. The presence
of such substances, or the failure to properly remediate such substances, when
released, may adversely affect occupancy of the Properties affected and the
owner's ability to sell such real estate or to borrow using such real estate as
collateral. In addition to investigation and clean-up actions brought by
federal, state and local agencies, the presence of hazardous wastes on a
property could result in personal injury or similar claims by private
plaintiffs. The Company has not been notified by any governmental authority of
any noncompliance, liability or other claim in connection with any of its
Properties or developments, nor is the Company aware of any other material
environmental condition with respect to any of the Properties.
Each of the Properties has been subjected to a Phase I environmental site
assessment ("ESA") (which does not involve invasive procedures, such as soil
sampling or ground water analysis) by independent environmental consultants.
Phase II testing (which involves invasive procedures) has been performed on two
of the Company's Properties. These ESAs have not revealed any significant
environmental liability that would have a material adverse effect on the
Company's business. However, in connection with the ownership and operation of
the Properties, the Company, the Operating Partnership or the Subsidiaries, as
the case may be, potentially may be liable for damages or cleanup, investigation
or remediation costs.
With the exception of two Properties, the ESAs completed prior to 1994 have
been updated in connection with additional financings. Several of the ESAs
indicated the presence of radon levels exceeding Environmental Protection Agency
("EPA") approved levels. In each instance where sampling disclosed elevated
radon levels, the owners of the affected Properties have taken the recommended
remedial actions, and subsequent testing was done to confirm that the levels
were brought to acceptable EPA levels. Unknown and unremediated radon levels at
any Property could give rise to personal injury claims by residents and others.
No assurances can be given that existing ESAs with respect to any of the
Properties have revealed all environmental liabilities, that any prior owner of
a Property did not create any material
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environmental condition not known to the Company, or that a material
environmental condition does not otherwise exist as to any one or more of the
Properties.
Eighteen of the Properties have asbestos-containing materials ("ACM") on
or in insulation, floor and ceiling coverings. While the precise amounts of ACM
contained in the Properties cannot be determined without incurring substantial
expense, the Company believes, based on its review of the Phase I and Phase II
environmental reports, that overall levels are low and that ACM at ten of the
Properties are non-friable. Friable ACM are contained in eight Properties and
the Company believes that such ACM are subject to adequate maintenance programs.
The ESAs do not recommend any remediation of ACM at any Property. However, there
can be no assurance that the Company will not be required to remediate ACM in
the future at significant expense, which could have a material adverse affect on
the Company's ability to make distributions to shareholders.
COMPLIANCE WITH OTHER LAWS. The Properties and any apartment community
acquired or developed by the Company in the future must comply with Title III of
the Americans with Disabilities Act (the "ADA") to the extent that such
Properties are "public accommodations" and/or "commercial facilities" as
defined by the ADA. Compliance with the ADA requirements could require removal
of structural barriers to handicapped access in certain public areas of the
Properties, where such removal is readily achievable. The ADA does not, however,
consider residential properties such as apartment communities to be public
accommodations or commercial facilities, except to the extent portions of such
facilities, such as a leasing office, are open to the public. The Company
believes that the Properties comply with all present requirements under the ADA
and applicable state laws. Noncompliance with the ADA could result in imposition
of fines or an award of damages to private litigants.
The Fair Housing Amendments Act of 1988 (the "FHA") requires apartment
communities first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the FHA could result in the imposition of fines
or an award of damages to private litigants. The Company believes that the
Properties that are subject to the FHA are in compliance with such law.
TAX RISKS
TAX LIABILITIES AS A CONSEQUENCE OF THE FAILURE TO QUALIFY AS A REIT. The
Company intends to operate so as to continue to meet the requirements for
qualification as a REIT for federal income tax purposes. Although the Company
has not requested, and does not expect to request, a ruling from the Internal
Revenue Service (the "IRS") that it qualifies as a REIT, it has received an
opinion of Baker, Donelson, Bearman & Caldwell that, based on certain
assumptions and representations, the Company meets the requirements for
qualification as a REIT. Persons receiving this Prospectus Supplement and the
accompanying Prospectus should be aware, however, that opinions of counsel are
not binding on the IRS or any court. The foregoing opinion represents only the
view of counsel to the Company based on such counsel's review and analysis of
existing law, which includes no controlling precedent. Furthermore, the
conclusions stated in the opinion are conditioned on, and the continued
qualification of the Company as a REIT will depend on, the Company's continuing
ability to meet various requirements concerning, among other things, the
ownership of its outstanding stock, the nature of its assets, the sources of its
income and the amount of its distributions to its shareholders.
If the Company fails to qualify as a REIT in any taxable year, the Company
would not be allowed a deduction for distributions to shareholders in computing
its taxable income and would be subject to federal income tax (including any
applicable minimum tax) on its resulting taxable income at regular corporate
rates. Unless entitled to relief under certain provisions of the Code, the
Company also would be disqualified from electing to be taxed as a REIT for four
taxable years following the year during which qualification was lost. As a
result, the funds available for distribution to shareholders would be reduced
substantially for each of the years involved. Although the Company currently
intends to operate in a manner designed to qualify as a REIT, it is possible
that future economic, market, legal, tax or other considerations may cause the
Company's Board of Directors, with the affirmative vote of two-thirds of the
outstanding shares of the Company's Common Stock, to revoke the Company's REIT
election.
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DISTRIBUTIONS TO SHAREHOLDERS. In order to qualify as a REIT, the Company
generally will be required to distribute to its shareholders at least 95% of its
annual taxable income (excluding any capital gain). Moreover, the Company will
be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital
gain net income for that year, and (iii) any undistributed taxable income from
prior years.
The Company intends to make distributions to its shareholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
The Company's income consists primarily of its share of the income of the
Operating Partnership and the Subsidiaries, and the Company's funds available
for distribution consist primarily of its share of cash distributions from the
Operating Partnership and the Subsidiaries. Differences in timing between
recognition of taxable income and the actual receipt of cash distributions from
the Operating Partnership and the Subsidiaries could require the Company to
borrow funds on a short-term basis to meet the 95% distribution requirement and
to avoid the nondeductible excise tax. For federal income tax purposes,
distributions paid to shareholders may consist of ordinary income, capital
gains, nontaxable return of capital, or a combination thereof. The Company will
provide its shareholders with an annual statement as to its designation of the
taxability of distributions.
Distributions by the Operating Partnership and the Subsidiaries are
dependent on a number of factors, including the aggregate amount of the
Operating Partnership's and the Subsidiaries' funds available for distribution,
the financial condition of those entities, any decision by the Board of
Directors to reinvest funds rather than to distribute such funds, the capital
expenditures with respect to Properties, the annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board of
Directors deems relevant.
CLASSIFICATION OF THE OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
FOR FEDERAL INCOME TAX PURPOSES; IMPACT ON REAL ESTATE INVESTMENT TRUST
SHARES. At the time of the Company's formation, the Company received an opinion
of its counsel that the Operating Partnership and each subsidiary partnership
will be classified as partnerships for federal income tax purposes. Such opinion
has not been updated. Persons receiving this Prospectus Supplement and the
accompanying Prospectus should be aware that opinions of counsel are not binding
on the IRS or any court. If the IRS were to challenge successfully the tax
status of the Operating Partnership or a subsidiary partnership as a partnership
for federal income tax purposes, such partnership would be taxable as a
corporation. If the Operating Partnership were treated as a corporation for
federal income tax purposes, the Company would not be able to qualify as a REIT.
If a subsidiary partnership were treated as a corporation, the Company may cease
to qualify as a REIT because the value of the Company's ownership interest in
such partnership would exceed 10% of the partnership's voting interests.
Furthermore, the imposition of a corporate income tax on the Operating
Partnership or a subsidiary partnership would reduce substantially the amount of
cash available for distribution to the Company and its shareholders.
OTHER TAX LIABILITIES. Even if the Company qualifies as a REIT, the
Company and its Subsidiaries may be subject to certain federal, state, and local
taxes on its income and property which could reduce operating cash flow.
CONFLICTS OF INTEREST COULD RESULT IN MANAGEMENT DECISIONS THAT ARE NOT
NECESSARILY IN THE SHAREHOLDERS' BEST INTERESTS
TAX CONSEQUENCES UPON SALE OR REFINANCING OF PROPERTIES OR DEBT. Holders
of Units may suffer different and more adverse tax consequences than the Company
upon the sale of or refinancing of indebtedness associated with any of the
Properties acquired upon formation of the Company or prepayment of debt secured
thereby. Therefore, such holders, including George E. Cates, President and Chief
Executive Officer and a director of the Company, Mr. Fogelman, O. Mason Hawkins,
who is also a member of the Board of Directors, and other executive officers of
the Company, may have different objectives from the Company regarding the
appropriate pricing and timing of any sale of or refinancing of indebtedness
associated with such Properties or any debt prepayment. As the sole general
partner of the Operating
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Partnership, the Company has exclusive authority as to whether and on what terms
to sell or refinance or repay indebtedness related to an individual property
(except certain Properties described below), and the Company's bylaws provide
that a majority of the Board of Directors, including a majority of the
independent directors, may approve the sale or other disposition of a Property.
However, Messrs. Cates, Fogelman and Hawkins may influence the remaining
directors not to approve the sale of or refinancing of the indebtedness
associated with a particular Property, even though such sale or refinancing
might otherwise be financially advantageous to the Company, or may influence the
Company to refinance the indebtedness associated with a particular Property and
increase the level of debt. Moreover, in connection with the acquisition of five
of the Properties acquired upon formation of the Company, the Operating
Partnership has agreed that it will not sell such Properties or refinance the
indebtedness associated with such Properties without the advance written consent
of certain former owners thereof. Mr. Fogelman is one of those former owners.
Such owners are likely to be motivated by tax reasons to withhold such consent,
which would adversely affect the Operating Partnership's ability to take
advantage of particular opportunities. Finally, the Company is obligated to (i)
maintain at least $12.6 million of non-recourse debt guaranteed by Mr. Fogelman
so long as he continues to own 285,250 Units and (ii) maintain approximately
$8.9 million of recourse debt in order to preserve the Taxable Partners' tax
bases in their Units.
POLICIES WITH RESPECT TO CONFLICTS OF INTERESTS. The Company has adopted
certain policies and included noncompetition provisions in an employment
agreement with Mr. Cates designed to reduce conflicts of interest. However,
there can be no assurance that these policies always will be successful in
reducing such conflicts, and if they are not successful, decisions could be made
that might fail to reflect fully the interests of all shareholders.
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF SHARES
In order to maintain its qualification as a REIT, not more than 50% in
value of the outstanding capital stock of the Company, including the Series A
Preferred Stock, may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) at any time
during the last half of the Company's taxable year (other than its first taxable
year). The Company's charter limits ownership of the issued and outstanding
shares of the Company's capital stock by any single shareholder to 9.9% of the
outstanding shares (the "Ownership Limit"). Although the Board of Directors
presently has no intention of doing so, the Board of Directors could waive this
restriction if it were satisfied, based upon the advice of tax counsel, that
ownership in excess of this limit will not jeopardize the Company's status as a
REIT and the Board of Directors otherwise were to decide that such action would
be in the best interests of the Company. Shares acquired or transferred in
breach of the Ownership Limit shall be deemed Excess Shares and (i) shall be
held in trust for the exclusive benefit of the person(s) to whom such Excess
Shares may later be transferred, (ii) subject to transfer at the direction of
the Board of Directors, and (iii) subject to redemption at a price equal to the
lesser of (a) the price paid by the holder of such Excess Shares or (b) the
closing price per share of such shares on the NYSE (which redemption price may
be paid in Units). If the Board of Directors directs a holder of Excess Shares
to sell such Excess Shares, such holder shall pay the Company out of the
proceeds of such sale all expenses incurred by the Company in connection with
such sale plus any remaining amount of such proceeds that exceeds the amount
paid by such holder for the Excess Shares. To the extent allowed by law, a
transfer of shares to a person who, as a result of the transfer, violates the
Ownership Limit will be void.
LIMITATION ON ACQUISITION AND CHANGE IN CONTROL COULD DETER A TAKEOVER WHICH
MIGHT OTHERWISE BE IN THE SHAREHOLDERS' BEST INTERESTS
OWNERSHIP LIMIT. The ownership limit described above under "Possible
Adverse Consequences of Limits on Ownership of Shares" may have the effect of
precluding acquisition of control of the Company by a third party without
consent of the Board of Directors.
STAGGERED BOARD OF DIRECTORS. The Board of Directors has three classes of
directors. The terms of the first, second and third classes will expire in 1997,
1998, and 1999, respectively. Directors for each class are chosen for a
three-year term upon the expiration of the current class' term. The staggered
terms for directors
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may affect the shareholders' ability to change control of the Company even if a
change in control were in the shareholders' interest.
PREFERRED STOCK. The Company's Charter authorizes the Board of Directors
to issue up to 5,000,000 shares of preferred stock and to establish the
preferences and rights of any shares issued. The issuance of preferred stock
could have the effect of delaying or preventing a change in control of the
Company even if a change in control were in the shareholders' interest. Upon
consummation of this Offering, the Company anticipates that 1,200,000 shares of
preferred stock will be issued and outstanding (1,380,000 shares if the
Underwriters' overallotment option is exercised in full).
TENNESSEE ANTI-TAKEOVER STATUTES. As a Tennessee corporation, the Company
is subject to various legislative acts set forth in Chapter 35 of Title 48 of
the Tennessee Business Corporation Act (the "TBCA"), which impose certain
restrictions and require certain procedures with respect to certain takeover
offers and business combinations, including, but not limited to, combinations
with interested shareholders and share repurchases from certain shareholders.
These provisions may have the effect of delaying or preventing a change in
control of the Company even if a change in control were in the shareholders'
interest.
USE OF PROCEEDS
The net cash proceeds from the sale of the Series A Preferred Stock after
payment of all underwriting discounts and expenses of the Offering (estimated to
be approximately $187,500) are expected to be approximately $28.6 million
(approximately $33.0 million if the Underwriters' overallotment option is
exercised in full). The Company will contribute the net proceeds of the Offering
to the Operating Partnership, in which it presently has an 81.7% interest, in
exchange for 1,200,000 (1,380,000 if the Underwriters' over-allotment option is
exercised in full) units of % Series A Cumulative Preferred limited
partnership interests having distribution, liquidation, redemption and other
features identical to the terms of the Series A Preferred Stock. The Operating
Partnership will use approximately $9.7 million of the net proceeds to
consummate the Proposed Acquisition and the balance of approximately $18.9
million (approximately $23.3 million if the Underwriters' overallotment option
is exercised in full) to reduce the Company's outstanding borrowings under the
Credit Line. Any amounts not used to consummate the Proposed Acquisition will be
used to reduce the outstanding indebtedness under the Credit Line. Amounts paid
to reduce the outstanding indebtedness under the Credit Line may be re-borrowed
(subject to the terms and limits of the Credit Line) to finance acquisitions of
additional properties and for other corporate purposes.
The Credit Line, which matures in March 1998, had an outstanding principal
balance as of August 31, 1996 of approximately $58 million bearing interest at
an annual rate of 7.2%. The Credit Line bears interest at a floating rate equal
to LIBOR plus 1.75% and is unsecured. The maximum credit available under the
Credit Line is $65 million, of which $4 million was available as of August 31,
1996. The proceeds of borrowings under the Credit Line during the 12 months
immediately preceding the Offering were utilized to acquire new Properties and
for capital improvements.
S-15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996, and pro forma as adjusted to give effect to (a) an increase in notes
payable of approximately $34.4 million resulting from the consummation of the
Completed Acquisitions and the Proposed Acquisition reduced by the proceeds from
the June 1996 disposition of Laguna Pointe Apartments and (b) the issuance of
1,200,000 shares of Series A Preferred Stock and application of the estimated
net proceeds thereof.
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
DEBT:
Notes payable................... $ 321,745 $ 327,568
MINORITY INTEREST.................... 40,228 40,228
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
5,000,000 shares authorized, no
shares issued and outstanding,
1,200,000 shares % Series A
Cumulative Preferred Stock,
Liquidation Preference $25 per
share, issued and outstanding,
as adjusted..................... -- 12
Common Stock, $0.01 par value,
20,000,000 shares authorized,
10,940,962 shares issued and
outstanding..................... 109 109
Additional paid-in-capital......... 208,752 237,390
Unearned compensation.............. (320) (320)
Accumulated deficit................ (9,745) (9,745)
---------- -----------
Total shareholders' equity...... $ 198,796 $ 227,446
---------- -----------
TOTAL CAPITALIZATION................. $ 560,769 $ 595,242
========== ===========
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating information
on an historical basis for the Company and its predecessor. The following
information should be read in conjunction with all of the financial statements
and notes thereto included in the Quarterly Report on Form 10-Q for the quarter
and six-month period ended June 30, 1996, and the Annual Report on Form 10-K for
the year ended December 31, 1995, which are incorporated by reference into the
accompanying Prospectus. Also set forth below are unaudited selected pro forma
financial, operating and other data for the Company at and for the six months
ended June 30, 1996 and the year ended December 31, 1995. The unaudited pro
forma balance sheet data at June 30, 1996 have been prepared as if the Completed
Acquisitions, the Proposed Acquisition, the Dispositions, the consummation of
the Offering and the application of the net proceeds thereof had each occurred
on June 30, 1996. The unaudited pro forma operating and other data for the six
months ended June 30, 1996 and the year ended December 31, 1995 have been
prepared as if the transactions described above and other property acquisitions
since January 1, 1995 had occurred at the beginning of the period presented. The
pro forma interest expense reflects the $5.8 million incremental increase in
total debt based on the June 30, 1996 average 30-day LIBOR of 7.25%. The pro
forma general and administrative expense reflects increased corporate expenses
resulting from the transactions described above. The pro forma financial and
operating data are not necessarily indicative of what the actual financial
position or results of operations of the Company would have been as of the date
or for the periods indicated, nor do they purport to represent the results of
operations or financial position for future periods. This data should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus
Supplement. In the opinion of management, the operating data for the periods
presented include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
S-16
<PAGE>
MID-AMERICA APARTMENT COMMUNITIES, INC.
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND PROPERTY DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------- ------------------------------------------------------
HISTORICAL HISTORICAL
-------------------- ------------------------------------------
(UNAUDITED) (PREDECESSOR)
PRO FORMA -------------------- PRO FORMA --------------------
1996 1996 1995 1995 1995 1994(1) 1993 1992
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental............................. $ 56,463 $ 53,787 $ 40,748 $109,679 $ 93,509 $ 50,181 $ 25,687 $ 21,756
Other.............................. 637 639 658 1,542 1,310 1,026 608 438
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenue.................... 57,100 54,426 41,406 111,221 94,819 51,207 26,295 22,194
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses:
Property expenses(2)............... 21,530 20,624 16,267 44,294 37,810 19,484 11,316 9,682
General and administrative(3)...... 3,106 3,079 2,133 5,370 4,851 3,613 1,402 1,112
Interest........................... 13,000 12,789 10,436 25,034 22,684 10,233 7,448 7,524
Depreciation and amortization...... 10,857 10,351 7,131 20,041 16,574 8,803 3,521 3,235
Amortization of deferred financing
costs............................ 316 316 267 573 593 296 199 109
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before gain on
disposition of properties.......... 8,291 7,267 5,172 15,909 12,307 8,778 2,409 532
Gain on disposition of properties.... -- 1,966 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest and extraordinary item.... 8,291 9,233 5,172 15,909 12,307 8,778 2,409 532
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 6,901 $ 7,536 $ 3,997 $ 13,243 $ 9,810 $ 6,944 $ 2,542 $ 1,090
Preferred dividends(4)............... $ 1,425 -- -- $ 2,850 -- -- -- --
Net income available for common
shares............................. $ 5,476 $ 7,536 $ 3,997 $ 10,393 $ 9,810 $ 6,944 $ 2,542 $ 1,090
Net income per weighted average
common share outstanding........... $ 0.50 $ 0.69 $ 0.46 $ .95 $ 1.00 $ 1.01 -- --
Weighted average common shares
outstanding (fully diluted)........ 10,988 10,988 8,714 10,988 9,860 6,577 -- --
BALANCE SHEET DATA:
Real estate owned, at cost........... $629,711 $ 587,884 $ 565,044 $ 578,788 $ 434,460 $ 125,269 $ 111,686
Total assets......................... $608,685 $ 574,212 $ 570,998 $ 565,267 $ 439,233 $ 104,439 $ 93,252
Total debt........................... $327,568 $ 321,745 $ 306,882 $ 307,939 $ 232,766 $ 105,594 $ 95,036
Minority interest.................... $ 40,228 $ 40,228 $ 41,055 $ 41,049 $ 43,709 -- --
Shareholders' equity (owners'
deficit)........................... $227,446 $ 198,796 $ 202,232 $ 202,278 $ 152,385 $ (4,684) $ (4,493)
OTHER DATA (AT END OF PERIOD):
Funds from operations(5)............. $ 17,645 $ 17,548 $ 12,251 $ 32,944 $ 28,627 $ 17,525 $ 5,908 $ 3,747
Distributions declared per share and
unit............................... -- $ 1.02 $ 1.00 -- $ 2.01 $ 1.71 -- --
Weighted average common shares and
units outstanding (fully
diluted)........................... 13,433 13,433 11,172 -- 12,306 9,038 -- --
Ratio of earnings to combined debt
service and preferred stock
dividends(6)....................... 1.53x 1.52x 1.45x 1.52x 1.49x 1.76x 1.27x 1.06x
Ratio of earnings to fixed
charges(7)......................... 1.55x 1.48x 1.52x 1.83x 1.32x 1.07x
Ratio of funds from operations to
combined debt service and preferred
stock dividends(8)................. 2.13x 2.25x 2.07x 2.08x 2.13x 2.51x 1.65x 1.40x
Ratio of total debt to total
capitalization(9).................. 47.0% 48.6% 47.8% -- 48.2% 44.1% -- --
Number of Properties................. 73 69 70 -- 70 54 22 19
Number of apartment units............ 19,232 18,176 18,094 -- 18,219 14,333 5,580 5,064
(Table continued below)
</TABLE>
YEAR ENDED
DECEMBER 31,
-------------
HISTORICAL
-------------
(PREDECESSOR)
-------------
1991
-------------
OPERATING DATA:
Revenue:
Rental............................. $ 19,288
Other.............................. 407
---------
Total revenue.................... 19,695
---------
Expenses:
Property expenses(2)............... 8,707
General and administrative(3)...... 849
Interest........................... 8,071
Depreciation and amortization...... 2,891
Amortization of deferred financing
costs............................ 83
---------
Income (loss) before gain on
disposition of properties.......... (906)
Gain on disposition of properties.... --
---------
Income (loss) before minority
interest and extraordinary item.... (906)
---------
Net income........................... $ 17
Preferred dividends(4)............... --
Net income available for common
shares............................. $ 17
Net income per weighted average
common share outstanding........... --
Weighted average common shares
outstanding (fully diluted)........ --
BALANCE SHEET DATA:
Real estate owned, at cost........... $ 103,455
Total assets......................... $ 88,032
Total debt........................... $ 90,834
Minority interest.................... --
Shareholders' equity (owners'
deficit)........................... $ (5,460)
OTHER DATA (AT END OF PERIOD):
Funds from operations(5)............. $ 1,967
Distributions declared per share and
unit............................... --
Weighted average common shares and
units outstanding (fully
diluted)........................... --
Ratio of earnings to combined debt
service and preferred stock
dividends(6)....................... .90x
Ratio of earnings to fixed
charges(7)......................... .89x
Ratio of funds from operations to
combined debt service and preferred
stock dividends(8)................. 1.22x
Ratio of total debt to total
capitalization(9).................. --
Number of Properties................. 18
Number of apartment units............ 4,702
(NOTES ON FOLLOWING PAGE)
S-17
<PAGE>
- ------------
(1) Operating data for 1994 includes 34 days of predecessor financial
information and per share data for 1994 is for the period February 4, 1994
through December 31, 1994.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Expenditures."
(3) Includes corporate expenses.
(4) Assuming an annual dividend rate of 9.5% on the Liquidation Preference of
the Series A Preferred Stock.
(5) FFO represents net income (computed in accordance with GAAP) excluding
extraordinary items, minority interest in Operating Partnership income, gain
or loss on disposition of real estate assets, and certain non-cash items,
primarily depreciation and amortization, less preferred stock dividends. FFO
is computed in accordance with the definition adopted by NAREIT. FFO should
not be considered as an alternative to net income or any other GAAP
measurement of performance, as an indicator of operating performance or as
an alternative to cash flows from operating, investing, and financing
activities as a measure of liquidity. The Company believes that FFO is
helpful in understanding a property portfolio in that such calculation
reflects cash flow from operating activities and the properties' ability to
support interest payments and general operating expenses before the impact
of certain activitites such as changes in other assets and accounts payable.
In March 1995, NAREIT modified the definition of FFO to eliminate
amortization of deferred financing costs and depreciation of non-real estate
assets as items added back to net income when computing FFO. The Company
implemented the new method of calculating FFO effective as of the
NAREIT-suggested adoption date of January 1, 1996. For the above schedule,
FFO has been restated for the new method for all periods.
(6) For purposes of these computations, earnings consist of net income (loss)
before gain on dispositions of Properties, extraordinary items and
allocation to minority interests, plus debt service. Debt service consists
of interest and recurring principal amortization (excluding maturities) and
excludes amortization of debt expense and discount related to indebtedness.
The historical earnings do not include preferred stock dividends as no
shares of preferred stock were outstanding for the periods presented.
(7) For purposes of these computations, earnings consist of net income (loss)
before gain on dispositions of Properties, extraordinary items and
allocation to minority interests plus fixed charges. Fixed charges
principally consist of interest expense, capitalized interest and
amortization of deferred financial costs as of the dates presented. The
computation of the ratio of earnings to fixed charges for 1991 indicates
that earnings were inadequate to cover fixed charges by approximately
$906,000.
(8) For purposes of these computations, funds from operations includes debt
service and preferred stock dividend requirements. Debt service consists of
interest and recurring principal amortization (excluding maturities) and
excludes amortization of debt expense and discount related to indebtedness.
The historical funds from operations do not include preferred stock
dividends as no shares of preferred stock were outstanding for the periods
presented.
(9) Total capitalization is total debt plus the aggregate market value of the
Company's Common Stock, Series A Preferred Stock (on a pro forma basis, as
adjusted) and Units held by persons other than the Company, which are
redeemable for shares of Common Stock on a one-for-one basis.
S-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion of the consolidated financial condition and
results of operations of the Company and its predecessor for the six months
ended June 30, 1996 and 1995 and for the years ended December 31, 1995, 1994 and
1993. This discussion should be read in conjunction with all of the financial
statements incorporated by reference into this Prospectus Supplement and the
accompanying Prospectus. These financial statements include all adjustments
which are, in the opinion of management, necessary to reflect a fair statement
of the results for the interim periods presented, and all such adjustments are
of a normal recurring nature.
FUNDS FROM OPERATIONS
Funds from Operations represents net income (computed in accordance with
GAAP) excluding extraordinary items, minority interest in Operating Partnership
income, gain or loss on disposition of real estate assets, and certain non-cash
items, primarily depreciation and amortization, less preferred stock dividends.
FFO is computed in accordance with the definition adopted by NAREIT. FFO should
not be considered as an alternative to net income or any other GAAP measurement
of performance, as an indicator of operating performance or as an alternative to
cash flows from operating, investing, and financing activities as a measure of
liquidity. The Company believes that FFO is helpful in understanding a property
portfolio in that such calculation reflects cash flow from operating activities
and the Properties' ability to support interest payments and general operating
expenses before the impact of certain activities such as changes in other assets
and accounts payable.
In March 1995, NAREIT modified the definition of FFO to eliminate
amortization of deferred financing costs and depreciation of non-real estate
assets as items added back to net income when computing FFO. The Company
implemented the new method of calculating FFO effective as of the
NAREIT-suggested adoption date of January 1, 1996.
For the six months ended June 30, 1996, FFO increased by $5,297,000, or
43%, when compared to the same period a year earlier (adjusted for the new
NAREIT FFO definition). The increase was primarily attributable to a $13,020,000
increase in revenues, which was partially offset by increases in expenses
associated with the increase in the number of units owned by the Company.
CAPITAL EXPENDITURES
Capital expenditures are those made for assets having a useful life in
excess of one year. In conjunction with acquisitions of Properties, the
Company's policy is to provide in its acquisition budgets adequate funds to
complete any deferred maintenance in order to bring the Properties to the
Company's quality standards and/or to stabilize.
Following a review of its capital expenditure and depreciation policy,
effective January 1, 1996, the Company implemented a new capitalization policy
the primary changes of which are as follows:
(a) increase minimum dollar amounts to capitalize from $500 to
$1,000,
(b) for stabilized Properties, capitalize replacement purchases for
major appliances and carpeting of an entire unit which was
previously expensed, and
(c) reduce depreciation life for certain assets from 20 years to 10
to 15 years.
The Company believes that the newly adopted accounting policy is preferable
because it is consistent with policies currently being used by the majority of
the largest apartment REITs and provides a better matching of expenses with the
estimated benefit period. The policy has been implemented prospectively
effective January 1, 1996.
The following table presents the impact on 1995 net income of the Company's
adoption of its new capitalization policy and NAREIT's new FFO definition.
S-19
<PAGE>
IMPACT OF CHANGE IN ACCOUNTING POLICY AND THE NEW NAREIT FFO DEFINITION
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SIX MONTHS ENDED JUNE 30, 1995 DECEMBER 31, 1995
------------------------------------ ------------------------------------
WITH NEW WITH NEW
NAREIT FFO NAREIT FFO
DEFINITION DEFINITION
SIX MONTHS WITH NEW AND WITH NEW AND
ENDED AS NAREIT FFO CAPITAL AS NAREIT FFO CAPITAL
JUNE 30, 1996 REPORTED DEFINITION POLICY REPORTED DEFINITION POLICY
------------- -------- ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income before minority
interest........................... $ 7,267 $ 5,172 $ 5,172 $ 5,172 $ 12,307 $12,307 $12,307
Change for capitalization policy as
if in effect at January 1, 1995.... N/A N/A N/A 447 N/A N/A 1,243
Additional depreciation due to change
in capitalization policy........... N/A N/A N/A (89) N/A N/A (249)
------------- -------- ----------- ----------- -------- ----------- -----------
Adjusted net income before minority
interest........................... 7,267 5,172 5,172 5,530 12,307 12,307 13,301
Depreciation and amortization of:
Real estate assets................. 10,281 7,079 7,079 7,168 16,470 16,470 16,719
Non-real estate assets............. -- 52 -- -- 104 -- --
Deferred financing costs........... -- 267 -- -- 593 -- --
------------- -------- ----------- ----------- -------- ----------- -----------
FFO................................ $ 17,548 $ 12,570 $12,251 $12,698 $ 29,474 $28,777 $30,020
============= ======== =========== =========== ======== =========== ===========
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 TO THE SIX MONTHS ENDED
JUNE 30, 1995
The total number of apartment units owned at June 30, 1996 was 18,176 in 69
apartment communities, compared to 18,094 in 70 communities at June 30, 1995.
Weighted average rental revenue per unit increased to $517 at June 30, 1996 from
$493 at June 30, 1995. Weighted average occupancy at June 30, 1996 and 1995 was
93.7% and 94.2%, respectively. Weighted average occupancy for the six months
ended June 30, 1996 and 1995 was 95.1% and 93.9%, respectively.
Total revenues for the six months ended June 30, 1996 increased by
$13,020,000 due primarily to the acquisition of 12 properties on June 29, 1995
as a result of the AFRI Merger. Expenses increased by $10,925,000, which was
primarily attributable to (i) operation of the 12 properties acquired on June
29, 1995, (ii) an increase in general and administrative expense due to the
Company's assuming management of Properties acquired through the AFRI Merger and
the opening of the new training center, and (iii) higher depreciation due to the
continued growth of the Company. As a percentage of revenues, interest expense,
real estate taxes and insurance, and personnel costs decreased for the six
months ended June 30, 1996 compared to the same period a year earlier.
During the six months ended June 30, 1996, the Company recorded a
$1,966,000 gain attributable to the disposition of two apartment communities.
As a result of the foregoing, income before minority interest for the six
months ended June 30, 1996 increased $4,061,000 over the same period a year
earlier.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31, 1994
(THE COMPANY AND THE PREDECESSOR)
The total number of apartment units owned at December 31, 1995 was 18,219
in 70 apartment communities, compared to 14,333 in 54 communities at December
31, 1994. Weighted average rental revenue per unit increased to $508 for 1995
from $482 for 1994. Average occupancy for 1995 and 1994 was 95.2% and 95.5%,
respectively.
S-20
<PAGE>
For the 10,268 units owned on December 31, 1995 and 1994, occupancy
increased to 95.4% as compared to 92.8%, respectively, and average rental rate
increased for this same period 6.2% to $499 from $470.
Total revenues for 1995 increased by $43,612,000 due primarily to (i)
$13,966,000 from the 15 apartment communities acquired, including the Properties
acquired in the AFRI Merger, during 1995, (ii) $28,204,000 from a full year's
operation of 32 apartment communities acquired in 1994, and (iii) $1,373,000
from the apartment communities owned throughout both periods.
Property operating expenses increased by $18,326,000 over 1994. The dollar
increase primarily resulted from (i) $5,514,000 of operating expense from the 15
apartment communities acquired in 1995, including the Properties acquired in the
AFRI Merger, (ii) $12,110,000 for full year's operation of the 32 Properties
acquired in 1994, and (iii) $580,000 from the apartment communities owned
throughout both periods. As a percentage of revenue, property operating expenses
increased to 39.9% from 38.1% for the year ended December 31, 1995 and 1994,
respectively. The 5,176 units owned in the states of Florida and Texas acquired
during 1994 and 1995 account for a 2.5% increase in the expense ratio. As
anticipated in the acquisition forecasts, these units are more expensive to
operate than the balance of the portfolio. During 1995, $1,374,000 was expensed
for replacement of appliances and carpets compared to $888,000 for 1994.
General and administrative expenses decreased to 5.1% of revenues for 1995
from 7.1% for 1994 as a result of increased efficiencies from the economies of
scale.
Depreciation and amortization expense increased primarily due to (i) an
increase of $2,017,000 from the 15 apartment communities acquired during 1995
and (ii) an increase of $5,390,000 for a full years operation of 32 apartment
communities acquired during 1994. Amortization of deferred financing costs and
unamortized costs in excess of fair value of net assets acquired for 1995 were
$593,000 and $186,000, respectively.
Interest expense increased $12,451,000 during 1995 due to apartment
communities acquired during the year as well as a full year of operation for
Properties acquired in 1994. The Company reduced the average borrowing cost to
8.15% at December 31, 1995 as compared to 8.45% on December 31, 1994. The
average maturity on the Company's debt increased to 9.9 years from 8.71 years
for the years ended December 31, 1995 and 1994, respectively.
As a result of the foregoing, income before minority interest and
extraordinary items in 1995 increased by $3,529,000 over 1994.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 (THE COMPANY AND THE PREDECESSOR)
TO THE YEAR ENDED DECEMBER 31, 1993 (PREDECESSOR)
The total number of apartment units owned at December 31, 1994 was 14,333
in 54 apartment communities, compared to 5,580 in 22 communities at December 31,
1993. Weighted average rental per unit increased to $482 for 1994 from $434 for
1993. Average occupancy for 1994 and 1993 was 95.5% and 95.4%, respectively.
Total revenues for 1994 increased by $24,912,000 due primarily to (i) the
acquisition of 32 properties during 1994, (ii) $1,523,000 from rental rate
increases at Properties owned throughout both periods and (iii) $1,491,000 from
a full year's operation of three Properties, The Oaks, The Corners, and Park
Haywood, acquired in 1993.
Property operating expenses in 1994 increased by $8,168,000 over 1993. As a
percentage of revenue, property operating expenses decreased to 38.1% from 43.0%
for 1994 and 1993, respectively. The majority of the dollar increase resulted
from increased personnel, real estate taxes, insurance, and building repairs and
maintenance. The increase was primarily due to Properties acquired during 1994.
Property operating expenses at Properties owned throughout both periods
increased $76,000, or 0.8%. During 1994, $1,022,000 was expensed for replacement
of appliances, blinds, vinyl flooring and carpets. Approximately $800,000 ($158
per unit) of this amount related to Properties that were owned throughout both
periods. This compares with $881,000 for the same period in 1993, or $166 per
apartment unit.
S-21
<PAGE>
General and administrative expenses in 1994 increased by $2,211,000 from
1993. This increase was primarily due to (i) franchise taxes of $365,000 which
were not required for the predecessor due to its organization as partnerships;
(ii) increased personnel-related expenses for the corporate management of new
Properties; and (iii) increased administrative expenses, consulting and other
professional fees related to requirements of becoming a public company.
Depreciation and amortization expense increased in 1994 primarily due to
(i) an increase of $3,803,000 from the Properties acquired during 1994, (ii) an
increase of $291,000 for a full year's operation of three Properties acquired
during 1993, and (iii) increased depreciation and amortization associated with
recording the acquisition of partnership interests at the date of the Initial
Offering using the purchase method of accounting. Amortization of deferred
financing costs and unamortized costs in excess of fair value of net assets
acquired for 1994 were $296,000 and $168,000, respectively.
Interest expense increased $2,785,000 during 1994 due to additional
borrowings associated with the acquisition of additional Properties.
As a result of the foregoing, income before minority interest and
extraordinary items increased by $6,369,000 over 1993. In 1994, the Company
recorded an extraordinary gain of $485,000, net of minority interest, due to the
early extinguishment of debt following the Initial Offering. In 1993, litigation
proceeds of $133,000 were recorded as extraordinary income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities decreased from $12,600,000
for the period January 1, 1995 through June 30, 1995 to $8,391,000 for the
period January 1, 1996 through June 30, 1996. The decrease in net cash flow was
primarily due to an increase in restricted cash due to (i) an increase in tax-
exempt bond financing requiring additional cash reserves and increases in other
mortgage escrows and replacement reserves and (ii) $7,354,000 held by an
independent escrow agent pending completion of a like-kind exchange (in July
1996) of the Laguna Pointe apartment community in June 1996. This decrease in
cash provided was offset by an increase in net income of $3,539,000.
Net cash flow used in investing activities decreased from $26,137,000 in
the period January 1, 1995 through June 30, 1995 to $8,430,000 for the period
January 1, 1996 through June 30, 1996. The decrease was primarily due to (i) the
disposition in May and June of 1996 of the Park at 58 II and Laguna Pointe for
an aggregate of $16,769,000, (ii) capital improvements, and (iii) construction
in progress. Capital improvements to existing Properties totaled $9,327,000 in
1996. Capital improvements during 1996 included $3,626,000 for "recurring"
capital expenditures, including carpet and appliances, and averaged $231 per
unit, or $462 annualized. Additions to construction in progress decreased from
$9,202,000 for 1995 to $1,563,000 for 1996, due primarily to the completion of
the 122-unit development in Jackson, Tennessee which began leasing during the
third quarter of 1995.
Net cash flow from financing activities decreased from providing
$11,654,000 during the period January 1, 1995 through June 30, 1995 to utilizing
$552,000 for the period January 1, 1996 through June 30, 1996 primarily due to
changes in notes payable and increases in dividends paid, resulting from the
additional shares issued in connection with the AFRI Merger.
The Company incurred additional indebtedness of $22.7 million during the
period January 1, 1996 through June 30, 1996 primarily on account of a $16.5
million refinancing of tax-exempt bonds secured by three apartment communities,
net borrowings under the Credit Line of $5.7 million and construction draws for
the Woods of Post House of $500,000. Notes payable decreased primarily due to
the mortgage payoff upon disposition of its Laguna Pointe apartment community in
June 1996. At June 30, 1996, the Company had $40.8 million of floating rate
debt; all other debt was fixed rate term debt. Excluding the Credit Line, which
bears a floating rate, 94.3% of the Company's debt was fixed rate. The weighted
average interest rate at June 30, 1996 was 7.81%. The Company anticipates that
its interest payments for the 12 month period ending December 31, 1996 will
approximate $26.5 million.
S-22
<PAGE>
The Company believes that cash provided by operations is adequate and
anticipates that it will continue to be adequate in both the short and long term
to meet operating requirements (including capital expenditures required to
maintain the communities) and payment of distributions by the Company in
accordance with requirements to maintain qualification as a REIT.
Planned capital expenditures on property improvements and expansion
projects for the full year 1996 presently total $22.4 million, of which $10.9
million was expended in the six month period ended June 30, 1996. The Company
expects to meet its long term liquidity requirements, such as scheduled mortgage
debt maturities, property acquisitions, expansions and non-budgeted capital
improvements, through long and medium term collateralized and uncollateralized
fixed rate borrowings, issuance of debt or additional equity securities in the
Company and the Credit Line.
INSURANCE
In the opinion of management, property and casualty insurance is in place
which provides adequate coverage to provide financial protection against normal
insurable risks such that it believes that any loss experienced would not have a
significant impact on the Company's liquidity, financial position, or results of
operations.
INFLATION
Substantially all of the resident leases at the properties allow, at the
time of renewal, for adjustments in the rent payable thereunder, and thus may
enable the Company to seek rent increases. The substantial majority of these
leases are for one year or less. The short-term nature of these leases generally
serves to reduce the risk to the Company of the adverse effects of inflation.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of management
for future operations, including plans and objectives relating to capital
expenditures and rehabilitation costs on the apartment communities. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties which are discussed in "Risk
Factors" in this Prospectus Supplement. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this prospectus supplement will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
S-23
<PAGE>
PROPERTIES
As of September 30, 1996, the Company owned 72 apartment communities
containing 18,992 units. The following table sets forth selected financial and
operating information on an historical basis for the 69 properties owned at June
30, 1996:
<TABLE>
<CAPTION>
AVERAGE AVERAGE
APPROXIMATE RENT PER OCCUPANCY
RENTABLE UNIT AT % AT
YEAR AREA AVERAGE -------- ---------
YEAR MANAGEMENT NUMBER (SQUARE UNIT SIZE JUNE 30, JUNE 30,
PROPERTY LOCATION COMPLETED COMMENCED OF UNITS FT.) (SQUARE FT.) 1996 1996
- ------------------------- ------------------ --------- ---------- -------- ----------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Calais Forest............ Little Rock, AR 1987 1994 260 194,928 750 $535 94.2%
Whispering Oaks.......... Little Rock, AR 1978 1994 206 192,488 934 $464 94.2%
-------- ----------- ------------ -------- ----
466 387,416 831 $504 94.2%
-------- ----------- ------------ -------- ----
Marsh Oaks............... Atlantic Beach, FL 1986 1995 120 93,240 777 $490 97.5%
Anatole.................. Daytona Beach, FL 1986 1995 208 149,136 717 $541 92.8%
Cooper's Hawk............ Jacksonville, FL 1987 1995 208 218,400 1,050 $627 94.2%
Lakeside................. Jacksonville, FL 1985 1996 416 344,032 827 $541 94.7%
St. Augustine............ Jacksonville, FL 1987 1995 400 304,400 761 $494 91.3%
Woodbridge at the Lake... Jacksonville, FL 1985 1994 188 166,000 883 $554 95.7%
Savannahs at James
Landing.................. Melbourne, FL 1990 1995 256 238,592 932 $534 88.3%
Belmere.................. Tampa, FL 1984 1994 210 202,440 964 $584 91.9%
Sailwinds at Lake
Magdalene................ Tampa, FL 1975 1994 798 667,084 836 $496 97.6%
-------- ----------- ------------ -------- ----
2,804 2,383,324 850 $529 94.3%
-------- ----------- ------------ -------- ----
Shenandoah Ridge......... Augusta, GA 1975/1982 1994 272 202,640 745 $427 91.2%
Hollybrook............... Dalton, GA 1972 1994 158 188,640 1,194 $530 94.3%
-------- ----------- ------------ -------- ----
430 391,280 910 $464 92.3%
-------- ----------- ------------ -------- ----
Lakepointe............... Lexington, KY 1986 1994 118 90,614 768 $515 91.5%
Mansion, The............. Lexington, KY 1987 1994 184 138,720 754 $526 93.5%
Village, The............. Lexington, KY 1989 1994 252 182,716 725 $534 93.3%
Stonemill Village........ Louisville, KY 1985 1994 384 324,008 844 $517 94.5%
-------- ----------- ------------ -------- ----
938 736,058 785 $523 93.6%
-------- ----------- ------------ -------- ----
Canyon Creek
(Wedgefield)............. St. Louis, MO 1987 1994 320 312,592 977 $515 92.5%
Riverhills............... Grenada, MS 1972 1985 96 81,942 854 $388 99.0%
Advantages, The.......... Jackson, MS 1984 1991 252 199,136 790 $457 90.5%
Lakeshore Landing........ Jackson, MS 1974 1994 196 171,156 873 $482 96.9%
Pear Orchard............. Jackson, MS 1985 1994 389 338,430 870 $552 92.5%
Pine Trails.............. Jackson, MS 1978 1988 120 98,560 821 $442 91.7%
Reflection Pointe........ Jackson, MS 1986 1988 296 254,856 861 $530 98.3%
Somerset Place........... Jackson, MS 1981 1995 144 128,848 881 $484 96.5%
Woodridge................ Jackson, MS 1987 1988 192 175,034 912 $485 94.3%
-------- ----------- ------------ -------- ----
1,685 1,447,962 859 $495 94.6%
-------- ----------- ------------ -------- ----
Summit Ridge............. Charlotte, NC 1982 1994 240 204,750 853 $518 77.1%
Woodstream............... Greensboro, NC 1983 1994 304 217,186 714 $510 96.4%
Corners, The............. Winston-Salem, NC 1982 1993 240 173,496 723 $506 89.2%
-------- ----------- ------------ -------- ----
784 595,432 759 $511 88.3%
-------- ----------- ------------ -------- ----
Fairways at Royal Oak.... Cincinnati, OH 1988 1994 214 214,477 1,002 $565 97.7%
Tanglewood............... Anderson, SC 1980 1994 168 146,600 873 $501 96.4%
The Fairways............. Columbia, SC 1992 1994 240 213,720 891 $532 95.0%
Highland Ridge........... Greenville, SC 1984 1995 168 144,000 857 $468 95.2%
Park Haywood............. Greenville, SC 1983 1993 208 152,256 732 $477 94.7%
Spring Creek............. Greenville, SC 1984 1995 208 182,000 875 $500 98.6%
Runaway Bay.............. Mt. Pleasant, SC 1988 1995 208 177,840 855 $623 92.3%
-------- ----------- ------------ -------- ----
1,200 1,016,416 847 $519 95.3%
-------- ----------- ------------ -------- ----
(Table continued below)
</TABLE>
<TABLE>
<CAPTION>
ENCUMBRANCES AT
-----------------------------------
JUNE 30, 1996
-----------------------------------
MORTGAGE INTEREST MATURITY
PROPERTY LOCATION PRINCIPAL RATE DATE
- ------------------------- ------------------ ----------- -------- --------
<S> <C> <C> <C> <C>
Calais Forest............ Little Rock, AR $ 5,610,000 8.915% 12/01/99
Whispering Oaks.......... Little Rock, AR $ 3,000,000 8.915% 12/01/99
-----------
$ 8,610,000
-----------
Marsh Oaks............... Atlantic Beach, FL -(2) -(2) -(2)
Anatole.................. Daytona Beach, FL $ 7,000,000 5.280% 09/01/05
Cooper's Hawk............ Jacksonville, FL -(7) -(7) -(7)
Lakeside................. Jacksonville, FL -(2) -(2) -(2)
St. Augustine............ Jacksonville, FL -(7) -(7) -(7)
Woodbridge at the Lake... Jacksonville, FL $ 3,769,091 -(1) -(1)
Savannahs at James
Landing.................. Melbourne, FL -(7) -(7) -(7)
Belmere.................. Tampa, FL - - -
Sailwinds at Lake
Magdalene................ Tampa, FL $15,950,000 8.915% 12/01/99
-----------
$26,719,091
-----------
Shenandoah Ridge......... Augusta, GA -(2) -(2) -(2)
Hollybrook............... Dalton, GA $ 2,520,000 8.915% 12/01/99
-----------
$ 2,520,000
-----------
Lakepointe............... Lexington, KY $ 2,584,190 8.750% 06/15/97
Mansion, The............. Lexington, KY $ 4,140,000 8.915% 12/01/99
Village, The............. Lexington, KY $ 5,300,903 8.750% 06/15/97
Stonemill Village........ Louisville, KY -(6) -(6) -(6)
-----------
$12,025,093
-----------
Canyon Creek
(Wedgefield)............. St. Louis, MO -(6) -(6) -(6)
Riverhills............... Grenada, MS $ 894,253 7.000% 05/01/13
Advantages, The.......... Jackson, MS -(6) -(6) -(6)
Lakeshore Landing........ Jackson, MS -(6) -(6) -(6)
Pear Orchard............. Jackson, MS $ 8,704,365 10.000% 11/01/97
Pine Trails.............. Jackson, MS $ 1,414,174 7.000% 04/01/15
Reflection Pointe........ Jackson, MS $ 6,247,837 7.000% 09/01/10
Somerset Place........... Jackson, MS -(2) -(2) -(2)
Woodridge................ Jackson, MS $ 4,863,717 6.500% 10/01/27
-----------
$22,124,346
-----------
Summit Ridge............. Charlotte, NC $ 5,800,000 9.500% 08/01/96
Woodstream............... Greensboro, NC $ 5,598,856 9.250% 12/01/98
Corners, The............. Winston-Salem, NC $ 4,452,887 7.850% 06/15/03
-----------
$15,851,743
-----------
Fairways at Royal Oak.... Cincinnati, OH -(2) -(2) -(2)
Tanglewood............... Anderson, SC $ 2,685,832 7.600% 11/15/02
The Fairways............. Columbia, SC $ 7,689,191 8.500% 03/01/33
Highland Ridge........... Greenville, SC -(3) -(3) -(3)
Park Haywood............. Greenville, SC -(2) -(2) -(2)
Spring Creek............. Greenville, SC -(3) -(3) -(3)
Runaway Bay.............. Mt. Pleasant, SC -(3) -(3) -(3)
-----------
$10,375,023
-----------
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE RENT PER OCCUPANCY
RENTABLE UNIT AT % AT
YEAR AREA AVERAGE -------- ---------
YEAR MANAGEMENT NUMBER (SQUARE UNIT SIZE JUNE 30, JUNE 30,
PROPERTY LOCATION COMPLETED COMMENCED OF UNITS FT.) (SQUARE FT.) 1996 1996
- --------------------------- ---------------- --------- ---------- -------- ----------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hamilton Pointe............ Chattanooga, TN 1989 1992 361 256,716 711 $443 92.5%
Hidden Creek............... Chattanooga, TN 1987 1988 300 259,152 864 $458 91.3%
Steeplechase............... Chattanooga, TN 1986 1991 108 97,016 898 $513 95.4%
Oaks, The.................. Jackson, TN 1978 1993 100 87,512 875 $476 89.0%
Post House Jackson......... Jackson, TN 1987 1989 150 163,640 1,091 $559 86.0%
Post House North........... Jackson, TN 1987 1989 144 144,724 1,005 $562 95.8%
Williamsburg Village....... Jackson, TN 1987 1994 148 121,412 820 $499 96.6%
Woods at Post House........ Jackson, TN 1995 1995 122 118,922 975 $627 78.3%
Cedar Mill................. Memphis, TN 1973/1986 1982/1984 276 297,794 1,079 $539 92.4%
Clearbrook Village......... Memphis, TN 1974 1987 176 150,400 855 $465 96.6%
Crossings.................. Memphis, TN 1974 1991 80 89,968 1,125 $587 98.8%
East View.................. Memphis, TN 1974 1984 432 356,480 825 $469 92.4%
Greenbrook................. Memphis, TN 1986 1988 1,031 934,490 906 $465 94.9%
Hickory Farm............... Memphis, TN 1985 1994 200 150,256 751 $489 95.0%
Kirby Station.............. Memphis, TN 1978 1994 371 310,742 838 $515 98.9%
Lincoln on the Green....... Memphis, TN 1988 1994 384 293,664 765 $559 98.4%
McKellar Woods............. Memphis, TN 1976 1988 624 589,776 945 $440 94.4%
Nineteenth Green........... Memphis, TN 1975 1990 184 189,560 1,030 $511 95.7%
Park Estate................ Memphis, TN 1974 1977 81 95,751 1,182 $635 93.8%
Winchester Square.......... Memphis, TN 1973 1977 252 301,409 1,196 $543 96.8%
Brentwood Downs............ Nashville, TN 1986 1994 286 220,166 770 $601 97.9%
Park at Hermitage.......... Nashville, TN 1987 1995 440 392,480 892 $570 93.9%
-------- ----------- ------------ -------- ---
6,251 5,622,030 899 $505 94.4%
-------- ----------- ------------ -------- ---
Stassney Woods............. Austin, TX 1985 1995 288 248,832 864 $575 85.8%
Travis Station............. Austin, TX 1987 1995 304 249,888 822 $519 95.1%
Redford Park............... Conroe, TX 1984 1994 212 153,744 725 $476 85.8%
Celery Stalk............... Dallas, TX 1978 1994 410 552,220 1,347 $603 93.9%
Lodge at Timberglen (Falls,
The)..................... Dallas, TX 1984 1994 260 226,124 870 $561 89.2%
MacArthur Ridge............ Irving, TX 1991 1994 248 210,393 848 $661 92.7%
Westborough................ Katy, TX 1984 1994 274 197,264 720 $470 96.7%
Lane at Towne Crossing..... Mesquite, TX 1983 1994 384 277,616 723 $484 90.1%
Cypresswood Court.......... Spring, TX 1984 1994 208 160,672 772 $502 92.3%
Green Tree Place........... Spring, TX 1984 1994 200 152,168 761 $545 94.5%
-------- ----------- ------------ -------- ---
2,788 2,428,921 871 $541 91.7%
-------- ----------- ------------ -------- ---
Township Woods in
Hampton.................. Hampton, VA 1987 1995 296 248,048 838 $545 90.5%
-------- ----------- ------------ -------- ---
Total.............. 18,176 15,783,956 868 $517 93.7%
======== =========== ============ ======== ===
(Table continued below)
</TABLE>
<TABLE>
<CAPTION>
ENCUMBRANCES AT
-----------------------------------
JUNE 30, 1996
-----------------------------------
MORTGAGE INTEREST MATURITY
PROPERTY LOCATION PRINCIPAL RATE DATE
- --------------------------- ---------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Hamilton Pointe............ Chattanooga, TN -(6) -(6) -(6)
Hidden Creek............... Chattanooga, TN -(6) -(6) -(6)
Steeplechase............... Chattanooga, TN -(2) -(2) -(2)
Oaks, The.................. Jackson, TN -(6) -(6) -(6)
Post House Jackson......... Jackson, TN $ 5,196,780 8.170% 10/01/27
Post House North........... Jackson, TN $ 3,845,000 4.840% 09/01/25
Williamsburg Village....... Jackson, TN -(2) -(2) -(2)
Woods at Post House........ Jackson, TN $ 5,351,363 7.250% 09/01/35
Cedar Mill................. Memphis, TN $ 2,548,622 -(4) -(4)
Clearbrook Village......... Memphis, TN $ 1,256,216 9.000% 04/01/08
Crossings.................. Memphis, TN -(6) -(6) -(6)
East View.................. Memphis, TN $ 3,905,792 8.625% 12/01/99
Greenbrook................. Memphis, TN $15,869,216 -(5) -(5)
Hickory Farm............... Memphis, TN -(6) -(6) -(6)
Kirby Station.............. Memphis, TN $ 6,085,370 10.000% 12/01/96
Lincoln on the Green....... Memphis, TN -(2) -(2) -(2)
McKellar Woods............. Memphis, TN $ 8,569,254 -(5) -(5)
Nineteenth Green........... Memphis, TN -(6) -(6) -(6)
Park Estate................ Memphis, TN $ 1,508,855 -(5) -(5)
Winchester Square.......... Memphis, TN -(6) -(6) -(6)
Brentwood Downs............ Nashville, TN $ 6,678,000 8.915% 12/01/99
Park at Hermitage.......... Nashville, TN $ 8,480,000 5.790% 01/31/15
-----------
$69,294,468
-----------
Stassney Woods............. Austin, TX $ 4,975,000 6.600% 04/01/19
Travis Station............. Austin, TX $ 4,400,000 6.600% 04/01/19
Redford Park............... Conroe, TX $ 3,000,000 9.006% 12/01/04
Celery Stalk............... Dallas, TX $ 8,460,000 9.006% 12/01/04
Lodge at Timberglen (Falls,
The)..................... Dallas, TX $ 4,740,000 9.006% 12/01/04
MacArthur Ridge............ Irving, TX $ 7,706,157 7.400% 08/15/98
Westborough................ Katy, TX $ 3,958,000 9.006% 12/01/04
Lane at Towne Crossing..... Mesquite, TX $ 5,784,178 8.750% 01/01/98
Cypresswood Court.......... Spring, TX $ 3,330,000 9.006% 12/01/04
Green Tree Place........... Spring, TX $ 3,180,000 9.006% 12/01/04
-----------
$49,533,335
-----------
Township Woods in
Hampton.................. Hampton, VA $10,800,000 8.750% 11/01/09
-----------
Total.............. $227,853,099
===========
</TABLE>
- ------------
(1) Encumbered by two mortgages with interest rates of 7.75% and maturities of
September 7, 1999 and January 1, 2004.
(2) These nine properties are subject to a negative pledge pursuant to the loan
agreement in respect of the Credit Line.
(3) These three properties are encumbered by a $10.3 million mortgage securing a
tax exempt bond amortizing over 25 years with an average interest rate of
6.09%.
(4) Cedar Mill is encumbered by two mortgages with interest rates of 7.8% and
8.35% with maturities of February 4, 2004 and July 1, 2001 and Mendenhall
Townhomes with a 8.65% loan maturing July 1, 2001.
(5) Encumbered by three mortgages with interest rates of 7.8%, 7.55% and 8.35%
and maturities of February 4, 2004, July 1, 2001 and July 1, 2001,
respectively.
(6) These eleven properties are encumbered by a $43.4 million mortgage.
(7) These three properties are encumbered by a $16.5 million mortgage securing a
tax exempt bond amortizing over 25 years with an average interest rate of
5.75%.
S-25
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and a brief account of the business
experience of each person who is a director or executive officer of the Company.
H. ERIC BOLTON, JR., age 39. Mr. Bolton has served as the Executive Vice
President of the Company since April 1994 and Chief Operating Officer of the
Company since October 1995. Mr. Bolton has over 10 years of real estate
experience and prior to joining the Company, Mr. Bolton was Executive Vice
President and Chief Financial Officer of Trammell Crow Realty Advisors.
JOHN J. BYRNE, III, age 37. Mr. Byrne has served as a director of the
Company since May 1995. Mr. Byrne founded Cirque Property L.C., a real estate
acquisitions and property management company headquartered in Salt Lake City,
Utah, in 1986, and since that time has served as its President and Managing
Member.
GEORGE E. CATES, age 59. Mr. Cates has served as the President, Chief
Executive Officer and a director of the Company since October 1993. Mr. Cates
was President and Chief Executive Officer of The Cates Company from 1977 until
its merger with the Company in February 1994.
ROBERT F. FOGELMAN, age 60. Mr. Fogelman has served as a director of the
Company since July 1994 and has been the President of Fogelman Investment
Company, a privately-owned investment firm for more than five years.
O. MASON HAWKINS, age 48. Mr. Hawkins has served as a director of the
Company since October 1993 and is Chairman and Chief Executive Officer of
Southeastern Asset Management, Inc., a registered investment advisor, since
1975. He has also been a director of Longleaf Partners Funds Trust, a registered
investment company of which Southeastern Asset Management, Inc. serves as
investment advisor, for more than five years.
SIMON R. C. WADSWORTH, age 49. Mr. Wadsworth has served as Executive Vice
President, Chief Financial Officer and a director of the Company since March
1994. Prior to joining the Company, Mr. Wadsworth was with Holiday Inns, Inc.,
Royal Crown Companies and TMF, Inc.
MICHAEL B. YANNEY, age 62. Mr. Yanney has served as a director of the
Company since consummation of the AFRI Merger in June 1995. Mr. Yanney has
served as Chairman and Chief Executive Officer of America First Companies since
1984. From 1977 until 1984, Mr. Yanney was principally engaged in the ownership
and management of commercial banks. He is also a director of Burlington Northern
Inc., Forest Oil Corporation, MFS Communications Company, Inc. and Lozier
Corporation.
S-26
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as
of September 24, 1996 by (i) each director, (ii) each executive officer, and
(iii) all directors and executive officers as a group:
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS(1)
- ------------------------------------- ----------- ---------
Robert F. Fogelman................... 653,000(2) 5.5%
George E. Cates...................... 586,970(3) 4.9
O. Mason Hawkins..................... 353,417(4) 3.0
Michael B. Yanney.................... 135,647 1.1
John J. Byrne, III................... 72,500 *
Simon R. C. Wadsworth................ 19,653(5) *
H. Eric Bolton, Jr................... 6,617(6) *
All Directors and Executive Officers
as a Group (7 Persons)............. 1,827,804 15.3%
- ------------
(1) Based on 10,946,016 shares of Common Stock outstanding on September 24,
1996, plus, with respect to each listed person (or all listed persons, as a
group), the number of shares of Common Stock issuable by the Company to such
person or group in exchange for Units in Mid-America Apartments, L.P. plus
the number of shares of Common Stock issuable to such person (or group) in
respect of currently exercisable options. The total number of shares used in
calculating this percentage assumes that none of the Units or exercisable
options held by other persons are redeemed or exercised for shares of Common
Stock.
(2) Includes 82,500 shares owned directly by Mr. Fogelman and 570,500 shares
that Mr. Fogelman has the current right to acquire upon redemption of Units.
(3) Includes 285,166 shares owned directly by Mr. Cates, 235,794 shares that Mr.
Cates has the current right to acquire upon redemption of Units, 26,000
shares that Mr. Cates has the current right to acquire upon the exercise of
options that are currently exercisable and 40,010 shares owned by the
Company's ESOP over which Mr. Cates shares voting power. Excludes shares
owned by Mr. Cates' wife, over which Mr. Cates exercises no voting or
investment power and with respect to which Mr. Cates disclaims beneficial
ownership.
(4) Includes 194,799 shares owned directly by Mr. Hawkins and 158,618 shares
that Mr. Hawkins has the current right to acquire upon redemption of Units.
(5) Includes 6,500 shares that Mr. Wadsworth has the current right to acquire
upon the exercise of options that are currently exercisable.
(6) Includes 3,000 shares that Mr. Bolton has the current right to acquire upon
the exercise of options that are currently exercisable.
* Represents less than 1% of total.
S-27
<PAGE>
DESCRIPTION OF SERIES A PREFERRED STOCK
THE DESCRIPTION OF THE PARTICULAR TERMS OF THE SERIES A PREFERRED STOCK
SUPPLEMENTS, AND TO THE EXTENT INCONSISTENT THEREWITH REPLACES, THE DESCRIPTION
OF THE GENERAL TERMS AND PROVISIONS OF THE PREFERRED STOCK SET FORTH IN THE
ACCOMPANYING PROSPECTUS, TO WHICH DESCRIPTION REFERENCE IS HEREBY MADE.
GENERAL
The Company is authorized to issue up to 5,000,000 shares of preferred
stock ("Preferred Stock") in one or more series, with such designations,
powers, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption, in each case, if any, as are permitted by Tennessee
law and as the Board of Directors may determine by adoption of an amendment of
the Charter without any further vote or action by the Company's shareholders. As
of the date of this Prospectus Supplement, no shares of Preferred Stock were
outstanding.
The following summary of the terms and provisions of the Series A Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the pertinent sections of the Charter and the Charter amendment
creating the Series A Preferred Stock, (the "Designating Amendment") each of
which is available from the Company.
MATURITY
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
RANK
The Series A Preferred Stock will, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company, rank (i)
senior to all classes or series of Common Stock of the Company, and to all
equity securities ranking junior to the Series A Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company; (ii) on a parity with all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank on a parity
with the Series A Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; and (iii) junior to all
existing and future indebtedness of the Company. The term "equity securities"
does not include convertible debt securities, which will rank senior to the
Series A Preferred Stock prior to conversion.
DIVIDENDS
Holders of shares of the Series A Preferred Stock are entitled to receive,
when and as declared by the Board of Directors (or a duly authorized committee
thereof), out of funds legally available for the payment of dividends,
preferential cumulative cash dividends at the rate of % per annum of the
Liquidation Preference per share (equivalent to a fixed annual amount of $
per share).
Dividends on the Series A Preferred Stock shall be cumulative from the date
of original issue and shall be payable monthly in arrears on or before the 15th
day of each month, or, if not a business day, the next succeeding business day
(each, a "Dividend Payment Date"). The first dividend, which will be paid on
November 15, 1996, will be for less than a full month. Such dividend and any
dividend payable on the Series A Preferred Stock for any partial dividend period
will be computed on the basis of a 360-day year consisting of twelve 30-day
months. Dividends will be payable to holders of record as they appear in the
stock records of the Company at the close of business on the applicable record
date, which shall be the first day of the calendar month in which the applicable
Dividend Payment Date falls or on such other date designated by the Board of
Directors of the Company for the payment of dividends that is not more than 30
nor less than 10 days prior to such Dividend Payment Date (each, a "Dividend
Record Date").
No dividends on shares of Series A Preferred Stock shall be declared by the
Board of Directors or paid or set apart for payment by the Company at such time
as the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such declaration, payment or
S-28
<PAGE>
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 Stock
will accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series A
Preferred Stock will not bear interest and holders of the Series A Preferred
Stock will not be entitled to any distributions in excess of full cumulative
distributions described above. Except as set forth in the next sentence, no
dividends will be declared or paid or set apart for payment on any capital stock
of the Company or any other series of Preferred Stock ranking, as to dividends,
on a parity with or junior to the Series A Preferred Stock (other than a
dividend in shares of the Company's Common Stock or in shares of any other class
of stock ranking junior to the Series A Preferred Stock as to dividends and upon
liquidation) for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Series A Preferred Stock
for all past dividend periods and the then current dividend period. 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 Stock and the shares of any other
series of Preferred Stock ranking on a parity as to dividends with the Series A
Preferred Stock, all dividends declared upon the Series A Preferred Stock and
any other series of Preferred Stock ranking on a parity as to dividends with the
Series A Preferred Stock shall be declared pro rata so that the amount of
dividends declared per share of Series A Preferred Stock and such other series
of Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the Series A Preferred Stock and such other
series of Preferred Stock (which shall not include any accrual in respect of
unpaid dividends for prior dividend periods if such Preferred Stock does not
have a cumulative dividend) bear to each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series A Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in shares of Common Stock
or other shares of capital stock ranking junior to the Series A Preferred Stock
as to dividends and upon liquidation) shall be declared or paid or set aside for
payment nor shall any other distribution be declared or made upon the Common
Stock, or any other capital stock of the Company ranking junior to or on a
parity with the Series A Preferred Stock as to dividends or upon liquidation,
nor shall any shares of Common Stock, or any other shares of capital stock of
the Company ranking junior to or on a parity with the Series A Preferred Stock
as to dividends or upon liquidation be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any such shares) by the Company (except by conversion
into or exchange for other capital stock of the Company ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation or redemptions for
the purpose of preserving the Company's qualification as a REIT). Holders of
shares of the Series A Preferred Stock shall not be entitled to any dividend,
whether payable in cash, property or stock, in excess of full cumulative
dividends on the Series A Preferred Stock as provided above. Any dividend
payment made on shares of the Series A Preferred Stock shall first be credited
against the earliest accrued but unpaid dividend due with respect to such shares
which remains payable.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, the holders of shares of Series A Preferred Stock
are entitled to be paid out of the assets of the Company legally available for
distribution to its shareholders a liquidation preference of $25 per share, plus
an amount equal to any accrued and unpaid dividends to the date of payment, but
without interest, before any distribution of assets is made to holders of Common
Stock or any other class or series of capital stock of the Company that ranks
junior to the Series A Preferred Stock as to liquidation rights. Holders of
Series A Preferred Stock will be entitled to written notice of any event
triggering the right to receive such
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<PAGE>
Liquidation Preference. After payment of the full amount of the Liquidation
Preference, plus any accrued and unpaid dividends to which they are entitled,
the holders of Series A Preferred Stock will have no right or claim to any of
the remaining assets of the Company. The consolidation or merger of the Company
with or into any other corporation, trust or entity or of any other corporation
with or into the Company, or the sale, lease or conveyance of all or
substantially all of the property or business of the Company, shall not be
deemed to constitute a liquidation, dissolution or winding up of the Company.
REDEMPTION
The Series A Preferred Stock is not redeemable prior to November 1, 2001.
However, in order to ensure that the Company will continue to meet the
requirement for qualification as a REIT, the Series A Preferred Stock will be
subject to provisions in the Charter pursuant to which capital stock of the
Company owned by a shareholder in excess of the Ownership Limit will be Excess
Shares, and the Company will have the right to purchase such Excess Shares from
the holder. See "-- Restrictions on Ownership." On and after November 1, 2001,
the Company, at its option upon not less than 30 nor more than 60 days' written
notice, may redeem shares of the Series A Preferred Stock, in whole or in part,
at any time or from time to time, for cash at a redemption price of $25 per
share, plus all accrued and unpaid dividends thereon to the date fixed for
redemption (except with respect to Excess Shares. See "-- Restrictions on
Ownership."), without interest. Holders of Series A Preferred Stock to be
redeemed shall surrender such Series A Preferred Stock at the place designated
in such notice and shall be entitled to the redemption price and any accrued and
unpaid dividends payable upon such redemption following such surrender. If
notice of redemption of any shares of Series A Preferred Stock has been given
and if the funds necessary for such redemption have been set aside by the
Company in trust for the benefit of the holders of any shares of Series A
Preferred Stock so called for redemption, then from and after the redemption
date dividends will cease to accrue on such shares of Series A Preferred Stock,
such shares of Series A Preferred Stock shall no longer be deemed outstanding
and all rights of the holders of such shares will terminate, except the right to
receive the redemption price. If less than all of the outstanding Series A
Preferred Stock is to be redeemed, the Series A Preferred Stock to be redeemed
shall be selected pro rata (as nearly as may be practicable without creating
fractional shares) or by any other equitable method determined by the Company.
Unless full cumulative dividends on all shares of Series A Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no shares of Series A Preferred
Stock shall be redeemed unless all outstanding shares of Series A Preferred
Stock are simultaneously redeemed and the Company shall not purchase or
otherwise acquire directly or indirectly any shares of Series A Preferred Stock
(except by exchange for capital stock of the Company ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation); PROVIDED,
HOWEVER, that the foregoing shall not prevent the purchase by the Company of
Excess Shares in order to ensure that the Company continues to meet the
requirements for qualification as a REIT, or the purchase or acquisition of
shares of Series A Preferred Stock pursuant to a purchase or exchange offer made
on the same terms to holders of all outstanding shares of Series A Preferred
Stock. So long as no dividends are in arrears, the Company shall be entitled at
any time and from time to time to repurchase shares of Series A Preferred Stock
in open-market transactions duly authorized by the Board of Directors and
effected in compliance with applicable laws.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two successive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice will be mailed by the Company, postage
prepaid, not less than 30 nor more than 60 days prior to the redemption date,
addressed to the respective holders of record of the Series A Preferred Stock to
be redeemed at their respective addresses as they appear on the stock transfer
records of the Company. 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 shares of Series A Preferred Stock except as to the holder to
whom notice was defective or not given. Each notice shall state: (i) the
redemption date; (ii) the redemption price; (iii) the number of shares of Series
A Preferred Stock to be redeemed; (iv) the place or places where the Series A
Preferred Stock is to be surrendered for
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<PAGE>
payment of the redemption price; and (v) that dividends on the shares to be
redeemed will cease to accrue on such redemption date. If less than all of the
Series A Preferred Stock held by any holder is to be redeemed, the notice mailed
to such holder shall also specify the number of shares of Series A Preferred
Stock held by such holder to be redeemed.
Immediately prior to any redemption of Series A Preferred Stock, the
Company shall pay, in cash, any accumulated and unpaid dividends through the
redemption date, unless a redemption date falls after a Dividend Record Date and
prior to the corresponding Dividend Payment Date, in which case each holder of
Series A Preferred Stock at the close of business on such Dividend Record Date
shall be entitled to the dividend payable on such shares on the corresponding
Dividend Payment Date notwithstanding the redemption of such shares before such
Dividend Payment Date.
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption. However, in order to ensure that
the Company continues to meet the requirements for qualification as a REIT,
Series A Preferred Stock acquired by a shareholder in excess of the Ownership
Limit will automatically become Excess Shares, and the Company will have the
right to purchase such Excess Shares from the holder. In addition, Excess Shares
may be redeemed, in whole or in part, at any time when outstanding shares of
Series A Preferred Stock are being redeemed, for cash at a redemption price of
$25 per share, but excluding accrued and unpaid dividends on such Excess Shares,
without interest. Such Excess Shares shall be redeemed in such proportion and in
accordance with such procedures as shares of Series A Preferred Stock are being
redeemed.
VOTING RIGHTS
Holders of the Series A Preferred Stock will not have any voting rights,
except as set forth below or as otherwise from time to time required by law.
Whenever dividends on any shares of Series A Preferred Stock shall be in
arrears for eighteen or more months (a "Preferred Dividend Default"), the
holders of such shares of Series A Preferred Stock (voting separately as a class
with all other series of Preferred Stock ranking on a parity with the Series A
Preferred Stock as to dividends or upon liquidation ("Parity Preferred") upon
which like voting rights have been conferred and are exercisable) will be
entitled to vote separately as a class for the election of a total of two
additional directors of the Company (the "Preferred Stock Directors") at a
special meeting called by the holders of record of at least 20% of the Series A
Preferred Stock or the holders of record of at least 20% of any series of Parity
Preferred so in arrears (unless such request is received less than 90 days
before the date fixed for the next annual or special meeting of shareholders) or
at the next annual meeting of shareholders, and at each subsequent annual
meeting until all dividends accumulated on such shares of Series A Preferred
Stock for the past dividend periods and the dividend for the then current
dividend period shall have been fully paid or declared and a sum sufficient for
the payment thereof set aside for payment. A quorum for any such meeting shall
exist if at least a majority of the outstanding shares of Series A Preferred
Stock and shares of Parity Preferred upon which like voting rights have been
conferred and are exercisable are represented in person or by proxy at such
meeting. Such Preferred Stock Directors shall be elected upon the affirmative
vote of a plurality of the shares of Series A Preferred Stock and such Parity
Preferred present and voting in person or by proxy at a duly called and held
meeting at which a quorum is present. If and when all accumulated dividends and
the dividend for the then current dividend period on the Series A Preferred
Stock shall have been paid in full or set aside for payment in full, the holders
thereof shall be divested of the foregoing voting rights (subject to revesting
in the event of each and every Preferred Dividend Default) and, if all
accumulated dividends and the dividend for the then current dividend period have
been paid in full or declared and set aside for payment in full on all series of
Parity Preferred upon which like voting rights have been conferred and are
exercisable, the term of office of each Preferred Stock Director so elected
shall terminate. Any Preferred Stock Director may be removed at any time with or
without cause by, and shall not be removed otherwise than by the vote of, the
holders of record of a majority of the outstanding shares of the Series A
Preferred Stock when they have the voting rights described above (voting
separately as a class with all series of Parity Preferred upon which like voting
rights have been conferred and are exercisable). So long as a Preferred Dividend
Default shall continue, any
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<PAGE>
vacancy in the office of a Preferred Stock Director may be filled by written
consent of the Preferred Stock Director remaining in office, or if none remains
in office, by a vote of the holders of record of a majority of the outstanding
shares of Series A Preferred Stock when they have the voting rights described
above (voting separately as a class with all series of Parity Preferred upon
which like voting rights have been conferred and are exercisable). The Preferred
Stock Directors shall each be entitled to one vote per director on any matter.
So long as any shares of Series A Preferred Stock remain outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least two-thirds of the shares of the Series A Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (voting
separately as a class), amend, alter or repeal the provisions of the Charter or
the Designating Amendment, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of the Series A Preferred Stock or the holders
thereof; PROVIDED, HOWEVER, that with respect to the occurrence of any Event set
forth above, so long as the Series A Preferred Stock remains outstanding with
the terms thereof materially unchanged, the occurrence of any such Event shall
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of the Series A Preferred Stock and
PROVIDED, FURTHER that (i) any increase in the amount of the authorized
Preferred Stock or the creation or issuance of any other series of Preferred
Stock, or (ii) any increase in the amount of authorized shares of such series,
in each case ranking on a parity with or junior to the Series A Preferred Stock
with respect to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up, shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series A Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
CONVERSION
The Series A Preferred Stock is not convertible into or exchangeable for
any other property or securities of the Company.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital stock may be owned,
directly or indirectly, by five or fewer individuals (defined in the Code to
include certain entities) during the last half of a taxable year, and such
capital stock must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year. To ensure that the Company continues to meet the
requirements for qualification as a REIT, the Charter, subject to certain
exceptions, provides that no holder may own, or be deemed to own by virtue of
the attribution provisions of the Code, shares of the Company's capital stock in
excess of the Ownership Limit. The Board of Directors may waive the Ownership
Limit with respect to a shareholder if evidence satisfactory to the Board of
Directors and the Company's tax counsel is presented that the changes in
ownership will not then or in the future jeopardize the Company's status as a
REIT. Any transfer of capital stock or any security convertible into capital
stock that would result in a direct or indirect ownership of capital stock by a
shareholder in excess of the Ownership Limit or that would result in the failure
of the Company to meet the requirements for qualification as a REIT, including
any transfer that results in the capital stock being owned by fewer than 100
persons or results in the Company being "closely held" within the meaning of
section 856(h) of the Code, shall be null and void, and the intended transferee
will acquire no rights to the capital stock. The foregoing restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interests of the Company to attempt
to qualify, or to continue to qualify, as a REIT.
Capital stock owned, or deemed to be owned, or transferred to a shareholder
in excess of the Ownership Limit shall be deemed Excess Shares held by such
holder as agent on behalf of, and in trust for
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<PAGE>
the exclusive benefit of the transferees (which may include the Company) to whom
such capital stock may be ultimately transferred without violating the Ownership
Limit. While the Excess Shares are held in trust, the holder thereof will not be
entitled to vote, the Excess Shares will not be considered issued and
outstanding for purposes of any shareholder vote or the determination of a
quorum for such vote and, except upon liquidation, will not be entitled to
participate in dividends or other distributions. Any dividend or distribution
paid to a proposed transferee of Excess Shares prior to the discovery by the
Company that capital stock has been transferred in violation of the Ownership
Limitation shall be repaid to the Company upon demand.
Excess Shares are further subject to transfer at the direction of the Board
of Directors. If the Board of Directors directs a holder of Excess Shares to
sell such Excess Shares, such holder shall pay the Company out of the proceeds
of such sale all expenses incurred by the Company in connection with such sale
plus any remaining amount of such proceeds that exceeds the amount paid by such
holder for the Excess Shares.
In addition, the Company will have the right, for a period of six months
during the time any Excess Shares are held by the holder in trust, to redeem all
or any portion of the Excess Shares from the holder for the lesser of the price
paid for the capital stock by the holder or the market price (as determined in
the manner set forth in the Charter) of the capital stock on the date the
Company gives notice of its intent to redeem such Excess Shares. The six month
period begins on the date on which the Company receives written notice of the
transfer or other event resulting in the classification of capital stock as
Excess Shares.
Each shareholder shall upon demand be required to disclose to the Company
in writing any information with respect to the direct, indirect and constructive
ownership of beneficial interests in the Company as the Board of Directors deems
necessary to comply with the provisions of the Code applicable to REITs, to
comply with the requirements of any taxing authority or governmental agency or
to determine any such compliance.
The Ownership Limitation may have the effect of precluding acquisition of
control of the Company unless the Board of Directors determines that maintenance
of REIT status is no longer in the best interests of the Company.
TRANSFER AND DIVIDEND PAYING AGENT
AmSouth Bank of Alabama, N.A. will act as the transfer and dividend payment
agent in respect of the Series A Preferred Stock.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations is based
on current law, is for general information only, and is not tax advice. This
discussion does not purport to deal with all aspects of taxation that may be
relevant to particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax exempt organizations, financial institutions or broker dealers,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws. In
addition, this section does not discuss foreign, state or local taxation.
This discussion does not address fully the taxation of the Company or the
impact on the Company of its election to be taxed as a REIT. Such matters are
discussed in the accompanying Prospectus under "Federal Income Tax
Considerations." Prospective investors should consult, and must depend on,
their own tax advisors regarding the state, local, foreign and other tax
consequences of holding and disposing of Series A Preferred Stock.
TAXATION OF THE COMPANY
The Company currently has eight corporate subsidiaries and may have
additional corporate subsidiaries in the future. Code section 856(i) provides
that a corporation that is a "qualified REIT subsidiary" shall not be treated
as a separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income,
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<PAGE>
deduction, and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which has been held by the REIT at all
times during the period such corporation was in existence. Thus, in applying the
requirements described herein, and "qualified REIT subsidiaries" of the
Company will be ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiaries will be treated as assets,
liabilities, and items of income, deduction, and credit of the Company. The
Company's corporate subsidiaries are "qualified REIT subsidiaries." Such
subsidiaries, therefore, will not be subject to federal corporate income
taxation, although they may be subject to state and local taxation. See
"Federal Income Tax Considerations -- Taxation of the Company" in the
Prospectus.
DISTRIBUTIONS ON SERIES A PREFERRED STOCK
As long as the Company qualifies as a REIT, distributions that are made to
its shareholders out of the Company's current or accumulated earnings and
profits, and that are not designated as capital gain dividends, generally will
be taxed to shareholders as ordinary income, either in the year of payment or,
with respect to distributions declared in the last quarter of any year, payable
to shareholders of record on a specified date in such quarter, and paid by
January 31 of the following year, in the year of declaration, and will not be
eligible for the dividends received deduction for corporations. For purposes of
determining whether distributions on the Series A Preferred Stock are out of
current or accumulated earnings and profits, the Company's earnings and profits
will be allocated first to the Series A Preferred Stock and then allocated to
the Company's Common Stock. A distribution of net capital gain by the Company
generally will be treated as long term capital gain to shareholders to the
extent properly designated by the Company as a capital gain dividend, regardless
of the length of time a shareholder has held such shareholder's Series A
Preferred Stock. Under section 291 of the Code, however, corporate shareholders
may be required to treat up to 20% of any such capital gain as ordinary income.
Capital gain distributions also are not eligible for the dividends received
deduction for corporations. A distribution in excess of the Company's current or
accumulated earnings and profits will constitute a nontaxable return of capital
to the extent of the shareholder's basis in such shareholder's Series A
Preferred Stock, and will be applied to reduce the shareholder's basis in the
Series A Preferred Stock. To the extent such a distribution is greater than such
basis, generally it will be treated as capital gain to those shareholders
holding their Series A Preferred Stock as capital assets. The Company will
notify shareholders as to the portions of each distribution which, in its
judgment, constitute ordinary income, capital gain distributions or return of
capital. Should the Company incur ordinary or capital losses, shareholders will
not be entitled to include such losses in their own income tax returns.
REDEMPTION OF SERIES A PREFERRED STOCK
A redemption of shares of Series A Preferred Stock for cash generally will
be treated as a sale or exchange if the holder of such redeemed shares does not
own, actually or constructively within the meaning of Section 318 of the Code,
any stock of the Company other than the redeemed Series A Preferred Stock. If a
shareholder does own, actually or constructively, such other stock (including
Series A Preferred Stock not redeemed), a redemption of Series A Preferred Stock
may be treated as a dividend to the extent of the Company's current or
accumulated earnings and profits. Such dividend treatment would not apply if the
redemption were "not essentially equivalent to a dividend" with respect to the
shareholder under Section 302(b)(1) of the Code. A distribution to a shareholder
will be "not essentially equivalent to a dividend" if it results in a
"meaningful reduction" in the shareholder's stock interest in the Company. For
this purpose, a redemption of Series A Preferred Stock that results in a
reduction in the proportionate interest in the Company (taking into account any
ownership of Common Stock and any stock constructively owned) of a shareholder
whose relative stock interest in the Company is minimal and who exercises no
control over corporate affairs should be regarded as a meaningful reduction in
the shareholder's stock interest in the Company. If the redemption of the Series
A Preferred Stock for cash is not treated as a distribution taxable as a
dividend, the redemption will result in capital gain or loss equal to the
difference between the amount of cash received by the shareholder and the
shareholder's adjusted tax basis in the Series A Preferred Stock redeemed.
If a redemption of Series A Preferred Stock is treated as a distribution
that is taxable as a dividend, the shareholder's adjusted tax basis in the
redeemed Series A Preferred Stock will be transferred to any
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<PAGE>
remaining stock holdings in the Company. If the shareholder does not retain any
stock ownership in the Company, the holder may lose such basis entirely.
UNDERWRITING
Morgan Keegan & Company, Inc. and J.C. Bradford & Co. (the
"Underwriters"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Series A Preferred Stock set forth opposite their respective names
below:
UNDERWRITER NUMBER OF SHARES
- ------------------------------------- ----------------
Morgan Keegan & Company, Inc.........
J.C. Bradford & Co...................
----------------
Total........................... 1,200,000
================
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Series A Preferred Stock offered hereby (other
than those covered by the over-allotment option described below) if any such
shares are purchased. The Company has been advised by the Underwriters that the
Underwriters propose to offer the Series A Preferred Stock to the public at the
offering price set forth on the cover page of this Prospectus Supplement and to
certain dealers at such price less a concession not in excess of $
per share of Series A Preferred Stock. The Underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per share to other
dealers. The public offering price and the concessions and discount to dealers
may be changed by the Underwriters after the initial offering.
The Company has granted to the Underwriters an option, expiring on the
close of business on the thirtieth day subsequent to the date of this Prospectus
Supplement to purchase up to an additional 180,000 shares of Series A Preferred
Stock at the public offering price, less underwriting discount, as shown on the
cover page of this Prospectus Supplement. The Underwriters may exercise such
option solely for the purpose of covering over-allotments incurred in the sale
of the Series A Preferred Stock. To the extent that the Underwriters exercise
such option, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Series A Preferred Stock set forth next to
such Underwriter's name in the preceding table bears to the total offered
initially.
The Company and the Operating Partnership have agreed to indemnify the
several Underwriters or to contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company has applied to list the Series A Preferred Stock on the NYSE
under the symbol "MAA PrA." If approved, trading of the Series A Preferred
Stock on the NYSE is expected to commence within a seven-day period after the
initial delivery of the Series A Preferred Stock. Prior to the Offering, there
has been no public market for the shares of Series A Preferred Stock. The
Underwriters have advised the Company that each intends to make a market in the
Series A Preferred Stock prior to the commencement of trading on the NYSE, but
is not obligated to do so and may discontinue market making at any time without
notice.
LEGAL MATTERS
Certain legal matters, including the legality of the Series A Preferred
Stock being offered hereby, are being passed upon for the Company by Baker,
Donelson, Bearman & Caldwell. Certain legal matters related to the Offering are
being passed upon for the Underwriters by Hunton & Williams.
S-35
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS SUPPLEMENT AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH THEY RELATE, NOR DO THEY CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT, THE ACCOMPANYING PROSPECTUS, NOR ANY SALE OR OFFER
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
SUMMARY TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
---------------------
Prospectus Supplement Summary .................................... S-1
Risk Factors ..................................................... S-9
Use of Proceeds .................................................. S-15
Capitalization ................................................... S-16
Selected Financial and Operating Data ............................ S-16
Management's Discussion and Analysis of
Financial Condition and Results of Operations .................. S-19
Properties ....................................................... S-24
Management ....................................................... S-26
Security Ownership of Management ................................. S-27
Description of Series A Preferred Stock .......................... S-28
Certain Federal Income Tax Considerations ........................ S-33
Underwriting ..................................................... S-35
Legal Matters .................................................... S-35
PROSPECTUS
----------
Available Information ............................................ 2
Incorporation of Certain Documents by Reference .................. 3
Prospectus Summary ............................................... 4
Price and Dividend History ....................................... 6
Use of Proceeds .................................................. 6
Consolidated Ratios of Earnings to Fixed Charges ................. 6
Description of the Capital Stock of the Company .................. 7
Federal Income Tax Considerations ................................ 11
Description of Debt Securities ................................... 20
Description of Securities Warrants ............................... 30
Plan of Distribution ............................................. 32
Experts .......................................................... 33
Legal Matters .................................................... 33
1,200,000 SHARES
MID-AMERICA
APARTMENT
COMMUNITIES, INC.
% SERIES A CUMULATIVE
PREFERRED STOCK
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MORGAN KEEGAN & COMPANY, INC.
J.C. BRADFORD & CO.
October , 1996
================================================================================
