PROSPECTUS SUPPLEMENT [LOGO]
(TO PROSPECTUS DATED MAY 14, 1996)
1,750,000 SHARES
MID-AMERICA APARTMENT COMMUNITIES, INC.
9.5% SERIES A CUMULATIVE PREFERRED STOCK
LIQUIDATION PREFERENCE $25 PER SHARE
------------------------
Dividends on the 9.5% 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 9.5% per annum of the
$25 liquidation preference (the "Liquidation Preference") per share
(equivalent to a fixed annual amount of $2.375 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... $25.00 $.96875 $24.03125
- -------------------------------------------------------------------------------
Total(3).... $43,750,000 $1,695,313 $42,054,687
================================================================================
(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 250,000 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 $50,000,000,
$1,937,500 and $48,062,500, 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 16, 1996.
MORGAN KEEGAN & COMPANY, INC. J.C. BRADFORD & CO.
OCTOBER 10, 1996
<PAGE>
Mid-America Apartment Communities, Inc.
[Map]
[Investment in Real Estate by State chart]
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
and related assumption of debt valued at approximately $120 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;
S-1
<PAGE>
o compensating all employees through performance-based compensation
programs and employee stock ownership programs;
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
- ------------------------------------- --------------------- ------
# 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>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered................... 1,750,000 shares of 9.5% Series A Cumulative Preferred Stock (2,000,000 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 9.5% 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.
</TABLE>
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 $7.4 million net decrease in total debt in
connection with the above-described transactions based on the June 30, 1996
interest rate for the Credit Line of 7.25% as if such debt had been decreased 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........................... 12,491 12,789 10,436 24,942 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.......... 8,800 7,267 5,172 16,001 12,307 8,778 2,409 532
Gain on disposition of properties.... -- 1,966 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest and extraordinary item.... 8,800 9,233 5,172 16,001 12,307 8,778 2,409 532
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 7,193 $ 7,536 $ 3,997 $ 13,079 $ 9,810 $ 6,944 $ 2,542 $ 1,090
Preferred dividends(4)............... $ 2,078 -- -- $ 4,156 -- -- -- --
Net income available for common
shares............................. $ 5,115 $ 7,536 $ 3,997 $ 8,923 $ 9,810 $ 6,944 $ 2,542 $ 1,090
Net income per weighted average
common share outstanding........... $ 0.47 $ 0.69 $ 0.46 $ 0.81 $ 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........................... $314,351 $ 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)........................... $240,663 $ 198,796 $ 202,232 $ 202,278 $ 152,385 $ (4,684) $ (4,493)
OTHER DATA (AT END OF PERIOD):
Funds from operations(5)............. $ 17,501 $ 17,548 $ 12,251 $ 31,730 $ 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)....................... 1.56 x 1.52x 1.45x 1.50 x 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)................. 2.11 x 2.25x 2.07x 2.00 x 2.13x 2.51x 1.65x 1.40x
Ratio of total debt to total
capitalization(9).................. 45.1 % 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>
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 1,750,000 shares of
preferred stock will be issued and outstanding (2,000,000 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 $41.9 million
(approximately $47.9 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 a 77.9% interest, in
exchange for 1,750,000 (2,000,000 if the Underwriters' over-allotment option is
exercised in full) units of 9.5% 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 $32.2
million (approximately $38.2 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
1,750,000 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 $ 314,351
MINORITY INTEREST.................... 40,228 40,228
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
5,000,000 shares authorized, no
shares issued and outstanding,
1,750,000 shares 9.5% Series A
Cumulative Preferred Stock,
Liquidation Preference $25 per
share, issued and outstanding,
as adjusted..................... -- 18
Common Stock, $0.01 par value,
20,000,000 shares authorized,
10,940,962 shares issued and
outstanding..................... 109 109
Additional paid-in-capital......... 208,752 250,601
Unearned compensation.............. (320) (320)
Accumulated deficit................ (9,745) (9,745)
---------- -----------
Total shareholders' equity...... $ 198,796 $ 240,663
---------- -----------
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 $7.4 million net decrease in total debt
in connection with the above-described transactions based on the June 30, 1996
interest rate for the Credit Line of 7.25% as if such debt had been decreased 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-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........................... 12,491 12,789 10,436 24,942 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.......... 8,800 7,267 5,172 16,001 12,307 8,778 2,409 532
Gain on disposition of properties.... -- 1,966 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest and extraordinary item.... 8,800 9,233 5,172 16,001 12,307 8,778 2,409 532
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 7,193 $ 7,536 $ 3,997 $ 13,079 $ 9,810 $ 6,944 $ 2,542 $ 1,090
Preferred dividends(4)............... $ 2,078 -- -- $ 4,156 -- -- -- --
Net income available for common
shares............................. $ 5,115 $ 7,536 $ 3,997 $ 8,923 $ 9,810 $ 6,944 $ 2,542 $ 1,090
Net income per weighted average
common share outstanding........... $ 0.47 $ 0.69 $ 0.46 $ 0.81 $ 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........................... $314,351 $ 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)........................... $240,663 $ 198,796 $ 202,232 $ 202,278 $ 152,385 $ (4,684) $ (4,493)
OTHER DATA (AT END OF PERIOD):
Funds from operations(5)............. $ 17,501 $ 17,548 $ 12,251 $ 31,730 $ 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)....................... 1.56 x 1.52x 1.45x 1.50 x 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)................. 2.11 x 2.25x 2.07x 2.00 x 2.13x 2.51x 1.65x 1.40x
Ratio of total debt to total
capitalization(9).................. 45.1 % 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>
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 DECEMBER 31,
SIX MONTHS ENDED JUNE 30, 1995 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) $1,442,000
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) $12,099,000 for full year's operation of the 32 Properties
acquired in 1994, and (iii) $713,000 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 $2,998,000 for "recurring"
capital expenditures, including carpet and appliances, at Properties owned
throughout both periods and averaged $226 per unit, or $452 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 $519,000. 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>
ENCUMBRANCES AT
-----------------------------------
JUNE 30, 1996
-----------------------------------
MORTGAGE INTEREST MATURITY
PROPERTY PRINCIPAL RATE DATE
- ------------------------- ----------- -------- --------
Calais Forest............ $ 5,610,000 8.915% 12/01/99
Whispering Oaks.......... $ 3,000,000 8.915% 12/01/99
-----------
$ 8,610,000
-----------
Marsh Oaks............... -(2) -(2) -(2)
Anatole.................. $ 7,000,000 5.280% 09/01/05
Cooper's Hawk............ -(7) -(7) -(7)
Lakeside................. -(2) -(2) -(2)
St. Augustine............ -(7) -(7) -(7)
Woodbridge at the Lake... $ 3,769,091 -(1) -(1)
Savannahs at James
Landing.................. -(7) -(7) -(7)
Belmere.................. - - -
Sailwinds at Lake
Magdalene................ $15,950,000 8.915% 12/01/99
-----------
$26,719,091
-----------
Shenandoah Ridge......... -(2) -(2) -(2)
Hollybrook............... $ 2,520,000 8.915% 12/01/99
-----------
$ 2,520,000
-----------
Lakepointe............... $ 2,584,190 8.750% 06/15/97
Mansion, The............. $ 4,140,000 8.915% 12/01/99
Village, The............. $ 5,300,903 8.750% 06/15/97
Stonemill Village........ -(6) -(6) -(6)
-----------
$12,025,093
-----------
Canyon Creek
(Wedgefield)............. -(6) -(6) -(6)
Riverhills............... $ 894,253 7.000% 05/01/13
Advantages, The.......... -(6) -(6) -(6)
Lakeshore Landing........ -(6) -(6) -(6)
Pear Orchard............. $ 8,704,365 10.000% 11/01/97
Pine Trails.............. $ 1,414,174 7.000% 04/01/15
Reflection Pointe........ $ 6,247,837 7.000% 09/01/10
Somerset Place........... -(2) -(2) -(2)
Woodridge................ $ 4,863,717 6.500% 10/01/27
-----------
$22,124,346
-----------
Summit Ridge............. $ 5,800,000 9.500% 08/01/96
Woodstream............... $ 5,598,856 9.250% 12/01/98
Corners, The............. $ 4,452,887 7.850% 06/15/03
-----------
$15,851,743
-----------
Fairways at Royal Oak.... -(2) -(2) -(2)
Tanglewood............... $ 2,685,832 7.600% 11/15/02
The Fairways............. $ 7,689,191 8.500% 03/01/33
Highland Ridge........... -(3) -(3) -(3)
Park Haywood............. -(2) -(2) -(2)
Spring Creek............. -(3) -(3) -(3)
Runaway Bay.............. -(3) -(3) -(3)
-----------
$10,375,023
-----------
S-24
<PAGE>
<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>
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>
ENCUMBRANCES AT
-----------------------------------
JUNE 30, 1996
-----------------------------------
MORTGAGE INTEREST MATURITY
PROPERTY PRINCIPAL RATE DATE
- --------------------------- ----------- -------- --------
Hamilton Pointe............ -(6) -(6) -(6)
Hidden Creek............... -(6) -(6) -(6)
Steeplechase............... -(2) -(2) -(2)
Oaks, The.................. -(6) -(6) -(6)
Post House Jackson......... $ 5,196,780 8.170% 10/01/27
Post House North........... $ 3,845,000 4.840% 09/01/25
Williamsburg Village....... -(2) -(2) -(2)
Woods at Post House........ $ 5,351,363 7.250% 09/01/35
Cedar Mill................. $ 2,548,622 -(4) -(4)
Clearbrook Village......... $ 1,256,216 9.000% 04/01/08
Crossings.................. -(6) -(6) -(6)
East View.................. $ 3,905,792 8.625% 12/01/99
Greenbrook................. $15,869,216 -(5) -(5)
Hickory Farm............... -(6) -(6) -(6)
Kirby Station.............. $ 6,085,370 10.000% 12/01/96
Lincoln on the Green....... -(2) -(2) -(2)
McKellar Woods............. $ 8,569,254 -(5) -(5)
Nineteenth Green........... -(6) -(6) -(6)
Park Estate................ $ 1,508,855 -(5) -(5)
Winchester Square.......... -(6) -(6) -(6)
Brentwood Downs............ $ 6,678,000 8.915% 12/01/99
Park at Hermitage.......... $ 8,480,000 5.790% 01/31/15
-----------
$69,294,468
-----------
Stassney Woods............. $ 4,975,000 6.600% 04/01/19
Travis Station............. $ 4,400,000 6.600% 04/01/19
Redford Park............... $ 3,000,000 9.006% 12/01/04
Celery Stalk............... $ 8,460,000 9.006% 12/01/04
Lodge at Timberglen (Falls,
The)..................... $ 4,740,000 9.006% 12/01/04
MacArthur Ridge............ $ 7,706,157 7.400% 08/15/98
Westborough................ $ 3,958,000 9.006% 12/01/04
Lane at Towne Crossing..... $ 5,784,178 8.750% 01/01/98
Cypresswood Court.......... $ 3,330,000 9.006% 12/01/04
Green Tree Place........... $ 3,180,000 9.006% 12/01/04
-----------
$49,533,335
-----------
Township Woods in
Hampton.................. $10,800,000 8.750% 11/01/09
-----------
Total.............. $227,853,099
===========
- ------------
(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 9.5% per annum of the
Liquidation Preference per share (equivalent to a fixed annual amount of $2.375
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
S-29
<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
S-30
<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
S-31
<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
S-32
<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,
S-33
<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
S-34
<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......... 875,000
J.C. Bradford & Co................... 875,000
----------------
Total........................... 1,750,000
================
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 $.58 per share
of Series A Preferred Stock. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $.25 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 250,000 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
1,750,000 SHARES
MID-AMERICA
APARTMENT
COMMUNITIES, INC.
9.5% SERIES A CUMULATIVE
PREFERRED STOCK
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MORGAN KEEGAN & COMPANY, INC.
J.C. BRADFORD & CO.
October 10, 1996
================================================================================
<PAGE>
PROSPECTUS
MID-AMERICA APARTMENT COMMUNITIES, INC.
$150,000,000
DEBT SECURITIES, PREFERRED STOCK, COMMON
STOCK AND SECURITIES WARRANTS
Mid-America Apartment Communities, Inc. (the "Company") may from time to
time offer and sell in one or more series (i) its unsecured debt securities (the
"Debt Securities"); (ii) shares of its preferred stock, par value $.01 per share
(the "Preferred Stock"); (iii) shares of its common stock, par value $.01 per
share ("Common Stock"); or (iv) warrants to purchase Debt Securities (the "Debt
Securities Warrants"), warrants to purchase Preferred Stock (the "Preferred
Stock Warrants") and warrants to purchase Common Stock (the "Common Stock
Warrants") (the Debt Securities Warrants, Preferred Stock Warrants and Common
Stock Warrants, collectively, the "Securities Warrants"), with an aggregate
public offering price of up to $150,000,000. The Debt Securities, Preferred
Stock, Common Stock and Securities Warrants offered pursuant hereto
(collectively, the "Offered Securities") may be offered separately or together,
in separate series, in amounts and at prices and terms to be set forth in an
accompanying supplement to this Prospectus (a "Prospectus Supplement"). The
aggregate public offering price and terms of the Offered Securities will be
determined by market conditions at the time such securities are offered. Unless
otherwise specified in a Prospectus Supplement, the proceeds from the sale of
the Offered Securities will be received by the Company and used for general
corporate purposes.
The applicable Prospectus Supplement shall set forth (i) with respect to
the Debt Securities, the specific title, aggregate principal amount, currency,
form (which may be registered or bearer, or certificated or global), authorized
denominations, maturity, rate (or manner of calculation thereof) and time of
payment of interest, terms for redemption at the option of the Company or
repayment at the option of the Holder, any sinking fund provisions and any
conversion provisions, (ii) with respect to Preferred Stock, the specific
designation and stated value per share, any dividend, liquidation, redemption,
conversion, voting and other rights, and all other specific terms of the
Preferred Stock, (iii) with respect to the Common Stock, the specific number of
shares and issuance price per share, and (iv) with respect to the Securities
Warrants, the duration, offering price, exercise price and detachability. The
applicable Prospectus Supplement will also contain information, where
applicable, about all material United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by such Prospectus Supplement.
The Offered Securities may be sold on a negotiated or competitive bid basis
to or through underwriters or dealers designated from time to time or by the
Company, directly or through agents, to other purchasers. Certain terms of any
offering and sale of Offered Securities, including, where applicable, the names
of the underwriters, dealers or agents, if any, the principal amount or number
of shares or Securities Warrants to be purchased, the purchase price of the
Offered Securities, any applicable commissions, discounts and other compensation
to underwriters, dealers and agents, and the proceeds to the Company from such
sale, will be set forth in, or calculable from information contained in, a
Prospectus Supplement. See "Plan of Distribution."
The Common Stock is listed on the New York Stock Exchange under the symbol
"MAA." To ensure that the Company maintains its qualification as a REIT,
ownership by any person is limited to 9.9% of the outstanding shares of Common
Stock, with certain exceptions.
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.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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.
The date of this Prospectus is May , 1996.
<PAGE>
IN CONNECTION WITH AN OFFERING, THE UNDERWRITERS FOR SUCH OFFERING MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE SECURITIES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE,
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained or incorporated by
reference in this Prospectus or any Prospectus Supplement in connection with the
offering covered by this Prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell, or a solicitation
of an offer to buy, any Offered Securities, in any jurisdiction where, or to any
person to whom, it is unlawful to make any such offer or solicitation. Neither
the delivery of this Prospectus nor any offer or sale made hereunder shall,
under any circumstances, create an implication that there has not been any
change in the facts set forth in this Prospectus or in the affairs of the
Company since the date hereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"), pursuant to the Exchange
Act. Such reports, proxy statements and other information filed by the Company
may be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and are also available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048 and at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. The Common Stock of the
Company is listed on the New York Stock Exchange, and such material can also be
inspected and copied at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-3 under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations promulgated thereunder, with respect to the securities offered
pursuant to this Prospectus. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and financial schedules thereto. For further
information concerning the Company and the securities offered hereby, reference
is made to the Registration Statement and the exhibits and schedules filed
therewith, which may be examined without charge at, or copies obtained upon
payment of prescribed fees from, the Commission at its regional offices at the
locations listed above. Any statements contained herein concerning the
provisions of any document are not necessarily complete, and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by America First REIT, Inc. (File
No. 1-11798), which, by means of a merger with and into a wholly owned
subsidiary of the Company, on June 29, 1995 became a wholly owned subsidiary of
the Company, with the Commission are incorporated herein by reference:
(a) Annual Report on Form 10-K for the year ended December 31, 1994; and
(b) Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
The following documents heretofore filed by the Company with the Commission
(File No. 1-12762) are incorporated herein by reference:
(a) Annual Report on Form 10-K for the year ended December 31, 1995;
(b) Current Reports on Form 8-K dated February 5, 1996 and March 15, 1996,
respectively;
(c) pages 2 through 10 of the Company's Proxy Statement for its 1996 Annual
Meeting of Shareholders; and
(d) the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A filed with the Commission on
December 14, 1993.
<PAGE>
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the filing of a post-effective amendment which indicates that all Offered
Securities offered hereby have been sold or which deregisters all Offered
Securities then remaining unsold shall be incorporated by reference in this
Prospectus and made a part hereof from the date of the filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
document subsequently filed with the Commission which also is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents incorporated by reference herein (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Request for such copies should be
directed to: Mid-America Apartment Communities, Inc., 6584 Poplar Avenue, Suite
340, Memphis, Tennessee, 38138, Attention: Lynn A. Johnson, Secretary, telephone
(901) 682-6600.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
descriptions and the financial information and statements appearing elsewhere
and incorporated in this Prospectus. As used herein, the term "Company" includes
Mid- America Apartment Communities, Inc. and its predecessor and those entities
owned or controlled thereby (collectively, the "Operating Subsidiaries"),
including Mid-America Apartments, L.P. and its subsidiaries (the "Operating
Partnership") and seven wholly owned subsidiaries that are "qualified REIT
subsidiaries" for Federal tax purposes. Where used herein, the term "Funds from
Operations" ("FFO") shall mean net income (computed in accordance with generally
accepted accounting principles), excluding gains (losses) from debt
restructuring, sales of property and other extraordinary items, plus
depreciation and amortization, and after adjustments for consolidated
partnerships and joint ventures, which definition has been adopted by the
National Association of Real Estate Investment Trusts ("NAREIT"). Effective
January 1, 1996, the Company implemented the modified NAREIT definition of FFO
to eliminate amortization of deferred financing costs and depreciation of
non-real estate assets as items added back to net income.
THE COMPANY
General
The Company, a Tennessee corporation, is a self- administered and
self-managed equity REIT which invests in and operates multifamily residential
properties. As of March 31, 1996, the Company owns 71 apartment communities
containing 18,660 units in 13 states (the "Properties"), and has grown by 13,080
units since the Company's initial public offering which was completed in
February 1994 (the "Initial Offering"), an increase of 234% 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 Arizona, Kentucky, Missouri, Ohio and Virginia.
Since the Initial Offering, the Company has expanded geographically from having
apartment communities in 4 states to its current presence in 13 states. Of the
Company's properties, 48 contain more than 200 units, with the largest apartment
community containing 1,031 units. As of March 1, 1996, the Properties had an
average occupancy rate of 95.8%. The Properties are characterized by amenities
which may include extensive landscaping, swimming pools, tennis courts, fitness
centers, saunas or hot tubs. Many apartment units offer one or more additional
features, such as vaulted ceilings, fireplaces and washer and dryer connections.
The Company's principal executive offices are located at 6584 Poplar
Avenue, Suite 340, Memphis, Tennessee, 38138 and its telephone number is (901)
682-6600.
The Operating Subsidiaries of the Company
The operations of the Company are conducted primarily through the Operating
Subsidiaries, so that, among other things, the Company is able to comply with
certain technical and complex requirements under the federal tax law relating to
the assets and income that a REIT may hold or earn.
The Company presently holds an 82.3% partnership interest in the Operating
Partnership. The remaining 17.7% partnership interest in the Operating
Partnership is owned by third parties who own units of limited partnership
interests in the Operating Partnership ("Units"). Units are redeemable on a
one-for-one basis for shares of Common Stock or, at the Company's election, for
cash, and holders of Units generally receive distributions per Unit equal to the
dividend per share paid in respect of the Common Stock. The Amended and Restated
Agreement of Limited Partnership of the Operating Partnership (the "Partnership
Agreement") provides for a special allocation of net income or loss of the
Operating Partnership to holders of Units to provide such holders with the
economic effect of net income or losses realized in respect of all Properties on
a consolidated basis.
<PAGE>
Tax Status of the Company
The Company elected to be taxed as a REIT for federal income tax purposes
for its taxable year ended December 31, 1994, and expects to continue to elect
such status. Although the Company believes that it was organized and has been
operating in conformity with the requirements for qualification as a REIT under
the Internal Revenue Code of 1986, as amended (the "Code") ("REIT
Qualification"), no assurance can be given that the Company will continue to
qualify as a REIT. REIT Qualification involves application of highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations. If in any taxable year the Company should fail
to qualify as a REIT, the Company would not be allowed a deduction for
distributions to shareholders for computing taxable income and would be subject
to federal taxation at regular corporate rates. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
REIT Qualification was lost. As a result, the Company's ability to make
distributions to its shareholders would be adversely affected. See "Federal
Income Tax Considerations."
To ensure that the Company qualifies as a REIT, transfer of the Common
Stock is subject to certain restrictions and ownership of the Common Stock by
any single person is limited to 9.9% of the total number of shares of
outstanding Common Stock, subject to certain exceptions. As provided in the
Company's Charter, any purported transfer in violation of the above-described
ownership limitations shall be void.
<PAGE>
PRICE AND DIVIDEND HISTORY
The Common Stock has been traded on the New York Stock Exchange ("NYSE")
under the symbol "MAA" since the Company's Initial Offering. The following table
sets forth the quarterly high and low sales prices per share reported on the
NYSE and the Company's distribution history.
<TABLE>
<CAPTION>
Portion of
Distribution
Representing
Distribution Return of
Period or Quarter Ended: High Low Per Share Capital
<S> <C> <C> <C> <C>
1994:
First Quarter, commencing January 28 $24 1/2 $20 3/4 $.26(1) $.12(1)
Second Quarter $27 $22 3/4 $.45 $.20
Third Quarter $26 7/8 $24 1/8 $.50 $.23
Fourth Quarter $26 3/4 $23 1/4 $.50 $.22
1995:
First Quarter $26 $25 3/4 $.50 $.13
Second Quarter $25 $24 3/4 $.50 $.14
Third Quarter $24 3/4 $24 5/8 $.50 $.14
Fourth Quarter $24 7/8 $24 3/8 $.51 $.14
1996:
First Quarter $26 3/4 $24
<FN>
(1) Represents the distribution per share, including the
portion representing a return of capital, paid for the 56-
day period ended March 31, 1994.
</FN>
</TABLE>
On March 29, 1996 the last reported sale price of the Common Stock on the
NYSE was $25.75 per share. On March 29, 1996 the Company had approximately
15,040 shareholders of record.
USE OF PROCEEDS
Unless otherwise described in the Prospectus Supplement which accompanies
this Prospectus, the Company intends to use the net proceeds from the sale of
the Offered Securities for general corporate purposes, which may include the
acquisition and development of multifamily properties as suitable opportunities
arise, the improvement of certain properties in the Company's portfolio and the
repayment of certain then-outstanding secured or unsecured indebtedness.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings to fixed
charges of the Company and for the predecessor to the Company prior to February
4, 1994:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges .89x(1) 1.07x 1.32x 1.83x 1.52x
<FN>
(1) Although the Company and its predecessor have historically generated
positive net cash flow, the financial statements of the predecessor reflect a
net loss for 1991. Consequently, the computation of the ratio of earnings to
fixed charges for such year indicates that earnings were inadequate to cover
fixed charges by approximately $906,000.
</FN>
</TABLE>
<PAGE>
For the purpose of calculating the ratio or earnings to fixed charges,
earnings consist of income before minority interest and extraordinary items, and
fixed charges. Fixed charges consist of interest expense, capitalized interest
and amortization of deferred financing costs. To date, the Company has not
issued any Preferred Stock; therefore, the ratios of earnings to combined fixed
charges and preferred stock dividend requirements are the same as the ratios of
earnings to fixed charges presented above.
<PAGE>
DESCRIPTION OF THE CAPITAL STOCK OF THE COMPANY
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock. Each outstanding share
of Common Stock entitles the holder to one vote on all matters presented to
shareholders for a vote.
Common Stock
Subject to such preferential rights as may be granted by the Board of
Directors in connection with the future issuance of Preferred Stock, holders of
shares of Common Stock are entitled to one vote per share on all matters to be
voted on by shareholders and are entitled to receive ratably such dividends as
may be declared in respect of the Common Stock by the Board of Directors in its
discretion from funds legally available therefor. ln the event of the
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of all debts
and other liabilities and any liquidation preference of the holders of Preferred
Stock. Holders of Common Stock have no subscription, redemption, conversion or
preemptive rights. Matters submitted for shareholder approval generally require
a majority vote of the shares present and voting thereon. The outstanding shares
of Common Stock are fully paid and nonassessable.
Preferred Stock
The Board of Directors is empowered by the Company's Charter to designate
and issue from time to time one or more classes or series of Preferred Stock
without shareholder approval. The Board of Directors may fix the relative
rights, limitations, preferences and privileges of each class or series of
Preferred Stock so issued. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred Stock,
it may afford the holders in any series or class of Preferred Stock preferences,
powers and rights, voting or otherwise, senior to the rights of holders of
Common Stock. The issuance of Preferred Stock could have the effect of delaying
or preventing a change in control of the Company. As of the date hereof, no
shares of Preferred Stock are outstanding.
The applicable Prospectus Supplement will describe each of the following
terms that may be applicable in respect of any Preferred Stock offered and
issued pursuant to this Prospectus: (1) the specific designation, number of
shares, seniority and purchase price; (2) any liquidation preference per share;
(3) any maturity date; (4) any mandatory or option redemption or repayment dates
and terms or sinking fund provisions; (5) any dividend rate or rates and the
dates on which any dividends will be payable (or the method by which such rates
or dates will be determined); (6) any voting rights; (7) any rights to convert
the Preferred Stock into other securities or rights of the Company, including a
description of the securities or rights into which such Preferred Stock is
convertible (which may include other Preferred Stock) and the terms and
conditions upon which such conversions will be effected, including, without
limitation, conversion rates or formulas, conversion periods and other related
provisions; (8) the place or places where dividends and other payments with
respect to the Preferred Stock will be payable; (9) any additional voting,
dividend, liquidation, redemption and other rights, preferences, privileges,
limitations and restrictions, including restrictions imposed for the purpose of
maintaining the Company's qualification as a REIT. Upon issuance and delivery
against payment therefor, the Preferred Stock will be fully paid and
nonassessable.
Charter and Bylaw Provisions
Shareholders' rights and related matters are governed by the Tennessee
Business Corporation Act (the "TBCA"), the Company's Charter and its Bylaws.
Certain provisions of the Charter and Bylaws of the Company, which are
summarized below, may make it more difficult to change the composition of the
Board of Directors and may discourage or make more difficult any attempt by a
person or group to obtain control of the Company.
<PAGE>
Voting Requirement. The Company's Charter may not be amended without the
affirmative vote of at least a majority of the shares entitled to vote generally
in the election of directors, voting as a single voting group. The Company's
Bylaws may be amended by either the affirmative vote of a majority of all shares
outstanding and entitled to vote generally in the election of directors, voting
as a single group, or by an affirmative vote of a majority of the Board of
Directors then holding office, unless the shareholders prescribe that any such
bylaw may not be amended or repealed by the Board of Directors. Notwithstanding
the foregoing, the Company cannot take any action intended to terminate its
qualification as a REIT without the affirmative vote of at least two-thirds of
the outstanding shares of Common Stock.
Special Meetings. Under the Company's Bylaws, special meetings of the
shareholders may be called by shareholders only if such shareholders hold
outstanding shares representing more than 50% of all votes entitled to be cast
on any issue proposed to be considered at any such special meeting.
Staggered Board of Directors. The Company's Board of Directors is divided
into three classes of directors serving staggered three year terms. A majority
of the directors must be persons who are not officers of the Company. The
requirements for a majority of independent directors and the provisions for
staggered terms of directors may not be changed without approval of a majority
of the shareholders or by 80% of the members of the Board of Directors. Certain
provisions of the Company's Charter, including the use of a staggered board, may
render more difficult a change in control of the Company or removal of incumbent
management.
Advance Notice of Director Nominations and New Business. The Bylaws of the
Company provide that with respect to an annual meeting of shareholders, the
proposal of business to be considered by shareholders may be made only (i) by or
at the direction of the Board of Directors, or (ii) by a shareholder who has
complied with the advance notice procedures set forth in the Bylaws. In
addition, with respect to any meeting of shareholders, nominations of persons
for election to the Board of Directors may be made only (i) by or at the
direction of the Board of Directors or (ii) by any shareholder of the Company
who is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
The advance notice provisions of the Bylaws could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their shares
over the then prevailing market price or which such holders might believe to be
otherwise in their best interests.
Limitation of Directors' Liability
The Company's Charter eliminates, subject to certain exceptions, the
personal liability of a director to the Company or its shareholders for monetary
damages for breaches of such director's duty of care or other duties as a
director. The Charter does not provide for the elimination of or any limitation
on the personal liability of a director for (i) any breach of a director's duty
of loyalty to the Company, (ii) acts or omissions which involve intentional
misconduct or knowing violations of law, (iii) unlawful corporate distributions,
or (iv) acts or omissions which involve transactions from which the director
derived an improper personal benefit. The Charter of the Company further
provides that if the TBCA is amended to authorize corporate action further
eliminating or limiting the personal liability of a director of the Company
shall be eliminated or limited to the fullest extent permitted by the TBCA, as
amended. These provisions of the Charter will limit the remedies available to a
shareholder in the event of breaches of any director's duties to such
shareholder of the Company.
<PAGE>
Tennessee Anti-Takeover Statutes
In addition to certain of the Company's Charter provisions discussed above,
Tennessee has adopted a series of statutes which can have an anti-takeover
effect and may delay or prevent a tender offer or takeover attempt that a
shareholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the Common Stock.
Under the Tennessee Investor Protection Act, unless a company's board of
directors has recommended a takeover offer to shareholders no offeror
beneficially owning 5% or more of any class of equity securities of the offeree
company, any of which was purchased within one year prior to the proposed
takeover offer (unless the offeror, before making such purchase, has made a
public announcement of his intention with respect to changing or influencing the
management or control of the offeree company, has made a full, fair and
effective disclosure of such intention to the person from whom he intends to
acquire such securities and has filed with the Tennessee Commissioner of
Commerce and Insurance (the "Commissioner") and the offeree company a statement
signifying such intentions and containing such additional information as the
Commissioner by rule prescribes), may offer to acquire any class of equity
security of an offeree company pursuant to a tender offer if after the
acquisition thereof the offeror would be directly or indirectly a beneficial
owner of more than 10% of any class of outstanding equity securities of the
company (a "Takeover Offer"). Such an offeror must provide that any equity
securities of an offeree company deposited or tendered pursuant to a Takeover
Offer may be withdrawn by an offeree at any time within seven days from the date
the offer has become effective following filing with the Commissioner and the
offeree company and public announcement of the terms or after 60 days from the
date the offer has become effective. If an offeror makes a Takeover Offer for
less than all the outstanding equity securities of any class, and if the number
of securities tendered is greater than the number the offeror has offered to
accept and make for, the securities shall be accepted pro rata. If an offeror
varies the terms of a Takeover Offer before its expiration date by increasing
the consideration offered to offeree, the offeror shall make the increased
consideration for all equity securities accepted, whether accepted before or
after the variation in the terms of the offer.
Under the Tennessee Business Combination Act, subject to certain
exceptions, no Tennessee corporation may engage in any "business combination"
with an "interested shareholder" for a period of five years following the date
that such shareholder became an interested shareholder unless prior to such date
the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the shareholder becoming an
interested shareholder.
"Business combination" is defined by the Tennessee Business Combination Act
as any (i) merger or consolidation; (ii) share exchange; (iii) sale, lease,
exchange, mortgage, pledge or other transfer of assets representing 10% of more
of (A) the aggregate market value of the corporation's consolidated assets, (B)
the aggregate market value of the corporation's shares, or (C) the corporation's
consolidated net income; (iv) issuance or transfer of shares from the
corporation to the interested shareholder, (v) plan of liquidation of
dissolution proposed by the interested shareholder, (vi) transaction or
recapitalization which increases the proportionate share of any outstanding
voting securities owned or controlled by the interested shareholder, or (vii)
financing arrangement whereby any interested shareholder receives, directly or
indirectly, a benefit except proportionately as a shareholder.
"Interested shareholder" is defined as (i) any person that is the
beneficial owner of 10% or more of the voting power of any class or series of
outstanding voting stock of the corporation or (ii) an Affiliate or associate of
the corporation who at any time within the five-year period immediately prior to
the date in question was the beneficial owner, directly or indirectly, of 10% or
more of the voting power of any class or series of the outstanding stock of the
corporation. Consummation of a business combination that is subject to the
five-year moratorium is permitted after such period when the transaction (a) (i)
complies with all applicable charter and bylaw requirements and (ii) is approved
by the holders of two-thirds of the voting stock not beneficially owned by the
interested shareholder, and (b) meets certain fair price criteria.
<PAGE>
The Tennessee Greenmail Act prohibits a Tennessee corporation from
purchasing, directly or indirectly, any of its shares at a price above the
market value of such shares (defined as the average of the highest and lowest
closing market price for such shares during the 30 trading days preceding the
purchase and sale or preceding the commencement or announcement of a tender
offer if the seller of such shares has commenced a tender offer or announced an
intention to seek control of the corporation) from any person who holds more
than 3% of the class of securities to be purchased if such person has held such
shares for less than two years, unless the purchase has been approved by the
affirmative vote of a majority of the outstanding shares of each class of voting
stock issued by such corporation or the corporation makes an offer, of at least
equal value per share, to all holders of shares of such class.
Restrictions on Transfer
Ownership Limits. The Company's Charter contains certain restrictions on
the number of shares of Common Stock that an individual shareholder may own. For
the Company to qualify as a REIT under the Code, no more than 50% in value of
its outstanding shares of Common Stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first taxable year) or
during a proportionate part of a shorter taxable year. The Common Stock must
also be beneficially owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year. Because
the Company expects to continue to qualify as a REIT, the Charter of the Company
contains restrictions on the acquisition of Common Stock intended to ensure
compliance with these requirements.
Subject to certain exceptions specified in the Charter, no holder may own,
or be deemed to own by virtue of the attribution provisions of the Code, more
than 9.9% (the "Ownership Limit") of the issued and outstanding shares of Common
Stock. Although the Board of Directors presently has no intention of doing so,
the Board of Directors could increase the Ownership Limit from time to time, but
may not do so to the extent that after giving effect to such increase five
beneficial owners of shares could beneficially own in the aggregate more than
49.5% of the outstanding shares of Common Stock. The Board of Directors may,
with a ruling from the IRS or an opinion of counsel satisfactory to it, waive
the Ownership Limit with respect to a holder if such holder's ownership will not
then or in the future jeopardize the Company's status as a REIT.
If any shareholder purports to transfer shares to a person and either the
transfer would result in the Company's failing to qualify as a REIT, or the
transfer would cause the transferee to hold more than the applicable Ownership
Limit, the purported transfer shall be void. In addition, if any person holds
shares of Common Stock in excess of the applicable Ownership Limit, such person
will be deemed to hold the shares that cause the Ownership Limit to be exceeded
in trust, and will not receive distributions with respect to such shares and
will not be entitled to vote such shares. At the Company's option, the person
will be required to sell such shares. At the Company's option, the person will
be required to sell such shares on terms determined by and at the direction of
the Company or the Company will redeem such shares for the lesser of the amount
paid for the shares and the closing price on the date the Company exercises its
right to redeem. If the Company redeems such shares, it may pay for the shares
with Units, which are non transferrable except in very limited circumstances.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Code or regulations thereunder) of the issued and outstanding shares of Common
Stock must file a written notice with the Company containing the information
required by applicable Treasury Regulations no later than January 30 of each
year. In addition, each shareholder shall upon demand be required to disclose to
the Company in
<PAGE>
writing such information as the Company may request in good faith in order to
determine the Company's status as a REIT.
The foregoing ownership limitations may have the effect of precluding
acquisition of control of the Company without the consent of the Board of
Directors.
Other Matters
The transfer agent and registrar for the Company's Common Stock is AmSouth
Bank of Alabama, Birmingham, Alabama.
Pursuant to the TBCA, the Company cannot merge with or sell all or
substantially all of the assets of the Company, except pursuant to a resolution
approved by the affirmative vote of a majority of the outstanding shares of
Common Stock entitled to vote on the resolution. In addition, the Partnership
Agreement requires that any merger or sale of all or substantially all of the
assets of or dissolution of the Operating Partnership be approved by the
affirmative vote of a majority of the outstanding Units.
FEDERAL INCOME TAX CONSIDERATIONS
Introductory Notes
The applicable Prospectus Supplement will contain information, where
applicable, about all material Federal income tax considerations relating to the
Offered Securities covered by such Prospectus Supplement. The following
discussion summarizes all material Federal income tax considerations that may be
relevant to investors in the Offered Securities. Baker, Donelson, Bearman &
Caldwell, which has acted as tax counsel to the Company, has reviewed the
following discussion and is of the opinion that the descriptions of the law and
the legal conclusions contained herein are correct in all material respects, and
the discussion hereunder does not omit any material provision with respect to
the matters covered. This discussion and such opinion are based on current law.
This summary does not give a detailed discussion of any state, local, or foreign
tax consideration nor does it discuss all of the aspects of Federal income
taxation that may be relevant to a prospective shareholder in light of his or
her particular circumstances or to certain types of shareholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) who are subject to special treatment under the
Federal income tax laws. As used in this section, the term "Company" refers
solely to Mid-America Apartment Communities, Inc.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND SALE OF THE OFFERED SECURITIES IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAl, STATE, LOCAL, FOREIGN, AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of the Company
General. The Company has made an election to be taxed as a REIT under
Sections 856 through 860 of the Code effective for its short taxable year ending
on December 31, 1994. The Company believes that it is organized and has operated
in such a manner as to qualify under the Code for taxation as a REIT commencing
with its 1994 taxable year, and the Company intends to continue to operate in
such a manner. No assurance, however, can be given that the Company will operate
in a manner so as to qualify or remain qualified as a REIT. See "Failure to
Qualify" below.
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The Company has obtained the opinion of Baker, Donelson, Bearman & Caldwell
that the Company is organized in conformity with the requirements for
qualification as a REIT pursuant to Sections 856 through 860 of the Code and
that the Company's current and proposed method of operation will enable it to
meet the requirements for qualification and taxation as a REIT under the Code
for its 1995 and subsequent taxable years.
The following is a general summary of the Code provisions that govern the
Federal income tax treatment of a REIT and its shareholders. The provisions of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, the regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to Federal corporate income taxes on net income that it currently
distributes to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) that generally results from
investment in a corporation. Notwithstanding its REIT election, however, the
Company will be subject to Federal income tax in the following circumstances.
First, the Company will be taxed at regular corporate rates on any undistributed
taxable income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alterative minimum tax" on its
items of tax preference. Third, if the Company has (i) net income from the sale
or other disposition of "foreclosure property" (which is, in general, property
acquired by foreclosure or otherwise on default of a loan secured by the
property) which is held primarily for sale to customers in the ordinary course
of business or (ii) other non-qualifying income from foreclosure property, it
will be subject to tax at the highest corporate rate on such income. Fourth, if
the Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), and has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which the
Company fails the 75% or 95% test, multiplied by a fraction intended to reflect
the Company's profitability. Sixth, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such
year, and (iii) any undistributed taxable income from prior years, the Company
would be subject to a non-deductible 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company acquires any asset from a C corporation (i.e., a corporation generally
subject to full corporate level tax) in a transaction in which the basis of the
asset in the Company's hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation, and the Company
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by the Company, then, to
the extent of such property's "built-in" gain (the excess of the fair market
value of such property at the time of acquisition by the Company over the
adjusted basis of such property at such time), such gain will be subject to tax
at the highest regular corporate rate applicable (as provided in IRS regulations
that have not yet been promulgated). The results described above with respect to
the recognition of "built-in" gain assume that the Company would have an
election pursuant to IRS Notice 88-19 if it were to make any such acquisition.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation but for Sections 856 through 859 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held by 100 or
more persons; (6) not more than 50% in value of the outstanding stock of which
is owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities of each taxable year) (the "5/50 Rule");
and (7) which meets certain other tests, described below, regarding the nature
of its income and assets. The Code provides that conditions (1) through (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (5) and
(6) will not apply until after the first taxable year for which an election is
made to be taxed as a REIT. The Company has issued sufficient shares of Common
Stock with sufficient diversity of ownership to allow the Company to satisfy
requirements (5) and (6). In addition, the Company's Charter contains
restrictions regarding the transfer of
<PAGE>
its shares that are intended to assist the Company in continuing to satisfy the
share ownership requirements described in (5) and (6) above. See "Description of
the Capital Stock of the Company - Restrictions on Transfer." A corporation may
not elect to become a REIT unless its taxable year is the calendar year. The
Company's taxable year is the calendar year.
For purposes of determining Share Ownership under the 5/50 Rule, a pension
trust generally is considered an individual. However, beneficiaries of certain
pension trusts are treated as holding shares of a REIT in proportion to their
actual interests in the pension trust for purposes of the 5/50 Rule.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership will retain the same character in the
hands of the REIT for purposes of Section 856 of the Code, including satisfying
the gross income tests and asset tests (as discussed below). Thus, the Company's
proportionate share of the assets, liabilities and items of income of the
Operating Partnership and the Subsidiary Partnerships are treated as assets,
liabilities and items of the Company for purposes of applying the requirements
described herein.
Income Tests. In order to maintain qualification as a REIT, three gross
income requirements must be satisfied annually. First, at least 75% of the
REIT's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the REIT's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments described above, and from
dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Third, short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions and gain on the sale or other disposition of real property held for
less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of the REIT's gross income
(including gross income from prohibited transactions) for each taxable year. For
purposes of applying the 30% gross income test the holding period of Properties
held by Operating Partnership on the date of the Initial Offering will be deemed
to have commenced on such date.
Rents received by the Company will qualify as "rents from real property" in
satisfying the above gross income tests only if several conditions are met.
First, the amount of rent must not be based in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not
be excluded from "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, rents received
from a resident will not qualify as "rents from real property" if the Company,
or an owner of 10% or more of the Company, directly or constructively owns 10%
or more of such resident (a "Related Party Tenant"). Third, if rent attributable
to personal property that is leased in connection with a lease of real property
is greater than 15% of the total rent received under the lease, then the portion
of rent attributable to such personal property will not qualify as "rents from
real property." The Company does not charge, and does not anticipate charging,
rent for any portion of any Property that is based in whole or in part on the
income or profits of any person, and the Company does not receive, and does not
anticipate receiving, any rents from Related Party Tenants. The Company does not
anticipate that rent attributable to personal property leased in connection with
any lease of real property will exceed 15% of total rent received under such
lease. Finally, for rents received to qualify as "rents from real property," the
Company generally must not operate or manage the property or furnish or render
services to residents, other than through an "independent contractor" who is
adequately compensated and from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only and
<PAGE>
are not otherwise considered "rendered to the occupant." The Operating
Partnership provides certain services with respect to its Properties and with
respect to Properties of the Subsidiary Partnerships.
The Operating Partnership receives fees in consideration of the performance
of management, landscaping and administrative services with respect to
properties that are not wholly owned, directly or indirectly, by the Operating
Partnership. A portion of such fees generally will not qualify under the 75% or
95% gross income tests. The Company will also receive certain other types of
non-qualifying income, such as income from coin-operated laundry machines and
income from corporate and guests apartments. The Company believes, however, that
the aggregate amount of such fees and other non-qualifying income in any taxable
year will not cause the Company to exceed the limits on non-qualifying income
under the 75% and 95% gross income tests.
It is possible that, from time to time, the Company, the Operating
Partnership, or a Subsidiary Partnership will enter into hedging transaction
with respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms, including interest rate swap
contracts, interest rate cap or floor contracts, futures or forward contracts,
and options. To the extent that the Company, the Operating Partnership, or a
Subsidiary Partnership enters into an interest rate swap or cap contract to
hedge any variable rate indebtedness incurred to acquire or carry real estate
assets, any periodic income or gain from the disposition of such contract should
be qualifying income for purposes of the 95% gross income test. Furthermore, any
such contract would be considered a "security" for purposes of applying the 30%
gross income test. To the extent that the Company, the Operating Partnership, or
a Subsidiary Partnership hedges with other types of financial instruments or in
other situations, it may not be entirely clear how the income from those
transactions will be treated for purposes of the various income tests that apply
to REITs under the Code. The Company intends to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return and any income
information on the schedules was not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances the Company
would be entitled to the benefit of these relief provisions. As discussed above
in "General," even if these relief provisions were to apply, a tax would be
imposed with respect to the excess net income.
Asset Tests. At the close of each quarter of its taxable year, the Company
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including (i) its allocable share of real estate assets held by
the Operating Partnership and the Subsidiary Partnerships and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company),
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company must not exceed 5% of
the value of the Company's total assets, and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
interest in the Operating Partnership or the stock of a subsidiary with respect
to which it has held 100% of the stock at all times during the subsidiaries
existence). The Company intends to comply with the asset tests for REIT status.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute distributions (other than capital gain
distributions) to its shareholders in an amount at least equal to (A) the sum of
(i) 95% of the Company's "REIT taxable income" (computed without regard to the
<PAGE>
distributions paid deduction and the REIT s net capital gain) and (ii) 95% of
the net income (after tax), if any, from foreclosure property, minus (B) the sum
of certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before the Company timely files its tax return for such year and if paid on or
before the first regular dividend payment after such declaration. To the extent
that the Company does not distribute all of its net capital gain or distributes
at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it
will be subject to tax on the undistributed amount at regular capital gains and
ordinary corporate tax rates. Furthermore, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain income for such
year, and (iii) any undistributed taxable income from prior periods, the Company
will be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed.
The Company has made and intends to continue to make timely distributions
sufficient to satisfy the annual distribution requirements. In this regard, the
Partnership Agreement authorizes the Company, as general partner, to take such
steps as may be necessary to cause the Operating Partnership to distribute to
its partners an amount sufficient to permit the Company to meet these
distribution requirements. It is possible, however, that the Company, from time
to time, may not have sufficient cash or other liquid assets to meet the
distribution requirements due to timing differences between the actual receipt
of income and actual payment of deductible expenses and the inclusion of such
income and deduction of such expenses in arriving at taxable income of the
Company, or if the amount of nondeductible expenses such as principal
amortization or capital expenditures exceed the amount of noncash deductions. In
the event that such timing differences occur, in order to meet the distribution
requirements, the Company may cause the Operating Partnership to arrange for
short-term, or possibly long-term, borrowing to permit the payment of required
dividends. If the amount of nondeductible expenses exceeds noncash deductions,
the Operating Partnership may refinance its indebtedness to reduce principal
payments and borrow funds for capital expenditures.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year that may be included in the Company' deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay interest to the IRS based upon the amount of any
deduction taken for deficiency dividends.
Special Distribution Requirement. Applicable Treasury Regulations generally
provide that, in the case of a corporation, such as the Company, that succeeds
to earnings and profits accumulated during a non-REIT taxable year, such a
corporation is eligible to elect to be taxed as a REIT for a taxable year only
if, as of the close of that taxable year, it has distributed such non-REIT
earnings and profits. Accordingly, to elect to be taxed as a REIT it was
necessary for the Company to distribute, on or before December 31, 1994, the
full amount of its current and accumulated earnings and profits attributable to
the operations of The Cates Company prior to its merger with and into the
Company. The Cates Company satisfied this requirement by distributing all
current and accumulated earnings and profits up to and including the date of its
merger with and into the Company to its shareholders immediately prior to the
consummation of such merger.
Annual Record Keeping Requirement. Pursuant to applicable Treasury
Regulations, in order to be able to elect to be taxed as a REIT, the Company
must maintain certain records and request on an annual basis certain information
from its shareholders designed to disclose the actual ownership of its
outstanding shares. The Company intends to comply with such requirements.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year and no relief provisions apply, the Company will be subject
to tax (including any applicable alterative minimum tax) on its taxable income
at regular corporate rates. Distributions to shareholders in any year in which
the Company fails to qualify will not be deductible by the Company, nor will
they be required to be made. In such
<PAGE>
event, to the extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income, and, subject
to certain limitations in the Code, corporate distributees may be eligible for
the distributions received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances the Company
would be entitled to such statutory relief.
Taxation of Shareholders
Taxation of Taxable Domestic Shareholders. As long as the Company qualifies
as a REIT, distributions made to the Company's taxable domestic shareholders out
of current or accumulated earnings and profits (and not designated as capital
gain dividends) will be taken into account by them as ordinary income, and
corporate shareholders will not be eligible for the dividends received deduction
as to such amounts. Distributions that are designated as capital gain dividends
will be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the shareholder has held his shares. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
distributions as ordinary income. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's shares of
Common Stock, but rather will reduce the adjusted basis of such shares. To the
extent that such distributions exceed the adjusted basis of a shareholder's
shares of Common Stock, they will be included in income as long-term capital
gain (or short-term capital gain if the shares have been held for one year or
less), assuming the shares are a capital asset in the hands of the shareholder.
In addition, any dividend. declared by the Company in October, November or
December of any year payable to a shareholder of record on a specific date in
any such month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following calendar year. Shareholders
may not include in their individual income tax returns any net operating losses
or capital losses of the Company.
In general any loss upon a sale or exchange of shares of Common Stock by a
shareholder who has held such shares for six months or more (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from the Company required to be treated by such
shareholder as long-term capital gain.
Backup Withholding. The Company will report to its domestic shareholders
and the IRS the amount of distributions paid during each calendar year, and the
amount of tax withheld, if any, with respect thereto. Under the backup
withholding rules, a shareholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. A
shareholder who does not provide the Company with its correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions made to any shareholders who fail to
certify their non-foreign status to the Company. See "Taxation of Foreign
Shareholders" below.
Taxation of Tax-Exempt Shareholders. The IRS has ruled that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
"unrelated business taxable income" ("UBTI"). Based upon this ruling and the
analysis therein, distributions by the Company to a shareholder that is a
tax-exempt entity, including a qualified employee pension or profit sharing
trust or an individual retirement account (an "Exempt Organization"), should not
constitute UBTI, provided that the Exempt Organization has not financed the
acquisition of its shares with "acquisition indebtedness" within the meaning of
the Code and the shares of
<PAGE>
Common Stock are not otherwise used in an unrelated trade or business of the
Exempt Organization. Revenue rulings, however, are interpretative in nature and
subject to revocation or modification by the IRS. Social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts, and
qualified group legal services plans that are exempt from taxation under
paragraphs (7), (9), (17) and (20), respectively, of Code Section 501(c) are
subject to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. In addition, a pension
trust owning more than 10% of a REIT is required to treat a percentage of the
dividends from the REIT as UBTI (the "UBTI Percentage") under certain
circumstances. The UBTI Percentage is the gross income derived from an unrelated
trade or business (determined as if the REIT were a pension trust) divided by
the gross income of the REIT for the year in which the dividends are paid. The
UBTI rule applies only if (i) the UBTI Percentage is at least 5%, (ii) the REIT
qualifies as a REIT by reason of the modification of the 5/50 Rule described
above, and (iii) either (A) one pension trust owns more than 25% of the value of
the REIT's stock or (B) a group of pension trusts individually holding more than
10% of the value of the REIT's stock collectively own more than 50% of the value
of the REIT's stock.
Taxation of Foreign Shareholders. The rules governing U.S. Federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign shareholders (collectively, "Foreign
Shareholders") are complex, and no attempt will be made herein to provide more
than a limited summary of such rules. Prospective Foreign Shareholders should
consult with their own tax advisors to determine the impact of U.S. Federal,
state and local income tax laws with regard to an investment in Common Stock,
including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of U.S. real property interests and not designated by the Company as
capital gain dividends will be treated as distributions of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions, ordinarily, will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces that tax. However, if income from the investment in the
shares of Common Stock is treated as effectively connected with the Foreign
Shareholder's conduct of a U.S. trade or business, the Foreign Shareholder
generally will be subject to a tax at graduated rates, in the same manner as
U.S. shareholders are taxed with respect to such distributions (and may also be
subject to the 30% branch profits tax if the shareholder is a foreign
corporation). The Company expects to withhold U.S. income tax at the rate of 30%
on the gross amount of any distributions paid to a Foreign Shareholder that are
not designated as capital gain dividends unless (i) a lower treaty rate applies
and the required form evidencing eligibility for that reduced rate is filed with
the Company or (ii) the Foreign Shareholder files an IRS Form 4224 with the
Company claiming that the distribution is "effectively connected" income.
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's shares of Common Stock, but
rather will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a Foreign Shareholder's shares, they
will give rise to tax liability if the Foreign Shareholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares of Common
Stock as described below. Because it generally cannot be determined at the time
a distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, distributions that are not exempt
from withholding tax will be subject to withholding in full at the rate
applicable to distributions. However, the Foreign Shareholder may seek a refund
of such amounts from the IRS if it is subsequently determined that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Foreign Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
<PAGE>
FIRPTA, these distributions are taxed to a Foreign Shareholder as if such gain
were effectively connected with a U.S. business. Thus, Foreign Shareholders will
be taxed on such distributions at the normal capital gain rates applicable to
U.S. shareholders (subject to applicable alterative minimum tax and a special
alterative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a corporate Foreign Shareholder not entitled to treaty relief or
exemption. The Company is required by applicable Treasury Regulations to
withhold 34% of any distribution that could be designated by the Company as a
capital gain dividend. However, because the Omnibus Budget Reconciliation Act of
1993 provides for an increase in the rate of withholding for distributions made
by certain domestic partnerships, trusts, and estates to 35%, it is likely that
the Treasury Regulations will be amended to impose a similar withholding rate on
REIT capital gain dividends. The amount withheld is creditable against the
Foreign Shareholder's FIRPTA tax liability.
Gain recognized by a Foreign Shareholder upon a sale of Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. The Company believes that it currently
qualifies as a "domestically controlled REIT," and that the sale of Common Stock
will not therefore be subject to tax under FIRPTA. However, because the Company
is publicly traded, however, no assurance can be given that the Company will
continue to be a domestically controlled REIT. In addition, gain not subject to
FIRPTA will be taxable to a Foreign Shareholder if (i) the investment in Common
Stock is treated as effectively connected with the Foreign Shareholder's U.S.
trade or business, in which case the Foreign Shareholder will be subject to the
same treatment as U.S. shareholders with respect to such gains or (ii) the
Foreign Shareholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains. If the gain on the sale
of Common Stock were to be subject to tax under FIRPTA, the Foreign Shareholder
would be subject to the same treatment as U.S. shareholders with respect to such
gain (subject to applicable alterative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals).
Other Tax Considerations
The Company, the Operating Partnership, the Subsidiary Partnerships, and
the Company's and its shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they own
property, transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the Federal income tax
consequences discussed above. Consequently, prospective investors should consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in the Common Stock of the Company.
Tax Aspects of the Operating Partnership and the Subsidiary
Partnerships
The following discussion summarizes material Federal income tax
considerations applicable to the Company's investment in the Operating
Partnership and the Subsidiary Partnerships (collectively, the "Property-Owning
Partnerships"). The discussion does not cover state or local tax laws or any
Federal tax laws other than income tax laws.
Classification as a Partnership
The Company is entitled to include in its income its distributive share of
the Property-Owning Partnerships' income and to deduct its distributive share of
the Property- Owning Partnerships' losses only if the Property-Owning
Partnerships are classified for Federal income tax purposes as partnerships
rather than as associations taxable as corporations. An organization formed as a
partnership will be treated as a
<PAGE>
partnership, rather than as a corporation, for Federal income tax purposes only
if it has no more than two of the four corporate characteristics that the
Treasury Regulations use to distinguish a partnership from a corporation for tax
purposes. Those four characteristics are continuity of life, centralization of
management, limited liability, and free transferability of interests.
The Property-Owning Partnerships have not requested, and do not intend to
request, a ruling from the IRS that they will be classified as partnerships for
Federal income tax purposes. However, the Company has obtained an opinion of
Baker, Donelson, Bearman & Caldwell to the effect that the Property-Owning
Partnerships will be treated as partnerships for federal income tax purposes and
not associations taxable as corporations. For a more detailed discussion of the
basis for the opinion of counsel described herein, prospective investors should
refer to the complete opinion filed as an exhibit to the registration statement
of which this Prospectus is a part.
If for any reason the Operating Partnership were to be taxable as a
corporation, rather than as a partnership, for Federal income tax purposes, the
Company would not be able to satisfy the income and asset requirements for REIT
status. See "Requirements for Qualification (Income Test)" and "Requirements for
Qualification (Asset Tests). If a Subsidiary Partnership were to be taxable as a
corporation for tax purposes, 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. See "Requirements for Qualification
Asset Tests." In addition, any change in a Property-Owning Partnership's status
for tax purposes might be treated as a taxable event, in which case the Company
might incur a tax liability without any related cash distribution. See
"Requirements for Qualification - Annual Distribution Requirements." Further,
items of income and deduction of such partnership would not pass through to its
partners, and its partners would be treated as stockholders for tax purposes.
Consequently, the partnership would be required to pay income tax at corporate
tax rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing the partnership's taxable
income.
Income Taxation of the Operating Partnership, the Subsidiary
Partnerships and their Partners
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for Federal income tax purposes. Rather, the Company will be
required to take into account its allocable share of a Property-Owning
Partnership's income, gains, losses, deductions, and credits for any taxable
year of the Property-Owning Partnership ending within or with the taxable year
of the Company, without regard to whether the Company has received or will
receive any distribution from the Property-Owning Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under Section 704(b) of the Code if they do
not comply with the provisions of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
Federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interest in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such time.
Tax Allocations With Respect to Contributed Properties. Pursuant to Section
704(c) of the Code, income, gain loss, and deduction attributable to appreciated
or depreciated property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated for Federal income tax purposes in
a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department recently
issued regulations requiring partnerships to use a "reasonable method" for
allowing items affected by Section 704(c) of the Code and outlining two
reasonable allocation methods. Under the Partnership Agreement, the Company, as
general partner of the Operating Partnership, in its sole discretion may select
a method of making Code Section 704(c) allocations. The application of Section
704(c) to the
<PAGE>
Operating Partnership is not entirely clear and may be affected by Treasury
Regulations promulgated in the future.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in a Property-Owning Partnership generally (i) will be
equal to the amount of cash and the basis of any other property contributed to
the partnership by the Company; (ii) will be increased by (A) its allocable
share of the partnership's income and (B) its allocable share of indebtedness of
the partnership and (iii) will be reduced, but not below zero, by (I) the
Company's allocable share of the partnership's loss and (II) the amount of cash
distributed to the Company.
If the allocation of the Company's distributive share of a Property-Owning
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the partnership below zero, the recognition of such loss
will be deferred until such time as the recognition of such loss would not
reduce the Company's adjusted tax basis before zero. To the extent that a
Property-Owning Partnership's distributions, or any decrease in the Company's
share of the indebtedness of the partnership (such decrease being considered a
constructive cash distribution to the partners), would reduce the Company;s
adjusted tax basis below zero, such distributions (including such construction
distributions) constitute taxable income to the Company. Such distributions and
constructive distributions normally will be characterized as capital gain, and,
if the Company's partnership interest in a Property-Owning partnership has been
held for longer than the long-term capital gain holding period (currently one
year), the distributions and constructive distribution will constitute long-term
capital gain.
Depreciation Deductions. To the extent that the Operating Partnership
acquires Properties in exchange for cash, the Operating Partnership's initial
basis in the Properties for Federal income tax purposes generally is the price
paid by the Operating Partnership to acquire the Properties. The Operating
Partnership depreciates such depreciable property for Federal income tax
purposes under either the modified accelerated cost recovery system of
depreciation ("MACRS") or the alternative depreciation system of depreciation
("ADS"). The Operating Partnership uses MACRS for the furnishings and equipment
in the Properties. Under MACRS, the Operating Partnership generally depreciates
furnishings and equipment in service during the last three months of a taxable
year, a mid- quarter depreciation convention must be used for the furnishings
and equipment placed in service during that year. The Operating Partnership uses
ADS for the buildings and improvements comprising the Properties. Under ADS, the
Operating Partnership generally depreciates such buildings and improvements over
a 40-year recovery period using a straight line method and a mid-month
convention. However, to the extent that the Operating Partnership acquired the
Initial Properties in exchange for Units, the Operating Partnership's initial
basis in the Initial Properties for Federal income tax purposes is the same as
the selling partnership's basis in the Initial Properties on the date of
acquisition. The Operating Partnership depreciates such depreciable property for
Federal income tax purposes under the same methods previously used by the
selling partnerships.
<PAGE>
DESCRIPTION OF DEBT SECURITIES
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the Indenture.
The Debt Securities are to be issued under an Indenture, a copy of the form
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part and incorporated herein by reference, subject to such
supplements and amendments as may be adopted from time to time (each ans
"Indenture") and collectively, the "Indentures"). The Indentures will be
executed by the Company and one or more trustees (each a "Trustee"). The
Indenture is subject to, and governed by, the Trust Indenture Act of 1939, as
amended (the "TIA"). The statements made hereunder relating to the Indenture and
the Debt Securities to be issued thereunder are summaries of certain provisions
thereof and do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all provisions of the Indenture and such Debt
Securities. All section references appearing herein are to sections of the
Indenture, and capitalized terms used but not defined herein shall have the
respective meanings set forth in the Indenture.
General
The Debt Securities will be direct and unsecured general obligations of the
Company, unless otherwise provided in the Prospectus Supplement. As indicated in
the applicable Prospectus Supplement, the Debt Securities may be either senior
debt, senior to all future subordinated indebtedness of the Company and pari
passu with other current and future unsecured, unsubordinated indebtedness of
the Company, or, in the alternative, subordinated debt subordinate in right of
payment to current and future senior debt and pari passu with other future
subordinated indebtedness of the Company. The Indenture provides that the Debt
Securities may be issued without limit as to aggregate principal amount, in one
or more series, in each case as established from time to time in or pursuant to
authority granted by a resolution of the Board of Directors of the Company or as
established in one or more indentures supplemental to the Indenture. All Debt
Securities of one series need not be issued at the same time and, unless
otherwise provided, a series may be reopened, without the consent of the Holders
of the Debt Securities of such series, for issuances of additional Debt
Securities of such series (Section 3.1).
The Indenture provides that there may be more than one Trustee hereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
the Indenture may resign or be removed with respect to one or more series of
Debt Securities, and a successor Trustee may be appointed to act with respect to
such series (Section 6.9). In the event that two or more persons are acting as
Trustee with respect to different series of Debt Securities, each such Trustee
shall be a Trustee of a trust under the Indenture separate and apart from the
trust administered by any other Trustee (Section 6.10), and, except as otherwise
indicated herein, any action described herein to be taken by the Trustee may be
taken by each such Trustee with respect to, and only with respect to, the one or
more series of Debt Securities for which it is Trustee under the Indenture.
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including:
1. the title of such Debt Securities (including whether they are senior
debt or subordinated debt and whether they are convertible);
2. the aggregate principal amount of such Debt Securities and any limit on
such aggregate principal amount;
3. the date or dates, or the method for determining such date or dates, on
which the principal of such Debt Securities will be payable;
<PAGE>
4. the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities will
bear interest, if any;
5. the date or dates, or the method for determining such date or dates,
from which any such interest will accrue, the Interest Payment Dates on which
any such interest will be payable, the Regular Record Dates for such Interest
Payment Dates, or the method by which such dates shall be determined, the Person
to whom such interest shall be payable, and the basis upon which interest shall
be calculated if other than that of a 360-day year of twelve 30- day months;
6. the place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, such Debt Securities
may be surrendered for conversion or registration of transfer or exchange, and
notices or demands to or upon the Company in respect of such Debt Securities and
the Indenture may be served;
7. the period or periods within which, the price or prices at which and the
terms and conditions upon which such Debt Securities may be redeemed, as a whole
or in part, at the option of the Company, if the Company is to have such an
option;
8. the obligation, if any, of the Company to redeem, repay or purchase such
Debt Securities pursuant to any sinking fund or analogous provision or at the
option of a Holder thereof, and the period or periods within which, the price or
prices at which and the terms and conditions upon which such Debt Securities
will be redeemed, repaid or purchased, as a whole or in part, pursuant to such
obligation;
9. the percentage of the principal at which such Debt Securities will be
issued and, if other than the principal amount thereof, the portion of the
principal amount thereof payable upon declaration of acceleration of the
maturity thereof, or (if applicable) the portion of the principal amount of such
Debt Securities which is convertible into shares of Common Stock, Preferred
Stock or Debt Securities of another series, or the method by which any such
portion shall be determined;
10. if other than U.S. dollars, the currency or currencies in which such
Debt Securities are denominated and payable, which may be a foreign currency or
units of two or more foreign currencies or a composite currency or currencies,
and the terms and conditions relating thereto;
11. whether the amount of payments of principal of (and premium, if any) or
interest, if any, on such Debt Securities may be determined with reference to an
index, formula or other method (which index, formula or method may, but need not
be, based on a currency, currencies, currency unit or units or composite
currency or currencies) and the manner in which such amounts shall be
determined;
12. any additions to, modifications of or deletions from the terms of such
Debt Securities with respect to the Events of Default or covenants set forth in
the Indenture;
13. whether such Debt Securities will be issued in certificated or
book-entry form;
14. whether such Debt Securities will be in registered or bearer form and,
if in registered form, the denominations thereof if other than $1,000 and any
integral multiple thereof and, if in bearer form, the denominations thereof and
terms and conditions relating thereto;
<PAGE>
15. the applicability, if any, of the defeasance and covenant defeasance
provisions of Article XIV of the Indenture;
16. if such Debt Securities are to be issued upon the exercise of Debt
Securities Warrants, the time, manner and place for such Debt Securities to be
authenticated and delivered;
17. the terms, if any, upon which Debt Securities may be convertible into
Common Stock, Preferred Stock or Debt Securities of another series of the
Company and the terms and conditions upon which such conversion will be
effected, including, without limitation, the initial conversion price or rate
and the conversion period;
18. if convertible, in connection with the preservation of the Company's
status as a REIT, any applicable limitations on the ownership or transferability
of the Common Stock, Preferred Stock or other capital stock of the Company into
which such Debt Securities are convertible;
19. whether and under what circumstances the Company will pay Additional
Amounts as contemplated in the Indenture on such Debt Securities in respect of
any tax, assessment or governmental charge and, if so, whether the Company will
have the option to redeem such Debt Securities in lieu of making such payment;
20. the terms, if any, upon which such Debt Securities will be subordinate
to other debt of the Company; and
21. any other terms of such Debt Securities not inconsistent with the
provisions of the Indenture (Section 3.1)
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
or bear no interest or bear interest at a rate which at the time of issuance is
below market rates ("Original Issue Discount Securities"). Special U.S. federal
income tax, accounting and other considerations applicable to Original Issue
Discount Securities will be described in the applicable Prospectus Supplement.
The Indenture does not contain any other provisions that would limit the
ability of the Company to incur indebtedness or that would afford holders of
Debt Securities protection in the event of a highly leveraged or similar
transaction involving the Company or in the event of a change of control.
However, restrictions on ownership and transfers of the Company's Common Stock
are designed to preserve its status as a REIT and, therefore, may act to prevent
or hinder a change of control. See "Description of the Capital Stock of the
Company." Reference is made to the applicable Prospectus Supplement for
information with respect to any deletions from, modifications of or additions to
the Events of Default or covenants of the Company that are described below,
including any addition of a covenant or other provision providing event risk or
similar protection.
Denominations, Interest, Registration and Transfer
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof (Section 3.2).
Unless otherwise described in the applicable Prospectus Supplement, the
principal of (and premium, if any) and interest on any series of Debt Securities
will be payable at the corporate trust office of the Trustee, provided that, at
the option of the Company, payment of interest may be made by check mailed to
the address
<PAGE>
of the Person entitled thereto as it appears in the Security Register or by wire
transfer of funds to such Person at an account maintained within the United
States (Sections 3.5 and 3.7).
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the Holder on the applicable Regular Record
Date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to the Holder of such Debt Security not
less than 10 days prior to such Special Record Date, or may be paid at any time
in any other lawful manner, all as more completely described in the Indenture.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the Trustee. In addition,
subject to certain limitations imposed upon Debt Securities issued in book-entry
form, the Debt Securities of any series shall be surrendered for conversion (if
applicable) or registration of transfer thereof at the corporate trust office of
the Trustee. Every Debt Security surrendered for conversion, registration of
transfer or exchange shall be duly endorsed or accompanied by a written
instrument of transfer. No service charge will be made for any registration of
transfer or exchange of any Debt Securities, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith (Section 3.5). If the applicable Prospectus Supplement
refers to any transfer agent (in addition to the Trustee) initially designated
by the Company with respect to any series of Debt Securities, the Company may at
any time rescind the designation of any such transfer agent or approve a change
in the location through which any such transfer agent acts, except that the
Company will be required to maintain a transfer agent in each Place of Payment
for such series. The Company may at any time designate additional transfer
agents with respect to any series of Debt Securities (Section 10.2).
Neither the Company nor the Trustee shall be required to (i) issue,
register the transfer of or exchange Debt Securities of any series during a
period beginning at the opening of business 15 days before any selection of Debt
Securities of that series to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption; (ii) register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed in
part; or (iii) issue, register the transfer of or exchange any Debt Security
which has been surrendered for repayment at the option of the holder, except the
portion, if any, of such Debt Security not to be so repaid (Section 3.5).
Merger, Consolidation or Sale
The Company, without the consent of the Holders of any of the Debt
Securities, may consolidate with, or sell, lease or convey all or substantially
all of its assets to, or merge with or into, any other corporation, provided
that (a) either the Company shall be the continuing corporation or, the
successor corporation (if other than the Company) formed by or resulting from
any such consolidation or merger or which shall have received the transfer of
such assets shall expressly assume payment of the principal of (and premium, if
any) and interest on all of the Debt Securities and the due and punctual
performance and observance of all of the covenants and conditions contained in
the Indenture; (b) immediately after giving effect to such transaction and
treating any indebtedness which becomes an obligation of the Company or any
Subsidiary as a result thereof as having been incurred and be continuing; and
(c) an officer's certificate and legal opinion covering such conditions shall be
delivered to the Trustee (Sections 8.1 and 8.3).
<PAGE>
Certain Covenants
Existence. Except as permitted under "Merger, Consolidation or Sale," the
Company will do or cause to be done all things necessary to preserve and keep in
full force and effect its corporate existence, rights (charter and statutory)
and franchises; provided, however, that the Company shall not be required to
preserve any right or franchise if it determines that the preservation thereof
is no longer desirable in the conduct of its business and that the loss thereof
is not disadvantageous in any material respect to the Holders of the Debt
Securities (Section 10.6).
Maintenance of Properties. The Company will cause all of its properties
used or useful in the conduct of its business or the business of any Subsidiary
to be maintained and kept in good condition, repair and working order and
supplied with all necessary equipment and will cause to be made all necessary
repairs, renewals, replacements and improvements thereof, all as in the judgment
of the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that the Company and its Subsidiaries shall not be prevented from
selling or otherwise disposing for value its properties in the ordinary course
of business (Section 10.7).
Insurance. The Company will, and will cause each of its Subsidiaries to,
keep all of its insurable properties insured against loss or damage in
accordance with industry practices and with insurers of recognized
responsibility and of suitable financial stability (Section 10.8).
Payment of Taxes and Other Claims. The Company will pay or discharge or
cause to be paid or discharged, before the same shall become delinquent, (i) all
taxes, assessments and governmental charges levied or imposed upon it or any
Subsidiary or upon the income, profits or property of the Company or any
Subsidiary; and (ii) all lawful claims for labor, materials and supplies which,
if unpaid, might by law become a lien upon the property of the Company or any
Subsidiary; provided, however, that the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings (Section 10.9).
Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Company will, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the Commission pursuant to such Section 13 or 15(d) (the "Financial
Statements") if the Company were so subject, such documents to be filed with the
Commission on or prior to the respective dates (the "Required Filing Dates") by
which the Company would have been required to file such documents if the Company
were so subject. The Company will also in any event (x) within 15 days of each
Required Filing Date file with the Trustee copies of the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act
if the Company were subject to such Section; and (y) if filing such documents by
the Company with the Commission is not permitted under the Exchange Act,
promptly upon written request and payment of the reasonable cost of duplication
and delivery, supply copies of such documents to any Holder (Section 10.10).
Additional Covenants. Any additional covenants of the Company with respect
to any series of Debt Securities will be set forth in the Prospectus Supplement
relating thereto.
Events of Default, Notice and Waiver
The Indenture provides that the following events are "Events of Default"
with respect to any series of Debt Securities issued thereunder: (a) default for
30 days in the payment of any installment of interest
<PAGE>
on any Debt Security of such series; (b) default in the payment of the principal
of (or premium, if any, on) any Debt Security of such series at its Maturity or
in the deposit of any sinking fund payment when and as due by the terms of any
Debt Security; (c) default in the performance of any other covenant of the
Company contained in the Indenture (other than a covenant added to the Indenture
solely for the benefit of a series of Debt Securities issued thereunder other
than such series), continued for 60 days after written notice as provided in the
Indenture; (d) default in the payment of an aggregate principal amount not less
than $10,000,000 of any evidence of indebtedness of the Company or any mortgage,
indenture or other instrument under which such indebtedness is issued or by
which such indebtedness is secured, such default having occurred after the
expiration of any applicable grace period and having resulted in the
acceleration of the maturity of such indebtedness, but only if such indebtedness
is not discharged or such acceleration is not rescinded or annulled; (e) certain
events of bankruptcy, insolvency or reorganization, or court appointment of a
receiver, liquidator or trustee of the Company or for substantially all of its
properties; and (f) any other Event of Default provided with respect to a
particular series of Debt Securities (Section 5.1).
If an Event of Default under the Indenture with respect to Debt Securities
of any series at the time Outstanding occurs and is continuing, then in every
such case the Trustee or the Holders of not less than 25% in principal amount of
the Outstanding Debt Securities of that series may declare the principal amount
(or, if the Debt Securities of the series are Original Issue Discount Securities
or Indexed Securities, such portion of the principal amount as may be specified
in the terms thereof) of all of the Debt Securities of that series to be due and
payable immediately by written notice thereof to the Company (and to the Trustee
if given by the Holders). However, at any time after such a declaration of
acceleration with respect to Debt Securities of such series (or of all Debt
Securities then Outstanding under the Indenture, as the case may be) has been
made, but before a judgment or decree for payment of the money due has been
obtained by the Trustee, the holders of not less than 25% in principal amount of
Outstanding Debt Securities of such series (or of all Debt Securities then
Outstanding under the Indenture, as the case may be) may rescind and annul such
declaration and its consequences if (a) the Company shall have deposited with
the Trustee all required payments of the principal of (and premium, if any) and
interest on the Debt Securities of such series (or of all Debt Securities then
outstanding under the Indenture, as the case may be), plus certain fees,
expenses, disbursements and advances of the Trustee and (b) all Events of
Default, other than the non-payment of accelerated principal (or specified
portion thereof), with respect to Debt Securities of such series (or of all Debt
Securities then outstanding under the Indenture, as the case may be) have been
cured or waived as provided in the Indenture (Section 5.2). The Indenture also
provides that the Holders of not less than a majority in principal amount of the
Outstanding Debt Securities of any series (or of all Debt Securities then
Outstanding under the Indenture, as the case may be) may waive any past default
with respect to such series and its consequences, except a default (x) in the
payment of the principal of (or premium, if any) or interest on any Debt
Security of such series or (y) in respect of a covenant or provisions contained
in the Indenture that cannot be modified or amended without the consent of the
holder of each outstanding Debt Security affected thereby (Section 5.13).
The Trustee is required to give notice to the Holders of Debt Securities
within 60 days of a default under the Indenture; provided, however, that the
Trustee may withhold notice to the holders of any series of Debt Securities of
any default with respect to such series (except a default in the payment of the
principal of (or premium, if any) or interest on any Debt Security of such
series or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if the Responsible Officers of the Trustee consider
such withholding to be in the interest of such Holders (Section 6.2).
The Indenture provides that no holders of Debt Securities of any series may
institute any proceedings, judicial or otherwise, with respect to the Indenture
or for any remedy thereunder, except in the case of failure of the Trustee, for
60 days, to act after it has received a written request to institute proceedings
in respect of an Event of Default from the Holders of not less than 25% in
principal amount of the outstanding Debt
<PAGE>
Securities of such series as well as an offer of reasonable indemnity (Section
5.7). This provision will not prevent, however, any holder of Debt Securities
from instituting suit for the enforcement of payment of the principal of (and
premium, if any) and interest on such Debt Securities at the respective due
dates thereof (Section 5.8).
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any Holders of any
series of Debt Securities then outstanding under the Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
(Section 6.3). The Holders of not less than a majority in principal amount of
the Outstanding Debt Securities of any series (or of all Debt Securities then
outstanding under the Indenture, as the case may be) shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or of exercising any trust or power conferred upon the
Trustee. However, the Trustee may refuse to follow any direction which is in
conflict with any law or the Indenture, which may involve the Trustee in
personal liability or which may be unduly prejudicial to the Holders of Debt
Securities of such series not joining therein (Section 5.12).
Within 120 days after the close of each fiscal year, the Company must
deliver to the Trustee a certificate, signed by one of several specified
officers, stating whether or not such officer has knowledge of any default under
the Indenture and, if so, specifying each such default and the nature and status
thereof (Section 10.11).
Modification of the Indenture
Modifications and amendments of the Indenture may be made only with the
consent of the Holders of not less than a majority in principal amount of all
outstanding Debt Securities which are affected by such modification or
amendment; provided, however, that no such modification or amendment may,
without the consent of the holder of each such Debt Security affected thereby,
(a) change the Stated Maturity of the principal of, or any installment of
interest (or premium, if any) on, any such Debt Security; (b) reduce the
principal amount of, or the rate or amount of interest on, or any premium on
redemption of, any such Debt Security, or reduce the amount of principal of an
Original Issue Discount Security that would be due and payable upon declaration
of acceleration of the majority thereof or would be provable in bankruptcy, or
adversely affect any right of repayment of the Holder of any such Debt Security;
(c) change the Place of Payment, or in the coin or currency, for payment of
principal of, premium, if any, or interest on any such Debt Security; (d) impair
the right to institute suit for the enforcement of any payment on or with
respect to any such Debt Security; (e) reduce the above-stated percentage of
outstanding Debt Securities of any series necessary to modify or amend the
Indenture, to waive compliance with certain provisions thereof or certain
defaults and consequences thereunder or to reduce the quorum or voting
requirements set forth in the Indenture; or (f) modify any of the foregoing
provisions or any of the provisions relating to the waiver of certain past
defaults or certain covenants, except to increase the required percentage to
effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the Holder of such Debt Security
(Section 9.2).
The Holders of not less than a majority in principal amount of each series
of Outstanding Debt Securities have the right to waive compliance by the Company
with certain covenants in the Indenture (Section 10.13).
Modifications and amendments of the Indenture may be made by the Company
and the Trustee without the consent of any Holder of Debt Securities for any of
the following purposes: (i) to evidence the succession of another person to the
Company as obligor under the Indenture; (ii) to add to the covenants of the
Company for the benefit of the Holders of all or any series of Debt Securities
or to surrender any right
<PAGE>
or power conferred upon the Company in the Indenture; (iii) to add Events of
Default for the benefit of the Holders of all or any series of Securities; (iv)
to add or change any provisions of the Indenture to facilitate the issuance of,
or to liberalize certain terms of, Debt Securities in bearer form, or to permit
or facilitate the issuance of Debt Securities in uncertificated form, provided
that such action shall not adversely affect the interest of the Holders of the
Debt Securities of any series in any material respect; (v) to change or
eliminate any provisions of the Indenture, provided that any such change or
elimination shall become effective only when there are no Debt Securities
Outstanding of any series created prior thereto which are entitled to the
benefit of such provision; (vi) to secure the Debt Securities; (vii) to
establish the form or terms of Debt Securities of any series, including the
provisions and procedures, if applicable, for the conversion of such Debt
Securities into Common Stock or Preferred Stock of the Company; (viii) to
provide for the acceptance of appointment by a successor Trustee or facilitate
the administration of the trusts under the Indenture, by more than one Trustee;
(ix) to cure any ambiguity, correct or supplement any provision which may be
defective or inconsistent or make any other provisions with respect to matters
or questions arising under the Indenture, provided that such action shall not
adversely affect the interests of Holders of Debt Securities of any series in
any material respect; or (x) to supplement any of the provisions of the
Indenture to the extent necessary to permit or facilitate defeasance and
discharge of any series of such Debt Securities, provided that such action shall
not adversely affect the interests of the Holders of the Debt Securities of any
series in any material respect (Section 9.1).
The Indenture provides that in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of Holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof; (ii) the principal amount
of a Debt Security denominated in a Foreign Currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above); (iii) the
principal amount of an Indexed Security that shall be deemed outstanding shall
be the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such Indexed Security pursuant to
Section 3.1 of the Indenture; and (iv) Debt Securities owned by the Company or
any other obligor upon the Debt Securities or any Affiliate of the Company or of
such other obligor shall be disregarded (Section 3.1).
The Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series (Section 15.1). A meeting may be called at any time
by the Trustee, and also, upon request, by the Company or the Holders of at
least 10% in principal amount of the Outstanding Debt Securities of such series,
in any such case upon notice given as provided in the Indenture (Section 15.2).
Except for any consent that must be given by the Holder of each Debt Security
affected by certain modifications and amendments of the Indenture, any
resolution presented at a meeting or adjourned meeting duly reconvened at which
a quorum is present may be adopted by the affirmative vote of the Holders of a
majority in principal amount of the Outstanding Debt Securities of that series;
provided, however, that, except as referred to above any resolution with respect
to any request, demand, authorization, direction, notice, consent, waiver or
other action that may be made, given or taken by the Holders of a specified
percentage, which is less than a majority, in principal amount of the
Outstanding Debt Securities of a series may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the Holders of such specified percentage in principal amount of the Outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of Holders of Debt Securities of any series duly held in accordance with
the Indenture will be binding on all Holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be Persons holding or representing a majority in principal
<PAGE>
amount of the Outstanding Debt Securities of a series; provided, however, that
if any action is to be taken at such meeting with respect to a consent or waiver
which may be given by the Holders of not less than a specified percentage in
principal amount of the Outstanding Debt Securities of a series, the Persons
holding or representing such specified percentage in principal amount of the
Outstanding Debt Securities of such series will constitute a quorum (Section
15.4).
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Debt Securities of any series with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action that
the Indenture expressly provides may be made, given or taken by the Holders of a
specified percentage in principal amount of all Outstanding Debt Securities
affected thereby, or of the Holders of such series and one or more additional
series: (i) there shall be no minimum quorum requirement for such meeting; and
(ii) the principal amount of the Outstanding Debt Securities of such series that
vote in favor of such request, demand, authorization, direction, notice,
consent, waiver or other action shall be taken into account in determining
whether such request, demand, authorization, direction, notice, consent, waiver
or other action has been made, given or taken under the Indenture (Section
15.4).
Discharge, Defeasance and Covenant Defeasance
The Company may discharge certain obligations to Holders of any series of
Debt Securities that have not already been delivered to the Trustee for
cancellation and that either have become due and payable or will become due and
payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the Trustee, in trust, funds in such currency or
currencies, currency unit or units or composite currency or currencies in which
such Debt Securities are payable in an amount sufficient to pay the entire
indebtedness on such Debt Securities in respect of principal (and premium, if
any) and interest to the date of such deposit (if such Debt Securities have
become due and payable) or to the Stated Maturity or Redemption Date, as the
case may be (Section 4.1).
The Indenture provides that, if the provisions of Article Fourteen are made
applicable to the Debt Securities of or within any series pursuant to Section
14.4 of the Indenture, the Company may elect either (a) to defease and be
discharged from any and all obligations with respect to such Debt Securities
(except for the obligation to pay Additional Amounts, if any, upon the
occurrence of certain events of tax, assessment or governmental charge with
respect to payments on such Debt Securities and the obligations to register the
transfer or exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities to maintain an office or agency in
respect of such Debt Securities and to hold moneys for payment in trust)
("defeasance") (Section 14.2) or (b) to be released from its obligations with
respect to such Debt Securities under Section 10.4 to 10.10, inclusive, of the
Indenture (being the restrictions described under "Certain Covenants") or, if
provided pursuant to Section 3.1 of the Indenture, its obligations with respect
to any other covenant, and any omission to comply with such obligations shall
not constitute a default or an Event of Default with respect to such Debt
Securities ("Covenant Defeasance") (Section 14.3), in either case upon the
irrevocable deposit by the Company with the Trustee, in trust, of an amount, in
such currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable at Stated Maturity, or
Governmental Obligations (as defined below), or both, applicable to such Debt
Securities which through the scheduled payment of principal and interest in
accordance with their terms will provide money in an amount sufficient to pay
the principal of (and premium, if any) and interest on such Debt Securities, and
any mandatory sinking fund or analogous payments thereon, on the scheduled due
dates therefor.
Such a trust may only be established if, among other things, the Company
has delivered to the Trustee an Opinion of Counsel (as specified in the
Indenture) to the effect that the Holders of such Debt Securities will not
recognize income, gain or loss for U.S. federal income tax purposes as a result
of such defeasance or
<PAGE>
covenant defeasance and will be subject to U.S. federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such defeasance or covenant defeasance had not occurred, and such Opinion of
Counsel, in the case of defeasance, must refer to and be based upon a ruling of
the Internal Revenue Service or a change in applicable United States federal
income tax law occurring after the date of the Indenture (Section 14.4).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the Foreign
Currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations of
a Person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government which issued the Foreign
Currency in which the Debt Securities of such series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America, or such other government, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by the bank or trust company as custodian
with respect to any such Government Obligation or a specific payment of interest
on or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, provided that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt (Section 1.1).
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the Holder of a Debt Security of such series is entitled to, and does, elect
pursuant to Section 14.5 of the Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security shall be deemed to have been and
will be, fully discharged and satisfied through the payment of the principal of
(and premium, if any) and interest on such Debt Security as they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or such
cessation of usage based on the applicable market exchange rate (Section 14.5).
"Conversion Event" means the cessation of use of (i) a currency, currency unit
or composite currency both by the government of the country which issued such
currency and for the settlement of transactions by a central bank or other
public institutions of or within the international banking community, (ii) the
ECU both within the European Monetary System and for the settlement of
transactions by public institutions of or within the European Communities or
(iii) any currency unit or composite currency other than the ECU for the
purposes for which it was established. Unless otherwise provided in the
applicable Prospectus Supplement, all payments of principal of (and premium if
any) and interest on any Debt Security that is payable in Foreign Currency that
ceases to be used by its government of issuance shall be made in U. S.
dollars (Section 1.1).
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than the Event of Default described
in clause (d) under "Events of Default, Notice and Waiver" with respect to
Sections 10.4 to 10.10, inclusive, of the Indenture (which Sections would no
longer be applicable to such Debt Securities) or described in clause (g) under
"Events of Default, Notice and Waiver" with respect to any other covenant as to
which there has been covenant defeasance, the amount in such currency, currency
unit or composite currency in which such Debt Securities are payable, and
Government Obligations on deposit with the Trustee, will be sufficient to pay
amounts due on such Debt Securities at the time of their Stated Maturity
<PAGE>
but may not be sufficient to pay amounts due on such Debt Securities at the time
of the acceleration resulting from such Event of Default. However, the Company
would remain liable to make payment of such amounts due at the time of
acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provision described above, with respect to the Debt
Securities of or within a particular series.
Conversion Rights
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock, Preferred Stock or Debt Securities of another
series will be set forth in the applicable Prospectus Supplement relating
thereto. Such terms will include whether such Debt Securities are convertible
into Common Stock, Preferred Stock or Debt Securities of another series, the
conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the Holders or the
Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities. To protect the Company's status as a REIT, a Holder may not convert
any Debt Security, and such Debt Security shall not be convertible by any
Holder, if as a result of such conversion any person would then be deemed to
own, directly or indirectly, more than 9.9% of the Company's Common Stock.
Global Securities
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the applicable Prospectus Supplement relating to such series. Global Securities
may be issued in either registered or bearer form and in either temporary or
permanent form. The specific terms of the depositary arrangement with respect to
a series of Debt Securities will be described in the applicable Prospectus
Supplement relating to such series. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery as such securities in
definitive form. Such laws may impair the ability to transfer beneficial
interests in Debt Securities represented by Global Securities.
DESCRIPTION OF SECURITIES WARRANTS
The Company may issue Securities Warrants for the purchase of Debt
Securities, Preferred Stock or Common Stock. Securities Warrants may be issued
independently or together with any other Offered Securities offered by any
Prospectus Supplement and may be attached to or separate from such Offered
Securities. Each series of Securities Warrants will be issued under a separate
warrant agreement (each, a "Warrant Agreement") to be entered into between the
Company and a warrant agent specified in the applicable Prospectus Supplement
(the "Warrant Agent"). The Warrant Agent will act solely as an agent of the
Company in connection with the Securities Warrants of such series and will not
assume any obligations or relationship of agency or trust for or with any
holders of beneficial owners of Securities Warrants. The following summaries of
certain provisions of the Securities Warrant Agreement and the Securities
Warrants do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all the provisions of the Securities Warrant
Agreement and the Securities Warrant certificates relating to each series of
Securities Warrants which will be filed with the Commission and incorporated by
reference as an exhibit to the Registration Statement of which this Prospectus
is a part at or prior to the time of the issuance of such series of Securities
Warrants.
<PAGE>
If Securities Warrants are offered, the applicable Prospectus Supplement
will describe the terms of Securities Warrants, including, in the case of
Securities Warrants for the purchase of Debt Securities, the following where
applicable: i) the offering price; ii) the denominations and terms of the series
of Debt Securities purchasable upon exercise of such Securities Warrants; iii)
the designation and terms of any series of Debt Securities with which such
Securities Warrants are being offered and the number of such Securities Warrants
being offered with such Debt Securities; iv) the date, if any, on and after
which such Securities Warrants and the related series of Debt Securities will be
transferable separately; v) the principal amount of the series of Debt
Securities purchasable upon exercise of each such Securities Warrant and the
price at which such principal amount od Debt Securities shall commence and the
date on which such right shall expire (the "Expiration Date"); vi) the date on
which the right to exercise such Securities Warrants shall commence and the date
on which such right shall expires (the "Expiration Date"); vii) whether the
Securities Warrants will be issued in registered or bearer form; viii) all
materialUnited States federal income tax consequences; ix) the terms, if any, on
which the Company may accelerate the date by which the Securities Warrants must
be exercise; and x) any other material terms of such Securities Warrants.
In the case of Securities Warrants for the purchase of Preferred Stock of
Common Stock, the applicable Prospectus Supplement will describe the terms of
such Securities Warrants, including the following where applicable; (i) the
offering price; (ii) the aggregate number of shares purchasable upon exercise of
such Securities Warrants, the exercise price, and in the case of Securities
Warrants for Preferred Stock, the designation, aggregate number and terms of the
series of Preferred Stock purchasable upon exercise of such Securities Warrants;
(iii) the designation and terms of any series of Preferred Stock with which such
Securities Warrants are being offered and the number of such Securities Warrants
being offered with such Preferred Stock; (iv) the date, if any, on and after
which such Securities Warrants and the related series of Preferred Stock or
Common Stock will be transferable separately; (v) the date on which the right to
exercise such Securities Warrants shall commence and the Expiration Date; (vi)
any special United States federal income tax consequences; and (vii) any other
material terms of such Securities Warrants.
Securities Warrant certificates may be exchanged for new Securities Warrant
certificates of different denominations, may (if in registered form) be
presented for registration of transfer, and may be exercised at the corporate
trust office of the Securities Warrant Agent or any other office indicted in the
applicable Prospectus Supplement. Prior to the exercise of any Securities
Warrant to purchase debt Securities, holders of such Securities Warrants will
not have any of the rights of holders of the Debt Securities purchasable upon
such exercise, including the right to receive payments of principal, premium, if
any, or interest, if any, on such Debt Securities or to enforce covenants in the
applicable indenture. Prior to the exercise of any Securities Warrants to
purchase Preferred Stock or Common Stock, including the right to receive
payments of dividends, if any, on such Preferred Stock or Common Stock, or to
exercise any applicable right to vote.
Exercise of Securities Warrants
Each Securities Warrant will entitle the holder thereof to purchase such
principal amount of Debt Securities or number of shares of Preferred Stock or
Common Stock, as the case may be, at such exercise price as shall in each case
be set forth in, or calculable from, the Prospectus Supplement relating to the
offered Securities Warrants. After the close of business on the Expiration Date
(or such later date to which such Expiration Date may be extended by the
Company), unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities
Warrant Agent payment as provided in the applicable Prospectus Supplement of the
amount required to purchase the Debt Securities, Preferred Stock or Common
Stock, as the case may be, purchasable upon such exercise together with certain
information set forth on the reverse side of the Securities Warrant certificate.
Securities Warrants will be deemed to have been exercised upon receipt of
payment of the exercise price, subject to the receipt within five (5) business
days, of the Securities Warrant certificate evidencing such Securities Warrants.
Upon receipt of
<PAGE>
such payment and the Securities Warrant certificate properly completed and duly
executed at the corporate trust office of the Securities Warrant Agent or any
other office indicated in the applicable Prospectus Supplement, the Company
will, as soon as practicable, issue and deliver the Debt Securities, Preferred
Stock or Common Stock, as the case may be, purchasable upon such exercise. If
fewer than all of the Securities Warrants represented by such Securities Warrant
certificate as exercised, a new Securities Warrant certificate will be issued
for the remaining amount of Securities Warrants.
Amendments and Supplements to Warrant Agreement
The Warrant Agreements may be amended or supplemented without consent of
the holders of the Securities Warrants issued thereunder to effect changes that
are not inconsistent with the provisions of the Securities Warrants and that do
not adversely affect the interests of the holders of the Securities Warrants.
Adjustments
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Common Stock covered by, a Common
Stock Warrant are subject to adjustment in certain events, including, (i)
payment of a dividend on the Common Stock payable in shares of Common Stock and
stock splits, combinations or reclassification of Common Stock; (ii) issuance to
all holders of Common Stock of rights or warrants to subscribe for or purchase
shares of Common Stock at less than their current market price (as defined in
the Warrant Agreement for such series of Common Stock Warrants); and (iii)
certain distributions of evidences of indebtedness or assets (including
securities but excluding cash dividends or distributions paid out of
consolidated earnings or retained earnings or dividends payable in Common Stock)
or of subscription rights and warrants (excluding those referred to above).
No adjustment in the exercise price of, and the number of shares of Common
Stock covered by, a Common Stock Warrant will be made for regular or quarterly
or other periodic or recurring cash dividends or distributions or for cash
dividends or distributions to the extent paid from consolidated earnings or
retained earnings. No adjustment will be required unless such adjustment would
require a change of at least 1% in the exercise price then in effect. Except as
stated above, the exercise price of, and the number of shares of Common Stock
covered by, a Common Stock Warrant will not be adjusted for the issuance of
shares of Common Stock or any securities convertible into or exchangeable for
shares of Common Stock, or carrying the right or option to purchase or otherwise
acquire the foregoing, in exchange for cash, other property or services.
In the event of any (i) consolidation or merger of the Company with or into
any entity (other than a consolidation or merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock); (ii) sale, transfer, lease or conveyance of all or substantially
all of the assets of the Company; or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value or from par value to no par value), then any holder of a Common Stock
Warrant will be entitled, on or after the occurrence of any such event, to
receive on exercise of such Common Stock Warrant the kind and amount of shares
of stock or other securities, cash or other property (or any combination
thereof) that the holder would have received had such holder exercised such
holder's Common Stock Warrant immediately prior to the occurrence of such event.
If the consideration to be received upon exercise of the Common Stock Warrant
following any such event consists of common stock of the surviving entity, then
from and after the occurrence of such event, the exercise price of such Common
Stock Warrant will be subject to the same anti-dilution and other adjustments
described in the second preceding paragraph, applied as if such common stock
were Common Stock.
<PAGE>
PLAN OF DISTRIBUTION
The Securities may be sold (i) through agents, (ii) through underwriters,
(iii) through dealers or (iv) directly to purchasers (through a specific bidding
or auction process or otherwise). The distribution of Securities may be effected
from time to time in one or more transactions at a fixed price or prices, which
may be changed, or at market prices prevailing at the time of sale, at prices
relating to such prevailing market prices or at negotiated prices.
Offers to purchase the Securities may be solicited by agents designated by
the Company from time to time. Any such agent involved in the offer or sale of
the Securities will be named, and any commissions payable by the company to such
agent will be set forth in the Prospectus Supplement. Unless otherwise indicated
in the Prospectus Supplement, any such agent will be acting on a best efforts
basis for the period of its appointment. Any such agent may be deemed to be an
underwriter, as that term is defined in the Securities Act, of the Securities so
offered and sold.
If an underwriter or underwriters are utilized in the sale of Securities,
the Company will execute an underwriting agreement with such underwriter or
underwriters at the time an agreement for such sale is reached, and the names of
the specific managing underwriter or underwriters, as well as any other
underwriters, and the terms of the transactions, including compensation of the
underwriters and dealers, in any, will be set forth in the Prospectus
Supplement, which will be used by the underwriters to make resales of the
Securities.
If a dealer is utilized in the sale of the Securities, the Company will
sell such Securities to the dealer, as principal. The dealer may then resell
such Securities to the public at varying prices to be determined by such dealer
at the time of resale. The name of the dealer and the terms of the transactions
will be set forth in the Prospectus Supplement relating thereto.
Offers to purchase the securities may be solicited directly by the Company
and sales thereof may be made by the Company directly to institutional investors
or others. The terms of any such sales, including the terms of any bidding or
auction prices, if utilized, will be described in the Prospectus Supplement
relating thereto.
Agents, underwriters and dealers may be entitled under agreements which may
be entered into with the Company to indemnification by the Company against
certain liabilities, including liabilities under the Securities Act, and any
such agents, underwriters or dealers, or their affiliates may be customers of,
engage in transactions with or perform services for the Company in the ordinary
course of business.
If so indicated in the Prospectus Supplement, the Company will authorize
agents and underwriters to solicit offers by certain institutions to purchase
Debt Securities from the Company at the public offering price set forth in the
Prospectus Supplement pursuant to Delayed Delivery Contracts ("Contracts")
providing for payment and delivery on the date stated in the Prospectus
Supplement. Such Contracts will be subject to only those conditions set forth in
the Prospectus Supplement. Each Contract will be for an amount not less than,
and the principal amount of Offered Securities sold pursuant to Contracts shall
not be less nor more than, the respective amounts stated in such Prospectus
Supplement. Institutions with which Contracts, when authorized, may be made
include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions and other
institutions, but will in all cases be subject to approval of the Company.
Contracts will not be subject to any conditions except (i) the purchase by an
institution of the Offered Securities covered by its Contract shall not at the
time of delivery be prohibited under the laws of any jurisdiction in the United
States to which such institution is subject and (ii) the Company shall have sold
to such underwriters the total principal amount of the Offered Securities less
the principal amount thereof covered by Contracts. A commission indicated in the
Prospectus Supplement
<PAGE>
will be paid to underwriters and agents soliciting purchases of Debt Securities
pursuant to Contracts accepted by the Company.
EXPERTS
The Consolidated Financial Statements incorporated in this Prospectus by
reference to the Annual Report on Form 10-K for the year ended December 31,
1995, have been so incorporated in reliance on the report of KPMG Peat Marwick
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting. The Consolidated Financial Statements of America First
REIT, Inc. incorporated in this Prospectus by reference to the Annual Report on
Form 10-K for the year ended December 31, 1994, have been so incorporated in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the issuance of the Offered Securities offered pursuant to
this Prospectus or any Prospectus Supplement will be passed upon for the Company
by Baker, Donelson, Bearman & Caldwell, Memphis, Tennessee. In addition, the
description of federal income tax consequences contained in the section of the
Prospectus entitled "Federal Income Tax Considerations" is based on the opinion
of Baker, Donelson, Bearman & Caldwell.
