PROSPECTUS SUPPLEMENT
(To Prospectus Dated September 9, 1997)
3,333,000 Shares
Mid-America Apartment Communities, Inc.
Common Stock
------------------
MID-AMERICA APARTMENT COMMUNITIES, INC. (THE "COMPANY") IS A REAL ESTATE
INVESTMENT TRUST WHICH OWNS AND OPERATES APARTMENT COMMUNITIES
PRIMARILY IN THE SOUTHEASTERN UNITED STATES AND TEXAS. THE
COMPANY OWNS AND OPERATES 81 APARTMENT COMMUNITIES
CONTAINING 21,943 APARTMENT UNITS IN 12 STATES.
------------------
ALL OF THE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE (THE "COMMON
STOCK") OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. THE COMMON STOCK IS
LISTED ON THE NEW YORK STOCK EXCHANGE (THE "NYSE") UNDER THE SYMBOL
"MAA." THE LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NYSE
ON SEPTEMBER 30, 1997 WAS $29 11/16 PER SHARE.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-5 AND IN THE ACCOMPANYING PROSPECTUS
FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------
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 ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------
PRICE $29 11/16 A SHARE
------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND
PRICE TO COMMIS- PROCEEDS TO
PUBLIC SIONS(1) COMPANY(2)
-------------- ------------- --------------
<S> <C> <C> <C>
Per Share........................................ $29.6875 $1.5586 $28.1289
Total(3)......................................... $98,948,438 $5,194,814 $93,753,624
- ------------
</TABLE>
(1) The Company and its principal subsidiary, Mid-America Apartments, L.P., have
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriters."
(2) Before deducting expenses payable by the Company estimated at $250,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 499,950
additional shares of Common Stock at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the Underwriters exercise such option in full, the total price to
public, underwriting discounts and commissions and proceeds to company will
be $113,790,703, $5,974,036 and $107,816,667, respectively. See
"Underwriters."
------------------
The shares of Common Stock are offered, subject to prior sale, when, as and
if accepted by the Underwriters named herein, and subject to approval of certain
legal matters by Hunton & Williams, counsel for the Underwriters. It is expected
that delivery of the Common Stock offered hereby will be made on or about
October 6, 1997 at the office of Morgan Stanley & Co. Incorporated, New York,
N.Y., against payment therefor in immediately available funds.
------------------
MORGAN STANLEY DEAN WITTER
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
October 1, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
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 BY THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS 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 ANY OFFER TO
BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DO THEY
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
STOCK 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 OR, 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.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
The Company.......................... S-3
Recent Developments.................. S-3
Risk Factors......................... S-5
Unaudited Pro Forma Condensed
Combined Financial Statements...... S-7
Use of Proceeds...................... S-21
Price Range of Common Stock and
Dividend History................... S-21
Capitalization....................... S-23
Underwriters......................... S-24
Safe Harbor Statement Under the
Private Securities Litigation
Reform Act of 1995................. S-25
Experts.............................. S-25
Legal Matters........................ S-25
Incorporation of Certain Documents by
Reference.......................... S-25
PROSPECTUS
Available Information................ 2
Incorporation of Certain Documents by
Reference.......................... 2
Prospectus Summary................... 4
The Company.......................... 4
Risk Factors......................... 7
Use of Proceeds...................... 12
Consolidated Ratio of Earnings to
Combined Fixed Charges and
Preferred Stock Distributions and
Consolidated Ratio of Earnings to
Fixed Charges...................... 13
Description of Capital Stock......... 14
Description of Debt Securities....... 18
Description of Securities Warrants... 28
Federal Income Tax Considerations.... 30
Plan of Distribution................. 43
Experts.............................. 44
Legal Matters........................ 44
S-2
<PAGE>
UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT
EXERCISED. UNLESS OTHERWISE INDICATED, AS USED HEREIN, THE TERM "COMPANY"
INCLUDES MID-AMERICA APARTMENT COMMUNITIES, INC., ITS PREDECESSOR AND THOSE
ENTITIES OWNED OR CONTROLLED THEREBY, INCLUDING MID-AMERICA APARTMENTS, L.P.
(THE "OPERATING PARTNERSHIP" OR "MAALP").
THE COMPANY
GENERAL
Mid-America Apartment Communities, Inc., a Tennessee corporation (the
"Company" or "MAAC"), is a self-administered and self-managed umbrella
partnership real estate investment trust ("REIT") which owns and operates 81
apartment communities (the "Communities") containing 21,943 apartment units in
12 states, and has agreements to acquire three apartment communities containing
602 apartment units. As measured by the number of apartment units owned, the
Company is the sixth largest apartment REIT in the United States.
Founded in 1977 by George E. Cates, the Company's Chairman of the Board of
Directors and Chief Executive Officer, the Company's predecessor grew from an
operator of a single 252-unit apartment community in Memphis, Tennessee into a
fully-integrated owner and operator of 5,580 apartment units in 22 apartment
communities in four southeastern states immediately prior to the Company's
initial public offering of Common Stock in February 1994 (the "Initial
Offering"). Since the Initial Offering, the Company's portfolio has increased
by 59 apartment communities containing 16,363 apartment units.
The Company seeks to acquire apartment communities appealing to middle and
upper income residents in mid-size cities in the southeastern United States and
Texas. Approximately 65% of the Company's apartment units are located in
Tennessee, Florida and Texas markets. The Company's strategic focus is to
provide its residents high quality apartment units in attractive community
settings, characterized by extensive landscaping and attention to aesthetic
detail.
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.
RECENT DEVELOPMENTS
PENDING TRANSACTION WITH FLOURNOY PROPERTIES GROUP
On September 17, 1997, the Company, the Operating Partnership and Flournoy
Development Company, a Georgia corporation ("FDC") entered into an Agreement
and Plan of Reorganization (the "Plan of Reorganization") pursuant to which
FDC will merge with and into the Company (the "FDC Merger") and the Company
and the Operating Partnership will acquire all the assets of FDC and certain
affiliated entities (collectively, the "Flournoy Properties Group" or "FPG")
through a series of merger, exchange and purchase transactions (the
"Reorganization"). The Flournoy Properties Group owns and operates 29
multifamily apartment communities containing an aggregate of 7,255 apartment
units located primarily in Georgia, Florida, South Carolina and Tennessee.
Completion of the Reorganization is conditioned upon certain consents and
approvals and certain other closing conditions. The Company will also acquire
FDC's construction, development and management businesses.
As consideration for the transfer of the assets of the Flournoy Properties
Group to the Company and the Operating Partnership upon consummation of the
Reorganization, the Company shall issue to the shareholders of FDC an aggregate
of 1,556,510 shares of Common Stock as consideration for the FDC Merger, and the
Operating Partnership shall issue to the partners of the several partnerships
holding the remaining assets included in the Flournoy Properties Group an
aggregate of 481,704 Class A Common Units of limited partnership interests
("Class A Common Units") in the Operating Partnership. In addition, in
connection with the Reorganization, the Company and the Operating Partnership
are obligated under the Plan of Reorganization to prepay at the time of closing
certain indebtedness of the Flournoy Properties Group which at June 30, 1997
totalled approximately $197.2 million and shall assume (either expressly
S-3
<PAGE>
or by operation of law) certain indebtedness of the Flournoy Properties Group
which at June 30, 1997 totalled approximately $93.5 million. Finally, the
Operating Partnership shall acquire certain properties of the Flournoy
Properties Group for aggregate consideration of approximately $29.6 million
cash. The Company currently expects to spend approximately $11 million in
capital expenditures to reposition certain of the apartment communities acquired
in the Reorganization.
Upon completion of the Reorganization, John F. Flournoy, the Chairman of
the Board and Chief Executive Officer of FDC, will become a director of the
Company and W. Randall Jones, President of FDC, will become an advisory member
of the Company's Board of Directors. The Company has completed substantially all
of its due diligence with respect to, and has obtained approval from the
Company's Board of Directors for the Reorganization. See "Risk Factors" in
this Prospectus Supplement for a description of certain risks associated with
the Reorganization.
OTHER PENDING ACQUISITIONS
In addition to the apartment communities to be acquired pursuant to the
Reorganization, the Company has entered into agreements to acquire three
apartment communities containing 602 apartment units for aggregate cash prices
of approximately $21.9 million, excluding customary closing costs.
S-4
<PAGE>
RISK FACTORS
RISK THAT REORGANIZATION WILL NOT CLOSE
While the Company has entered into the Plan of Reorganization and has
completed substantially all of its due diligence with respect to the Flournoy
Properties Group, the closing of the Reorganization is not scheduled to occur
until after the offering. The closing is subject to customary closing
conditions, including the consent of lenders to the Company's assumption of
certain indebtedness of the Flournoy Properties Group as a result of the
Reorganization. In addition, the partners of 24 limited partnerships must
consent to the disposition of certain properties to the Company in the
Reorganization. There can be no assurance that the conditions to closing will be
fulfilled or that the Company will complete the Reorganization.
Failure of FDC or the Company to consummate the Reorganization will result
in liquidated damages to the non-defaulting party of $250,000, provided,
however, that if any defaulting party closes a substantially similar business
combination with another person within one year after the date of termination of
the Plan of Reorganization, the non-defaulting party shall be entitled to
receive a termination fee of $8.5 million from the defaulting party, with the
liquidated damages of $250,000 being credited against such termination fee. The
Company has incurred approximately $250,000 in due diligence expenses in
connection with investigating the Flournoy Properties Group.
INDEBTEDNESS OF THE FLOURNOY PROPERTIES GROUP
In connection with the Reorganization, the Company intends to refinance a
substantial portion of the Flournoy Properties Group's indebtedness. The Company
currently has no binding commitments to refinance such indebtedness and there
can be no assurance that the Company will be able to refinance such indebtedness
or obtain new financing on terms commensurate with the Company's expectations.
In addition, the Company intends to assume a substantial portion of the Flournoy
Properties Group's existing indebtedness which assumption requires the consent
of the lenders and, with respect to certain indebtedness, the consent of the
U.S. Department of Housing and Urban Development. Neither the Company nor the
Flournoy Properties Group has yet obtained those consents and there can be no
assurance that such consents will be forthcoming. Failure to timely obtain such
consents could result in the Company needing to obtain other financing to repay
such indebtedness and could result in prepayment penalties in order to complete
the Reorganization. There can be no assurance that the Company will be able to
obtain other financing or obtain financing on terms as favorable as the Flournoy
Properties Group indebtedness which the Company intends to assume.
SHORTAGE OF AUTHORIZED SHARES OF COMMON STOCK
The Plan of Reorganization requires the Company to issue shares of Common
Stock in partial consideration of the purchase price for the Flournoy Properties
Group. Following completion of the offering, but prior to the closing of the
Reorganization, the Company will need to increase the number of shares of
authorized and unissued Common Stock to complete the issuance of the total
number of shares of Common Stock issuable in the Reorganization. The Company
plans to hold a special shareholders' meeting in November 1997 in order for the
Company's shareholders to vote on a proposed amendment to the Company's charter
to increase the number of authorized shares of Common Stock from 20,000,000
shares to 50,000,000 shares and to increase the number of authorized shares of
preferred stock from 5,000,000 shares to 20,000,000 shares. There can be no
assurance that a sufficient number of shareholders will vote to approve the
amendment to the Company's charter. In the event the Company's shareholders do
not approve the proposed increase in the number of authorized shares of Common
Stock, in order to complete the Reorganization, the Company may be required to
terminate its Dividend Reinvestment and Stock Purchase Plan (the "DRSPP") and
redeem Class A Common Units in the Operating Partnership which are subsequently
tendered for conversion for cash rather than the issuance of Common Stock which
could require the Company to undertake substantial borrowings.
S-5
<PAGE>
OPERATIONAL RISKS OF GROWTH
If the Reorganization is completed, the number of properties and size of
operations of the Company will increase substantially. The Company intends to
offer employment to substantially all of the employees of the Flournoy
Properties Group, including property managers and regional managers. However,
there can be no assurance that the Company will be able to retain the services
of existing employees of the Flournoy Properties Group. To the extent the
Company is unable to retain experienced personnel following the Reorganization,
the amounts per share available for distribution to the Company's shareholders
could be adversely affected.
THIRD PARTY MANAGEMENT AGREEMENTS
The Reorganization includes the Company's acquisition of FDC's property
management services business. FDC currently manages 43 multi-family residential
properties for third party property owners pursuant to separate management
contracts. Management agreements pursuant to which FDC manages these properties
provide that the management agreements may not be assigned without the consent
of the property owner and that such management agreements may be terminated by
the property owner upon 60 days' notice. There can be no assurance that any such
consents to assignment will be forthcoming.
S-6
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma condensed combined financial statements
give effect to the following transactions: (i) consummation of the FDC Merger
and the Reorganization pursuant to which MAAC and MAALP shall acquire all the
properties and assets comprising the Flournoy Properties Group, including FDC,
in exchange for 1,556,510 shares of Common Stock, 481,704 Class A Common Units
of MAALP, and approximately $29.6 million cash; in addition, MAAC is obligated
to prepay certain FPG indebtedness totalling approximately $197.2 million at
June 30, 1997 and to assume certain FPG indebtedness totalling approximately
$93.5 million at June 30, 1997; (ii) the acquisition in 1996 of six Communities
containing an aggregate of 1,760 apartment units for an aggregate cash price of
$65.7 million (the "1996 Completed Acquisitions"); (iii) the acquisition in 1997
of nine Communities containing an aggregate of 2,600 apartment units for an
aggregate cash purchase price of $107.6 million (the "1997 Completed
Acquisitions") (the 1996 Completed Acquisitions and 1997 Completed Acquisitions,
collectively, the "Completed Acquisitions"); (iv) the disposition in 1996 of
three Communities containing an aggregate of 724 apartment units for an
aggregate cash consideration of $17.8 million (the "Dispositions"); (v) the
anticipated acquisition, subsequent to June 30, 1997, of three additional
Communities containing an aggregate of 602 apartment units for an aggregate cash
purchase price of $21.9 million, excluding customary closing costs (the "1997
Probable Acquisitions"); (vi) the issuance and sale in October 1996 of 2,000,000
shares of MAAC's 9.5% Series A Cumulative Preferred Stock (Liquidation
Preference $25 per Share) (the "Series A Preferred Stock") for an aggregate net
cash price of $47.8 million (the "October 1996 Preferred Stock Offering"), and
the related use of such proceeds; and (vii) the issuance and sale in March 1997
of 2,300,000 shares of MAAC Common Stock for an aggregate net cash price of
$62.6 million, and the related use of such proceeds.
In addition, such unaudited pro forma condensed combined financial
statements give effect to the following financing transactions that the Company
expects to consummate prior to the closing of the Reorganization and the
Company's assumptions with respect to the terms of such financing: (i) the
issuance and sale of 3,333,000 shares of Common Stock at an assumed price of
$29.50 per share for an estimated aggregate net cash price of $92.9 million (the
"Common Stock Offering"); (ii) the issuance and sale of 3,200,000 shares of
MAAC's 9% Preferred Stock (Liquidation Preference $25 per share) for an
estimated aggregate net cash price of $77.4 million (the "Preferred Stock
Offering"); and (iii) the establishment of a new $150 million secured term loan
bearing interest at 7% per annum and the establishment of a new $150 million
secured line of credit bearing interest at 7.65% per annum (collectively, the
"New Credit Facilities") and the Company's initial anticipated borrowings
thereunder. The Preferred Stock Offering and New Credit Facilities are intended
to provide financing for the transactions described in the above paragraph.
While the Company intends to undertake the financing transactions described
above, there can be no assurance that such financings will occur on the terms
assumed by the Company.
The unaudited pro forma condensed combined balance sheet at June 30, 1997
has been prepared as if the Reorganization, the Common Stock Offering, the
Preferred Stock Offering, the establishment of the New Credit Facilities and the
1997 Probable Acquisitions had been completed on that date.
The unaudited pro forma condensed combined statements of operations for the
six months ended June 30, 1997 and the year ended December 31, 1996 have been
prepared as if each of the transactions described above had been consummated on
January 1, 1996 and assuming that MAAC had qualified as a REIT and distributed
all of its taxable income for the periods presented and, therefore, incurred no
income tax expense.
S-7
<PAGE>
For purposes of these pro forma financial statements, the Reorganization
has been accounted for as a purchase in accordance with Accounting Principles
Board Opinion No. 16. In the opinion of MAAC's management, all significant
adjustments necessary to reflect the effects of the foregoing transactions have
been made.
These unaudited pro forma financial statements have been prepared by MAAC
based on the historical financial statements of FPG and MAAC, which have been
previously filed with the Securities and Exchange Commission and are
incorporated herein by reference. These unaudited pro forma financial statements
should be read in conjunction with the foregoing historical financial
statements, including the notes thereto. These pro forma combined financial
statements are presented for comparative purposes only and are not indicative of
what the actual financial position or results of operations of MAAC would have
been had the foregoing transactions occurred on the dates indicated.
S-8
<PAGE>
MID-AMERICA APARTMENT COMMUNITIES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAAC FPG PRO FORMA
PRO FORMA(A) HISTORICAL(B) ADJUSTMENTS(C) COMBINED
------------ ------------- -------------- ------------
ASSETS:
<S> <C> <C> <C> <C>
Rental real estate assets, net....... $712,106 $ 202,804 $ 158,497(D) $ 1,073,407
Construction in progress............. 14,123 7,632 (539)(E) 21,216
Real estate held for development..... -- 12,817 1,934(D) 14,751
------------ ------------- -------------- ------------
Net real estate assets.......... 726,229 223,253 159,892 1,109,374
Cash and cash equivalents............ 5,214 4,075 (3,875)(F) 5,414
Trading securities................... -- 2,241 (2,241)(G) --
Restricted cash...................... 5,271 5,350 (1,527)(H) 9,094
Due from affiliates.................. -- 4,936 (4,936)(I) --
Deferred financing costs, net........ 2,856 5,012 (4,342)(J) 3,526
Other assets......................... 6,679 7,870 (428)(K) 14,121
------------ ------------- -------------- ------------
Total assets.................... $746,249 $ 252,737 $ 142,543 $ 1,141,529
============ ============= ============== ============
LIABILITIES:
Notes payable........................ $318,670 $ 291,049 $ (130,222)(L) $ 479,497
Line of credit....................... 72,007 -- -- 72,007
Due to affiliates.................... -- 2,453 (1,029)(M) 1,424
Deferred development fees............ -- 1,347 (1,347)(N) --
Other liabilities.................... 15,914 18,072 (5,631)(O) 28,355
------------ ------------- -------------- ------------
Total liabilities............... $406,591 $ 312,921 $ (138,229) $ 581,283
============ ============= ============== ============
Minority interest.................... $ 45,282 $ -- $ 31,298(P) $ 76,580
SHAREHOLDERS' EQUITY:
Preferred stock...................... 20 -- 32(Q) 52
Common stock......................... 134 -- 49(R) 183
Additional paid-in-capital........... 317,253 -- 197,368(S) 514,621
Accumulated deficit.................. (22,112) (60,184) 52,025(T) (30,271)
Other................................ (919) -- -- (919)
------------ ------------- -------------- ------------
Total shareholders' equity...... 294,376 (60,184) 249,474 483,666
------------ ------------- -------------- ------------
Total liabilities and
shareholders' equity.......... $746,249 $ 252,737 $ 142,543 $ 1,141,529
============ ============= ============== ============
</TABLE>
PRO FORMA ADJUSTMENTS:
(A) See MAAC Pro Forma on page S-12.
(B) Reflects the unaudited combined historical balance sheet of FPG as of
June 30, 1997.
(C) MAAC may issue additional shares of Common Stock having a value of up
to $7,500 ("Contingent Value Shares") if certain agreed upon
conditions are satisfied during calendar years 1998, 1999 and 2000.
When and if issued, the Contingent Value Shares will be recorded as
additional purchase consideration based upon the fair value of the
Common Stock at the date of issuance. The amount of the Contingent
Value Shares potentially issuable by MAAC has not been included in
the Pro Forma Condensed Combined Balance Sheet.
(NOTES CONTINUED ON FOLLOWING PAGE)
S-9
<PAGE>
(D) Represents an increase in the carrying value of FPG properties
resulting from the application of the purchase method of accounting.
(E) Represents the elimination of income on a construction contract
between MAAC and FPG.
(F) Represents:
Estimated proceeds from the
sale of trading securities,
net of estimated
commissions of $67......... $ 2,174
Anticipated FPG distributions
at the date of consummating
the Reorganization......... (3,172)
Contributions to FPG by the
majority shareholder....... 201
Net change in cash resulting
from the disposition of
Section 42 partnership
interests and related
affiliate balances......... 1,639
Purchase of certain real
estate assets and partnership
interests in connection
with the Reorganization.... (29,589)
Prepayment of certain FPG
mortgages and notes payable
consisting of principal
($197,222), interest
($2,262), penalties ($7,620)
and escrow refunds $1,385.. (205,719)
Settlement of FPG's deferred
compensation plan.......... (1,610)
Legal, accounting, investment
banking and other costs.... (5,000)
Settlement of a portion of
amounts due from majority FPG
stockholder................ 595
Anticipated net proceeds from
the Preferred Stock
Offering................... 77,360
Anticipated net proceeds from
the Common Stock Offering.. 92,916
Anticipated proceeds from the
New Credit Facilities, net of
issuance costs
of $670.................... 66,330
------------
$ (3,875)
============
(G) Represents the sale of trading securities.
(H) Represents the refund ($1,385) of escrow deposits on FPG mortgages
and notes payable expected to be prepaid and escrow deposits ($142)
expected to be settled in connection with the sale of the Section 42
partnership interests.
(I) Represents amounts which were eliminated in conjunction with the sale
of the Section 42 partnership interests ($2,311), the settlement of
certain Section 42 and other affiliate balances for cash ($1,610),
the settlement of amounts due from the majority stockholder for cash
($595) and units in MAALP ($420).
(J) Represents the write-off of FPG deferred financing costs ($5,012)
resulting from the application of the purchase method of accounting
to reflect the debt at fair value and deferred financing costs of
$670 for new debt expected to be incurred as part of the New Credit
Facilities.
(K) Represents the elimination of amounts receivable by FPG under a
construction contract between MAAC and FPG ($1,759), and an increase
in the carrying value of certain non-rental FPG assets resulting from
the application of the purchase method of accounting of $1,331.
(L) Represents the anticipated prepayment of certain FPG mortgages and
notes payable ($197,222) and anticipated additional borrowings under
the New Credit Facilities in connection with the transactions of
$67,000.
(M) Represents amounts which were eliminated in conjunction with the sale
of the Section 42 partnership interests ($413), the settlement of
Section 42 and other affiliate balances for cash ($144) and the
elimination of an affiliate balance ($472) related to a formation
entity acquired for cash.
(N) Represents the elimination of amounts resulting from the sale of the
Section 42 partnership interests.
S-10
<PAGE>
(O) Represents the elimination of amounts payable by MAAC to FPG under a
construction contract ($1,759), payment of accrued interest on FPG
mortgages and notes payable expected to be prepaid in connection with
the Reorganization ($2,262), and the termination of FPG's deferred
compensation plan ($1,610).
(P) Represents the issuance of 481,700 Class A Common Units in MAALP at
consummation of the Reorganization at a market value of $13,819
(based upon $28.69 per unit) and an adjustment to minority interest
for the issuance of Class A Common Units in connection with the
Reorganization, the Common Stock Offering and a property acquisition
of $17,479.
(Q) Represents the issuance of 3,200,000 shares of preferred stock in the
Preferred Stock Offering.
(R) Represents the issuance of 3,333,000 shares of Common Stock in the
Common Stock Offering, $33 ($29.50 per share), and the issuance of
Common Stock in connection with the Reorganization, $16 ($28.69 per
share).
<TABLE>
<CAPTION>
(S) Represents:
<S> <C>
Net proceeds from the anticipated Preferred Stock Offering................................ $ 77,360
Net proceeds from the anticipated Common Stock Offering................................... 92,916
Issuance of 1,556,510 shares of Common Stock in connection with the Reorganization
assuming a market value of $28.69 per share............................................. 44,652
Adjustment to minority interest of MAALP for the issuance of Class A Common Units......... (17,479)
Par value of shares issued in the Common Stock Offering and the Preferred Stock
Offering................................................................................ (81)
----------
$ 197,368
==========
(T) Represents:
Elimination of income recognized on a construction contract between MAAC and FPG.......... $ (539)
Anticipated prepayment penalties to be incurred in connection with the prepayment of
certain FPG mortgages and notes payable subsequent to the Reorganization................ (7,620)
Elimination of FPG accumulated deficit as a result of the application of the purchase
method of accounting.................................................................... 60,184
----------
$ 52,025
==========
</TABLE>
S-11
<PAGE>
MID-AMERICA APARTMENT COMMUNITIES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAAC COMPLETED PROBABLE MAAC
HISTORICAL(U) ACQUISITIONS ACQUISITIONS PRO FORMA
-------------- ------------- ------------- ----------
ASSETS:
<S> <C> <C> <C> <C>
Real estate assets, net.............. $669,191 $20,798(V) $22,117(W) $712,106
Construction in progress............. 14,123 -- -- 14,123
-------------- ------------- ------------- ----------
Net real estate assets............. 683,314 20,798 22,117 726,229
Cash and cash equivalents............ 5,214 -- -- 5,214
Restricted cash...................... 5,271 -- -- 5,271
Deferred financing costs, net........ 2,751 100(X) 5(X) 2,856
Other assets......................... 6,679 -- -- 6,679
-------------- ------------- ------------- ----------
Total assets.................. $703,229 $20,898 $22,122 $746,249
============== ============= ============= ==========
LIABILITIES:
Notes payable........................ $299,972 $15,149(Y) $ 3,549(Y) $318,670
Line of credit....................... 47,925 5,509(Z) 18,573(Z) 72,007
Other liabilities.................... 15,914 -- -- 15,914
-------------- ------------- ------------- ----------
Total liabilities............. 363,811 20,658 22,122 406,591
Minority interest.................... 45,042 240(AA) -- 45,282
SHAREHOLDERS' EQUITY:
Cumulative preferred stock........... 20 -- -- 20
Common shares........................ 134 -- -- 134
Additional paid-in-capital........... 317,253 -- -- 317,253
Accumulated deficit.................. (22,112) -- -- (22,112)
Other................................ (919) -- -- (919)
-------------- ------------- ------------- ----------
Total shareholders' equity.... 294,376 -- -- 294,376
-------------- ------------- ------------- ----------
Total liabilities and
shareholders' equity....... $703,229 $20,898 $22,122 $746,249
============== ============= ============= ==========
</TABLE>
MAAC PRO FORMA ADJUSTMENTS:
(U) Reflects the unaudited historical consolidated balance sheet of MAAC as of
June 30, 1997.
(V) Increase represents Completed Acquisitions which were consummated
subsequent to June 30, 1997.
(W) Increase represents the 1997 Probable Acquisitions which are expectred to
occur subsequent to June 30, 1997.
(X) Increase represents deferred financing costs incurred in connection with
the assumption of debt to fund the Completed Acquisitions which were
consummated subsequent to June 30, 1997 and the 1997 Probable Acquisitions.
(Y) Increase represents assumption of debt anticipated in connection with the
Completed Acquisitions which were consummated subsequent to June 30, 1997
and the 1997 Probable Acquisitions.
(Z) Increase represents additional borrowings which are anticipated in
connection with the Completed Acquisitions which were consummated
subsequent to June 30, 1997 and the 1997 Probable Acquisitions.
(AA) Increase represents Class A Common Units in MAALP which were issued in
connection with a property acquisition.
S-12
<PAGE>
MID-AMERICA APARTMENT COMMUNITIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAAC FPG COMBINED
PRO FORMA(A) HISTORICAL(B) ADJUSTMENTS(C) PRO FORMA
------------ ------------- -------------- ----------
REVENUES:
Property
<S> <C> <C> <C>
Rental.......................... $ 68,360 $24,422 -- $ 92,782
Other........................... 778 1,309 -- 2,087
Property management.................. -- 706 -- 706
Development.......................... -- 363 -- 363
Construction, net.................... -- 754 (539)(D) 215
Miscellaneous........................ 330 331 (269)(E) 392
------------ ------------- -------------- ----------
TOTAL REVENUES............. 69,468 27,885 (808) 96,545
EXPENSES:
Personnel............................ 7,231 2,863 -- 10,094
Building repairs / maintenance,
utilities, landscaping, and other
operating.......................... 11,550 4,241 (37)(F) 15,754
Real estate taxes and insurance...... 7,481 2,306 -- 9,787
Depreciation and amortization -- real
estate assets...................... 13,719 5,422 259(G) 19,400
Depreciation and amortization -- non
real estate assets................. 95 141 (10)(G) 226
Property management.................. -- 381 -- 381
General and administrative........... 3,223 2,367 (485)(H) 5,105
Interest............................. 15,409 11,958 (6,635)(I) 20,732
Amortization of deferred financing
costs.............................. 444 299 (232)(J) 511
Offering expenses.................... -- 2,056 (2,056)(K) --
Other, net........................... -- -- -- --
------------ ------------- -------------- ----------
TOTAL EXPENSES............. 59,152 32,034 (9,196) 81,990
------------ ------------- -------------- ----------
Income before gains on sale of
assets............................. 10,316 (4,149) 8,388 14,555
------------ ------------- -------------- ----------
Gains on sale of assets.............. -- 2 (2)(L) --
------------ ------------- -------------- ----------
Income before minority interest in
operating partnership income....... 10,316 (4,147) 8,386 14,555
------------ ------------- -------------- ----------
Minority interest in operating
partnership income................. 1,630 -- 422(M) 2,052
------------ ------------- -------------- ----------
Net income........................... 8,686 (4,147) 7,964 12,503
------------ ------------- -------------- ----------
Dividend on preferred shares......... 2,375 -- 3,600(N) 5,975
------------ ------------- -------------- ----------
Net income available for common
shareholders....................... $ 6,311 $(4,147) $ 4,364 $ 6,528
============ ============= ============== ==========
Net income per common share.......... $ 0.36(O)
==========
</TABLE>
S-13
<PAGE>
PRO FORMA ADJUSTMENTS:
(A) See MAAC Pro Forma on page S-15.
(B) Reflects the historical combined statement of operations of FPG for
the six months ended June 30, 1997. Certain reclassifications have
been made to FPG's historical statement of operations to conform to
MAAC's presentation. Subsequent to the Reorganization, MAAC expects
to incur prepayment penalties of approximately $7,620 on notes
payable of FPG which are expected to be prepaid. These nonrecurring
costs are charged to operations as an extraordinary item when
incurred. Such amounts have not been included in the Pro Forma
Condensed Consolidated Statement of Operations.
(C) MAAC may issue additional shares of Common Stock having a value of up
to $7,500 if certain agreed upon conditions are satisfied during
calendar years 1998, 1999 and 2000. When and if issued, the
Contingent Value Shares will be recorded as additional purchase
consideration based upon the fair value of the Common Stock at the
date of issuance. The amount of the amortization charge related to
the Contingent Value Shares potentially issuable by MAAC has not been
included in the Pro Forma Condensed Combined Statement of Operations.
(D) Represents the elimination of income recognized on a construction
contract between MAAC and FPG.
(E) Represents the elimination of nonrecurring income of FPG consisting
of dividend income on trading securities ($18), distributions from
the Section 42 interests which are expected to be disposed of prior
to the Reorganization ($224) and other ($27).
(F) Represents elimination of certain administrative fees of FPG.
(G) Represents additional depreciation related to the increase in the
cost of FPG properties resulting from the application of purchase
method of accounting.
(H) Represents reductions in general and administrative expenses as a
result of the Reorganization due to a decrease in professional fees
($165) and a decrease in executive compensation and certain employee
benefit costs ($320).
(I) Represents the net reduction in interest and credit enhancement costs
associated with the repayment of FPG mortgage and notes payable as a
part of the transaction ($9,147) and interest on additional
borrowings under the New Credit Facilities of $2,512.
(J) Represents amortization of historical deferred financing costs of FPG
which were eliminated in connection with applying the purchase method
of accounting ($299) net of the amortization of deferred financing
costs on new debt which is expected to be incurred of $67.
(K) Represents elimination of accounting, legal and other costs incurred
in connection with proposed public offering of FDC common stock which
was abandoned during 1997.
(L) Represents the elimination of nonrecurring gains on sales of assets.
(M) Represents the change in minority interest in MAALP income as a
result of the Reorganization, Common Stock Offering and a property
acquisition where Class A Common Units were issued.
(N) Represents dividends on the 3,200,000 shares of preferred stock which
is expected to be issued in the Preferred Stock Offering.
(O) Pro Forma net income available per common shares is based on 18,275
shares outstanding during the period and Pro Forma net income
available for common shareholders. Extraordinary expenses related to
the debt financings have been excluded from the calculation of Pro
Forma net income available for common shareholders.
S-14
<PAGE>
MID-AMERICA APARTMENT COMMUNITIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
----------------------------------------------
MAAC COMPLETED PROBABLE MAAC
HISTORICAL(P) ACQUISITIONS(Q) ACQUISITIONS(R) OTHER PRO FORMA
------------- --------------- --------------- --------- ---------
REVENUES:
Property
<S> <C> <C> <C> <C>
Rental.......................... $61,629 $ 4,992 $ 1,739 -- $68,360
Other........................... 600 128 50 -- 778
Miscellaneous................... 330 -- -- -- 330
------------- --------------- --------------- --------- ---------
TOTAL REVENUES............. 62,559 5,120 1,789 -- 69,468
EXPENSES:
Personnel....................... 6,576 468 187 -- 7,231
Building repairs/maintenance,
utilities, landscaping, and
other operating............... 10,323 891 336 -- 11,550
Real estate taxes and
insurance..................... 6,537 600 344 -- 7,481
Depreciation and amortization --
real estate assets............ 12,350 -- -- 1,369(S) 13,719
Depreciation and amortization --
non real estate assets........ 85 -- -- 10(T) 95
General and administrative...... 3,016 -- -- 207(U) 3,223
Interest........................ 13,097 -- -- 2,312(V) 15,409
Amortization of deferred
financing costs............... 410 -- -- 34(W) 444
------------- --------------- --------------- --------- ---------
TOTAL EXPENSES............. $52,394 $ 1,959 $ 867 $ 3,932 $59,152
------------- =============== =============== ========= =========
Income before minority interest in
operating partnership income....... $10,165 $ 3,161 $ 922 $ (3,932) $10,316
------------- --------------- --------------- --------- ---------
Minority interest in operating
partnership income................. 1,750 -- -- (120)(X) 1,630
------------- --------------- --------------- --------- ---------
Net income........................... 8,415 3,161 922 (3,812) 8,686
------------- --------------- --------------- --------- ---------
Dividends on preferred shares........ 2,375 -- -- -- 2,375
------------- --------------- --------------- --------- ---------
Net income available for common
shareholders....................... $ 6,040 $ 3,161 $ 922 $ (3,812) $ 6,311
============= =============== =============== ========= =========
</TABLE>
S-15
<PAGE>
MAAC PRO FORMA ADJUSTMENTS:
(P) Reflects the unaudited historical consolidated statement of
operations of MAAC for the six months ended June 30, 1997.
(Q) Represents historical operating revenues and expenses from January 1,
1997 to the earlier of the acquisition date or June 30, 1997 for the
1997 Completed Acquisitions.
(R) Represents historical operating revenues and expenses for the six
months ended June 30, 1997 for the 1997 Probable Acquisitions.
(S) Represents additional real estate depreciation and amortization
resulting from the Completed Acquisitions and the 1997 Probable
Acquisitions.
(T) Represents additional non-real estate depreciation and amortization
resulting from the Completed Acquisitions and the 1997 Probable
Acquisitions.
(U) Represents anticipated additional costs to operate MAAC resulting
from property acquisitions.
(V) Represents additional interest costs related to mortgage debt
incurred or assumed in connection with the Completed Acquisitions and
the 1997 Probable Acquisitions.
(W) Represents additional amortization resulting from deferred financing
costs incurred in connection with the Completed Acquisitions and the
1997 Probable Acquisitions.
(X) Represents the change in the minority interest in the income of MAALP
during the period.
S-16
<PAGE>
MID-AMERICA APARTMENT COMMUNITIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAAC FPG COMBINED
PRO FORMA(A) HISTORICAL(B) ADJUSTMENTS(C) PRO FORMA
------------ ------------- -------------- ----------
REVENUES:
Property
<S> <C> <C> <C> <C>
Rental.......................... $134,591 $44,642 $-- $179,233
Other........................... 1,827 2,177 -- 4,004
Property management.................. -- 1,319 -- 1,319
Development.......................... -- 2,046 -- 2,046
Construction, net.................... -- 1,990 (136)(D) 1,854
Miscellaneous........................ 732 823 (296)(E) 1,259
------------ ------------- -------------- ----------
TOTAL REVENUES............. 137,150 52,997 (432) 189,715
EXPENSES:
Personnel............................ 13,944 5,286 -- 19,230
Building repairs / maintenance,
utilities, landscaping, and other
operating.......................... 23,218 8,573 (75)(F) 31,716
Real estate taxes and insurance...... 14,374 4,100 -- 18,474
Depreciation and amortization -- real
estate assets...................... 26,145 10,191 1,170(G) 37,506
Depreciation and amortization -- non
real estate assets................. 190 266 (4)(G) 452
Property management.................. -- 715 -- 715
General and administrative........... 6,912 4,548 (829)(H) 10,631
Interest............................. 29,992 21,338 (11,258)(I) 40,072
Amortization of deferred financing
costs.............................. 739 449 (315)(J) 873
Offering expenses.................... -- 233 (233)(K) --
Other, net........................... -- -- 640(L) 640
------------ ------------- -------------- ----------
TOTAL EXPENSES............. 115,514 55,699 (10,904) 160,309
------------ ------------- -------------- ----------
Income before gains on sale of
assets............................. 21,636 (2,702) 10,472 29,406
------------ ------------- -------------- ----------
Gains on sale of assets.............. -- 1,320 (1,320)(M) --
Income before minority interest in
operating partnership income....... 21,636 (1,382) 9,152 29,406
------------ ------------- -------------- ----------
Minority interest in operating
partnership income................. 3,419 -- 727(N) 4,146
------------ ------------- -------------- ----------
Net income........................... 18,217 (1,382) 8,425 25,260
------------ ------------- -------------- ----------
Dividend on preferred shares......... 4,750 -- 7,200(O) 11,950
------------ ------------- -------------- ----------
Net income available for common
shareholders....................... $ 13,467 $(1,382) $ 1,225 $ 13,310
============ ============= ============== ==========
Net income per common share.......... $ 0.73(P)
==========
</TABLE>
PRO FORMA ADJUSTMENTS:
(A) See MAAC Pro Forma on page S-19.
(B) Reflects the historical combined statement of operations of FPG for
the year ended December 31, 1996. Certain reclassifications have been
made to FPG's historical statement of
S-17
<PAGE>
operations to conform to MAAC's presentation. Subsequent to the
Reorganization, MAAC expects to incur prepayment penalties of
approximately $7,620 on mortgages and notes payable to FPG which are
expected to be prepaid. These nonrecurring costs will be charged to
operations as an extraordinary item when incurred. Such amounts have
not been included in the Pro Forma Condensed Combined Statement of
Operations.
(C) MAAC may issue additional shares of Common Stock having a value of up
to $7,500 if certain agreed upon conditions are satisfied during
calendar years 1998, 1999 and 2000. When and if issued, the
Contingent Value Shares will be recorded as additional purchase
consideration based upon the fair value of the Common Stock at the
date of issuance. The amount of the Contingent Value Shares
potentially issuable by MAAC has not been included in the Pro Forma
Condensed Combined Statement of Operations.
(D) Represents the elimination of income recognized on a construction
contract between MAAC and FPG.
(E) Represents the elimination of nonrecurring income recognized by FPG
during 1966 related to dividends on trading securities ($34) and
distributions from the Section 42 interests which are expected to be
disposed to prior to the Reorganization ($262).
(F) Represents elimination of certain administrative fees of FPG.
(G) Represents depreciation related to the increase in the cost of FPG
properties resulting from the application of the purchase method of
accounting.
(H) Represents reductions in general and administrative expenses as a
result of the Reorganization due to decreases in professional fees
($105), and a decrease in executive compensation and certain employee
benefit costs ($724).
(I) Represents the net reduction in interest and credit enhancement costs
associated with the expected prepayment of certain FPG mortgage and
notes payable ($16,283) net of interest on additional borrowings
under the New Credit Facilities of $5,025.
(J) Represents amortization of historical deferred financing costs of FPG
which were eliminated in connection with applying the purchase method
of accounting ($449), net of the amortization of the deferred
financing costs on new debt which is expected to be incurred of $134.
(K) Represents elimination of accounting, legal and other costs incurred
in connection with a proposed public offering of FDC common stock
which was abandoned during 1997.
(L) Represents the estimated additional income tax expense for the
operation of Mid-America Services Corporation, a subsidiary of MAALP
to be organized in connection with the Reorganization for the purpose
of conducting third-party service businesses.
(M) Represents the elimination of nonrecurring income of FPG on the sale
of trading securities ($1,058) and on the liquidation of a single
property partnership ($262).
(N) Represents the change in minority interest in the MAALP income as a
result of the Reorganization, the Common Stock Offering, and a
property acquisition where Class A Common Units were issued.
(O) Represents dividends on 3,200,000 shares of preferred stock which is
expected to be issued in the Preferred Stock Offering.
(P) Pro Forma net income available per common share is based on 18,275
shares outstanding during the period and Pro Forma net income
available for common shareholders. Extraordinary expenses related to
debt financings have been excluded from the calculation of Pro Forma
net income available for common shareholders.
S-18
<PAGE>
MID-AMERICA APARTMENT COMMUNITIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
-----------------------------------------------------------------
MAAC COMPLETED PROBABLE
HISTORICAL(Q) ACQUISITIONS(R) ACQUISITIONS(S) DISPOSITIONS(T) OTHER
------------- --------------- --------------- --------------- ---------
REVENUES:
Property
<S> <C> <C> <C> <C> <C>
Rental........................... $ 110,090 $23,186 $ 3,642 $(2,327) $ --
Other............................ 1,060 735 104 (72) --
Miscellaneous.................... 732 -- -- -- --
------------- --------------- --------------- --------------- ---------
TOTAL REVENUES.............. 111,882 23,921 3,746 (2,399) --
EXPENSES:
Personnel........................ 11,702 2,237 331 (326) --
Building repairs/maintenance,
utilities, landscaping, and
other operating................ 19,226 3,846 739 (593) --
Real estate taxes and
insurance........................ 11,642 2,442 491 (201) --
Depreciation and amortization --
real estate assets............. 21,288 -- -- (519) 5,376(U)
Depreciation and amortization --
non real estate assets......... 155 -- -- (3) 38(V)
General and administrative....... 6,154 -- -- -- 758(W)
Interest......................... 25,766 -- -- -- 4,226(X)
Amortization of deferred
financing costs................ 661 -- -- -- 78(Y)
------------- --------------- --------------- --------------- ---------
TOTAL EXPENSES.............. 96,594 8,525 1,561 (1,642) 10,476
------------- --------------- --------------- --------------- ---------
Income before gain on disposition of
properties......................... 15,288 15,396 2,185 (757) (10,476)
------------- --------------- --------------- --------------- ---------
Gain on dispositions of properties... 2,185 -- -- -- (2,185)(Z)
------------- --------------- --------------- --------------- ---------
Income before minority interest in
operating partnership.............. 17,473 15,396 2,185 (757) (12,661)
------------- --------------- --------------- --------------- ---------
Minority interest in operating
partnership income................. 3,213 -- -- -- 206(AA)
------------- --------------- --------------- --------------- ---------
Net income........................... 14,260 15,396 2,185 (757) (12,867)
------------- --------------- --------------- --------------- ---------
Dividends on preferred shares........ 990 -- -- -- 3,760(AB)
------------- --------------- --------------- --------------- ---------
Net income available for common
shareholders....................... $ 13,270 $15,396 $ 2,185 $ (757) $ (16,627)
============= =============== =============== =============== =========
</TABLE>
MAAC
PRO FORMA
---------
REVENUES:
Property
Rental........................... $134,591
Other............................ 1,827
Miscellaneous.................... 732
---------
TOTAL REVENUES.............. 137,150
EXPENSES:
Personnel........................ 13,944
Building repairs/maintenance,
utilities, landscaping, and
other operating................ 23,218
Real estate taxes and
insurance........................ 14,374
Depreciation and amortization --
real estate assets............. 26,145
Depreciation and amortization --
non real estate assets......... 190
General and administrative....... 6,912
Interest......................... 29,992
Amortization of deferred
financing costs................ 739
---------
TOTAL EXPENSES.............. 115,514
---------
Income before gain on disposition of
properties......................... 21,636
---------
Gain on dispositions of properties... --
---------
Income before minority interest in
operating partnership.............. 21,636
---------
Minority interest in operating
partnership income................. 3,419
---------
Net income........................... 18,217
Dividends on preferred shares........ 4,750
---------
Net income available for common
shareholders....................... $ 13,467
=========
S-19
<PAGE>
MAAC PRO FORMA ADJUSTMENTS:
(Q) Reflects the historical consolidated statement of operations of MAAC
for the year ended December 31, 1996.
(R) Represents historical operating revenues and expenses from January 1,
1996 to the earlier of the acquisition date or December 31, 1996 for
the 1996 Completed Acquisitions and the 1997 Completed Acquisitions.
(S) Represents historical operating revenues and expenses for the year
ended December 31, 1996 for the 1997 Probable Acquisitions.
(T) Represents historical operating revenues and expenses for the year
ended December 31, 1996 Dispositions subsequent to January 1, 1996.
(U) Represents real estate depreciation and amortization resulting from
the Completed Acquisitions and the 1997 Probable Acquisitions.
(V) Represents non-real estate depreciation and amortization resulting
from the Completed Acquisitions and the 1997 Probable Acquisitions.
(W) Represents anticipated additional costs to operate MAAC resulting
from property acquisitions, net of anticipated savings resulting from
the Dispositions.
(X) Represents interest costs related to mortgage debt incurred or
assumed in connection with the Completed Acquisitions and the 1997
Probable Acquisitions, net of reductions in interest expense
resulting from the repayment of mortgage debt in connection with the
Dispositions.
(Y) Represents amortization of deferred financing costs incurred in
connection with the financing of Completed Acquisitions and the 1997
Probable Acquisitions.
(Z) Represents the elimination of nonrecurring gain on Dispositions.
(AA) Represents the change in the minority interest in income of MAALP
during the period.
(AB) Represents dividends on the Series A Preferred Stock issued during
1996.
S-20
<PAGE>
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of the 3,333,000 shares
of Common Stock offered hereby are estimated to be approximately $93.5 million
after payment of all underwriting discounts and expenses of the offering
(approximately $107.6 million if the Underwriters' over-allotment option is
exercised in full). The Company will contribute the net proceeds (including net
proceeds from the Underwriters' exercise of the over-allotment option, if any)
of the offering to the Operating Partnership in exchange for additional
interests in the Operating Partnership. The Operating Partnership will use
substantially all of the net proceeds to repay outstanding borrowings under the
Company's unsecured bank line of credit (the "Credit Line") and any excess
will be used for general corporate purposes, including acquisitions. Amounts
repaid under the Credit Line may be re-borrowed (subject to the terms and limits
of the Credit Line) to finance acquisitions of additional apartment communities
and for other corporate purposes. The Credit Line, which matures in December
1998, had an outstanding principal balance as of August 31, 1997 of
approximately $69.0 million. Borrowings under the Credit Line bear interest at a
floating rate equal to LIBOR plus 1.75% (7.36% at August 31, 1997) and are
unsecured.
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY
The Common Stock has been listed and traded on the New York Stock Exchange
("NYSE") under the symbol "MAA" since the Initial Offering in February 1994.
On September 30, 1997, the last reported sale price of shares of Common Stock on
the NYSE was $29.6875 and there were approximately 1,609 holders of record of
the Common Stock. The Company estimates there are approximately 10,000
beneficial owners of the Common Stock. The following table sets forth the
quarterly high and low sales prices of the Common Stock as reported on the NYSE
and the dividends declared by the Company with respect to the periods indicated.
DISTRIBUTION
HIGH LOW PER SHARE
------ --------- -------------
1995
First Quarter........................ $ 26 $ 25 3/4 $ .50
Second Quarter....................... $ 25 $ 24 3/4 $ .50
Third Quarter........................ $24 3/4 $ 24 5/8 $ .50
Fourth Quarter....................... $24 7/8 $ 24 3/8 $ .51
1996
First Quarter........................ $26 5/8 $ 24 $ .51
Second Quarter....................... $26 5/8 $ 25 1/8 $ .51
Third Quarter........................ $25 7/8 $ 23 7/8 $ .51
Fourth Quarter....................... $28 7/8 $ 24 3/4 $.535
1997
First Quarter........................ $29 5/8 $ 27 3/4 $.535
Second Quarter....................... $28 3/4 $ 25 3/4 $.535
Third Quarter........................ $30 5/16 $ 27
The Company's current annual distribution rate with respect to the Common
Stock is $2.14 per share. The actual distributions made by the Company will be
affected by a number of factors, including the gross revenues received from the
Communities, the operating expenses of the Company, the interest expense
incurred on borrowings and unanticipated capital expenditures.
The Company pays a preferential regular monthly distribution on the Series
A Preferred Stock at a fixed annual rate of $2.375 per share. No distribution
may be made on the Common Stock unless all accrued distributions have been made
with respect to the Series A Preferred Stock. No assurance can be given that the
Company will be able to maintain its distribution rate on its Common Stock or
make required distributions with respect to the Series A Preferred Stock.
S-21
<PAGE>
In January 1997, the Company implemented the DRSPP under which holders of
Common Stock (and Series A Preferred Stock) may elect automatically to reinvest
their distributions in additional shares of Common Stock and/or to make optional
purchases of Common Stock free of brokerage commissions and charges. Shares
purchased directly from the Company will be purchased at up to a 3% discount
from their fair market value at the Company's discretion. To fulfill its
obligations under the DRSPP, the Company may either issue additional shares of
Common Stock or repurchase Common Stock in the open market.
Distributions by the Company to the extent of its current or accumulated
earnings and profits for federal income tax purposes generally will be taxable
to shareholders as ordinary dividend income. For purposes of determining whether
distributions on the Common Stock are out of current or accumulated earnings and
profits, the Company's earnings and profits are allocated first to the Series A
Preferred Stock and then allocated to the Common Stock. Distributions in excess
of earnings and profits generally will be treated as a non-taxable reduction of
the shareholder's basis in the Common Stock to the extent thereof, and
thereafter as taxable gain. Such distributions will have the effect of deferring
taxation until the earlier of exhaustion of a shareholder's basis in his Common
Stock or sale of such shareholder's Common Stock. In order to maintain its
qualification as a REIT, the Company must make annual distributions to
shareholders of at least 95% of its taxable income (which does not include net
capital gains). Under certain circumstances, the Company may be required to make
distributions in excess of cash available for distribution in order to meet such
distribution requirements. Because of such income tax requirements, debt service
resulting from the Company's borrowings could result in federal income tax
distribution requirements which exceed cash available for distribution, and in
such event the Company would have to seek to borrow the amount of the deficiency
or sell assets to obtain the cash necessary to make distributions to retain its
qualification as a REIT for federal income tax purposes.
Future distributions by the Company will be at the discretion of the Board
of Directors and will depend on the actual funds available for distribution of
the Company, its financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. For a discussion of the tax
treatment of distributions to holders of shares of Common Stock, see "Federal
Income Tax Considerations -- Taxation of Shareholders" in the accompanying
Prospectus.
S-22
<PAGE>
CAPITALIZATION
The following unaudited table sets forth the historical capitalization of
the Company as of June 30, 1997 and capitalization as adjusted to give effect to
the completion of the offering and the application of the net proceeds as
described under the caption "Use of Proceeds." The information set forth in the
following table should be read in conjunction with the financial statements and
notes thereto incorporated herein and in the accompanying Prospectus by
reference and the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" incorporated herein and in the accompanying Prospectus by reference.
JUNE 30, 1997
--------------------------
HISTORICAL AS ADJUSTED
---------- ------------
(IN THOUSANDS)
Debt:
Notes payable................... $ 347,897 $278,897
----------
Minority interest.................... 45,042 50,029
---------- ------------
Shareholders' Equity:
Preferred Stock, $.01 par value
per share, 5,000,000 shares
authorized, 2,000,000 shares of
9.5% Series A Cumulative
Preferred Stock, Liquidation
Preference $25 per share,
issued and outstanding......... 20 20
Common Stock, $.01 par value per
share, 20,000,000 shares
authorized, 13,385,251 shares
issued and outstanding,
16,718,251 shares issued and
outstanding, as adjusted....... 134 167
Additional paid-in-capital...... 317,253 405,737
Other........................... (919) (919)
Accumulated deficit............. (22,112) (22,112)
---------- ------------
Total shareholders
equity....................... 294,376 382,893
---------- ------------
Total Capitalization................. $ 687,315 $711,819
========== ============
S-23
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to the Underwriters
severally, the respective number of shares of Common Stock set forth opposite
their respective names below:
UNDERWRITER NUMBER OF SHARES
- ------------------------------------- ----------------
Morgan Stanley & Co., Incorporated... 2,333,000
Morgan Keegan & Company, Inc......... 500,000
Raymond James & Associates, Inc...... 500,000
----------------
Total......................... 3,333,000
================
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Stock are subject to
the approval of certain legal matters by counsel for the Underwriters and to
certain other conditions. The Underwriters are obligated to take and pay for all
of the shares of Common Stock offered hereby (other than those covered by the
Underwriters' over-allotment option described below) if any such shares are
taken.
The Underwriters initially propose to offer part of the Common Stock
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price that represents a concession not
in excess of $.9352 per share of Common Stock. After the initial offering of the
shares of Common Stock offered hereby, the offering price and other selling
terms may from time to time be varied by the Underwriters.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this Prospectus
Supplement, to purchase up to 499,950 additional shares of Common Stock at the
public offering price set forth on the cover page hereof, less underwriting
discounts and commissions. The Underwriters may exercise such option to purchase
solely for the purpose of covering over-allotments, if any, made in connection
with the offering.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the Underwriters may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in the offering, if the Underwriters repurchase previously distributed
shares of Common Stock in transactions to cover short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Company and certain executive officers have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock for a period
of 120 days after the date of this Prospectus Supplement, without the prior
written consent of Morgan Stanley & Co. Incorporated, as representative of the
several underwriters, provided that the Company may issue shares under its stock
option, employee stock ownership, and dividend reinvestment and stock purchase
plans during such 120-day period.
The Company and the Operating Partnership have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
S-24
<PAGE>
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements set forth herein or incorporated by reference herein
from the Company's filings under the Securities Exchange Act of 1934, as amended
(see "Incorporation by Reference" herein and in the accompanying Prospectus),
contain forward-looking statements, including, without limitation, statements
relating to the timing and anticipated capital expenditures of the Company's
development programs. Although the Company believes that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, the actual results may differ materially from those set forth in
the forward-looking statements. Certain factors that might cause such difference
include general economic conditions, local real estate conditions, construction
delays due to unavailability of construction materials, weather conditions or
other delays beyond the control of the Company. Consequently, such
forward-looking statements should be regarded solely as reflections of the
Company's current operating and development plans and estimates. These plans and
estimates are subject to revision from time to time as additional information
becomes available, and actual results may differ from those indicated in the
referenced statements.
EXPERTS
The combined financial statements of Flournoy Properties Group as of
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996 have been incorporated by reference in the accompanying
Prospectus and in the Registration Statement, of which the accompanying
Prospectus is a part, in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, which report is incorporated by
reference therein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL MATTERS
Certain legal matters, including the legality of the Common 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents incorporated by reference in the accompanying
Prospectus, the Company's Current Reports on Form 8-K dated September 19, 1997
and September 30, 1997 heretofore filed by the Company with the Commission (File
No. 1-2762) are incorporated herein by reference.
The Company will provide without charge to each person to whom this
Prospectus Supplement and the accompanying Prospectus is delivered, upon 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). Requests 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.
S-25
<PAGE>
PROSPECTUS
MID-AMERICA APARTMENT
COMMUNITIES, INC.
$233,875,000
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 $233,875,000. 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 RIGHT, 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: (I) DIRECTLY BY THE COMPANY; (II) THROUGH
UNDERWRITING SYNDICATES REPRESENTED BY ONE OR MORE MANAGING UNDERWRITERS, OR
THROUGH ONE OR MORE UNDERWRITERS WITHOUT A SYNDICATE; AND (III) THROUGH AGENTS
DESIGNATED FROM TIME TO TIME. 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 TOTAL VALUE OF OUTSTANDING
CAPITAL STOCK OF THE COMPANY, WITH CERTAIN EXCEPTIONS. SEE "DESCRIPTION OF
CAPITAL STOCK -- OWNERSHIP LIMITATIONS."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE OFFERED SECURITIES
UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
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 date of this Prospectus is September 9, 1997.
<PAGE>
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. Electronic
filings made through the Electronic Data Gathering, Analysis and Retrieval
System are publicly available through the Securities and Exchange Commission's
web site (http://www.sec.gov). 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 a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. The Prospectus and any accompanying
Prospectus Supplement do not contain all of the information included in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Offered Securities, reference is hereby made to
the Registration Statement, including the exhibits and schedules thereto.
Statements contained in this Prospectus and any accompanying Prospectus
Supplement concerning the provisions or contents of any contract, agreement or
other document referred to herein or therein are not necessarily complete. With
respect to each such contract, agreement or document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified in its entirety by such reference to the copy of the applicable
document filed with the Commission. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. and
copies of it or any part thereof may be obtained from such office, upon payment
of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
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, 1996;
(b) Quarterly Reports on Form 10-Q for the periods ended March 31,
1997 and June 30, 1997, respectively;
(c) Current Reports on Form 8-K dated August 19, 1997, June 5, 1997,
April 25, 1997, April 11, 1997, March 19, 1997, and February 21, 1997 and
Current Reports of Form 8-K/A dated July 29, 1997, April 11, 1997, June 10,
1997, May 19, 1997, March 17, 1997 and February 21, 1997;
(d) pages 2 through 10 of the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders;
(e) 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; and
(f) the description of the Company's 9.5% Series A Cumulative
Preferred Stock contained in the Company's Registration Statement on Form
8-A/A filed with the Commission on October 11, 1996.
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
2
<PAGE>
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.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE
IN THIS PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE. UNLESS OTHERWISE
INDICATED, AS USED HEREIN, THE TERM "COMPANY" INCLUDES MID-AMERICA APARTMENT
COMMUNITIES, INC., ITS PREDECESSOR AND THOSE ENTITIES OWNED OR CONTROLLED
THEREBY, INCLUDING MID-AMERICA APARTMENTS, L.P., A TENNESSEE LIMITED PARTNERSHIP
(THE "OPERATING PARTNERSHIP"), ALL SUBSIDIARY LIMITED PARTNERSHIPS AND ALL
QUALIFIED REIT SUBSIDIARIES OF THE COMPANY. WHERE USED HEREIN, THE TERM "FUNDS
FROM OPERATIONS" ("FFO") SHALL MEAN NET INCOME (COMPUTED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES), 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 DISTRIBUTIONS. FFO IS COMPUTED IN ACCORDANCE
WITH THE CURRENT NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS, INC.
("NAREIT") DEFINITION, WHICH ELIMINATES AMORTIZATION OF DEFERRED FINANCING
COSTS AND DEPRECIATION OF NON-REAL ESTATE ASSETS AS ITEMS ADDED BACK TO NET
INCOME WHEN COMPUTING FFO. THE COMPANY ADOPTED THIS METHOD OF CALCULATING FFO
EFFECTIVE AS OF THE NAREIT-SUGGESTED ADOPTION DATE OF JANUARY 1, 1996.
THE COMPANY
GENERAL
The Company is a Memphis, Tennessee-based self-administered and
self-managed umbrella partnership REIT ("UPREIT") which, as of June 30, 1997,
owned and operated 80 apartment communities containing 21,482 apartment units in
12 states (the "Communities"). At June 30, 1997, the Communities had an
average occupancy of 94.1% and an average rental rate per unit of $540.
Founded in 1977 by George E. Cates, the Company's Chairman of the Board of
Directors and Chief Executive Officer, the Company's predecessor grew from an
operator of a single 252-unit apartment community in Memphis, Tennessee into a
fully-integrated owner and operator of 5,580 apartment units in 22 apartment
communities in four southeastern states immediately prior to the Company's
initial public offering in February 1994 (the "Initial Offering"). Since the
Initial Offering, the Company has increased in size by 58 apartment communities
containing 15,902 apartment units, including 12 apartment communities containing
3,212 apartment units acquired in the Company's merger with America First REIT,
Inc. ("AFR") in June 1995 (the "AFR Merger") for an aggregate value of
approximately $111 million (as measured by Common Stock issued and AFR debt
assumed).
The Company's internal growth strategy is to increase operating cash flow
by (i) increasing rental rates through physical and marketing improvements, (ii)
controlling expenses through its system of detailed management reporting and
accountability, and (iii) maintaining high occupancy levels. The Company's
external growth strategy is to acquire and selectively develop additional
apartment units and, when apartment communities no longer meet the Company's
long-term strategic objectives or investment return goals, to dispose of those
communities. Through the UPREIT structure, the Company has the ability to
acquire apartment communities by issuing units of limited partnership interest
in the Operating Partnership ("Units") in tax-deferred exchanges with owners
of such communities.
The Company seeks to acquire apartment communities appealing to middle and
upper income residents in mid-size cities primarily in the southeastern United
States and Texas. Approximately 65% of the Company's apartment units are located
in Tennessee, Florida and Texas markets. The Company's strategic focus is to
provide its residents high quality apartment units in attractive community
settings, characterized by extensive landscaping and attention to aesthetic
detail. The Company's utilizes its experience and expertise in maintenance,
landscaping, marketing and management to effectively "reposition" many of the
apartment communities it acquires to raise occupancy levels and per unit average
rentals.
4
<PAGE>
As of July 31, 1997, the executive officers and directors of the Company
owned approximately 12% of the combined outstanding Common Stock and Class A
Common Units of Limited Partnership Interest in the Operating Partnership
("Class A Common Units"). Class A Common Units are redeemable by the holders
thereof for Common Stock on a one-for-one basis, or, at the Company's sole
election, for cash. Stock and other incentive compensation are used to motivate
employees to meet long-term management goals that are consistent with creating
value for the Company's shareholders.
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 STRUCTURE OF THE COMPANY
The Company is formed and operates in an UPREIT structure primarily through
the Operating Partnership and certain subsidiary operating partnerships. In
addition, the Company owns four Communities directly and 9 Communities through
wholly owned qualified REIT subsidiaries (each, a "QRS" and, collectively,
"QRSs") as defined in Section 856(i) of the Code.
THE OPERATING PARTNERSHIP
The Operating Partnership is the principal operating unit of the Company
and currently owns and operates 48 Communities and an approximately 42,000
square foot office building in Memphis, Tennessee in which the Company's
principal offices are located (the "Office Building"). In addition, the
Operating Partnership has entered into definitive agreements to acquire 3
apartment communities and to acquire approximately 64 acres of land on which it
intends to develop an apartment community (the "Proposed Acquisitions"). The
Operating Partnership conducts the Company's multifamily property management,
marketing, landscaping and acquisition business. The Company currently owns
directly a 1% general partnership interest in the Operating Partnership, and,
through its QRS, MAC II of Delaware, Inc., owns a 80.4% limited partnership
interest in the Partnership. The remaining 18.6% limited partnership interest in
the Partnership is owned by the holders of Class A Common Units. The Amended and
Restated Agreement of Limited Partnership of the Operating Partnership, as
further amended (the "Partnership Agreement") provides for a special
allocation of net income or loss of the Operating Partnership to holders of the
Class A Common Units to provide such holders with the economic and tax
attributes that they would enjoy if the Operating Partnership owned all assets
currently owned outright by the Company or by the AFRI QRSs (hereinbelow
defined).
THE TEXAS OPERATING PARTNERSHIP
Nine Communities are owned and operated through Mid-America Apartments of
Texas, L.P. (the "Texas Operating Partnership") in which the Operating
Partnership is the sole 99% limited partner and MAC of Delaware, Inc., a QRS of
the Company is the sole 1% general partner. The Texas Operating Partnership is
the primary operating unit of the Company in the state of Texas.
SUBSIDIARY PARTNERSHIPS
Nine Communities are owned and operated through subsidiary limited
partnerships (the "Subsidiary Partnerships"). The Company is the sole general
partner of all Subsidiary Partnerships except one, owning between a 1% and 10%
general partnership interest therein, and the Operating Partnership is the sole
limited partner thereof, owning between a 90% and 99% limited partnership
interest therein. One Community is owned in a single purpose Subsidiary
Partnership of which a QRS is the sole general partner owning a 1% general
partnership interest therein, and the Operating Partnership is the sole limited
partner thereof, owning a 99% limited partnership interest therein.
PROPERTIES OWNED BY QRSS
Nine Communities are owned through five QRSs, namely America First Austin
REIT, Inc., America First Florida REIT, Inc., America First South Carolina REIT,
Inc., America First Tennessee REIT, Inc., and
5
<PAGE>
America First Texas REIT, Inc. (collectively, the "AFRI QRSs"). The AFRI QRSs
became wholly owned subsidiaries of the Company in connection with the AFR
Merger.
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 be
taxed as a REIT. Although the Company believes that it was organized and has
been operating in conformity with the requirements for qualification as a REIT
("REIT Qualification") under the Internal Revenue Code of 1986, as amended
(the "Code"), 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 Company's
capital stock is subject to certain restrictions and ownership of the capital
stock by any single person is limited to 9.9% of the total value of outstanding
capital stock, subject to certain exceptions. See "Description of Capital
Stock -- Ownership Limitations."
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE OFFERED SECURITIES 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 AND IN ANY PROSPECTUS SUPPLEMENT IN DETERMINING WHETHER TO
PURCHASE THE OFFERED SECURITIES. INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND IN ANY PROSPECTUS SUPPLEMENT MAY CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, 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,
AND ANY DOCUMENT 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.
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS
The Company's ability to make distributions to its shareholders is
dependent on the ability of the Company to generate FFO in excess of scheduled
principal payments on indebtedness and capital expenditure requirements. FFO and
the value of the Communities may be adversely affected by events or conditions
which are beyond the Company's control, including an oversupply of apartments or
a reduction in demand for apartments in the Company's markets, the cost of
regulation, changes in tax laws, housing laws, increasing interest rate levels,
and the unavailability of financing. FFO would be adversely affected if a
significant number of residents were unable to pay rent or if apartments could
not be rented on favorable terms. Significant expenditures associated with each
equity investment in a Community (such as mortgage payments, if any, real estate
taxes and maintenance costs) generally are not reduced when circumstances cause
a reduction in a Community's rent revenue.
OPERATING RISKS
The Communities 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 adverse economic conditions in the areas in which the Communities
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. The local rental market
may limit the extent to which rents may be increased in response to operating
expense increases 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.
DEPENDENCE ON MEMPHIS, TENNESSEE MARKET
As of July 31, 1997, approximately 21% of the apartment units in the
Communities were located in the Memphis, Tennessee market. The Company's
performance, therefore, may be linked to economic conditions in that market.
Adverse developments in that market, including the risk factors described above,
could adversely affect the Company's operating results.
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ILLIQUIDITY OF REAL ESTATE COULD ADVERSELY AFFECT THE PRICE AND TIMING OF
SALES OF COMMUNITIES
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. 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 Robert F. Fogelman, a member
of the Company's Board of Directors, in connection with the Company's formation,
without the advance written consent of Mr. Fogelman, so long as he continues to
own at least 217,500 Common Units. The Company also has agreed not to sell or
refinance four other Communities without the advance written consent of certain
limited partners of the Operating Partnership (including, with respect to one
Community in addition to Greenbrook, Mr. Fogelman; all such limited partners
being collectively referred to hereinafter as the "Taxable Partners") who
continue to own in the aggregate at least 50% of the Common Units received on
account of the transfer of the applicable Community in connection with the
Company's formation. The Taxable Partners may withhold such consent in their
sole discretion, precluding the sale or refinancing of such Communities, which
could adversely affect the Company's liquidity or ability to take advantage of
particular opportunities.
BOND COMPLIANCE REQUIREMENTS MAY LIMIT INCOME FROM CERTAIN COMMUNITIES
Nineteen of the Company's Communities 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 July 31, 1997 was approximately $97.1 million.
Communities financed with the proceeds of tax-exempt bonds are subject to
various restrictions and requirements, including a requirement that not less
than 20% of the apartment units in each such Community be occupied by residents
whose income does not exceed 80% of the median income for the area at all times
during the period specified in the bond documents. The bond compliance
requirements may have the effect of limiting the Company's income from affected
Communities in the event the Company is required to lower its rental rates to
attract residents meeting the qualification requirements. In the event that tax
law 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 Communities or developments, nor is the Company aware of any other
material environmental condition with respect to any of the Communities.
Each of the Communities 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 Communities. 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 Communities, the Company, the Operating Partnership, the Texas Operating
Partnership or the Operating Subsidiaries, as the case may be, potentially may
be liable for damages or cleanup, investigation or remediation costs.
With the exception of two Communities, 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
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Environmental Protection Agency ("EPA") approved levels. In each instance
where sampling disclosed elevated radon levels, the owners of the affected
Communities 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 Community 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 Communities have revealed all
environmental liabilities, that any prior owner of a Community did not create
any material 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 Communities.
Twenty of the Communities have asbestos-containing materials ("ACM") on
or in insulation, floor and ceiling coverings. While the precise amounts of ACM
contained in the Communities 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 12 of the
Communities are non-friable. Friable ACM are contained in eight Communities and
the Company believes that such ACM are subject to adequate maintenance programs.
The ESAs do not recommend any remediation of ACM at any Community. 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 Communities 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 Communities 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 Communities, 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
Communities 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
Communities that are subject to the FHA are in compliance with such law.
RISKS ASSOCIATED WITH DEBT FINANCING
The Company currently uses and intends to continue using debt financing for
acquisitions and development. Such debt financing may include permanent mortgage
financing and the use of the Company's unsecured bank line of credit (the
"Credit Line"). Payments of principal and interest on borrowings may leave the
Company with insufficient cash resources to operate the Communities or pay
distributions required to be paid in respect of the Series A Preferred Stock or
in order for the Company to maintain its qualification as a REIT. 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's
assets, 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 46% at July 31, 1997. The Board of
Directors, without shareholder approval, can 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 FFO, cash flow and ability to make distributions to its
shareholders; increase the risk of default on the Company's obligations and
increase the risk of foreclosure on property securing debt.
As of July 31, 1997, approximately $131.7 million of long-term fixed rate
debt was recourse to the Operating Partnership. The Company has agreed to
maintain $8.9 million of recourse debt in order to
9
<PAGE>
preserve the tax bases of the Taxable Partners (except Mr. Fogelman) in their
Common Units. Upon the liquidation and dissolution of the Operating Partnership,
the Taxable Partners (except Mr. Fogelman) have agreed to indemnify the Company
for any deficiency in the repayment of such debt and contribute the amount of
any such deficiency to the Operating Partnership as additional capital. 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 Common
Units. The Company has agreed to maintain at least $12.6 million of such
guaranteed non-recourse indebtedness for so long as Mr. Fogelman owns at least
285,250 Common Units. The Company has agreed to indemnify Mr. Fogelman and the
other Taxable Partners for taxes, penalties and interest that may be incurred
due to inadvertent prepayment of debt by the Company. The foregoing agreements
require that the Company to maintain at least $21.5 million of indebtedness
unless the appropriate Taxable Partners consent to the prepayment of such
indebtedness or dispose of their Common Units, which could limit the Company's
ability to control the terms of its mortgage financing or the Credit Line. The
Company could be forced to dispose of certain Communities upon disadvantageous
terms, which could result in losses to the Company and could adversely affect
cash flow available for distribution to shareholders. Moreover, if a Community
is mortgaged to secure payment of indebtedness and the Company is unable to meet
mortgage payments, the Community could be foreclosed upon by or otherwise
transferred to the mortgagee with a consequent loss of income and asset value to
the Company.
TAX RISKS
TAX LIABILITIES AS A CONSEQUENCE OF THE FAILURE TO QUALIFY AS A REIT
The Company operates and intends to continue to operate so as to qualify as
a REIT for federal income tax purposes. The Company has not requested, and does
not expect to request, a ruling from the Internal Revenue Service (the
"Service") that it qualifies as a REIT. 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 capital stock, the nature of its assets, the sources of its income
and the amount of its distributions to its shareholders. See "Federal Income
Tax Considerations."
If the Company were to fail 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 alternative minimum tax) on its resulting taxable
income at regular corporate rates. Unless entitled to relief under certain
provisions of the Code, the Company would be disqualified from treatment as a
REIT for the four taxable years following the year during which the
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 continue 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. See "Federal
Income Tax Considerations".
REIT MINIMUM DISTRIBUTION REQUIREMENTS
In order to avoid corporate income taxation of the earnings it distributes,
the Company generally is required each year to distribute to its shareholders at
least 95% of its net taxable income (excluding any net capital gain). In
addition, 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) 100% of
its undistributed income from prior years.
The Company has made and intends to continue to make distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The Company's income will consist primarily of the
Company's share of the income of the Operating Partnership, and the Company's
cash available for distribution will consist primarily of the Company's share of
cash distributions from the Operating Partnership. Differences in timing between
the recognition of taxable income and the receipt of cash available for
distribution due to the seasonality of the multi-family residential industry
10
<PAGE>
could require the Company, through the Operating Partnership, to borrow funds on
a short-term basis to meet the 95% distribution requirement and to avoid the
nondeductible excise tax.
Distributions by the Operating Partnership will be determined by the Board
of Directors of the Company, as the sole general partner of the Operating
Partnership, and will be dependent on a number of factors, including the
aggregate amount of the Operating Partnership's cash available for distribution,
the Operating Partnership's financial condition, any decision by the Board of
Directors to reinvest funds rather than to distribute such funds, the aggregate
amount of capital expenditures, the annual distribution requirements under the
REIT provisions of the Code and such other factors as the Board of Directors
deems relevant. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Distribution Requirements."
CLASSIFICATION OF THE OPERATING PARTNERSHIP, THE TEXAS OPERATING PARTNERSHIP
AND THE SUBSIDIARY PARTNERSHIPS FOR FEDERAL INCOME TAX PURPOSES; IMPACT ON REAL
ESTATE INVESTMENT TRUST STATUS
The Company has not requested, and does not expect to request, a ruling
from the Service that the Operating Partnership, the Texas Operating Partnership
or any Subsidiary Partnership (collectively, the "Property Partnerships") will
be classified as partnerships for federal income tax purposes. If the Service
were to challenge successfully the tax status of any Property Partnership as a
partnership for federal income tax purposes, such Property Partnership would be
taxable as a corporation. In such event, the Company would cease to qualify as a
REIT for a variety of reasons. Furthermore, imposition of a corporate income tax
on any Property Partnership would substantially reduce the amount of cash
available for distribution to the Company and its shareholders. See "Federal
Income Tax Considerations."
OTHER TAX LIABILITIES
Even if the Company qualifies as a REIT, the Company, any QRS, or any
Property Partnership may be subject to certain federal, state, and local taxes
on their income and property which could reduce operating cash flow.
POTENTIAL CONFLICTS OF INTEREST
Holders of Class A Common Units may suffer different and more adverse tax
consequences than the Company upon the sale of any of the Communities acquired
upon formation of the Company or refinancing or prepayment of indebtedness
associated with or secured by any of such Communities. Therefore, such holders,
including Mr. Cates, Mr. Fogelman, and O. Mason Hawkins, who is also a member of
the Board of Directors, may have different objectives from the Company regarding
the appropriate pricing and timing of any refinancing or prepayment of
indebtedness associated with such Communities or any sale of such Communities.
The Company has exclusive authority as to whether and on what terms to sell or
refinance or repay indebtedness related to an individual Community (except
certain Communities 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 Community. 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 Community, 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 Community and increase
the level of debt. Moreover, as to five of the Communities acquired upon
formation of the Company, the Operating Partnership has agreed that it will not
sell such Communities or refinance the indebtedness associated with such
Communities 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. Further, 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 Common Units and (ii) maintain approximately $8.9 million of
recourse debt in order to preserve the Taxable Partners' tax bases in their
Common Units.
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<PAGE>
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF SHARES
The Company's charter limits ownership of the Company's capital stock by
any single shareholder to 9.9% of the aggregate value of the outstanding capital
stock (the "Ownership Limit"). Shares acquired or transferred in breach of the
Ownership Limit shall be deemed "Excess Shares" and shall be (i) 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 New York Stock Exchange (the "NYSE") (which
redemption price may be paid in Common Units). An individual who acquires Excess
Shares bears the risk that, among other things, (i) he may lose control over the
power to dispose of such Excess Shares, (ii) he may not be able to recognize the
profit from the sale of such Excess Shares upon an increase in the market price
thereof, and (iii) he may be required to recognize a loss from the sale of such
Excess Shares upon a decrease in the market price thereof.
LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL
OWNERSHIP LIMIT
The Ownership Limit may have the effect of precluding acquisition of
control of the Company by a third party without consent of the Board of
Directors. See "Description of Capital Stock of the Company -- Ownership
Limitations."
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 1998, 1999, and 2000,
respectively. Directors in each class are elected for a three-year term. The
staggered terms for directors may affect the shareholders' ability to change
control of the Company even if a change in control were in the shareholders'
interest. See "Description of Capital Stock of the Company -- Charter and Bylaw
Provisions."
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. Currently, 2,000,000 shares of the
Company's 9.5% Series A Cumulative Preferred Stock (the "Series A Preferred
Stock") are issued and outstanding. See "Description of Capital Stock of the
Company -- Preferred Stock" and "-- Series A Preferred Stock."
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. See "Description of
Capital Stock of the Company -- Tennessee Anti-Takeover Statutes."
USE OF PROCEEDS
The Company will contribute the net proceeds of any sale of the Offered
Securities by the Company to the Operating Partnership in exchange for units of
limited partnership interests having characteristics similar to those of the
Offered Securities. Unless otherwise set forth in the applicable Prospectus
Supplement, the net proceeds from the sale of any Offered Securities will be
used by the Company 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.
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CONSOLIDATED RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DISTRIBUTIONS AND
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratio of earnings to
combined fixed charges and preferred stock distributions of the Company and for
the predecessor to the Company prior to February 4, 1994:
<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ------------
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ------------
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
<S> <C> <C> <C> <C> <C> <C>
Distributions......................... 1.07x 1.32x 1.82x 1.50x 1.52x 1.48x
Ratio of Earnings to Fixed Charges...... 1.07x 1.32x 1.82x 1.50x 1.57x 1.73x
</TABLE>
For the purpose of calculating the consolidated ratio of earnings to
combined fixed charges and preferred stock distributions and the consolidated
ratio of earnings to fixed charges, earnings consist of net income (loss) before
gain on disposition of properties, extraordinary items and allocation to
minority interests, plus fixed charges less capitalized interest. Fixed charges
consist of interest expense, capitalized interest and amortization of deferred
financing costs. Prior to 1996, the Company had not issued any Preferred Stock;
therefore, for the years prior to 1996 the ratios of earnings to combined fixed
charges and preferred stock distributions and the ratios of earnings to fixed
charges are the same.
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DESCRIPTION OF CAPITAL STOCK
THE SUMMARY OF THE TERMS OF THE SHARES OF THE COMPANY'S CAPITAL STOCK SET
FORTH BELOW DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE AMENDED AND RESTATED CHARTER OF THE COMPANY AS
FURTHER AMENDED, AND THE AMENDED AND RESTATED BYLAWS OF THE COMPANY, BOTH OF
WHICH MAY BE FURTHER AMENDED FROM TIME TO TIME AND BOTH OF WHICH ARE
INCORPORATED HEREIN BY REFERENCE.
GENERAL
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 granted by the Board of Directors in
connection with the issuance of the Series A Preferred Stock and preferential
rights as may be granted by the Board of Directors in connection with the future
issuances 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. In 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 the Series A Preferred Stock and other
shares of Preferred Stock which may be issued in the future. 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 Company is authorized to issue up to 5,000,000 shares of 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 to the Company's
Charter without any further vote or action by the Company's shareholders. As of
the date of this Prospectus, 2,000,000 shares of the Series A Preferred Stock
were issued and outstanding, having the following rights, restrictions,
limitations, preferences, and other attributes:
THE SERIES A PREFERRED STOCK
MATURITY. The Series A Preferred Stock has no stated maturity and is not
be subject to any sinking fund or mandatory redemption.
RANK. The Series A Preferred Stock, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company, ranks (i)
senior to all classes or series of Common Stock, and to all equity securities
ranking junior to the Series A Preferred Stock, (ii) on 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.
DIVIDENDS. Holders 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 distributions at the rate of 9.5% per annum of the
$25 liquidation preference per share (equivalent to a fixed annual amount of
$2.375 per share).
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<PAGE>
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
distributions 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.
REDEMPTION. Except in certain circumstances relating to the 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 distributions
accrued and unpaid to the redemption date (whether or not declared) without
interest.
VOTING RIGHTS. Holders of Series A Preferred Stock generally will have no
voting rights except as required by law. However, whenever distributions on any
shares of Series A Preferred Stock shall be in arrears for 18 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 distributions 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 the holders of at least two-thirds of the outstanding Series
A Preferred Stock.
CONVERSION. The Series A Preferred Stock is not convertible into or
exchangeable for any other property or securities of the Company.
CHARTER AND BYLAW PROVISIONS
Shareholders' rights and related matters are governed by 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.
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.
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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 (x) by or at the
direction of the Board of Directors or (y) 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.
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.
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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.
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.
OWNERSHIP LIMITATIONS
For the Company to qualify as a REIT under the Code, among other things, no
more than 50% in value of its outstanding shares of capital stock may be owned,
directly or indirectly, by five or fewer shareholders (as 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 Company's 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
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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 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 that 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 Company's charter) of the capital stock on the date
the Company give 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.
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.
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 an
"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
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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 thereunder,
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;
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 dates on which any
such interest will be payable, the record dates for determining to whom
interest payments will be made, or the method by which such dates shall be
determined, the persons 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, where such
Debt Securities may be surrendered for conversion or registration of
transfer or exchange, and where 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, in whole or in part, at the option of the Company, if the Company
is to have such an option;
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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, in
whole or in part, pursuant to such obligation;
9. the price (stated as a percentage of par or the stated principal
amount of the Debt Securities) at which such Debt Securities will be issued
and, if other than 100% of the stated principal amount thereof, the portion
of the stated principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the portion of the
stated 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;
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 may bear no interest or may 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.
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The Indenture does not contain any other provision 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 deletion from, modification of or addition 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 of the person entitled thereto as it appears in the transfer record
maintained in respect of such series of Debt Securities 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 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 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).
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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).
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
of Debt Securities (Section 10.10).
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ADDITIONAL COVENANTS. Any additional covenant 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 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 holder of Debt Securities of any series may
institute any proceeding, judicial or otherwise, with respect to the Indenture
or for any remedy thereunder, except in the case of
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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
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 holder of any
series of Debt Securities then outstanding under the Indenture, unless such
holder 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 of and amendments to 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 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 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 provision 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
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issuance of Debt Securities in uncertificated form, PROVIDED that such action
shall not adversely affect the interests of the holders of the Debt Securities
of any series in any material respect; (v) to change or eliminate any provision
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 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).
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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 thereof
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 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,
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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 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
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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% in value Company's outstanding
capital 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 depository (the "Depository") 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 depository 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 of 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.
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: (1) the offering price; (2) the denominations and terms of the
series of Debt Securities purchasable upon exercise of such Securities Warrants;
(3) 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; (4) the date, if any, on and after
which such Securities Warrants and the related series of Debt Securities will be
transferable separately; (5) 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 of Debt Securities shall commence and the
date on which such right shall expire (the "Expiration Date"); (6) 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"); (7) whether the
Securities Warrants will be issued in registered or bearer form; (8) all
material United States federal income tax consequences; (9) the terms, if any,
on which the Company may accelerate the date by which the Securities Warrants
must be exercise; and (10) 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: (1) the
offering price; (2) 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;
(3) the designation and terms of any series of Preferred Stock with which such
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Securities Warrants are being offered and the number of such Securities Warrants
being offered with such Preferred Stock; (4) 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; (5) the date on which the right to
exercise such Securities Warrants shall commence and the Expiration Date; (6)
any special United States federal income tax consequences; and (7) 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 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).
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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.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTORY NOTES
The following summary of material federal income tax considerations that
may be relevant to a prospective holder of the Offered Securities is based on
current law, is for general information only and is not tax advice. The
discussion contained herein does not purport to deal with all aspects of
taxation that may be relevant to particular security holders 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.
The statements in this discussion are based on current provisions of the
Code, existing, temporary and currently proposed Treasury regulations
promulgated under the Code ("Treasury Regulations"), the legislative history
of the Code, existing administrative rulings and practices of the Service and
judicial decisions. No assurance can be given that future legislative, judicial,
or administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this Prospectus with respect to the
transactions entered into or contemplated prior to the effective date of such
changes. As used in this section, the term "Company" refers solely to
Mid-America Apartment Communities, Inc.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND SALE OF THE
OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
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.
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TAXATION OF THE COMPANY
GENERAL. The Company has elected 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, commencing with its 1994 taxable year, it
has been organized and has operated in such a manner as to qualify for taxation
as a REIT under the Code, and the Company intends to continue to operate in such
a manner, but no assurance 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.
Baker, Donelson, Bearman & Caldwell has acted as tax counsel to the
Company. The Company has obtained an opinion of Baker, Donelson, Bearman &
Caldwell as to its REIT qualification. Continued qualification and taxation as a
REIT will depend on the Company's ability to meet on a continuing basis, through
actual annual operating results, distribution levels, and stock ownership, the
various qualification tests imposed under the Code discussed below. No assurance
can be given that the actual results of the Company's operation for any
particular taxable year will satisfy such requirements. For a discussion of the
tax consequences of failure to qualify as a REIT, see "Federal Income Tax
Considerations -- Failure to Qualify".
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder and administrative and judicial interpretations thereof, all of which
are subject to change prospectively or retrospectively.
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" (i.e., taxation at both 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 "alternative minimum tax" on its undistributed 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) that 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. 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 asset)
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
asset's "built-in" gain (i.e. the excess of the fair market value of such
property at the time of acquisition by the Company over the adjusted basis of
such asset at such time), such gain will be subject to tax at the highest
regular corporate rate applicable (as provided in Treasury Regulations that have
not yet been promulgated). The results described above with respect to the
recognition of "built-in" gain
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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 (i) that is managed by one or more directors or trustees;
(ii) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (iii) that would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code; (iv) that
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (v) the beneficial ownership of which is held by 100 or
more persons; (vi) 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) during the last half of each taxable year
(the "5/50 Rule"); and (vii) that makes an election to be a REIT (or has made
such election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Service that must be met in
order to elect and to maintain REIT status; (viii) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations promulgated thereunder; and (ix) that meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) through (iv), inclusive, must be
met during the entire taxable year and that condition (v) 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. The Company has issued sufficient shares
of Common Stock and Preferred Stock with sufficient diversity of ownership to
allow the Company to satisfy requirements (v) and (vi). In addition, the
Company's Charter contains restrictions regarding the transfer of its shares
that are intended to assist the Company in continuing to satisfy the share
ownership requirements described in (v) and (vi) above. See "Description of the
Capital Stock of the Company -- Ownership Limitations."
For purposes of determining Share Ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code Section 401(a), however, generally is not considered an
individual and the beneficiaries of such trust are treated as holding shares of
a REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.
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, deduction and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of
which has been owned by the REIT from the commencement of such corporation's
existence. Thus, in applying the requirements described herein, the Company's
"qualified REIT subsidiaries" 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".
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 gross
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 and asset tests (as discussed below). Thus, the
Company's proportionate share of the assets, liabilities and items of income of
the Operating Partnership, the Texas Operating Partnership and the Subsidiary
Partnerships shall be 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, there are
requirements relating to the Company's gross income that must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real
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property (including "rents from real property" and, in certain circumstances,
interest) or temporary investment income. Second, at least 95% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property or temporary investments,
and from dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Third, not more than 30%
of the Company's gross income (including gross income from prohibited
transactions) for each taxable year may be gain from the sale or other
disposition of (i) stock or securities held for less than one year, (ii) dealer
property that is not foreclosure property and (iii) certain real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property). For purposes of applying the 30% gross income test the
holding period of Communities 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 gross income requirements for a REIT described above 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 the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that 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, 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." 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 the tenants of such property, 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 that the services provided by the Company are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant".
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. The
Operating Partnership provides certain services with respect to the Communities
and with respect to the Communities 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 or a Property
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 or a Property 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 or a
Property 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
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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 two 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 cash
or cash items (including certain receivables), government securities, "real
estate assets" or, in cases where the Company raises new capital through shares
or long-term (at least five years) debt offerings, temporary investments in
shares or debt instruments during the one-year period following the Company's
receipt of such capital. The term "real estate asset" includes interests in
real property, interests in mortgages on real property to the extent the
mortgage balance does not exceed the value of the associated real property and
shares of other REITS. For purposes of the 75% asset test, the term "interest
in real property" includes an interest in land and improvements thereon, such
as buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold in real
property and an option to acquire real property (or a leasehold in real
property). Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by the Company may 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 any Subsidiary Partnership or the stock of
a qualified REIT subsidiary as defined by Section 856(i) of the Code).
The Company believes that, at all relevant times (i) at least 75% of the
value of its total assets has been and will continue to be represented by real
estate assets, cash and cash items (including receivables) and government
securities and (ii) it has not owned and will not own any securities that do not
satisfy the 75% asset test. In addition, the Company does not intend to acquire
or to dispose of, or cause any Property Partnership to acquire or to dispose of,
assets in the future in a way that would cause it to violate either asset test.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of nonqualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT and avoid corporate income taxation of the earnings that it distributes, is
required to distribute distributions (other than capital gain distributions) to
its shareholders in an amount at least equal to (i) the sum of (A) 95% of the
Company's "REIT taxable income" (computed without regard to the distributions
paid deduction and its net capital gain) and (B) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) 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 distribution 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
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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% nondeductible 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, which may be included in the
Company' deduction for dividends paid for the earlier year. Although the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends,
it will be required to pay interest to the Service 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 has complied and will continue to comply with
such requirements.
FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative 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 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 the Company ceased to qualify as a REIT. It is
not possible to state whether in all circumstances the Company would be entitled
to such statutory relief.
REAL ESTATE INVESTMENT TRUST SIMPLIFICATION ACT. On August 5, 1997,
President Clinton signed into law the Taxpayer Relief Act of 1997 (the "TRA").
Included as part of that legislation was the Real Estate Investment Trust
Simplification Act ("REITSA"), comprising Sections 1251 through 1263 of the
TRA. The provisions of REITSA are effective for taxable years beginning after
the date of enactment. Therefore the provisions shall apply to the Company
beginning with its 1998 taxable year.
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Under REITSA, a REIT may now receive income from impermissible services at
a given property in an amount of up to one percent of the total income of such
property, provided that the amount of any such impermissible service shall be
not less that 150% of the cost to the REIT in rendering or furnishing such
service. This provision is intended to permit a REIT to receive a de minimus
amount of impermissible income from each of its properties.
Moreover, REITSA repeals the prior requirement that no more than 30% of a
REIT's gross income be derived from gain on the sale of stock or securities held
for less than one year, dealer property that is not foreclosure property, and
certain property held for less than four years.
Subject to limited exceptions, distributions of a REIT are now treated as
being made first out of the earliest accumulated earnings and profits of the
REIT and any C corporation predecessor, rather than out of the the most recently
accumulated earnings and profits.
Other provisions of REITSA benefiting REITs generally are (i) the inclusion
of payments under certain interest rate swaps, futures contracts and other
hedging instruments as qualifying income, (ii) the treatment of any wholly owned
subsidiary as a qualified REIT subsidiary, notwithstanding the fact that it
might not have always been owned by the REIT, (iii) the imposition of a $25,000
fine ($50,000 in the event of intentional disregard) for failure to issue a
shareholder demand letter, rather than loss of REIT status, and (iv) the
granting of a tax credit to REIT shareholders for taxes by the REIT on
undistributed capital gains.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE U.S. SHAREHOLDERS.
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common Stock or
Preferred Stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate whose income from sources without
the United States is includible in gross income for U.S. federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States or (iv) any trust with respect to which (A) a U.S.
court is able to exercise primary supervision over the administration of such
trust and (B) one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust. 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 stock. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's stock,
but rather will reduce the adjusted basis of such stock. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a shareholder's stock, such distributions will be included
in income as long-term capital gain (or short-term capital gain if the shares of
stock have been held for one year or less) assuming the shares of stock are
capital assets in the hands of the shareholder. In addition, any distribution
declared by the Company in October, November or December of any year and payable
to a shareholder of record on a specified 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 distribution 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. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the stock will not be treated as passive activity
income and, therefore, shareholders generally will not be able to apply any
"passive activity losses" (such as losses from certain types of
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limited partnerships in which the shareholder is a limited partner) against such
income. In addition, taxable distributions from the Company generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of stock (or distributions
treated as such) will be treated as investment income only if the shareholder so
elects, in which case such capital gains will be taxed at ordinary income rates.
The Company will notify shareholders after the close of the Company's taxable
year as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON OR PREFERRED STOCK.
In general, any gain or loss realized upon a taxable disposition of the
stock by a shareholder who is not a dealer in securities will be treated as
long-term capital gain or loss if the shares of stock have been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of shares of stock by a shareholder who has held
such shares for six months or less (after applying certain holding period
rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such shareholder as
long-term capital gain. All or a portion of any loss realized upon a taxable
disposition of shares of stock may be disallowed if other shares of stock are
purchased within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES.
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%,
and the tax rate on net capital gains applicable to individuals is 28% for
capital assets held for less than 18 months and 20% for capital assets held for
at least 18 months. Thus, the tax rate differential between capital gain and
ordinary income for individuals may be significant. In addition, the
characterization of income as capital or ordinary may affect the deductibility
of capital losses. Capital losses not offset by capital gains may be deducted
against an individual's ordinary income only up to a maximum annual amount of
$3,000. Unused capital losses may be carried forward. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING.
The Company will report to its U.S. shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. 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 to any shareholders
who fail to certify their non-foreign status to the Company. The Service issued
proposed regulations in April 1996 regarding the backup withholding rules as
applied to Non-U.S. Shareholders. These proposed regulations would alter the
current system of backup withholding compliance and are proposed to be effective
for distributions made after December 31, 1997. See "Federal Income Tax
Considerations -- Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS.
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions by a REIT to an exempt employee pension trust
do not constitute UBTI, provided that the
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shares of the REIT are not otherwise used in an unrelated trade or business of
the exempt employee pension trust. Based on that ruling, amounts distributed by
the Company to Exempt Organizations generally should not constitute UBTI.
However, if an Exempt Organization finances its acquisition of stock with debt,
a portion of its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17) and (20), respectively, of 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, in certain circumstances, a
pension trust that owns more than 10% of the Company's stock is required to
treat a percentage of the dividends from the Company as UBTI (the "UBTI
Percentage"). The UBTI Percentage is the gross income derived by the Company
from an unrelated trade or business (determined as if the Company were a pension
trust) divided by the gross income of the Company for the year in which the
dividends are paid. The UBTI rule applies to a pension trust holding more than
10% of the Company's stock only if (i) the UBTI Percentage is at least 5%, (ii)
the Company qualifies as a REIT by reason of the modification of the 5/50 Rule
that allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interests in the pension
trust and (iii) either (A) one pension trust owns more than 25% of the value of
the Company's shares or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's shares collectively own more than 50% of
the value of the Company's shares.
TAXATION OF NON-U.S. SHAREHOLDERS.
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no
attempt will be made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO
AN INVESTMENT IN THE COMMON OR PREFERRED STOCK, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends 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 or eliminates that tax.
However, if income from the investment in the stock is treated as effectively
connected with the Non-U.S. Shareholder's conduct of a U.S. trade or business,
the Non-U.S. Shareholder generally will be subject to federal income tax at
graduated rates, in the same manner as U.S. shareholders are taxed with respect
to such distributions (and also may be subject to the 30% branch profits tax in
the case of a Non-U.S. Shareholder that is a non-U.S. corporation). The Company
expects to withhold U.S. income tax at the rate of 30% on the gross amount of
any such distributions made to a Non-U.S. Shareholder unless (i) a lower treaty
rate applies and any required form evidencing eligibility for that reduced rate
is filed with the Company or (ii) the Non-U.S. Shareholder files an IRS Form
4224 with the Company claiming that the distribution is effectively connected
income. The Service issued proposed regulations is April 1996 that would modify
the manner in which the Company complies with the withholding requirements.
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's shares of
stock, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Shareholder's stock, such distributions
will give rise to tax liability if the Non-U.S. Shareholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares of 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, the entire
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amount of any distribution normally will be subject to withholding at the same
rate as a dividend. However, a Non-U.S. Shareholder can file a claim for refund
with the Service for the overwithheld amount to the extent it is determined
subsequently that such distribution was, in fact, in excess of the current and
accumulated earnings and profits of the Company.
In August 1996, the U.S. Congress passed the Small Business Job Protection
Act of 1996, which requires the Company to withhold 10% of any distribution in
excess of its current and accumulated earnings and profits. Consequently,
although the Company intends to withhold at a rate of 30% on the entire amount
of any distribution, to the extent that the Company does not do so, any portion
of a distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
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 Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Shareholders thus would be taxed at the
normal capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Distributions subject to FIRPTA also may be
subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty relief or exemption. The Company is required
to withhold 35% of any distribution that is designated by the Company as a
capital gains dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his shares of
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. Because the stock is publicly
traded, no assurance can be given that the Company is or will be a
"domestically controlled REIT." In addition, a Non-U.S. Shareholder that owns,
actually and constructively, 5% or less of the Company's shares throughout a
specified "look-back" period will not recognize gain on the sale of his shares
taxable under FIRPTA if the shares are traded on an established securities
market. Finally, gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (i) investment in the stock is effectively connected with the
Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain, or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and certain other conditions apply, 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 the stock were to be subject to taxation under
FIRPTA, the Non-U.S. Shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations).
OTHER TAX CONSIDERATIONS
The Company, the QRSs, the Property Partnerships and the Company's
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 PROPERTY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in the
Property Partnerships. The discussion does not cover state or local tax laws or
any Federal tax laws other than income tax laws.
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CLASSIFICATION AS A PARTNERSHIP
The Company is entitled to include in its income its distributive share of
the Property Partnerships' income and to deduct its distributive share of the
Property Partnerships' losses only if the Property Partnerships are classified
for Federal income tax purposes as partnerships rather than as associations
taxable as corporations. An entity will be classified as a partnership, rather
than as a corporation or an association taxable as a corporation for federal
income tax purposes if the entity (i) is treated as a partnership under Treasury
Regulations, effective January 1, 1997, relating to entity classification (the
"Check-the-Box Regulations") and (ii) is not a "publicly traded"
partnership.
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make an
election, it generally will be treated as a partnership for federal income tax
purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Operating Partnership, the Texas
Operating Partnership and all but one of the Subsidiary Partnerships, will be
respected for all periods prior to January 1, 1997 if (i) the entity had a
reasonable basis for its claimed classification, (ii) the entity and all members
of the entity recognized the federal tax consequences of any changes in the
entity's classification within the 60 months prior to January 1, 1997, and (iii)
neither the entity nor any member of the entity was notified in writing by a
taxing authority on or before May 8, 1996 that the classification of the entity
was under examination. The Property Partnerships in existence prior to January
1, 1997 reasonably claimed partnership classification under the Treasury
regulations relating to entity classification in effect prior to January 1, 1997
and such classification should be respected for federal income tax purposes. The
Property Partnerships intend to continue to be classified as partnerships for
federal income tax purposes and no Property Partnership will elect to be treated
as an association taxable as a corporation under the Check-the-Box Regulations.
Notwithstanding the Operating Partnership's classification as a
partnership, the Operating Partnership could be treated as a corporation for
federal income tax purposes if it were a "publicly traded partnership"
("PTP") within the meaning of Section 7704 of the Code. Under Section 7704 of
the Code, a partnership is classified as a PTP if interests in the partnership
are traded on an established securities market or are readily tradable on a
secondary market or the substantial equivalent thereof. If so classified, the
PTP is taxable as a corporation unless it qualifies for a special "90%
qualifying income exception" in Section 7704(c) of the Code. Under that
exception, a PTP is not subject to corporate-level tax if 90% or more of its
gross income consists of dividends, interest, "rents from real property" (as
that term is defined for purposes of the REIT rules, with certain
modifications), gain from the sale or other disposition of real property, and
certain other types of income. If the PTP fails to meet the 90% qualifying
income exception for a taxable year, and (i) the IRS determines that the failure
was inadvertent, (ii) the partnership takes steps to once again comply with the
90% qualifying income exception, and (iii) the partnership makes sure
adjustments or payments (including with respect to the partners) as may be
required by the IRS, then the partnership will be treated as continuing to
satisfy the 90% qualifying income exception.
The Regulations under Section 7704 (the "PTP Regulations") provide rules
for determining whether a partnership is a PTP and provide certain safe harbors
which, if satisfied, preclude a partnership from being so classified. However,
under a special transitional rule in the PTP Regulations, a partnership that was
actively engaged in an activity before December 4, 1995 is not subject to the
PTP Regulations, but rather may comply with the requirements of IRS Notice
88-75, for all taxable years beginning on or before December 31, 2005, provided
that the partnership does not add a substantial new line of business that does
not give rise to qualifying income. Under a "private placement" safe harbor
contained in IRS Notice 88-75, a partnership is not classified as a PTP if none
of he interests therein was issued in a transaction registered under the
Securities Act of 1933 and the partnership at all times does not have more than
500 partners (taking into account for this purpose the beneficial owners of
interests in any upper-tier partnerships, S corporations or grantor trust that
own an interest in the subject partnership).
The Operating Partnership has been, and will be, in the business of owning
and leasing real property before December 4, 1995 and thereafter through the
date of the closing of the Offering. Thus, it should
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qualify for transitional relief, and be subject to IRS Notice 88-75, provided it
is not deemed to have added a "substantial new line of business" that gives
rise to nonqualifying income. Assuming the Operating Partnership is not
considered to have added a substantial new line of business in connection with
the Transaction, it will satisfy the private placement safe harbor of IRS Notice
88-75 because it will have fewer than 500 partners (determined after looking
through upper-tier pass-through entities).
If the Operating Partnership is or becomes subject to the PTP Regulations
by reason of adding a substantial new line of business, it will not satisfy the
private placement safe harbor of such regulations because such safe harbor
requires, among other things, that the partnership have no more than 100
partners. The Operating Partnership presently has, and is expected to have in
the future, more than 100 partners. Moreover, the Operating Partnership may not
be able to satisfy any other safe harbor of the PTP Regulations. Consequently,
there is a risk that the ability of holders of Class A Common Units to exchange
their Class A Common Units for shares of Common Stock could cause the interests
in Operating Partnership to be viewed as readily tradable on a secondary market
or the substantial equivalent thereof. In the event, although the Operating
Partnership would be classified as a PTP, Counsel is of the opinion that the
Operating Partnership would satisfy the 90% qualifying income exception and
therefore be exempt from corporate-level tax. However, under Section 469(k) of
the Code, the partners of Operating Partnership would be required to apply the
passive loss limitations of Section 469 separately to the income and loss from
the Operating Partnership, even though it satisfies the 90% qualifying income
exception.
In rendering its opinion that the Operating Partnership will be treated for
federal income tax purposes as a partnership and not as a corporation or an
association taxable as a corporation, and that the Operating Partnership, if it
were classified as a publicly traded partnership, would satisfy the 90%
qualifying income exception of Section 7704(c) of the Code, Counsel has relied
on the following factual representations made by the Operating Partnership:
1. The Operating Partnership operate in accordance with Tennessee
law, the Partnership Agreement, and the statements and representations made
in this Prospectus.
2. No Units will be traded on an established securities market or
issued in a transaction registered under the Securities Act of 1933, and
the Operating Partnership will at no time have more than 500 Partners
(determined by treating as a Partner each person indirectly owning an
interest through a partnership, a grantor trust, or an S corporation).
3. Certain representations regarding the nature and type of the
Operating Partnership's expected sources of income.
The Company has obtained an opinion of Baker, Donelson, Bearman & Caldwell
that each Property Partnership will be classified as a partnership for federal
income tax purposes and not as a corporation or an association taxable as a
corporation or as a publicly traded partnership.
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 the Texas Operating Partnership or 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 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 Property Partnership would not pass through to its
partners, and its partners would be treated as stockholders for tax purposes.
Consequently, the Property 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.
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INCOME TAXATION OF THE PROPERTY 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 Partnership's income, gains, losses, deductions, and credits for any
taxable year of the Property 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 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 item.
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
has issued regulations requiring partnerships to use a "reasonable method" for
allocating 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 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
Partnership generally is equal to (i) the amount of cash and the basis of any
other property contributed to the partnership by the Company; (ii) increased by
(A) its allocable share of the partnership's income and (B) its allocable share
of indebtedness of the partnership and (iii) reduced, but not below zero, by (I)
the Company's allocable share of the Property Partnership's loss and (II) the
amount of cash distributed to the Company and by constructive distributions
resulting from a reduction in the Company's share of indebtedness of the
Property Partnership.
If the allocation of the Company's distributive share of a Property
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Property 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 Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Property 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 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.
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DEPRECIATION DEDUCTIONS.
To the extent that Communities have been or will be acquired in exchange
for cash, the initial basis in the Communities for federal income tax purposes
generally was or will be equal to the price paid to acquire the Communities. The
Property Partnerships depreciate 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 Property Partnerships use MACRS for the furnishings and equipment
in the Communities. Under MACRS, the Property Partnerships generally depreciate
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 Property Partnerships use ADS
for the buildings and improvements comprising the Communities. Under ADS, the
Property Partnerships generally depreciate 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 of limited partnership interest, 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.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters or
dealers for public offering and sale by them in syndicated or non-syndicated
public offerings or distributions, block trades, or otherwise, or may sell the
Offered Securities to investors directly or through designated agents. Any such
underwriter, dealer or agent involved in the offer and sale of the Offered
Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, or from time to time at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Company also may, from time to time, authorize
underwriters acting as agents to offer and sell the Offered Securities upon the
terms and conditions set forth in any Prospectus Supplement. Underwriters may
sell the Offered Securities to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions (which may be
changed from time to time) from the underwriters and/or from the purchasers for
whom they may act as agent. The Company may, from time to time, offer and sell
the Offered Securities directly to dealers, for their own account, utilizing any
of the pricing mechanisms described in the first sentence of this paragraph.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of the Offered Securities and any discounts,
concessions or commissions allowed by underwriters to participating dealers will
be set forth in the applicable Prospectus Supplement. Underwriters, dealers and
agents participating in the distribution of the Offered Securities may be deemed
to be underwriters, and any discounts and commissions received by them from the
Company or from purchasers of the Offered Securities and any profit realized by
them on resale of the Offered Securities may be deemed to be underwriting
discounts and commissions under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with the Company, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act.
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 Offered
Securities, the Company will execute an underwriting agreement with such
underwriter or underwriters at the time an agreement for such
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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 Offered Securities.
If a dealer is utilized in the sale of the Offered Securities, the Company
will sell such Offered Securities to the dealer, as principal. The dealer may
then resell such Offered 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 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,
1996, 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.
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.
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