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Filed pursuant to Rule 424(b)(5)
Registration No. 333-26415
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 22, 1997)
2,000,000 SHARES
AIMCO LOGO
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
9 1/2% CLASS H CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
------------------------
The shares of 9 1/2% Class H Cumulative Preferred Stock, par value $.01 per
share (the "Class H Preferred Stock"), are being offered by Apartment Investment
and Management Company ("AIMCO" or the "Company"), a Maryland corporation that
has elected to be taxed for Federal income tax purposes as a real estate
investment trust (a "REIT"). Dividends on the Class H Preferred Stock are
cumulative from the date of original issue and are payable quarterly, commencing
on October 15, 1998, at the rate of 9 1/2% per annum of the $25 liquidation
preference (equivalent to an annual dividend rate of $2.375 per share).
The Class H Preferred Stock is not redeemable prior to August 14, 2003,
except in certain limited circumstances relating to the ownership limitation
necessary to preserve AIMCO's qualification as a REIT. On and after August 14,
2003, the Class H Preferred Stock may be redeemed for cash at the option of
AIMCO, in whole or from time to time in part, at a redemption price of $25 per
share, plus accumulated, accrued and unpaid dividends, if any, to the redemption
date only with the proceeds from certain sales of equity securities. The Class H
Preferred Stock has no stated maturity and will not be subject to any sinking
fund or mandatory redemption and will not be convertible into or exchangeable
for any other securities of AIMCO. The Class H Preferred Stock will rank on a
parity with the outstanding shares of AIMCO's Preferred Stock (as defined
herein), including any shares of Class F Preferred Stock (as defined herein)
that may be issued in connection with the merger of Insignia Financial Group,
Inc. ("Insignia") into AIMCO (the "Insignia Merger"), and will rank senior to
any Class E Preferred Stock (as defined herein) that may be issued in connection
with the Insignia Merger, the Class A Common Stock (as defined herein) and Class
B Common Stock (as defined herein), in each case, with respect to the payment of
dividends and the distribution of amounts upon liquidation, dissolution or
winding up of AIMCO. The Class H Preferred Stock is subject to certain
restrictions on ownership and transfer designed to preserve AIMCO's status as a
REIT for federal income tax purposes.
AIMCO has applied to list the Class H Preferred Stock on the New York Stock
Exchange, Inc. (the "NYSE") under the symbol "AIVPrH." If approved for listing,
trading of the Class H Preferred Stock on the NYSE is expected to commence
within the 30-day period after the initial delivery of the Class H Preferred
Stock. While the Underwriters (as defined herein) have advised AIMCO that they
intend to make a market in the Class H Preferred Stock prior to the commencement
of trading on the NYSE, they are under no obligation to do so and may
discontinue market making at any time without notice. No assurance can be given
that a market for the Class H Preferred Stock will exist prior to commencement
of trading on the NYSE or at any other time. See "Underwriting."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-17 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS H PREFERRED STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- -------------------------------------------------------------------------------------------------------------------
Per Share................................................. $25.00 $.7875 $24.2125
- -------------------------------------------------------------------------------------------------------------------
Total(4).................................................. $50,000,000 $1,575,000 $48,425,000
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from the date of original issuance.
(2) AIMCO has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Before deducting estimated expenses of $300,000 payable by AIMCO.
(4) AIMCO has granted the Underwriters an option to purchase up to an additional
300,000 shares of Class H Preferred Stock to cover over-allotments, if any.
If all such shares are purchased, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $57,500,000, $1,811,250, and
$55,688,750, respectively. See "Underwriting."
------------------------
The shares of Class H Preferred Stock are offered by the several
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, subject to approval of certain legal matters by counsel for
the Underwriters and to certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the Class H Preferred Stock will be
made in New York, New York on or about August 14, 1998.
------------------------
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
------------------------
The date of this Prospectus Supplement is August 11, 1998.
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NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY AIMCO OR BY THE
UNDERWRITERS THAT WOULD PERMIT A PUBLIC OFFERING OF THE CLASS H PREFERRED STOCK
OFFERED HEREBY OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS
REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ARE REQUIRED BY AIMCO
AND THE UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS
AS TO THE OFFERING OF THE CLASS H PREFERRED STOCK OFFERED HEREBY AND THE
DISTRIBUTION OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS H PREFERRED
STOCK OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
THE CLASS H PREFERRED STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements in certain circumstances. Certain
statements in the Summary, under the caption "Risk Factors" and elsewhere in
this Prospectus Supplement, the accompanying Prospectus and the documents
incorporated by reference therein contain or may contain information that is
forward looking, including, without limitation, statements regarding
acquisitions, AIMCO's future financial performance and the effect of government
regulations. Actual results may differ materially from those described in the
forward-looking statements and will be affected by a variety of risks and
factors including, without limitation: national and local economic conditions;
the general level of interest rates; terms of governmental regulations that
affect AIMCO and interpretations of those regulations; the competitive
environment in which AIMCO operates; risks related to integrating acquired
businesses, including Insignia, with the existing businesses of AIMCO; financing
risks, including the risk that AIMCO's cash flow from operations may be
insufficient to meet required payments of principal and interest on outstanding
indebtedness and required dividends on outstanding preferred stock, including
the Class H Preferred Stock; real estate risks, including variations of real
estate values and the general economic climate in local markets and competition
for tenants in such markets; acquisition and development risks, including the
failure of acquisitions to perform in accordance with projections; and possible
environmental liabilities, including costs which may be incurred due to
necessary remediation of contamination of properties owned, acquired or
previously owned by AIMCO. In addition, AIMCO's continued qualification as a
REIT involves the application of highly technical and complex provisions of the
Internal Revenue Code of 1986, as amended (the "Code"). Readers should carefully
review AIMCO's financial statements and the notes thereto, as well as the risk
factors described herein and in the documents incorporated by reference in the
accompanying Prospectus.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere or incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus. Unless otherwise indicated, all information in this
Prospectus Supplement assumes that the Underwriters' over-allotment option is
not exercised.
THE COMPANY
AIMCO is one of the largest owners and managers of multifamily apartment
properties in the United States, based on apartment unit data compiled by the
National Multi Housing Council as of January 1, 1998. As of March 31, 1998,
AIMCO owned or managed 184,660 apartment units, comprised of 41,886 units in 153
apartment properties owned or controlled by AIMCO (the "Owned Properties"),
75,109 units in 480 apartment properties in which AIMCO had an equity interest
(the "Equity Properties") and 67,665 units in 356 apartment properties managed
by AIMCO for third parties and affiliates (the "Managed Properties," and,
together with the Owned Properties and the Equity Properties, the "AIMCO
Properties"). In addition to the Managed Properties, AIMCO manages all of the
Owned Properties and a majority of the Equity Properties. The AIMCO Properties
are located in 42 states, the District of Columbia and Puerto Rico. AIMCO
conducts substantially all of its operations through AIMCO Properties, L.P. (the
"AIMCO Operating Partnership") and its subsidiaries. As of March 31, 1998, AIMCO
held approximately an 88% interest in the AIMCO Operating Partnership. AIMCO was
formed on January 10, 1994 and has elected to be taxed as a REIT for Federal
income tax purposes since its inception.
RECENT DEVELOPMENTS
SECOND QUARTER EARNINGS
On July 24, 1998, the Company announced that its net income for the quarter
ended June 30, 1998 was $14.5 million, an increase of 173.6% compared to $5.3
million for the quarter ended June 30, 1997. The Company's net income for the
six months ended June 30, 1998 was $36.2 million, an increase of 269.4% compared
to $9.8 million for the six months ended June 30, 1997. Net income per common
share (diluted) was $0.63 for the six months ended June 30, 1998, an 18.9%
increase from $0.53 for the six months ended June 30, 1997. The Company's funds
from operations or "FFO" (calculated as described in note (d) to "-- Summary
Historical Financial Information of AIMCO" below) was $83.7 million for the six
months ended June 30, 1998, an increase of 194.7% compared to $28.4 million for
the six months ended June 30, 1997. FFO per common share was $1.63 for the six
months ended June 30, 1998, a 23.5% increase from $1.32 for the six months ended
June 30, 1997. Most of the improvement in net income and FFO for the 1998
periods over the comparable periods in 1997 was due to acquisitions. "Same
store" sales for the 168 apartment communities containing 43,937 units owned
during both 1998 and 1997, applying AIMCO's ownership interest in these "same
store" apartment communities, showed a 4.2% increase in revenues, a 3.2%
decrease in operating expenses and a 9.0% increase in net operating income for
the six months ended June 30, 1998 compared to the six months ended June 30,
1997. Weighted average physical occupancy for these 168 apartment communities
was 95.7% as of June 30, 1998 compared to 94.1% at June 30, 1997, an increase of
1.7%. Average monthly rent per occupied unit in these 168 apartment communities
increased from $614 at June 30, 1997 to $643 at June 30, 1998, a 4.7% increase.
CLASS G PREFERRED STOCK OFFERING
In July 1998, the Company sold an aggregate of 4,050,000 shares of its
Class G Cumulative Preferred Stock, par value $.01 per share ("Class G Preferred
Stock"), in an underwritten public offering, for net proceeds of approximately
$98.0 million. The Company used $83.0 million of net proceeds to repay
indebtedness outstanding under its credit facility, and used the remaining $15.0
million of net proceeds to fund acquisitions and for other general business
purposes.
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INSIGNIA MERGER
AIMCO and the AIMCO Operating Partnership have entered into a merger
agreement (the "Insignia Merger Agreement") with Insignia Financial Group, Inc.
("Insignia") and Insignia/ESG Holdings, Inc. ("Holdings") pursuant to which
Insignia will be merged into AIMCO (the "Insignia Merger"). Insignia is a fully
integrated real estate services organization specializing in the ownership and
operation of securitized real estate assets. Insignia is the largest manager of
multifamily residential properties in the United States according to the 1998
National Multi Housing Council 50 Report published in March 1998 and one of the
leading brokers and managers of commercial properties according to the
Commercial Property News dated January 1, 1998. Insignia performs property
management, asset management, investor services, partnership accounting, real
estate investment banking, and real estate brokerage services for various types
of property owners, including approximately 900 limited partnerships having
approximately 350,000 limited partners. Insignia provides property management
services for approximately 185,000 multifamily units, consisting of 113,000
units which are controlled by Insignia and 72,000 units owned by third parties.
The Insignia Merger is subject to approval by Insignia's stockholders and other
customary conditions. It is expected that the Insignia Merger, if approved,
would be completed in the third quarter of 1998.
At the time of the Insignia Merger, Insignia will consist principally of:
(i) Insignia's interests in Insignia Properties Trust, a Maryland REIT, which is
a majority owned subsidiary of Insignia ("IPT"), and Insignia Properties, L.P.,
IPT's operating partnership ("IPLP"); (ii) 100% of the ownership of the Insignia
entities that provide multifamily property management and partnership
administrative services; (iii) Insignia's interest in multifamily coinvestments;
(iv) Insignia's ownership of subsidiaries that control multifamily properties
not included in IPT; (v) Insignia's limited partner interests in public and
private syndicated real estate limited partnerships; and (vi) assets incidental
to the foregoing businesses (collectively, the "Insignia Multifamily Business").
Prior to the Insignia Merger, the remaining businesses of Insignia will be
transferred to Holdings and all of the capital stock of Holdings will be
distributed to Insignia's stockholders (the "Distribution").
If the Insignia Merger is approved by the stockholders of AIMCO, the
outstanding shares of Insignia's Common Stock will be converted into the right
to receive, in the aggregate, a number of shares of AIMCO's Class E Cumulative
Convertible Preferred Stock, par value $.01 per share (the "Class E Preferred
Stock"), approximately equal to $303 million divided by the AIMCO Index Price
(as defined below) or, in certain cases, cash which AIMCO, in its sole
discretion, may elect to pay if the AIMCO Index Price is less than $36.50 (the
"Merger Consideration"). In addition to receiving the same dividends as holders
of shares of AIMCO's Class A Common Stock, par value $.01 per share (the "Class
A Common Stock"), holders of Class E Preferred Stock will be entitled to receive
a special dividend of $50 million in the aggregate (the "Special Dividend").
When the Special Dividend is paid in full, each share of Class E Preferred Stock
will automatically convert into one share of Class A Common Stock (subject to
certain antidilution adjustments). In addition, approximately $458 million in
outstanding debt and other liabilities of Insignia and its subsidiaries will
become obligations of AIMCO and its subsidiaries after the Insignia Merger. The
"AIMCO Index Price" is defined as the average market price of Class A Common
Stock during a fixed period prior to the Insignia Merger, subject to a maximum
average price of $38.00 per share. The AIMCO Index Price is not intended to and
will not necessarily represent the fair market value of Class E Preferred Stock
and Class F Preferred Stock (as defined below).
If the stockholders of AIMCO do not approve the Insignia Merger, the
Insignia Merger will nonetheless be consummated assuming all other conditions
thereto are satisfied or waived. In such event, AIMCO will issue to holders of
shares of Insignia Common Stock, in the aggregate, a number of shares of Class E
Preferred Stock approximately equal to $203 million divided by the AIMCO Index
Price and a number of shares of AIMCO's Class F Cumulative Convertible Preferred
Stock, par value $.01 per share (the "Class F Preferred Stock"), approximately
equal to $100 million divided by the AIMCO Index Price in lieu of approximately
$303 million of Class E Preferred Stock. In either case, holders of Class E
Preferred Stock will be entitled to the Special Dividend. When the Special
Dividend is paid in full, each share of Class E Preferred Stock will
automatically convert into one share of Class A Common Stock (subject to certain
antidilution adjustments). If and when approved by stockholders of AIMCO, each
share of Class F Preferred Stock will convert into one share of Class A Common
Stock (subject to certain antidilution adjustments). For a
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description of the terms of the Class E Preferred Stock and the Class F
Preferred Stock, see "Description of Other Capital Stock of AIMCO."
As of the date hereof, Insignia and its subsidiaries own approximately 61%
of the outstanding shares of beneficial interest, par value $.01 per share, of
IPT ("IPT Shares"). The Insignia Merger Agreement requires AIMCO to propose to
acquire (by merger) all of the IPT Shares not owned by Insignia and its
subsidiaries, and to use its reasonable best efforts to consummate such merger
within three months following the completion of the Insignia Merger (the
"Effective Time") at a purchase price of not less than $13.25 per IPT Share,
payable in cash. Assuming a price of $13.25 per IPT Share, the remaining 39% of
IPT, owned principally by private investors and certain executives of Insignia,
is valued at approximately $100 million. In addition, IPT is party to a merger
agreement with Angeles Mortgage Investment Trust ("AMIT"), which, if approved by
AMIT's stockholders and consummated, will result in the issuance of additional
IPT Shares and, therefore, the payment by AIMCO in a merger with IPT of an
additional approximate $51.2 million at an assumed price of $13.25 per IPT
Share.
AMBASSADOR MERGER
On May 8, 1998, Ambassador Apartments, Inc. ("Ambassador") was merged into
AIMCO (the "Ambassador Merger"), and the outstanding shares of common stock, par
value $.01 per share, of Ambassador (the "Ambassador Common Stock"), were
converted into a total of 6,578,833 shares of Class A Common Stock. Upon the
consummation of the Ambassador Merger, Ambassador and its subsidiaries had
aggregate outstanding indebtedness of approximately $406.1 million, which by
operation of law became indebtedness of AIMCO or its subsidiaries upon
consummation of the Ambassador Merger.
Ambassador was a self-managed REIT engaged in the ownership and management
of garden style apartment properties leased primarily to middle income tenants.
As of the consummation of the Ambassador Merger, Ambassador owned 52 apartment
communities with a total of 15,728 units located in Arizona, Colorado, Florida,
Georgia, Illinois, Tennessee and Texas. In addition, Ambassador managed one
property containing 252 units for an unrelated third party.
OTHER PROPERTY ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1997, the AIMCO Operating Partnership
purchased or acquired control of 59 properties consisting of 17,191 apartment
units. The cash portion of the purchase price for the acquisitions was funded
with proceeds from equity offerings by AIMCO (which were contributed to the
AIMCO Operating Partnership in exchange for Partnership Common Units ("AIMCO OP
Units") or Partnership Preferred Units ("Preferred Units" and, collectively with
the AIMCO OP Units, "Partnership Units") of the AIMCO Operating Partnership),
borrowings under the AIMCO Operating Partnership's revolving credit facility,
other short-term and long-term financings, and with working capital.
The following are descriptions of property acquisitions completed by AIMCO
since December 31, 1997:
Crossings at Bell. In January 1998, AIMCO acquired the Crossings at Bell
Apartments, a 160-unit apartment community located in Amarillo, Texas for $3.2
million in cash.
Steeplechase. In February 1998, AIMCO acquired the Steeplechase Apartments,
a 484-unit apartment community located in Tyler, Texas. Total consideration paid
of $9.9 million consisted of $3.7 million in cash and the assumption of $6.2
million in mortgage indebtedness.
Cirque Portfolio. In March 1998, AIMCO acquired Casa Anita, a 224-unit
apartment complex, and San Marina, a 399-unit apartment complex, in Phoenix,
Arizona and three apartment complexes named Cobble Creek (301 units), Rio
Cancion (379 units) and Sundown Village (330 units), in Tucson, Arizona from
Cirque Properties of Salt Lake City. Total consideration paid of $62.4 million
consisted of 0.7 million OP Units and the assumption of $40.5 million of
mortgage indebtedness.
Arbor Station. In April 1998, AIMCO acquired all but 24 units of a 288-unit
apartment complex in Montgomery, Alabama called Arbor Station Apartments (the
remaining 24 units are expected to be acquired over the next five years). Total
consideration paid of $11.4 million was comprised of $9.9 million in cash and
38,237 OP Units.
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Heather Ridge. In April 1998, AIMCO purchased Heather Ridge II, a 72-unit
apartment community located in Arlington, Texas. Total consideration paid of
$2.0 million was comprised of $0.8 million in cash and the assumption of $1.2
million in mortgage indebtedness.
Landmark. In May 1998, AIMCO purchased Landmark Apartments, a 101-unit
apartment community located in Albuquerque, New Mexico. Total consideration paid
of $5.2 million was comprised of $1.8 million in cash and 89,964 AIMCO OP Units.
Citrus Grove. In June 1998, AIMCO purchased Citrus Grove Apartments, a
198-unit apartment community located in Redlands, California, for $7.5 million
in cash.
Villa La Paz. Also in June 1998, AIMCO purchased Villa La Paz Apartments, a
96-unit apartment community located in Sun City, California, for $3.8 million in
cash.
Sunset Village. In July 1998, AIMCO acquired Sunset Village Apartments, a
114-unit apartment community located in Oceanside, California. Total
consideration paid of $7.5 million consisted of $1.8 million in cash, 1,985 OP
Units and the assumption of $5.6 million of mortgage indebtedness.
Sunset Citrus. In July 1998, AIMCO acquired Sunset Citrus Apartments, a
97-unit apartment community located in Vista, California. Total consideration
paid of $4.4 million consisted of $0.7 million in cash, 1,110 OP Units and the
assumption of $3.6 million of mortgage indebtedness.
Rancho Escondido. In July 1998, AIMCO acquired Rancho Escondido Apartments,
a 334-unit apartment community located in Escondido, California. Total
consideration paid of $20.7 million consisted of $6.6 million in cash, 5,491 OP
units and the assumption of $13.8 million of mortgage indebtedness.
Property Dispositions. In October 1997, the AIMCO Operating Partnership
sold the Meadowbrook, Ashwood, Parkside, Chimney Ridge and Cobble Creek
apartment properties, which consisted of an aggregate of 916 units located in
Texas and Arizona, to an unaffiliated third party. Cash proceeds of
approximately $22.7 million from the sale were used to repay a portion of the
AIMCO Operating Partnership's outstanding short-term indebtedness. The AIMCO
Operating Partnership recognized a gain of approximately $2.8 million on the
disposition of these five properties.
In January 1998, the Company sold the Sun Valley Apartments, an apartment
community containing 430 apartment units located in Salt Lake City, Utah, for
$11.5 million, less selling costs of $0.3 million. The Company recognized a $3.3
million gain on the sale. Cash proceeds from the sale were used to repay a
portion of the AIMCO Operating Partnership's outstanding short-term
indebtedness.
Properties Subject to Letter of Intent or Contract. In the ordinary course
of AIMCO's business, AIMCO is engaged in discussions and negotiations with
property owners regarding the purchase of apartment properties or interests in
apartment properties. AIMCO frequently enters into letters of intent, which may
be binding or nonbinding, and contracts with respect to the purchase of real
property which are subject to certain conditions which permit AIMCO to terminate
the contract in its sole and absolute discretion if it is not satisfied with the
results of its due diligence investigation of the properties under contract.
AIMCO's management believes that such contracts essentially result in the
creation of an option on the property subject to the contract and give AIMCO
greater flexibility in seeking to acquire properties. As of July 28, 1998, AIMCO
had under letter of intent or contract an aggregate of 66 multifamily apartment
properties with a maximum aggregate purchase price of $841 million, including
estimated capital improvements, which, in some cases, may be paid in the form of
assumption of existing debt. All such contracts are subject to termination by
AIMCO as described above. Due diligence with respect to these properties is
generally not completed and there is no assurance that any transaction will
occur or that they will occur on the terms currently contemplated.
RECENT CONTRACTS
On January 31, 1998 AIMCO entered into a contribution agreement (the
"Contribution Agreement") with CK Services, Inc. ("CK") and the stockholders of
CK to cause certain assets of AIMCO to be contributed to CK and, subject to
certain conditions, to distribute all outstanding stock of CK to the
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stockholders of AIMCO. CK is a corporation wholly-owned by Terry Considine,
AIMCO's Chairman and Chief Executive Officer, and Peter Kompaniez, AIMCO's
President and Vice Chairman.
It is AIMCO's intent to use CK as a vehicle for holding property and
performing services that AIMCO is limited or prohibited from holding or
providing due to AIMCO's election to be taxed as a REIT. AIMCO is finalizing
which assets will be contributed to CK. Any transfer of assets or services to CK
will be at market prices and approved by the independent members of the AIMCO
board of directors (the "AIMCO Board"), and if market prices are difficult to
ascertain, there can be no assurance that the pricing will favor AIMCO. It is
anticipated that the assets to be contributed to CK will be immaterial compared
to total assets held by AIMCO.
Pursuant to the Contribution Agreement, AIMCO will contribute certain
assets of AIMCO to CK and, in return, the stock of CK will be contributed to
AIMCO or a subsidiary of AIMCO. Following the contribution of CK stock, AIMCO
will agree to contribute additional assets to CK with the intent of creating a
stand-alone entity meeting the requirements for listing on the NYSE or NASDAQ
National Market, and if AIMCO is successful in listing the CK stock on the NYSE
or NASDAQ National Market, the stock of CK will be distributed to the
stockholders of AIMCO. If AIMCO is unable to list the CK stock on the NYSE or
NASDAQ National Market, CK will remain a direct or indirect subsidiary of AIMCO
and AIMCO will pay to the former stockholders of CK an amount necessary to
compensate the former CK stockholders for the value of such stock on January 31,
1998. No prediction can be made as to whether or when any spinoff to AIMCO
stockholders will occur. Consummation of the transaction is subject to the
approval of the independent members of the AIMCO Board.
RECENT CREDIT AGREEMENTS
In January 1998, the Company replaced its $100 million revolving credit
facility with Bank of America National Trust and Savings Association ("Bank of
America") with an unsecured $50 million revolving credit facility with Bank of
America and BankBoston, N.A. (the "BOA Credit Facility"). The AIMCO Operating
Partnership is the borrower under the BOA Credit Facility, and all obligations
thereunder are guaranteed by AIMCO and certain of its subsidiaries. In May 1998,
the AIMCO Operating Partnership amended the BOA Credit Facility to increase its
borrowing capacity thereunder to $155.0 million for a six-month period. At the
conclusion of the six-month period, the maximum borrowing capacity returns to
its original $50.0 million. The additional borrowing capacity was used to
facilitate the closing of the Ambassador Merger and will be further utilized to
complete the Insignia Merger.
In February 1998, the AIMCO Operating Partnership, as borrower, and AIMCO
and certain single asset wholly-owned subsidiaries of AIMCO, as guarantors,
entered into a five year, $50 million secured revolving credit facility
agreement (the "WMF Credit Facility") with Washington Mortgage Financial Group,
Ltd. ("Washington Mortgage"), which provides for the conversion of all or a
portion of such revolving credit facility to a term facility. The WMF Credit
Facility provides that all the rights of Washington Mortgage are assigned to the
Federal National Mortgage Association ("Fannie Mae"), but Fannie Mae does not
assume Washington Mortgage's obligations under the WMF Credit Facility. At the
Company's request, the commitment amount under the WMF Credit Facility may be
increased to an amount not to exceed $250 million, subject to the consent of
Washington Mortgage and Fannie Mae in their sole and absolute discretion.
BUSINESS AND GROWTH STRATEGIES
OPERATING AND FINANCIAL STRATEGIES
The Company's operating and financing strategies to attempt to meet its
objective of providing long-term, predictable FFO per share of Class A Common
Stock include the following:
- Acquisition of Properties at Less Than Replacement Cost. AIMCO attempts
to acquire properties at a significant discount to their replacement
cost.
- Geographic Diversification. AIMCO operates in 42 states, the District of
Columbia and Puerto Rico. This geographic diversification insulates the
Company, to some degree, from inevitable downturns in any one market.
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- Market Growth. The Company seeks to operate in markets where population
and employment growth are expected to exceed the national average and
where it believes it can become a regionally significant owner or manager
of properties. For the 1996 to 1999 period, annual population and
employment growth rates in AIMCO's five largest regional markets are
forecasted to be 2.2% and 3.6%, respectively.
- Product Diversification. The Company's portfolio of apartment properties
spans a wide range of apartment community types, both within and among
markets.
- Capital Replacement. AIMCO believes that the physical condition and
amenities of its apartment communities are important factors in its
ability to maintain and increase rental rates. The Company allocates
approximately $300 annually per owned apartment unit for capital
replacements ("Capital Replacements") and reserves unexpended amounts for
future capital replacements.
- Debt Financing. AIMCO's strategy is generally to incur debt to increase
its return on equity while maintaining acceptable interest coverage
ratios. AIMCO seeks to maintain a ratio of free cash flow to combined
interest expense and preferred stock dividends of between 2:1 and 3:1,
and a ratio of earnings before interest, income taxes, depreciation and
amortization (with certain adjustments and after a provision of
approximately $300 per owned apartment unit) to debt service of at least
2:1, and to match debt maturities to the character of the assets
financed. The Company uses predominantly long-term, fixed-rate and
self-amortizing non-recourse debt in order to avoid the refunding or
repricing risks of short-term borrowings. The Company also uses
short-term debt financing to fund acquisitions and generally expects to
refinance such borrowings with proceeds from equity offerings or
long-term debt financings. As of March 31, 1998 approximately 5% of
AIMCO's outstanding debt was short-term debt and 95% was long-term debt.
- Dispositions. From time to time, the Company sells properties that do not
meet its return on investment criteria or that are located in areas where
AIMCO does not believe that the long-term neighborhood values justify the
continued investment in the properties.
- Dividend Policy. AIMCO pays dividends on its Class A Common Stock to
share its profitability with its stockholders. The Company distributed
66.5%, 72.3% and 75.1% of FFO to holders of Class A Common Stock for the
years ended December 31, 1997, 1996 and 1995, respectively. It is the
present policy of the AIMCO Board to increase the dividend annually in an
amount equal to one-half of the projected increase in FFO, adjusted for
Capital Replacements, subject to minimum distribution requirements to
maintain its REIT status.
GROWTH STRATEGIES
The Company seeks growth through two primary sources -- acquisitions and
internal expansion.
Acquisition Strategies. The Company believes its acquisition strategies
will increase profitability and predictability of earnings by increasing its
geographic diversification, economies of scale and opportunities to provide
ancillary services to tenants at the AIMCO Properties. From AIMCO's initial
public offering in July 1994 (the "IPO") through March 31, 1998, the Company has
completed 31 acquisition transactions involving a total of 112 properties
comprising 29,124 units for an aggregate purchase price of approximately $1.072
billion, including the assumption and incurrence of $591 million of indebtedness
and the issuance of 4,829,806 OP Units. The Company acquires additional
properties primarily in three ways:
- Direct Acquisitions. AIMCO may directly, including through mergers and
other business combinations, acquire individual properties or portfolios
and controlling interests in entities that own or control such properties
or portfolios. To date, a significant portion of AIMCO's growth has
resulted from the acquisition of other companies that owned or controlled
properties. During the year ended December 31, 1997 and for the first
three months ended March 31, 1998, the Company directly acquired 44 and 7
apartment properties, respectively, for a total consideration of $467.4
million and $75.6 million, respectively, consisting of $191.0 million and
$6.7 million in cash, respectively, approximately
S-8
<PAGE> 9
1.9 million and 0.7 million OP Units, respectively, and the assumption or
incurrence of $220.4 million and $47.0 million of indebtedness,
respectively.
- Acquisition of Managed Properties. AIMCO believes that its property
management operations support its acquisition activities. Since the IPO,
the Company has acquired from its managed portfolio 12 properties
comprising 3,530 units for total consideration of $129.0 million.
- Increasing its Interest in Partnerships. For properties where AIMCO owns
a general partnership interest in the property-owning partnership, the
Company may seek to acquire, subject to its fiduciary duties, the
interests in the partnership held by third parties for cash or, in some
cases, in exchange for OP Units. AIMCO has completed tender offers with
respect to 51 partnerships and has purchased additional interests in such
partnerships for cash and for OP Units.
Internal Growth Strategies. The Company pursues internal growth primarily
through the following strategies:
- Revenue Increases. The Company increases rents where feasible and seeks
to improve occupancy rates. AIMCO's "same store" revenues, rental and
other property revenues from the Owned Properties (based on properties
owned from period to period and applying AIMCO's ownership interests in
these properties) have grown by 3.3% from the fiscal year ended December
31, 1995 to the fiscal year ended December 31, 1996, by 2.1% from the
fiscal year ended December 31, 1996 to the fiscal year ended December 31,
1997 and by 3.7% from the first three months ended March 31, 1997 to the
first three months ended March 31, 1998.
- Redevelopment of Properties. The Company believes redevelopment of
selected properties in superior locations provides advantages over
development of new properties. AIMCO believes that redevelopment
generally allows the Company to maintain rents comparable to new
properties and, compared to development of new properties, can be
accomplished with relatively lower financial risk, in less time and with
reduced delays due to governmental regulation.
- Expansion of Properties. The Company believes that expansion within or
adjacent to existing AIMCO Properties also provides growth opportunities
at lower risk than new development. Such expansion can offer cost
advantages to the extent common area amenities and on-site management
personnel can service the property expansions.
- Conversion of Affordable Properties; Improvement of Performance. The
Company believes that it may be able to significantly increase its return
from its portfolio of affordable properties by improving operations at
some of its properties or by converting some of these properties to
conventional properties.
- Ancillary Services. The Company's management believes that its ownership
and management of the AIMCO Properties provides it with unique access to
a customer base for the sale of additional services which generate
incremental revenues. The Company currently provides cable television,
telephone services, appliance rental, renters' insurance and carport,
garage and storage space rental at certain AIMCO Properties.
- Controlling Expenses. Cost reductions are accomplished by exploiting
economies of scale. As a result of the size of its portfolio and its
creation of regional concentrations of properties, the Company has the
ability to leverage fixed costs for general and administrative
expenditures and certain operating functions, such as insurance,
information technology and training, over a larger property base.
PROPERTY MANAGEMENT STRATEGIES
AIMCO seeks to improve the operating results from its property management
business by, among other methods, combining centralized financial control and
uniform operating procedures with localized property management decision-making
and market knowledge. AIMCO's management operations are organized into 13
regional hubs, each supervised by a Regional Vice President, who has, on
average, 17 years of experience in apartment management.
S-9
<PAGE> 10
THE OFFERING
Securities Offered......... 2,000,000 shares of Class H Preferred Stock
(2,300,000 shares if the Underwriters'
over-allotment option is exercised in full) (the
"Offering").
Dividends.................. Dividends on the Class H Preferred Stock are
cumulative from the date of original issue and are
payable quarterly, when and as declared, commencing
on October 15, 1998, at the rate of 9 1/2% per
annum of the $25 liquidation preference (equivalent
to an annual dividend rate of $2.375 per share).
The initial dividend payable on the Class H
Preferred Stock will be $.4024 per share.
Liquidation Preference..... $25 per share of Class H Preferred Stock, plus an
amount equal to accumulated, accrued and unpaid
dividends (whether or not earned or declared).
Redemption................. The Class H Preferred Stock is not redeemable prior
to August 14, 2003, except in certain limited
circumstances relating to the ownership limitation
necessary to preserve AIMCO's qualification as a
REIT. On and after August 14, 2003, the Class H
Preferred Stock will be redeemable for cash at the
option of AIMCO, in whole or from time to time in
part, at a redemption price of $25 per share, plus
accumulated, accrued and unpaid dividends, if any,
to the redemption date. The redemption price for
the Class H Preferred Stock (other than any portion
thereof consisting of accumulated, accrued and
unpaid dividends) shall be payable solely with the
proceeds from the sale by AIMCO or the AIMCO
Operating Partnership of other capital shares
(which term, as defined, includes common stock,
preferred stock, partnership interests and other
ownership interests) of AIMCO or the AIMCO
Operating Partnership (whether or not such sale
occurs concurrently with such redemption).
Ranking.................... The Class H Preferred Stock will rank on a parity
with the outstanding shares of AIMCO's Class B
Cumulative Convertible Preferred Stock, par value
$.01 per share (the "Class B Preferred Stock"),
AIMCO's Class C Cumulative Preferred Stock, par
value $.01 per share (the "Class C Preferred
Stock"), AIMCO's Class D Cumulative Preferred
Stock, par value $.01 per share (the "Class D
Preferred Stock"), AIMCO's Class G Cumulative
Preferred Stock, par value $.01 per share (the
"Class G Preferred Stock"), and any shares of Class
F Preferred Stock that may be issued pursuant to
the Insignia Merger, and senior to any shares of
Class E Preferred Stock that may be issued pursuant
to the Insignia Merger, AIMCO's Class A Common
Stock, par value $.01 per share ("Class A Common
Stock") and AIMCO's Class B Common Stock, par value
$.01 per share ("Class B Common Stock"), in each
case, with respect to the payment of dividends and
the distribution of amounts upon liquidation,
dissolution or winding up.
Voting Rights.............. Holders of Class H Preferred Stock will generally
have no voting rights. However, whenever dividends
on the shares of Class H Preferred Stock are in
arrears for six or more quarterly periods (whether
or not consecutive), the holders of such shares
(voting together as a single class with all other
shares of any class or series of stock ranking on a
parity with the Class H Preferred Stock which are
entitled to similar voting rights) will be entitled
to vote for the election of two additional
directors of AIMCO until all dividends in arrears
on outstanding shares of Class H Preferred
S-10
<PAGE> 11
Stock have been paid or declared and set apart for
payment. In addition, certain changes to the terms
of the Class H Preferred Stock that would be
materially adverse to the rights of holders of
Class H Preferred Stock cannot be made without the
affirmative vote of holders of at least 66 2/3% of
the outstanding shares of Class H Preferred Stock
and shares of any class or series of stock ranking
on a parity with the Class H Preferred Stock which
are entitled to similar voting rights, voting as a
single class.
Ownership Limit............ Ownership of shares of Class H Preferred Stock by
any person is limited such that the sum of (i) the
aggregate value of the Class H Preferred Stock, and
(ii) the aggregate value of all shares of any other
class of capital stock of AIMCO (such other classes
of stock, collectively with the Class H Preferred
Stock, the "Equity Stock"), owned, directly or
constructively, by such person, does not, subject
to certain exceptions, exceed 8.7% of the aggregate
value of all outstanding shares of Equity Stock.
Listing.................... AIMCO has applied to list the Class H Preferred
Stock on the NYSE under the symbol "AIVPrH." If
approved for listing, trading of the Class H
Preferred Stock on the NYSE is expected to commence
within the 30-day period after the initial delivery
of the Class H Preferred Stock.
Conversion................. The Class H Preferred Stock is not convertible into
or exchangeable for any other securities or
property of AIMCO.
Use of Proceeds............ AIMCO intends to contribute the net proceeds from
the sale of the Class H Preferred Stock (estimated
to be $48.1 million ($55.4 million if the
Underwriters' over-allotment option is exercised in
full)) to the AIMCO Operating Partnership in
exchange for Preferred Units of the AIMCO Operating
Partnership. The AIMCO Operating Partnership
intends to use the amounts received from AIMCO to
repay certain outstanding indebtedness, and to the
extent of any amounts remaining, for general
business purposes. See "Use of Proceeds."
For additional information regarding the terms of the Class H Preferred
Stock, see "Description of Class H Preferred Stock."
S-11
<PAGE> 12
SUMMARY HISTORICAL FINANCIAL INFORMATION OF AIMCO
The following table sets forth summary historical financial and operating
information for AIMCO. The summary historical financial information for the
three months ended March 31, 1998 and 1997 is based on unaudited financial
statements of AIMCO included in AIMCO's Quarterly Report on Form 10-Q, as
amended, for the three months ended March 31, 1998, incorporated by reference in
the accompanying Prospectus. Results for the quarter ended March 31, 1998 are
not necessarily indicative of the results to be expected for a full year. The
summary historical financial information for the years ended December 31, 1997,
1996 and 1995 is based on the audited financial statements of AIMCO incorporated
by reference in the accompanying Prospectus. The summary historical financial
information for the period January 10, 1994 (the date of AIMCO's inception)
through December 31, 1994 of AIMCO and for the period from January 1, 1994
through July 28, 1994 and for the year ended December 31, 1993 for the AIMCO
Predecessors (as defined below) is based on the audited financial statements of
AIMCO and the AIMCO Predecessors, respectively. The following information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical financial statements of
AIMCO and notes thereto incorporated by reference in the accompanying
Prospectus.
<TABLE>
<CAPTION>
AIMCO
-------------------------------------------------------------
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
--------------------- -------------------------------------
1998 1997 1997 1996 1995
---------- -------- ---------- -------- -------------
(RESTATED)(C)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Income from rental
property operations..... $ 28,918 $ 14,808 $ 72,477 $ 39,814 $ 27,483
Income from service
company business........ 992 551 2,028 1,717 1,973
Income from operations.... 21,404 5,694 30,246 15,629 14,988
Net income (loss)......... 21,642 4,584 28,633 12,984 13,375
PER SHARE DATA:
Basic earnings per common
share................... $ 0.44 $ 0.28 $ 1.09 $ 1.05 $ 0.86
Diluted earnings per
common share............ $ 0.43 $ 0.28 $ 1.08 $ 1.04 $ 0.86
Weighted average number of
common shares
outstanding............. 41,128 16,454 24,055 12,411 9,571
Weighted average number of
common shares and common
share equivalents
outstanding............. 41,310 16,586 24,436 12,427 9,579
Dividends paid per common
share................... $ 0.5625 $ 0.4625 $ 1.85 $ 1.70 $ 1.66
BALANCE SHEET DATA (END OF
PERIOD):
Real estate, before
accumulated
depreciation............ $1,753,370 $869,931 $1,657,207 $865,222 $477,162
Real estate, net of
accumulated
depreciation............ 1,537,646 742,399 1,503,922 745,145 448,425
Cash and cash
equivalents............. 35,948 11,531 37,088 13,170 2,379
Total assets.............. 2,220,471 816,229 2,100,510 827,673 480,361
Total mortgages and notes
payable................. 811,496 475,444 808,530 522,146 268,692
Mandatorily Redeemable
1994 Cumulative
Convertible Senior
Preferred Stock......... -- -- -- -- --
Minority interest in AIMCO
Operating Partnership... 124,952 50,045 111,962 58,777 30,376
Stockholders' equity...... 1,155,063 280,847 1,045,300 215,749 169,032
CASH FLOW DATA:
Cash provided by operating
activities.............. $ 9,661 $ 25,976 $ 73,032 $ 38,806 $ 25,911
Cash used in investing
activities.............. (47,025) (5,003) (717,663) (88,144) (60,821)
Cash provided by (used in)
financing activities.... 36,224 (22,612) 668,549 60,129 30,145
OTHER DATA:
Funds from
operations(d)........... $ 39,087 $ 12,512 $ 81,155 $ 35,185 $ 25,285
Weighted average number of
common shares, common
share equivalents and
AIMCO OP Units
outstanding(e).......... 49,069 19,626 29,119 14,994 11,461
<CAPTION>
AIMCO AIMCO Predecessors(a)
-------------- -----------------------------
FOR THE PERIOD FOR THE PERIOD
JANUARY 10, JANUARY 1, FOR THE
1994 THROUGH 1994 THROUGH YEAR ENDED
DECEMBER 31, JULY 28, DECEMBER 31,
1994 1994(B) 1993
-------------- -------------- ------------
(Restated)(c)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA:
Income from rental
property operations..... $ 9,126 $ 2,391 $ 3,154
Income from service
company business........ 1,006 360 983
Income from operations.... 7,702 (1,499) 291
Net income (loss)......... 7,143 (1,499) 291
PER SHARE DATA:
Basic earnings per common
share................... $ 0.42 -- --
Diluted earnings per
common share............ $ 0.42 -- --
Weighted average number of
common shares
outstanding............. 9,589 -- --
Weighted average number of
common shares and common
share equivalents
outstanding............. 9,589 -- --
Dividends paid per common
share................... $ 0.29 -- --
BALANCE SHEET DATA (END OF
PERIOD):
Real estate, before
accumulated
depreciation............ $ 406,067 $47,500 $ 46,819
Real estate, net of
accumulated
depreciation............ 392,368 33,270 33,701
Cash and cash
equivalents............. 7,144 1,531 809
Total assets.............. 416,739 39,042 38,914
Total mortgages and notes
payable................. 141,315 40,873 41,893
Mandatorily Redeemable
1994 Cumulative
Convertible Senior
Preferred Stock......... 96,600 -- --
Minority interest in AIMCO
Operating Partnership... 29,082 -- --
Stockholders' equity...... 140,319 (9,345) (7,556)
CASH FLOW DATA:
Cash provided by operating
activities.............. $ 16,825 $ 2,678 $ 2,203
Cash used in investing
activities.............. (186,481) (924) (16,352)
Cash provided by (used in)
financing activities.... 176,800 (1,032) 14,114
OTHER DATA:
Funds from
operations(d)........... $ 9,391 -- --
Weighted average number of
common shares, common
share equivalents and
AIMCO OP Units
outstanding(e).......... 10,920 N/A N/A
</TABLE>
S-12
<PAGE> 13
- ---------------
(a) On July 29, 1994, AIMCO completed its IPO of 9,075,000 shares of Class A
Common Stock and issued 966,000 shares of convertible preferred stock and
513,514 unregistered shares of Class A Common Stock. On such date, AIMCO and
Property Asset Management, L.L.C. and its affiliated companies and PDI
Realty Enterprises, Inc. (collectively, the "AIMCO Predecessors") engaged in
a business combination and consummated a series of related transactions
which enabled AIMCO to continue and expand the property management and
related businesses of the AIMCO Predecessors. The 966,000 shares of
convertible preferred stock and 513,514 shares of Class A Common Stock were
repurchased by AIMCO in 1995.
(b) Represents the period January 1, 1994 through July 28, 1994, the date of the
completion of the business combination with AIMCO.
(c) In the second quarter of 1996, AIMCO reorganized the ownership of the
service company, whereby the AIMCO Operating Partnership (i) owns all of the
non-voting preferred stock of the service company, Property Asset Management
Services, Inc. ("PAMS Inc."), representing a 95% economic interest, and (ii)
owns the 1% general partnership interest in Property Asset Management
Services, L.P. ("PAMS LP"). PAMS Inc. owns the 99% limited partnership
interest in PAMS LP. Substantially all the activity of PAMS Inc. is
conducted by PAMS LP. Because the AIMCO Operating Partnership owns 95% of
the economic value of PAMS Inc. and also controls the general partnership
interest in PAMS LP, thereby controlling the activity of the partnership,
the service company is consolidated. Prior to the reorganization, AIMCO
reported the service company business on the equity method. The restatement
has no impact on net income, but does increase third party and affiliate
management and other income, management and other expenses, amortization of
management company goodwill and depreciation of non-real estate assets.
AIMCO has restated the balance sheet as of December 31, 1995 and 1994, and
the statements of income and statements of cash flows for the year ended
December 31, 1995 and the period from January 10, 1994 through December 31,
1994 to reflect the change.
(d) AIMCO's management believes that the presentation of funds from operations
("FFO"), when considered with the financial data determined in accordance
with generally accepted accounting principles ("GAAP"), provides a useful
measure of AIMCO's performance. However, FFO does not represent cash flow
and is not necessarily indicative of cash flow or liquidity available to
AIMCO, nor should it be considered as an alternative to net income as an
indicator of operating performance. The Board of Governors of the National
Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net
income (loss), computed in accordance with GAAP, excluding gains and losses
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of financing costs),
and after adjustments for unconsolidated partnerships and joint ventures.
AIMCO calculates FFO in a manner consistent with the NAREIT definition,
which includes adjustments for minority interest in the AIMCO Operating
Partnership plus amortization of management company goodwill, the non-cash
deferred portion of the income tax provision for unconsolidated subsidiaries
and less the payments of dividends on preferred stock. AIMCO's management
believes that presentation of FFO provides investors with industry-accepted
measurements which help facilitate an understanding of AIMCO's ability to
make required dividend payments, capital expenditures and principal payments
on its debt. There can be no assurance that AIMCO's basis of computing FFO
is comparable with that of other REITs.
The following is a reconciliation of income before minority interest in
the AIMCO Operating Partnership to FFO:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE PERIOD
MONTHS FOR THE YEAR ENDED JANUARY 10,
ENDED MARCH 31, DECEMBER 31, 1994 THROUGH
----------------- --------------------------- DECEMBER 31,
1998 1997 1997 1996 1995 1994
------- ------- ------- ------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income before minority interest in
AIMCO Operating Partnership......... $23,930 $ 5,425 $32,697 $15,673 $14,988 $ 7,702
Gain on disposition of property....... (2,526) -- (2,720) (44) -- --
Extraordinary item.................... -- 269 269 -- -- --
Real estate depreciation, net of
minority interests.................. 12,779 6,581 33,751 19,056 15,038 4,727
Amortization of goodwill.............. 2,389 237 948 500 428 76
Equity in earnings of unconsolidated
subsidiaries:
Real estate depreciation............ 890 -- 3,584 -- -- --
Amortization of management
contracts......................... 1,379 -- 1,587 -- -- --
Deferred taxes...................... 309 -- 4,894 -- -- --
Equity in earnings of other
partnerships:
Real estate depreciation............ 2,301 -- 6,280 -- -- --
Preferred stock dividends............. (2,364) -- (135) -- (5,169) (3,114)
------- ------- ------- ------- ------- -------
Funds from operations................. $39,087 $12,512 $81,155 $35,185 $25,285 $ 9,391
======= ======= ======= ======= ======= =======
</TABLE>
(e) Generally, after a one-year holding period, AIMCO OP Units may be tendered
for redemption at the option of the holder and, upon tender, may be acquired
by AIMCO for shares of Class A Common Stock at an exchange ratio of one
share of Class A Common Stock for each AIMCO OP Unit (subject to
adjustment), or at AIMCO's election, cash.
S-13
<PAGE> 14
SUMMARY PRO FORMA FINANCIAL AND
OPERATING INFORMATION OF AIMCO
The following table sets forth summary pro forma financial and operating
information of AIMCO as of March 31, 1998 and for the three months then ended,
and for the year ended December 31, 1997. The Pre-Insignia Merger pro forma
financial and operating information set forth below gives effect to the
Ambassador Merger, the OP Reorganization (as defined herein) and a number of
transactions completed by AIMCO prior to the Insignia Merger (collectively, the
"Pre-Insignia Merger Transactions") as if such transactions had occurred on
January 1, 1997 or, in the case of balance sheet data, on March 31, 1998. The
Insignia Merger pro forma financial and operating information set forth below
gives effect to all of the transactions set forth above and to the Insignia
Merger, the Distribution, the Special Dividend and the transfer of certain
assets and liabilities of Insignia to certain unconsolidated subsidiaries of
AIMCO (collectively, the "Insignia Merger Transactions") as if such transactions
had occurred on January 1, 1997 or, in the case of balance sheet data, on March
31, 1998. The Insignia Merger pro forma financial information assumes that the
AIMCO stockholders approve the Insignia Merger. The pro forma financial and
operating information set forth below should be read in conjunction with, and is
qualified in its entirety by, the historical and pro forma financial statements
and notes thereto of AIMCO, NHP Incorporated ("NHP"), the NHP Real Estate
Companies (as defined in Note 1 to such financial statements included in
Amendment No. 1 to AIMCO's Current Report on Form 8-K, dated June 3, 1997 (the
"June 3, 1997 Form 8-K, Amendment No. 1"), NHP Southwest Partners, L.P., the NHP
New LP Entities (as described in Note 1 of such financial statements included in
the June 3, 1997 Form 8-K, Amendment No. 1), the NHP Borrower Entities (as
described in Note 1 of such financial statements included in the June 3, 1997
Form 8-K, Amendment No. 1), The Bay Club at Aventura, the Morton Towers
apartments, the Thirty-Five Acquisition Properties (as defined in AIMCO's
Current Report on Form 8-K dated October 15, 1997), First Alexandria Associates,
The Oak Park Partnership, Country Lakes Associates Two, Point West Limited
Partnership, Ambassador and Insignia which are incorporated by reference in the
accompanying Prospectus or included in prior filings of AIMCO. The pro forma
financial and operating information set forth below does not purport to be
indicative of the actual results of operations or financial condition that would
have occurred had the transactions referred to above in fact occurred on the
dates indicated.
<TABLE>
<CAPTION>
PRE-INSIGNIA MERGER PRO FORMAS INSIGNIA MERGER PRO FORMAS
---------------------------------- ----------------------------------
FOR THE FOR THE
THREE THREE
MONTHS FOR THE YEAR MONTHS FOR THE YEAR
ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1998 1997 1998 1997
-------------- ----------------- -------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Income from rental property operations............. $ 39,125 $ 132,542 $ 39,444 $ 133,860
Income (loss) from service company business........ 992 (1,353) (3,701) (2,200)
Income before minority interest in AIMCO Operating
Partnership...................................... 26,032 51,818 12,003 (7,223)
Net income attributable to preferred
stockholders..................................... 7,287 29,424 7,287 29,424
Net income (loss) attributable to common
stockholders..................................... 16,653 19,794 4,256(a) (32,933)(a)
PER SHARE DATA:
Basic earnings (loss) per common share............. $ 0.35 $ 0.42 $ 0.08 $ (0.61)
Diluted earnings (loss) per common share........... $ 0.35 $ 0.42 $ 0.08(a) $ (0.61)(a)
Weighted average number of common shares
outstanding...................................... 47,675 46,685 55,367 54,377
Weighted average number of common shares and common
share equivalents outstanding.................... 47,773 47,066 55,928 55,221
Dividends per common share......................... $ 0.5625 $ 1.85 $ 0.5625 $ 1.85
CASH FLOW DATA:
Cash provided by operating activities(b)........... $ 46,142 $ 143,633 $ 39,870 $ 133,380
Cash used by investing activities(c)............... (4,346) (17,385) (4,400) (17,602)
Cash used by financing activities(d)............... (37,562) (127,631) (44,398) (151,865)
</TABLE>
S-14
<PAGE> 15
<TABLE>
<CAPTION>
PRE-INSIGNIA MERGER PRO FORMAS INSIGNIA MERGER PRO FORMAS
---------------------------------- ----------------------------------
FOR THE FOR THE
THREE THREE
MONTHS FOR THE YEAR MONTHS FOR THE YEAR
ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1998 1997 1998 1997
-------------- ----------------- -------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OTHER DATA:
Funds from operations(e)........................... $ 46,447 $ 136,748 $ 51,161 $ 148,442
Weighted average number of common shares, common
share equivalents and AIMCO OP Units
outstanding(f)................................... 56,225 55,661 64,380 63,816
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------------------
PRE-INSIGNIA MERGER INSIGNIA MERGER
PRO FORMA PRO FORMA
------------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Real estate, before accumulated depreciation.............. $2,464,018 $2,516,763
Real estate, after accumulated depreciation............... 2,248,294 2,301,039
Cash and cash equivalents................................. 41,432 75,630
Total assets.............................................. 2,960,326 3,819,799
Total mortgages and notes payable......................... 1,134,121 1,553,969
Minority interest in AIMCO Operating Partnership.......... 126,423 126,423
Company-obligated mandatorily redeemable convertible
securities of a subsidiary trust........................ -- 149,500
Stockholders' equity...................................... 1,506,386 1,809,386
</TABLE>
- ---------------
(a) The unaudited Insignia Merger Pro Forma Financial Information has been
prepared under the assumption that the AIMCO stockholders approved the
Insignia Merger, and that $303 million of Class E Preferred Stock was
issued. In the event the AIMCO stockholders do not approve the Insignia
Merger and the Class F Preferred Stock is issued, the net income (loss)
attributable to common stockholders will decrease (increase) to $1,774 and
$(41,920) for the three months ended March 31, 1998 and the year ended
December 31, 1997, respectively, and the diluted net income (loss) per
common share will decrease (increase) to $0.03 and ($0.81) for the three
months ended March 31, 1998 and the year ended December 31, 1997,
respectively.
(b) Pro forma cash provided by operating activities represents income before
minority interests, plus depreciation and amortization less the non-cash
portion of AIMCO's equity in earnings of unconsolidated subsidiaries. The
pro forma amounts do not include adjustments for changes in working capital
resulting from changes in current assets and current liabilities as there is
no historical data available as of both the beginning and end of each period
presented.
(c) On a pro forma basis, cash used in investing activities represents the
minimum annual provision for capital replacements of $300 per owned
apartment unit.
(d) Pro forma cash used in financing activities represents (i) estimated
dividends and distributions to be paid based on AIMCO's historical dividend
rate of $0.5625 per share for the three months ended March 31, 1998 and
$1.85 per share for the year ended December 31, 1997, on outstanding shares
of Class A Common Stock and AIMCO OP Units, (ii) estimated dividends to be
paid based on the rate of $1.78125 per share for the three months ended
March 31, 1998 and $7.125 per share for the year December 31, 1997, on
outstanding shares of Class B Preferred Stock, (iii) estimated dividends to
be paid based on the rate of $0.5625 per share for the three months ended
March 31, 1998 and $2.25 per share for the year ended December 31, 1997, on
outstanding shares of Class C Preferred Stock, (iv) estimated dividends to
be paid based on the rate of $0.5475 per share for the three months ended
March 31, 1998 and $2.19 per share for the year ended December 31, 1997, on
outstanding shares of Class D Preferred Stock, and (v) estimated dividends
to be paid based on the rate of $0.5859375 per share for the three months
ended March 31, 1998 and $2.34 per share for the year ended December 31,
1997, on outstanding shares of Class G Preferred Stock.
(e) AIMCO's management believes that the presentation of FFO, when considered
with the financial data determined in accordance with GAAP, provides useful
measures of AIMCO's performance. However, FFO does not represent cash flow
and is not necessarily indicative of cash flow or liquidity available to
AIMCO, nor should it be considered as an alternative to net income as an
indicator of operating performance. The Board of Governors of NAREIT defines
FFO as net income (loss), computed in accordance with GAAP, excluding gains
and losses from debt restructuring and sales of property, plus real estate
related depreciation and amortization(excluding amortization of financing
costs), and after adjustments for unconsolidated partnerships and joint
ventures. AIMCO calculates FFO in a manner consistent with the NAREIT
definition, which includes adjustments for minority interest in the AIMCO
Operating Partnership, plus amortization of management company goodwill, the
non-cash deferred portion of the income tax provision for unconsolidated
subsidiaries and less the payments of dividends on preferred stock. AIMCO's
management believes that presentation of FFO provides investors with an
industry accepted measurement which helps facilitate an understanding of
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<PAGE> 16
AIMCO's ability to make required dividend payments, capital expenditures and
principal payments on its debt. There can be no assurances that AIMCO's
basis of computing FFO is comparable with that of other REITs.
The following is a reconciliation of pro forma income before minority
interest in the AIMCO Operating Partnership to pro forma FFO:
<TABLE>
<CAPTION>
PRE-INSIGNIA MERGER PRO FORMAS INSIGNIA MERGER PRO FORMAS
---------------------------------- ----------------------------------
FOR THE THREE FOR THE YEAR FOR THE THREE FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
MARCH 31, 1998 DECEMBER 31, 1997 MARCH 31, 1998 DECEMBER 31, 1997
-------------- ----------------- -------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income (loss) before minority interest in AIMCO
Operating Partnership........................ $26,032 $ 51,818 $12,003 $ (7,223)
HUD release fee and legal reserve.............. -- -- -- 10,202
Amortization of management contracts........... -- -- 2,887 11,546
Real estate depreciation, net of minority
interests.................................... 19,531 78,165 19,938 79,598
Amortization of goodwill....................... 1,545 6,182 1,690 6,763
Equity in earnings of unconsolidated
subsidiaries:
Real estate depreciation..................... 890 1,715 890 1,715
Amortization of management company
goodwill................................... 480 1,918 480 1,918
Amortization of management contracts......... 1,379 5,438 7,507 29,951
Deferred taxes............................... 309 4,342 2,822 (397)
Equity in earnings of other partnerships:
Real estate depreciation..................... 2,301 11,250 11,474 48,452
Interest on convertible debentures............. -- -- (2,510) (10,003)
Preferred stock dividends...................... (6,020) (24,080) (6,020) (24,080)
------- -------- ------- --------
Funds from operations.......................... $46,447 $136,748 $51,161 $148,442
======= ======== ======= ========
</TABLE>
(f) Generally, after a one year holding period, AIMCO OP Units may be tendered
for redemption at the option of the holder and, upon tender, may be acquired
by AIMCO for shares of Class A Common Stock at an exchange ratio of one
share of Class A Common Stock for each AIMCO OP Unit (subject to
adjustment), or at AIMCO's election, cash.
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<PAGE> 17
RISK FACTORS
An investment in the Class H Preferred Stock involves various risks. In
addition to general investment risks and those factors set forth elsewhere or
incorporated by reference in this Prospectus Supplement or the accompanying
Prospectus, potential investors should consider, among other things, the
following factors:
INTEGRATION OF INSIGNIA, AMBASSADOR AND OTHER ACQUIRED BUSINESSES.
The Insignia Merger constitutes the largest acquisition ever undertaken by
AIMCO, involving a total transaction value in excess of $800 million (which
includes the Merger Consideration, the Special Dividend and $458 million of
Insignia debt and other liabilities which will remain outstanding and become
consolidated indebtedness of AIMCO). In addition to the risks typically
associated with acquisitions generally, the integration of Insignia's and
Ambassador's respective businesses with the Company's business may place a
significant burden on the Company's management and its systems. See
"-- Acquisition and Development Activities". Such integration is subject to
risks commonly encountered in making such acquisitions, including, among others,
loss of key personnel of Insignia or Ambassador, the difficulty associated with
assimilating the personnel and operations of Insignia and Ambassador, the
disruption of the Company's ongoing business and acquisition strategy, the
difficulty in maintaining uniform standards, controls, procedures and policies
and the possible impairment of the Company's reputation. No assurance can be
given that the anticipated benefits from the Insignia Merger, if consummated, or
the Ambassador Merger will be realized, that the Company will be able to
integrate such businesses successfully or that the Company will not be required
to make expenditures to enhance its systems. Failure of the Company to integrate
such businesses successfully could have a material adverse effect on the
Company's results of operations. Substantial growth in the Company's portfolio
as a result of recent and possible future acquisitions of businesses may involve
similar burdens and risks.
ADVERSE CONSEQUENCES OF AIMCO'S FAILURE TO ACQUIRE IPT
The Insignia Merger Agreement provides that following consummation of the
Insignia Merger, AIMCO is required to propose to acquire (by merger) all IPT
Shares not owned by Insignia and its subsidiaries. The Insignia Merger Agreement
also provides that AIMCO will use its reasonable best efforts, and that Insignia
will use its commercially reasonable efforts, to cause the combination of the
assets of IPLP and the AIMCO Operating Partnership. If AIMCO is unable to
complete the acquisition of the IPT Shares or the combination of the assets of
IPLP and the AIMCO Operating Partnership, AIMCO may need to contribute the right
to manage IPT properties to a taxable subsidiary corporation to avoid the risk
that income from such activities would be considered to be derived from
third-party property management services, which income generally would not be
treated as qualifying income for purposes of the income-related REIT
requirements. Such actions could adversely affect the qualification of the
Distribution and Insignia Merger as tax-free transactions under the Code. If the
Insignia Merger does not qualify as a tax-free reorganization, Insignia would
recognize a taxable gain in an amount equal to the excess of the fair market
value of its assets over the tax basis in its assets. Such gain would result in
AIMCO succeeding to a substantial corporate income tax liability that could have
a material adverse effect on the Company.
POSSIBLE CONFLICT OF INTERESTS; TRANSACTIONS WITH AFFILIATES
AIMCO and certain of its officers and/or directors have entered into, and
may in the future enter into, certain types of transactions that may result in
conflicts of interest between AIMCO and such officers and/or directors. These
types of transactions include: the acquisition by AIMCO of property or assets
from, or the sale by AIMCO of property or assets to, such officers and/or
directors; making loans to or borrowing from such officers and/or directors,
including in connection with the purchase of Class A Common Stock or the
purchase of interests in the AIMCO Operating Partnership and other
unconsolidated subsidiaries of AIMCO; investments by AIMCO in partnerships or
other entities (such as the AIMCO Operating Partnership and such other
unconsolidated subsidiaries) in which such officers and/or directors have a
controlling equity interest or other form of ownership interest; and the
purchase or sale of real estate or other assets by such officers and/or
directors, where the acquisition of such real estate or assets is also a
corporate opportunity for AIMCO. AIMCO has adopted certain policies designed to
minimize or eliminate conflicts of interest between
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<PAGE> 18
AIMCO and its officers and/or directors. Without the approval of a majority of
the disinterested directors, AIMCO will not acquire from or sell to any
director, officer or employee of AIMCO or any entity in which such director,
officer or employee owns more than a 1% interest, or acquire from or sell to any
affiliate of any of the foregoing persons, any assets or other property of
AIMCO, make any loan to or borrow from any of the forgoing persons, or engage in
any material transaction with the foregoing persons. In addition, AIMCO has
entered into employment agreements with Messrs. Considine, Kompaniez and Ira
which include provisions intended to eliminate or minimize potential conflicts
of interest, and which provide that those persons will be prohibited from
engaging directly or indirectly in the acquisition, development, operation or
management of other multifamily apartment properties outside of AIMCO, except
with respect to certain investments currently held by such persons, as to which
investments those persons have committed to an orderly liquidation. There can be
no assurance, however, that these policies will be successful in eliminating the
influence of such conflicts, and if they are not successful, decisions could be
made that might fail to reflect fully the interests of AIMCO's stockholders as a
whole. Furthermore, such policies are subject to change without the approval of
stockholders of AIMCO.
AIMCO presently manages its Managed Properties through PAMS Inc., PAMS LP
and certain former subsidiaries of NHP (the "Management Subsidiaries"). In order
to satisfy certain REIT requirements, the ownership of PAMS Inc. and certain
other Management Subsidiaries consists of the AIMCO Operating Partnership
holding non-voting preferred stock that represents a 95% economic interest, and
certain officers and/or directors of AIMCO holding, directly or indirectly, all
of the voting common stock, representing a 5% economic interest. In addition,
PAMS LP provides property management services with respect to certain Managed
Properties in which certain officers and/or directors of AIMCO have separate
ownership interests. The fees for these services have been negotiated on an
individual basis and typically range from 3% to 6% of gross receipts for the
particular property. Although these arrangements were not negotiated on an
arm's-length basis, AIMCO believes, based on comparisons to the fees charged by
other real estate companies and by PAMS LP with respect to unaffiliated Managed
Properties in comparable locations, that the terms of such arrangements are fair
to AIMCO.
AIMCO has entered into the Contribution Agreement with CK and the
stockholders of CK to cause certain assets of AIMCO to be contributed to CK and,
subject to certain conditions, to distribute all outstanding stock of CK to the
stockholders of AIMCO. CK is a corporation wholly-owned by Terry Considine,
AIMCO's Chairman and Chief Executive Officer, and Peter Kompaniez, AIMCO's
President and Vice Chairman. As a result, when the stock of CK is transferred to
AIMCO, the stockholders of CK will receive payment for the stock; the stock is
to be priced at fair market value and, if market value is difficult to
ascertain, there can be no assurance that the pricing will favor AIMCO. It is
AIMCO's intent to use CK as a vehicle for holding property and performing
services that AIMCO is limited or prohibited from holding or providing due to
AIMCO's election to be taxed as a REIT. AIMCO is finalizing which assets will be
contributed to CK. Any transfer of assets or services to CK will be at market
prices and approved by the independent members of the AIMCO Board, and if market
prices are difficult to ascertain, there can be no assurance that the pricing
will favor AIMCO. It is anticipated that the assets to be contributed to CK will
be immaterial compared to total assets held by AIMCO. No prediction can be made
whether or when any spinoff of CK to AIMCO stockholders will occur.
DEBT FINANCING AND INTEREST RATE HEDGING RISKS
AIMCO and its subsidiaries, and partnerships in which a subsidiary of AIMCO
is a general partner, have significant amounts of debt outstanding and,
accordingly, are subject to the risks normally associated with debt financing,
including the risk that cash flow from operations will be insufficient to make
required payments of principal and interest, the risk that existing
indebtedness, including secured indebtedness, may not be refinanced or that the
terms of any refinancing will not be as favorable as the terms of existing
indebtedness. As of March 31, 1998, 94% of AIMCO's Owned Properties and 56% of
its total consolidated assets were encumbered by debt, and AIMCO had total
outstanding consolidated indebtedness of $811.5 million, $807.5 million of which
was secured by Owned Properties and other assets. The WMF Credit Facility and
the BOA Credit Facility (collectively, the "Credit Facilities") restrict AIMCO's
ability to effect certain mergers,
S-18
<PAGE> 19
business consolidations and asset sales, imposes minimum net worth requirements,
and require AIMCO to maintain a ratio of debt to gross asset value of no more
than 0.55:1, an interest coverage ratio of at least 2.25:1 and a debt service
coverage ratio of at least 2.00:1. The Credit Facilities contain restrictive
covenants which may limit the ability of the Company to pay dividends (including
dividends on the Class H Preferred Stock) or make other restricted payments. In
particular, the BOA Credit Facility provides that the Company may make
distributions during any 12 month period in an amount, in the aggregate, which
does not exceed the greater of 80% of FFO for such period or such amount as may
be necessary to maintain REIT status, provided that no event of default exists
as a result of a breach of certain financial ratios and tests that the Company
is required to meet. See "Risk Factors -- Holding Company Structure; Payment
Restrictions" and "Description of Class H Preferred Stock -- Dividends." Failure
to perform or observe covenants or conditions under an intracompany
subordination agreement entered into in connection with the BOA Credit Facility
and events of default resulting in acceleration under AIMCO's other financing
arrangements, among other events, are considered defaults under the BOA Credit
Facility. General Motors Acceptance Corporation has made loans (the "GMAC
Loans"), with an aggregate outstanding principal balance of $386.9 million at
March 31, 1998, to property owning partnerships in which a subsidiary of AIMCO
is the general partner, each of which is secured by the underlying Owned
Property of such partnership. Certain of the GMAC Loans, having an aggregate
balance of $146.4 million outstanding as of March 31, 1998, are
cross-collateralized with certain other GMAC Loans, and certain loans currently
held by Fannie Mae, having an aggregate balance of $66.9 million outstanding as
of March 31, 1998, are cross-collateralized and cross-defaulted with certain
other Fannie Mae loans. Other than certain GMAC Loans and Fannie Mae loans and
loans under the Credit Facilities, none of AIMCO's debt is subject to
cross-collateralization or cross-default provisions. Cross-collateralization of
indebtedness increases the risk of default on each loan as a single
under-performing property can draw on the revenues of any cross-collateralized
property. AIMCO's Articles of Incorporation, as amended and supplemented from
time to time (the "AIMCO Charter"), do not limit the amount of indebtedness
which may be incurred by AIMCO and its subsidiaries.
As a result of the Insignia Merger and related transactions, the total
indebtedness of the Company will increase from approximately $1.1 billion (after
giving effect to certain completed transactions) to approximately $1.6 billion,
in each case on a pro forma basis at March 31, 1998. After giving effect to the
Insignia Merger, AIMCO's pro forma ratios of earnings to combined fixed charges
and preferred stock dividends would have decreased to 1.3 to 1 and 1.5 to 1 for
the three months ended March 31, 1998 and for the year ended December 31, 1997,
respectively, compared to its historical ratios of 1.7 to 1 and 2.2 to 1,
respectively, for such periods. See "Ratio of Earnings to Fixed Charges." On a
pro forma basis giving effect to the Insignia Merger and related transactions,
AIMCO was in compliance at March 31, 1998 with the financial covenants under the
Credit Facilities.
Concurrently with the closing of the Ambassador Merger, the AIMCO Operating
Partnership executed a guaranty in favor of Fannie Mae (the "Global Guaranty")
pursuant to which the AIMCO Operating Partnership guaranteed payment of the
obligations under certain of the Fannie Mae loans and the WMF Credit Facility.
The obligations of the AIMCO Operating Partnership under the Global Guaranty are
limited to the amount of excess cash flow generated by the 74 properties
securing the loans guaranteed pursuant to the Global Guaranty. The Global
Guaranty is secured by certain cash collection accounts and a letter of credit.
As of March 31, 1998 and May 31, 1998, approximately 93% and 88%,
respectively, of AIMCO's total consolidated indebtedness was subject to fixed
interest rates and approximately 7% and 12%, respectively (approximately $54.8
million and $157.3 million, respectively), was subject to variable interest
rates. Although, as described below, AIMCO has certain hedging arrangements in
place, increases in interest rates could increase AIMCO's interest expense and
adversely affect cash flow. AIMCO from time to time enters into agreements to
reduce the risks associated with increases in short term interest rates.
Although these agreements provide AIMCO with some protection against rising
interest rates, these agreements also reduce the benefits to AIMCO when interest
rates decline.
From time to time, AIMCO enters into interest rate lock agreements with
major investment banking firms, in anticipation of refinancing debt. Interest
rate lock agreements related to planned refinancings of identified variable rate
indebtedness are accounted for as anticipatory hedges. Upon the refinancing of
such
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<PAGE> 20
indebtedness, any gain or loss associated with the termination of the interest
rate lock agreement is deferred and recognized over the life of the refinanced
indebtedness. In order for the interest rate lock to qualify as an anticipatory
hedge, the following criteria must be met: (a) the refinance being hedged
exposes AIMCO to interest rate risk; (b) the interest rate lock is designated as
a hedge; (c) the significant characteristics and expected terms of the refinance
are identified; and (d) it is probable that the refinance will occur. AIMCO
believes that all four of the above qualifications have been met for interest
rate lock agreements previously entered into. In the event that any of the above
qualifications are not met, the interest rate lock will not qualify as an
anticipatory hedge, and the gain or loss on the interest rate lock will be
recognized in the current period's earnings. In September 1997, AIMCO entered
into an interest rate lock agreement having a notional principal amount of $75.0
million, in anticipation of refinancing certain floating rate indebtedness. The
interest rate lock agreement fixed the ten-year treasury rate at 6.294%. An
unrealized loss of approximately $3.5 million relating to the hedge had been
deferred as of March 31, 1998. Subsequent to March 31, 1998, AIMCO refinanced
certain mortgage indebtedness relating to 10 real estate partnerships, and
realized losses of approximately $3.9 million, which have been deferred and will
be amortized over the life of the refinanced debt. These losses, when amortized,
will result in effective interest rates of 7.0% over the life of the refinanced
debt. There can be no assurance that the above described indebtedness will be
refinanced or that AIMCO will be able to enter into other hedging arrangements
to replace the hedge.
Interest rate hedging arrangements may expose AIMCO to certain risks.
Interest rate movements during the term of interest rate hedging arrangements
may result in a gain or loss on AIMCO's investment in the hedging arrangement.
In addition, if a hedging arrangement is not indexed to the same rate as the
indebtedness that is hedged, AIMCO may be exposed to losses to the extent that
the rate governing the indebtedness and the rate governing the hedging
arrangement change independently of each other. Finally, nonperformance by the
other party to the hedging arrangement may result in credit risks to AIMCO. In
order to minimize counterparty credit risk, AIMCO's policy is to enter into
hedging arrangements only with large financial institutions that maintain an
investment grade credit rating.
In December 1997, AIMCO refinanced certain secured long-term notes payable
in order to obtain more favorable interest rates. In anticipation of the
refinancing, AIMCO entered into a $100 million interest rate lock agreement,
which fixed the interest rate at 7.053%. Upon maturity of the interest rate lock
agreement, as a result of declining interest rates, AIMCO realized a loss of
approximately $10.9 million, which was deferred and will be recognized over the
life of the refinanced debt.
On March 18, 1998, Moody's Investors Services ("Moody's") announced that it
was reviewing for possible downgrade its "ba3" rating on Class C Preferred Stock
and Class D Preferred Stock. Moody's expressed concern that the acquisition of
the Insignia Multifamily Business would increase AIMCO's leverage, which Moody's
characterizes as "already high compared to its peers." Moody's subsequently
reconfirmed its rating of the Class C Preferred Stock and the Class D Preferred
Stock. On March 19, 1998, Duff & Phelps Credit Rating Co. ("DCR") placed its
ratings of AIMCO on its "Rating Watch -- Uncertain" in response to the
announcement that AIMCO will acquire the Insignia Multifamily Business. DCR has
since reviewed AIMCO's operating and financing plan for combining the Ambassador
and Insignia organizations and has removed AIMCO from its Rating Watch.
HOLDING COMPANY STRUCTURE; PAYMENT RESTRICTIONS
The Class H Preferred Stock, as well as AIMCO's other outstanding series of
Preferred Stock, are obligations exclusively of AIMCO. The principal asset of
AIMCO is its interest in the AIMCO Operating Partnership and the operations of
AIMCO are conducted almost exclusively through the AIMCO Operating Partnership
and its subsidiaries. Accordingly, the cash flow and the consequent ability of
AIMCO to satisfy its obligations and to make required dividend payments on the
Class H Preferred Stock is dependent upon the earnings of the AIMCO Operating
Partnership and its subsidiaries and the ability of the AIMCO Operating
Partnership and its subsidiaries to distribute those earnings to AIMCO, whether
by distributions, loans or otherwise. The payment of distributions or the making
of loans to AIMCO may be subject to statutory or contractual limitations, are
dependent upon the earnings of such subsidiaries and are subject to various
business considerations. In connection with the Offering, the net proceeds of
the Offering will be contributed
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<PAGE> 21
to the AIMCO Operating Partnership in exchange for Preferred Units of the AIMCO
Operating Partnership in respect of which distributions will be paid at the same
rates and at the same times as the dividends on the Class H Preferred Stock. Any
right of AIMCO to receive assets of the AIMCO Operating Partnership and its
subsidiaries upon their liquidation or reorganization (and the consequent right
of the holders of the Class H Preferred Stock to participate in those assets)
will be effectively subordinated to the claims of the AIMCO Operating
Partnership and its subsidiaries' creditors, except to the extent that AIMCO is
recognized as a creditor of the AIMCO Operating Partnership or such
subsidiaries, in which case the claims would still be subordinate to any
security interest in or other lien on the assets of the AIMCO Operating
Partnership or such subsidiaries and to any indebtedness or other obligations of
the AIMCO Operating Partnership or such subsidiaries that are senior to the
interest held by AIMCO.
The Credit Facilities contain restrictive covenants which may limit, among
other things, the ability of the Company to pay dividends (including dividends
on the Class H Preferred Stock) or make other restricted payments. In
particular, the BOA Credit Facility provides that the Company may make
distributions during any 12 month period in an amount in the aggregate which
does not exceed the greater of 80% of FFO for such period or such amount as may
be necessary to maintain REIT status, provided that no event of default exists
as a result of a breach of certain financial ratios and tests that the Company
is required to meet. A failure of the Company to comply with these or other
conditions and obligations contained in the Credit Facilities could result in
adverse consequences to holders of the Class H Preferred Stock, could render the
Company unable to pay required dividends or make redemptions, and could result
in an event of default under the Credit Facilities. If the Insignia Merger is
consummated, the 6 1/2% Convertible Debentures of Insignia (the "Insignia
Convertible Debentures") underlying the 6 1/2% Trust Convertible Preferred
Securities of Insignia Financing I (which is a subsidiary of Insignia and will
become a subsidiary of AIMCO as a result of the Insignia Merger) will prohibit
the payment of dividends on AIMCO's capital stock if AIMCO elects to defer
payments of interest on the Insignia Convertible Debentures, which it will have
the right, under certain circumstances, to do for periods of up to 60 months. If
the Insignia Merger is consummated, the terms of the Class E Preferred Stock to
be issued in connection therewith will prohibit, after January 15, 1999, the
payment by AIMCO of dividends on any other class or series of capital stock of
the Company (including the Class H Preferred Stock offered hereby) if the
Special Dividend or any other dividends have not been paid on the Class E
Preferred Stock. Other securities of the Company that may be issued in the
future may also contain financial or other covenants more restrictive than those
applicable to the existing Credit Facilities, the Insignia Convertible
Debentures or the Series E Preferred Stock. As a result, these instruments,
agreements and other securities could limit or prohibit the payment of dividends
on the Company's capital stock, including the Series H Preferred Stock offered
hereby.
INVESTMENT IN AND MANAGEMENT OF REAL ESTATE
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the amount
of income generated and expenses incurred. The Company's income from its Owned
Properties and Equity Properties may be adversely affected by the general
economic climate, local conditions such as oversupply of apartments or a
reduction in demand for apartments in the area, the attractiveness of the
properties to tenants, competition from other available apartments, the ability
of the Company to provide adequate maintenance and insurance, and increases in
operating costs (including real estate taxes). The Company's income from its
Owned Properties and Equity Properties would also be adversely affected if a
significant number of tenants were unable to meet their rent payment obligations
when due or if apartments could not be rented on favorable terms. Certain
significant expenditures associated with real property investments (such as debt
service, real estate taxes and maintenance costs) generally are not reduced when
circumstances cause a reduction in income from the investments. In addition,
income from properties and real estate values are also affected by such factors
as applicable laws, including tax laws, interest rate levels and the
availability of financing. If the Company's Owned Properties and Equity
Properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, the Company's income, and its
ability to pay dividends to holders of Class H Preferred Stock, will be
adversely affected. Many of the factors that could adversely affect the
Company's income from its Owned Properties and Equity Properties could also
adversely affect the Company's income from its Managed Properties by reducing
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<PAGE> 22
gross receipts for such properties. Most of the risks associated with the AIMCO
Properties will also be associated with properties which the Company may
hereafter acquire, invest in or manage, including the multifamily apartment
properties owned and managed by Insignia.
Illiquidity of Real Estate. Investments in real estate or partnerships
which own real estate may be illiquid. As a result, the Company may be unable to
vary its portfolio promptly in response to changes in economic or other
conditions. In addition, the Code may limit the ability of AIMCO, as a REIT, to
sell properties held for fewer than four years.
Operating Risks. The AIMCO Properties are subject to operating risks common
to apartment properties in general. These risks may adversely affect the
Company's cash flow from operations. For example, increases in unemployment in
the areas in which the AIMCO Properties are located may adversely affect
apartment occupancy or rental rates and it may not be possible to offset
increases in operating costs due to inflation and other factors by increased
rents. Local rental market characteristics also limit the extent to which rents
may be increased without decreasing occupancy rates.
Competition. There are numerous housing alternatives that compete with the
AIMCO Properties in attracting residents. Such properties compete directly with
other rental apartments and single family homes that are available for rent in
the markets in which such properties are located. Such properties also compete
for residents with new and existing homes and condominiums. The ability of the
Company to lease apartment units and the level of rents charged is determined in
large part by the number of competitive properties in the local market. Numerous
real estate companies compete with the Company in each of its market areas in
acquiring, developing and managing apartment properties and seeking tenants to
occupy their properties and the Company's market share is small in each of its
market areas. In addition, numerous property management companies compete with
the Company in the markets where the Managed Properties. As the multifamily
residential market is fragmented, AIMCO does not have a majority market share in
any market nor does it benefit from any competitive advantage.
Change in Laws. Changes in laws increasing the potential liability for
environmental conditions existing on properties or increasing the restrictions
on discharges or other conditions, as well as changes in laws affecting
development, construction and safety requirements, may result in significant
unanticipated expenditures which would adversely affect the Company's cash flow
from operating activities. In addition, future enactment of rent control or rent
stabilization laws or other laws regulating multifamily housing may reduce, or
limit the ability of the Company to increase rental revenue or increase
operating costs in particular markets.
Possible Environmental Liabilities. Under Federal, state and local
environmental laws and regulations, a current or previous owner or operator of
real property may be required to investigate and clean up a release of hazardous
substances at such property, and may, under such laws and common law, be held
liable for property damage and other costs incurred by third parties in
connection with such releases. The liability under certain of these laws has
been interpreted to be joint and several unless the harm is divisible or there
is a reasonable basis for allocation of responsibility. The failure to remediate
the property properly may also adversely affect the owner's ability to sell or
rent the property or to borrow using the property as collateral. In connection
with its ownership, operation or management of the AIMCO Properties, the Company
could be potentially liable for environmental liabilities or costs associated
with its properties or properties it may in the future acquire or manage.
Certain Federal, state and local laws and regulations govern the removal,
encapsulation or disturbance of asbestos-containing materials ("ACMs") when
those materials are in poor condition or in the event of building remodeling,
renovation or demolition, impose certain worker protection and notification
requirements and govern emissions of and exposure to asbestos fibers in the air.
These laws also impose liability for a release of ACMs and may enable third
parties to seek recovery from owners or operators of real properties for
personal injury associated with ACMs. In connection with the ownership,
operation or management of properties, the Company could be potentially liable
for those costs. There are ACMs at certain of the Owned Properties, and there
may be ACMs at certain of the other AIMCO Properties. The Company has developed
and implemented operations and maintenance programs, as appropriate, that
establish operating procedures
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with respect to the ACMs at most of the Owned Properties, and intends to develop
and implement, as appropriate, such programs at AIMCO Properties that do not
have such programs.
Certain of the Owned Properties, and some of the other AIMCO Properties,
are located on or near properties that contain or have contained underground
storage tanks or on which activities have occurred which could have released
hazardous substances into the soil or groundwater. There can be no assurances
that such hazardous substances have not been released or have not migrated, or
in the future will not be released or will not migrate, onto the AIMCO
Properties. Such hazardous substances have been released at certain Owned
Properties and, in at least one case, have migrated from an off-site location
onto the Company's property. In addition, the Company's Montecito property in
Austin, Texas, is located adjacent to, and may be partially on, land that was
used as a landfill. Low levels of methane and other landfill gas have been
detected at Montecito. The City of Austin (the "City"), the former landfill
operator, has assumed responsibility for conducting all investigation and
remedial activities to date associated with the methane and other landfill gas.
The remediation of the landfill gas is now substantially complete and the Texas
Natural Resources Conservation Commission ("TNRCC") has preliminarily approved
the methane gas remediation efforts. Final approval of the site and the
remediation process is contingent upon the results of continued methane gas
monitors to confirm the effectiveness of the remediation efforts. Should further
actionable levels of methane gas be detected, the City may implement a proposed
contingency plan of passive methane gas venting. The City has also conducted
testing at Montecito to determine whether, and to what extent, groundwater has
been impacted. Based on test reports received to date by the Company, the
groundwater does not appear to be contaminated at actionable levels. The Company
has not incurred, and does not expect to incur, liability for the landfill
investigation and remediation. However, in connection with the present raising
of four of its buildings in order to install stabilizing piers under the
building slabs, the Company has relocated some of its tenants and has installed
a venting system according to the TNRCC's specifications. The restabilization
was substantially completed as of January 1998, at a total cost of approximately
$550,000. The City will be responsible for monitoring the conditions at the
Montecito property.
All of the Owned Properties were subject to Phase I or similar
environmental audits by independent environmental consultants prior to
acquisition. The audits did not reveal, nor is the Company aware of, any
environmental liability relating to such properties that would have a material
adverse effect on the Company's business, assets or results of operations.
However, such audits involve a number of judgements and it is possible that such
audits did not reveal all environmental liabilities or that there are material
environmental liabilities of which the Company is unaware. In addition, the
Managed Properties and Equity Properties may not have been subject to Phase I or
similar environmental audits by independent environmental consultants. While the
Company is not aware of any environmental liability that it believes would have
a material adverse effect on its business, financial condition or results of
operations relating to the Managed Properties and Equity Properties, for which
audits are not available, there can be no assurance that material environmental
liabilities of which the Company is unaware do not exist at such properties.
In October 1997, NHP received a letter (the "EPA Letter") from the U.S.
Department of Justice ("DOJ") which stated that the U.S. Environmental
Protection Agency ("EPA") has requested that the DOJ file a lawsuit against NHP
alleging, among other things, that NHP violated the Clean Air Act, the National
Recycling and Emissions Reduction Programs and associated regulations in
connection with the employment of certain unlicensed personnel, maintenance and
disposal of certain refrigerants, and record-keeping practices at two
properties. A settlement in principle between NHP and EPA has been reached
whereby NHP has agreed to pay a fine of less than $100,000, permit EPA to audit
40 NHP properties with respect to their use and disposal of such refrigerants,
and continue to provide training to all maintenance workers with respect to the
disposal of such refrigerants. A formal settlement agreement is expected to be
executed in 1998. It is possible that the future EPA audits agreed to in the
settlement could result in additional allegations by EPA of violations at such
properties; however, based on the terms of the settlement in principle with EPA,
the Company anticipates that the fines, if any, resulting from such audits will
be nominal.
Restrictions Imposed by Laws Benefiting Disabled Persons. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation are required to meet certain Federal requirements related to
access and use by disabled persons. These requirements became effective in 1992.
A number of
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additional Federal, state and local laws exist which also may require
modifications to the Owned Properties, or restrict certain further renovations
thereof, with respect to access thereto by disabled persons. For example, the
Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment properties
first occupied after March 13, 1990 to be accessible to the handicapped.
Noncompliance with the ADA or the FHAA could result in the imposition of fines
or an award of damages to private litigants and also could result in an order to
correct any non-complying feature, which could result in substantial capital
expenditures. Although management of AIMCO believes that the Owned Properties
are substantially in compliance with present requirements, if the Owned
Properties are not in compliance, the Company is likely to incur additional
costs to comply with the ADA and FHAA.
Loss of Revenue Due to Termination or Other Loss of Property Management
Agreements. AIMCO and Insignia are dependent upon revenue received for services
performed under property management agreements relating to properties owned by
third parties. For the year ended December 31, 1997, AIMCO and Insignia derived
approximately 2% and 15%, respectively, of their gross revenues from management
of properties owned by third parties. Risks associated with the management of
properties owned by third parties include risks that management contracts will
be terminated by the property owner or will be lost in connection with a sale of
the property, contracts may not be renewed upon expiration or may not be renewed
on terms consistent with current terms, and rental revenues upon which
management fees are based will decline as a result of general real estate market
conditions or other factors and result in decreases in management fees. If
significant numbers of contracts are terminated or are not renewed, net income
from fee management operations could be adversely affected. Contracts with
unaffiliated third parties are for terms ranging from 30 days to 5 years, with
most contracts being terminable within one year or less. In general, management
contracts may be terminated or otherwise lost as a result of a number of
factors, many of which are beyond the control of AIMCO and Insignia, including:
(i) disposition of the property by the owner in the ordinary course or as a
result of financial distress of the property owner; (ii) the property owner's
determination that AIMCO's or Insignia's management of the property is
unsatisfactory; (iii) willful misconduct, gross negligence or other conduct by
the manager that constitutes grounds for termination under such contracts; or
(iv) with respect to certain affordable properties, termination of such
contracts by United States Department of Housing and Urban Development ("HUD")
or state housing finance agencies, generally at their discretion.
Risks Relating to Regulation of Affordable Housing. As of March 31, 1998,
the Managed Properties included 68,264 affordable units in 460 properties. In
addition, AIMCO owns interests in 55,546 affordable units. A substantial portion
of the affordable properties, and some conventional properties in which AIMCO
owns interests, were built or acquired by the owners with the assistance of
programs administered by HUD that provide mortgage insurance, favorable
financing terms, or rental assistance payments to the owners. As a condition to
the receipt of assistance under these and other HUD programs, the properties
must comply with various HUD requirements, which typically include limits on
rents to amounts approved by HUD. HUD approval is required before the Company
may be appointed as manager of additional HUD-assisted properties. There can be
no assurance that HUD approval will be received with respect to any particular
action for which it is required. In addition to the effects of HUD regulation on
the Company as a manager of affordable properties, the business of the Company
may be indirectly affected by regulations generally applicable to the entities
owning affordable properties. In particular, HUD limits the rents that may be
charged on certain HUD-assisted properties to approved amounts. If permitted
rents on a property are insufficient to cover costs, a sale of the property may
become necessary, which would result in a loss of management fee revenue. As of
March 31, 1998, and in addition to the 441 HUD-assisted properties, the Company
managed 19 properties that receive assistance from agencies other than HUD or
are subject to regulation by agencies other than HUD.
Certain of the properties owned or managed by Insignia are subject to
agreements which require the consent of HUD prior to the transfer of the right
to manage such properties. Such agreements generally define a transfer of
management such that the Insignia Merger would require advanced approval of HUD.
The Insignia Merger requires AIMCO to file or cause to be filed with HUD any
documents required to be filed under any applicable law or the rules and
regulations of HUD (collectively, the "HUD Rules") with respect to the Insignia
Merger, to use all commercially reasonable efforts to make such filings in a
timely manner, and
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requires Insignia to make reasonable efforts to assist AIMCO, upon request, in
obtaining any necessary approvals of HUD. If an approval of HUD necessary to
transfer a property from Insignia to AIMCO in the Insignia Merger ("HUD
Approval") is not obtained on or prior to the effective time of the Insignia
Merger, Holdings will use its reasonable efforts to cause the officers of IPT to
continue to serve in such capacities for purposes of supervising all entities
having an ownership interest in entities which own HUD-assisted or HUD-insured
properties (the "HUD Properties") and Insignia Residential Group, L.P. or its
general partner with respect to the management of all HUD Properties, until such
approval is obtained. All funds received from the HUD Properties shall be placed
in escrow until such time as either (i) HUD Approval is obtained, or (ii) AIMCO
directs the escrow agent to release the escrowed funds. The receipt of any
required HUD Approval is not a condition to the obligations of any party to
consummate the Insignia Merger, and the consideration payable by the Company in
the Insignia Merger will not be adjusted if such HUD Approval is not obtained.
There can be no assurance that all necessary HUD Approvals will be obtained
prior to the satisfaction of the conditions to the closing of the Insignia
Merger. While there can be no assurance, AIMCO believes that failure to transfer
such properties to AIMCO in the Insignia Merger will not result in a material
impact on AIMCO's results of operations or financial condition.
HUD Enforcement and Limited Denials of Participation. Under its
regulations, HUD has the authority to suspend or deny property owners and
managers from participation in HUD programs with respect to additional
assistance within a geographic region through imposition of a limited denial of
participation ("LDP") by any HUD office or nationwide for violations of HUD
regulatory requirements. In March 1997, HUD announced its intention to step up
enforcement against property owners and managers who violate their agreements
with HUD, and, in July 1997, HUD announced the creation of a new department-wide
enforcement division. In June 1997, the St. Louis HUD field office issued an LDP
to NHP as a result of a physical inspection and mortgage default at one property
owned and managed by NHP-related companies. The LDP suspended NHP's ability to
manage or acquire additional HUD-assisted properties in eastern Missouri through
June 24, 1998. Although this LDP has expired by its terms, the Company has
proposed a settlement agreement with HUD which includes aggregate payments to
HUD of approximately $485,000 and withdrawal of the LDP as of its date of
issuance. The Company believes a settlement will be executed in the near future.
Because an LDP is prospective, existing HUD agreements are not affected, so an
LDP is not expected to result in the loss of management service revenue from or
to otherwise affect properties that the Company currently manages in the subject
regions. In addition, the Company has resolved concerns raised by two other HUD
field offices. If HUD were to disapprove AIMCO as property manager for one or
more affordable properties, AIMCO's and NHP's ability to obtain property
management revenues from new affordable properties (including affordable
properties managed by Insignia) may be impaired.
HUD monitors the performance of properties with HUD-insured mortgage loans.
HUD also monitors compliance with applicable regulations, and takes performance
and compliance into account in approving management of additional HUD-assisted
properties. In this regard, since July 1988, 29 HUD-assisted properties owned or
managed by NHP or NHP-related companies have defaulted on non-recourse HUD
insured mortgage loans. Eight of these 29 properties are currently managed by
NHP. An additional six properties owned or managed by NHP have received
unsatisfactory performance ratings. As a result of the defaults and
unsatisfactory ratings, a national HUD office must review any application by
AIMCO to act as property manager or owner for additional HUD-assisted
properties. The national HUD office has consistently approved NHP's applications
to manage new properties, and AIMCO received HUD clearance to acquire its
interests in NHP and the NHP-related companies. AIMCO believes that it enjoys a
good working relationship with HUD and that the national office will continue to
apply the clearance process to large management portfolios such as AIMCO's with
discretion and flexibility. While there can be no assurance, AIMCO believes that
the unsatisfactory reviews and the mortgage defaults will not have a material
impact on its results of operations or financial condition.
In October 1997, NHP received a subpoena from the Inspector General of HUD
requesting documents relating to any arrangement whereby NHP or any of its
affiliates provides or has provided compensation to owners of HUD multifamily
projects in exchange for or in connection with property management of a HUD
project. AIMCO believes that other owners and managers of HUD projects have
received similar subpoenas. Documents relating to certain of NHP's acquisitions
of property management rights for HUD projects may be
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responsive to the subpoena. AIMCO and NHP are in the process of complying with
the subpoena and have provided certain documents to the Inspector General,
without conceding that they are responsive to the subpoena. AIMCO believes that
NHP's operations are in compliance, in all material respects, with all laws,
rules and regulations relating to HUD-assisted or HUD-insured properties.
Effective February 13, 1998, counsel for NHP and the U.S. Attorney for the
Northern District of California entered into a Tolling Agreement related to
certain civil claims the government may have against NHP. Although no action has
been initiated against NHP or AIMCO or, to AIMCO's knowledge, any owner of a HUD
property managed by NHP or AIMCO, if any such action is taken in the future, it
could ultimately affect existing arrangements with respect to HUD projects or
otherwise have a material adverse effect on the results of operations of AIMCO.
Uncertainty Regarding Status of Federal Subsidies. AIMCO owns and manages
apartment units that are subsidized under Section 8 of the United States Housing
Act of 1937, as amended ("Section 8"). These subsidies are generally provided
pursuant to project-based Housing Assistance Payment Contracts ("HAP Contracts")
between HUD and the owners of the properties or, with respect to a limited
number of units managed by AIMCO and Insignia, pursuant to vouchers received by
tenants. On October 27, 1997, the President of the United States signed into law
the Multifamily Assisted Housing Reform and Affordability Act of 1997 (the "1997
Housing Act"). Under the 1997 Housing Act, the mortgage financing and HAP
Contracts of certain properties assisted under Section 8, with rents above
market levels and financed with HUD-insured mortgage loans, will be restructured
by reducing subsidized rents to market levels, thereby reducing rent subsidies,
and lowering required debt service payments as needed to ensure financial
viability at the reduced rents and subsidy levels. The 1997 Housing Act retains
project-based subsidies for most properties (properties in rental markets with
limited supply, properties serving the elderly and certain other properties).
The 1997 Housing Act phases out project-based subsidies on selected
properties serving families not located in rental markets with limited supply,
converting such subsidies to a tenant-based subsidy. Under a tenant-based
system, rent vouchers would be issued to qualified tenants who then could elect
to reside at properties of their choice, provided such tenants have the
financial ability to pay the difference between the selected properties' monthly
rent and the monthly value of the vouchers, which would be established based on
HUD's regulated fair market rent for the relevant geographical areas. The 1997
Housing Act provides that properties will begin the restructuring process in
Federal fiscal year 1999 (beginning October 1, 1998), and that HUD will issue
final regulations implementing the 1997 Housing Act on or before October 27,
1998. Congress has elected to renew HAP Contracts expiring before October 1,
1998 for one-year terms, generally at existing rent levels, so long as the
properties remain in compliance with the HAP Contracts. While AIMCO does not
expect the provisions of the 1997 Housing Act to result in a significant number
of tenants relocating from properties managed by AIMCO, there can be no
assurance that the provisions will not significantly affect AIMCO's management
portfolio. Furthermore, there can be no assurance that other changes in Federal
housing subsidy policy will not occur. Any such changes could have a material
adverse effect on AIMCO's property management revenues.
ACQUISITION AND DEVELOPMENT ACTIVITIES
The Company has engaged in, and intends to continue to engage in, the
selective acquisition, development and expansion of multi-family apartment
properties. In the ordinary course of business, the Company engages in
discussions and negotiations regarding the acquisition of apartment properties
or interests in entities that own apartment properties. The Company frequently
enters into contracts and nonbinding letters of intent with respect to the
purchase of properties. These contracts are typically subject to certain
conditions and permit the Company to terminate the contract in its sole and
absolute discretion if it is not satisfied with the results of its due diligence
investigation of the properties. The Company believes that such contracts
essentially result in the creation of an option on the subject properties and
give the Company greater flexibility in seeking to acquire properties. As of
July 28, 1998, the Company had under contract or letter of intent an aggregate
of 66 multi-family apartment properties with a maximum aggregate purchase price
of $841 million, including estimated capital improvements, which, in some cases,
may be paid in the form of
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assumption of existing debt. All such contracts are subject to termination by
the Company as described above. In addition, the Company has entered into the
Insignia Merger Agreement. See "Summary -- Recent Developments -- Insignia
Merger." The Insignia Merger Agreement provides for AIMCO to pay Insignia $50
million in liquidated damages if the Insignia Merger Agreement is terminated
under certain circumstances, including certain breaches of AIMCO's
representations, warranties and covenants, and the failure to satisfy certain
conditions to closing, under the agreement. No assurance can be given that any
of these possible acquisitions will be completed or, if completed, that they
will be accretive on a per share basis. If the Insignia Merger Agreement is
terminated due to a breach by AIMCO, certain Insignia executives have the right
to require AIMCO to purchase certain of their shares of Insignia common stock.
If all such executives exercised this right, AIMCO would be required to purchase
approximately 6% of the shares of common stock of Insignia outstanding as of
July 31, 1998.
In addition to general investment risks associated with any new investment,
acquisitions entail risks that such investments will fail to perform in
accordance with expectations, including projected occupancy and rental rates,
management fees and the costs of property improvements, along with integration
related risks. Risks associated with redevelopment and expansion of properties
include the risks that development opportunities may be abandoned; that
construction costs of a property may exceed original estimates, possibly making
the property uneconomical; that occupancy rates and rents at a newly completed
property may not be sufficient to make the property profitable; that
construction and permanent financing may not be available on favorable terms;
and that construction and lease-up may not be completed on schedule, resulting
in increased debt service expense and construction costs. Development activities
are also subject to risks relating to any inability to obtain, or delays in
obtaining, necessary zoning, land-use, building, occupancy, and other
governmental permits and authorizations. See also "-- Integration of Insignia,
Ambassador and Other Acquired Businesses."
The Company also has engaged in, and intends to continue to engage in, the
selective acquisition of, or investment in, companies that own or manage
apartment properties or own general or limited partnership or other interests
therein, including tender offers for limited partnership interests. Risks
associated with the Company's past and future acquisitions of general
partnership interests, and tender offers for outstanding limited partnership
interests, include the risks that the general partner will be subject to
allegations (including legal actions) of, or will be otherwise liable for,
breaches of fiduciary duty to the limited partners of such partnership and that
the assets of the general partner may be subject to claims by creditors of the
partnership if the partnership becomes insolvent. See "-- English Litigation."
ENGLISH LITIGATION
In November 1996, the Company acquired (the "English Acquisition") certain
partnership interests, real estate and related assets from J.W. English, a
Houston, Texas-based real estate syndicator and developer, and certain
affiliated entities (collectively, the "J.W. English Companies"). In the English
Acquisition, the Company purchased all of the general and limited partnership
interests owned by the J.W. English Companies in 22 limited partnerships which
act as the general partner to 31 limited partnerships (the "English
Partnerships") that own 22 apartment properties and other assets and interests
related to the J.W. English Companies, and assumed management of the properties
owned by the English Partnerships. The Company made separate tender offers (the
"English Tender Offers") to the limited partners of 25 of the English
Partnerships (the "Tender Offer English Partnerships").
In November 1996, purported limited partners of certain of the Tender Offer
English Partnerships filed a purported class action lawsuit against the Company
and J.W. English in the U.S. District Court for the Northern District of
California (the "Federal Action"), alleging, among other things, that the
Company conspired with J.W. English to breach his fiduciary duty to the
plaintiffs, and that the offering materials used by the Company in connection
with the English Tender Offers contained misleading statements or omissions. The
Federal Action was voluntarily dismissed, without prejudice, in favor of another
purported class action filed in May 1997 by limited partners of certain of the
Tender Offer English Partnerships and six additional English Partnerships. Two
complaints were filed in the Superior Court of the State of California (the
"California Actions") against the Company and the J.W. English Companies,
alleging, among other things,
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that the consideration the Company offered in the English Tender Offers was
inadequate and designed to benefit the J.W. English Companies at the expense of
the limited partners, that certain misrepresentations and omissions were made in
connection with the English Tender Offers, that the Company receives excessive
fees in connection with its management of the properties owned by the English
Partnerships, that the Company continues to refuse to liquidate the English
Partnerships and that the English Acquisition violated the partnership
agreements governing the English Partnerships and constituted a breach of
fiduciary duty.
In addition to unspecified compensation and exemplary damages, the original
complaints in the California Actions sought an accounting, a constructive trust
on the assets and monies acquired by the English defendants in connection with
the English Acquisition, a court order removing the Company from management of
the English Partnerships and/or ordering disposition of the properties and
attorneys fees, expert fees and other costs. The Company intends to vigorously
defend itself in connection with these actions. The Company believes it is
entitled to indemnity from the J.W. English Companies, subject to certain
exceptions.
On August 4, 1997, the Company filed demurrers to both complaints in the
California Actions. At a hearing on the demurrers on January 9, 1998, the court
granted the Company's demurrers to each of the three causes of action against it
in the two complaints, with leave to amend.
On February 25, 1998, the plaintiffs filed a consolidated amended class and
derivative complaint for damages (the "Consolidated Amended Complaint"). The
Consolidated Amended Complaint has added as defendants the general partners of
the English Partnerships and dropped certain defendants, including AIMCO/PAM
Properties, L.P. The Consolidated Amended Complaint seeks compensatory and
punitive damages and alleges six causes of action for breach of fiduciary duty
(two separate causes of action), for an accounting, breach of the implied
covenant of good faith and fair dealing, and for inducing breach of contract.
Plaintiffs have also added allegations of alleged wrongful conduct in connection
with the AIMCO Operating Partnership's second group of tender offers commenced
in late 1997. On March 27, 1998, the remaining AIMCO defendants and the general
partners of the English Partnerships filed demurrers to the Consolidated Amended
Complaints. On May 22, 1998, the demurrers were overruled. The trial has been
continued until April 12, 1999. Plaintiff's motion for class certification,
which was scheduled to be heard on August 14, 1998, has been taken off-calendar.
The defendants intend to defend the action vigorously. Failure by the Company to
prevail in the California Actions or to receive indemnification could have a
material adverse effect on the Company's financial condition and results of
operations.
INSIGNIA LITIGATION
On March 24, 1998, certain persons claiming to own limited partner
interests in several partnerships managed by Insignia affiliates (the "Insignia
Partnerships") filed a purported class and derivative complaint (the
"Complaint") in California Superior Court in the County of San Mateo against
Insignia, the general partners of the Insignia Partnerships (the "Insignia
GPs"), AIMCO, certain persons and entities who purportedly formerly controlled
the Insignia GPs, and additional entities affiliated with and individuals who
are officers, directors and/or principals of several of the defendants. With
respect to AIMCO, plaintiffs allege that (i) AIMCO aided and abetted Insignia's
alleged breach of fiduciary duty in connection with Insignia's agreement to
merge with AIMCO and (ii) AIMCO aided and abetted other alleged acts of
mismanagement purportedly committed by the Insignia defendants. With respect to
Insignia and the other defendants, plaintiffs allege purported violations of
various California securities, corporate and partnership statutes, as well as
conversion and common law fraud. The Complaint seeks unspecified compensatory
and punitive damages, an injunction blocking the sale of control of the Insignia
GPs to AIMCO and a court order directing the defendants to discharge their
fiduciary duties to the plaintiffs. On June 25, 1998, AIMCO filed a demurrer to
the Complaint. On August 3, 1998, plaintiffs filed an amended complaint. AIMCO
currently must move, answer or otherwise respond by September 4, 1998. The
defendants intend to defend the action vigorously. Although the Company does not
believe that this litigation will interfere with the Insignia Merger or have a
material adverse effect on the Company, there can be no assurance that the
litigation will not have such effects.
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DEPENDENCE ON CERTAIN EXECUTIVE OFFICERS
Although each of Messrs. Terry Considine, Peter K. Kompaniez and Steven D.
Ira, officers and/or directors of the Company, has entered into an employment
agreement with the Company, the loss of any of their services could have an
adverse effect on the operations of the Company.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
General. Qualification as a REIT involves the application of highly
technical and complex provisions of the Code, for which there are only limited
judicial or administrative interpretations, and the determination of various
factual matters and circumstances not entirely within AIMCO's control. Although
AIMCO believes, and it has received an opinion of Skadden, Arps, Slate, Meagher
& Flom LLP to the effect, that it was organized, and has operated since its
initial taxable year ended December 31, 1994, until the date of such opinion, in
a manner so as to qualify as a REIT, no assurance can be given that AIMCO has
been or will remain so qualified. The opinion of Skadden, Arps, Slate, Meagher &
Flom LLP is based on, and conditioned upon, certain representations and
covenants made by AIMCO as to factual matters, including representations and
covenants regarding the nature of AIMCO's properties and the future conduct of
its business in accordance with the requirements for qualification as a REIT
under the Code as described in greater detail in "Certain Federal Income Tax
Considerations" herein and in the accompanying Prospectus. For example, if the
value of any one issuer's securities held by AIMCO exceeds 5% of the value of
AIMCO's total assets on certain testing dates, AIMCO would not qualify as a REIT
for federal income tax purposes. AIMCO believes that the values of its
investments in the various Management Subsidiaries, including PAMS, Inc., do not
exceed this 5% rule, and Skadden, Arps, Slate, Meagher & Flom LLP has relied on
AIMCO's representation of these values in rendering its opinion. No independent
appraisals have been obtained to support AIMCO's determination as to the values
of the Management Subsidiaries and these values are subject to change in the
future. Such opinion is expressed as of its date and Skadden, Arps, Slate,
Meagher & Flom LLP has no obligation to advise holders of the securities of the
Company of any subsequent change in the matters stated, represented or assumed
or any subsequent change in the applicable law. Moreover, the Company's
qualification and taxation as a REIT depends upon the Company's ability to meet,
through actual annual operating results, distribution levels and diversity of
stock ownership, the various qualification tests imposed under the Code, the
results of which have not and will not be reviewed by Skadden, Arps, Slate,
Meagher & Flom LLP. Accordingly, no assurance can be given that the actual
results of the Company's operation for any one taxable year has satisfied or
will satisfy such requirements. An opinion of counsel is not binding on the
Internal Revenue Service (the "IRS"), and no assurance can be given that the IRS
will not challenge the Company's eligibility for taxation as a REIT. In
addition, if the Insignia Merger is completed, AIMCO's qualification as a REIT
will depend, in part, upon the qualification of IPT as a REIT. Future tax
legislation could adversely affect AIMCO's ability to operate as a REIT and no
assurance can be given that any new legislation, regulations, administrative
interpretations or court decisions would not change the tax laws with respect to
AIMCO's qualification as a REIT or the Federal income tax consequences of such
qualification. See "Certain Federal Income Tax Considerations" herein and in the
accompanying Prospectus.
If, in any taxable year, AIMCO fails to qualify as a REIT, AIMCO would not
be allowed a deduction for dividends paid to stockholders in computing its
taxable income and would be subject to Federal income tax on its taxable income
at corporate rates. As a result of the additional tax liability, AIMCO might
need to borrow funds or liquidate certain investments on terms that may be
disadvantageous to AIMCO in order to pay the applicable tax and AIMCO would not
be compelled to make distributions under the Code. Unless entitled to relief
under certain statutory provisions, AIMCO would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. Although AIMCO currently intends to operate in a manner
designed to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause AIMCO to fail to qualify as a REIT
or may cause the AIMCO Board of Directors to revoke its REIT election. In
addition, if Insignia is subsequently determined to have earnings and profits in
excess of that distributed by AIMCO prior to December 31, 1998, AIMCO would fail
to qualify as a REIT. If AIMCO fails to qualify as a REIT, the agreement
pursuant to which AIMCO issued its Class B Preferred Stock provides that the
original purchaser may require AIMCO to repurchase such investor's
S-29
<PAGE> 30
Class B Preferred Stock, in whole or in part, at a price of $105 per share, plus
accrued and unpaid dividends to the date of repurchase. Such investor acquired
and currently owns 750,000 shares of Class B Preferred Stock and any such
required repurchase could have a material adverse effect on the Company. See
"Certain Federal Income Tax Considerations" herein and in the accompanying
Prospectus.
Distribution of Acquired Earnings and Profits. The Code provides that when
a REIT acquires a corporation that is currently a C corporation (such as
Insignia), the REIT may qualify as a REIT only if, as of the close of the year
of acquisition, the REIT has no "earnings and profits" acquired from such C
corporation. In the Insignia Merger, AIMCO will succeed to the earnings and
profits of Insignia and, therefore, AIMCO must distribute such earnings and
profits by December 31, 1998. Insignia has retained independent certified public
accountants to determine Insignia's earnings and profits through the Effective
Time for purposes of this requirement. The determination of the independent
certified public accountants will be based upon Insignia's tax returns as filed
with the IRS and other assumptions and qualifications set forth in the reports
issued by such accountants. Any adjustments to Insignia's income for taxable
years ending on or before the closing of the Insignia Merger including as a
result of an examination of its returns by the IRS and the receipt of certain
indemnity or other payments could affect the calculation of Insignia's earnings
and profits. Furthermore, the determination of earnings and profits requires the
resolution of certain technical tax issues with respect to which there is no
authority directly on point and, consequently, the proper treatment of these
issues for earnings and profits purposes is not free from doubt. There can be no
assurance that the IRS will not examine the tax returns of Insignia and propose
adjustments to increase its taxable income and therefore its earnings and
profits. In this regard, the IRS can consider all taxable years of Insignia as
open for review for purposes of determining the amount of such earnings and
profits. Additionally, if the Special Dividend is not treated as a dividend
under the Code, AIMCO may, depending upon the amount of other distributions made
by AIMCO subsequent to the Insignia Merger (if consummated), fail to distribute
an amount equal to Insignia's earnings and profits. AIMCO's failure to
distribute an amount equal to such earnings and profits effective on or before
December 31, 1998 would result in AIMCO's failure to qualify as a REIT.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING REITS
The rules dealing with Federal income taxation are constantly under review
by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. Changes to the Federal laws and interpretations thereof
could adversely affect the tax consequences of an investment in AIMCO. For
example, a proposal issued by President Clinton on February 2, 1998, if enacted
into law, may adversely affect the ability of AIMCO to expand the present
activities of its Management Subsidiaries. It cannot be predicted whether, when,
in what forms, or with what effective dates, the tax laws applicable to AIMCO or
an investment in AIMCO will be changed.
OWNERSHIP LIMIT
In order for AIMCO to maintain its qualification as a REIT, not more than
50% of the value of its outstanding capital stock may be owned, directly or
constructively, by five or fewer individuals or certain entities (as set forth
in the Code). The AIMCO Charter limits direct or constructive ownership of
shares of Class H Preferred Stock by any person such that the sum of (i) the
aggregate value of the Class H Preferred Stock, and (ii) the aggregate value of
all shares of any other Equity Stock owned, directly or constructively, by such
person may not exceed 8.7% (or 15% in the case of certain pension trusts,
registered investment companies and Mr. Considine) of the aggregate value of all
outstanding shares of Equity Stock. The constructive ownership rules are complex
and may cause shares of AIMCO's Equity Stock owned directly or constructively by
a group of related individuals or entities to be constructively owned by one
individual or entity. A transfer of shares to a person who, as a result of the
transfer, violates the limit on ownership described above may be void under some
circumstances or may be transferred to a trust, for the benefit of one or more
qualified charitable organizations designated by AIMCO, with the included
transferee having only a right to share (to the extent of the transferee's
original purchase price for such shares) in proceeds from the trust's sale of
such shares.
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<PAGE> 31
USE OF PROCEEDS
AIMCO intends to contribute the net proceeds from the sale of the Class H
Preferred Stock (estimated to be $48.1 million ($55.4 million if the
Underwriters' over-allotment option is exercised in full)) to the AIMCO
Operating Partnership in exchange for Preferred Units of the AIMCO Operating
Partnership. The terms of such Preferred Units will be substantially equivalent
to the economic terms of the Class H Preferred Stock. The AIMCO Operating
Partnership intends to use the amounts received from AIMCO to repay up to $55.0
million of indebtedness outstanding under the BOA Credit Facility, which
indebtedness bore interest at a weighted average rate of 6.6% at July 30, 1998
and matures on January 26, 2000 (unless otherwise extended). The indebtedness
under the BOA Credit Facility was incurred for general business purposes,
including property acquisitions. The AIMCO Operating Partnership intends to use
any remaining amounts for general business purposes.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------------------------------
AIMCO
PREDECESSORS (1)
AIMCO -----------------------------
--------------------------------------------------------
FOR THE THREE FOR THE YEARS FOR THE PERIOD
MONTHS ENDED ENDED FOR THE PERIOD JANUARY 1, FOR THE
MARCH 31, DECEMBER 31, JANUARY 10, 1994 1994 THROUGH YEAR ENDED
------------- --------------------- TO DECEMBER 31, JULY 28, DECEMBER 31,
1998 1997 1997 1996 1995 1994 1994(3) 1993
----- ----- ----- ----- ----- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges(2)....... 2.2:1 1.6:1 2.3:1 1.6:1 2.1:1 5.8:1 N/A 1.2:1
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(4)(5)........ 1.7:1 1.6:1 2.2:1 1.6:1 1.5:1 2.0:1 N/A 1.2:1
<CAPTION>
PRE-INSIGNIA MERGER INSIGNIA MERGER
PRO FORMA(6) PRO FORMA(7)
---------------------------- ----------------------------
FOR THE THREE FOR THE THREE
MONTHS ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Ratio of earnings to
fixed charges(2)....... 2.1:1 2.0:1 1.7:1 1.9:1
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(4)(5)........ 1.5:1 1.5:1 1.3:1 1:5.1
</TABLE>
- ---------------
(1) On July 29, 1994, AIMCO completed its IPO of 9,075,000 shares of Class A
Common Stock. On such date, the AIMCO Predecessors engaged in a business
combination and consummated a series of related transactions which enabled
AIMCO to continue and to expand the property management and related
businesses of the AIMCO Predecessors.
(2) The ratio of earnings to fixed charges for AIMCO was computed by dividing
earnings by fixed charges. For this purpose, "earnings" consists of income
before minority interest plus fixed charges (other than any interest which
has been capitalized); and "fixed charges" consists of interest expense
(including amortization of loan costs) and interest which has been
capitalized.
The ratio of earnings to fixed charges for the AIMCO Predecessors was
computed by dividing earnings by fixed charges. For this purpose, "earnings"
consists of income (loss) before extraordinary items and income taxes plus
fixed charges and "fixed charges" consists of interest expense (including
amortization of loan costs).
(3) The earnings of the AIMCO Predecessors for the period from January 1, 1994
to July 28, 1994 were inadequate to cover fixed charges by $1,463,000.
(4) The ratio of earnings to combined fixed charges and preferred stock
dividends for AIMCO was computed by dividing earnings by the total of fixed
charges and preferred stock dividends. For this purpose, "earnings" consists
of income before minority interest plus fixed charges (other than any
interest which has been capitalized); "fixed charges" consists of interest
expense (including amortization of loan costs) and interest which has been
capitalized; and "preferred stock dividends" consists of the amount of
pre-tax earnings that would be required to cover preferred stock dividend
requirements.
(5) The AIMCO Predecessors did not have any shares of preferred stock
outstanding during the period from January 1, 1994 through July 28, 1994.
(6) On a pro forma, as adjusted basis, to reflect the Pre-Insignia Merger
Transactions and the issuance of the Class H Preferred Stock and the
application of the net proceeds therefrom to repay indebtedness as if all
such transactions had occurred on January 1, 1997, the ratio of earnings to
fixed charges was 2.1:1 and 2.0:1 for the three months ended March 31, 1998
and the year ended December 31, 1997, respectively, and the ratio of
earnings to combined fixed charges and preferred stock dividends was 1.5:1
and 1.5:1 for the three months ended March 31, 1998 and the year ended
December 31, 1997, respectively.
(7) On a pro forma, as adjusted basis, to reflect the Insignia Merger
Transactions and the issuance of the Class H Preferred Stock and the
application of the net proceeds therefrom to repay indebtedness as if all
such transactions had occurred on January 1, 1997, the ratio of earnings to
fixed charges was 1.7:1 and 2.0:1 for the three months ended March 31, 1998
and the year ended December 31, 1997, respectively, and the ratio of
earnings to combined fixed charges and preferred stock dividends was 1.3:1
and 1.5:1 for the three months ended March 31, 1998 and the year ended
December 31, 1997, respectively.
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<PAGE> 32
CAPITALIZATION OF AIMCO
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
The following table sets forth the capitalization of AIMCO at March 31,
1998 (giving effect to the amendment to the charter of AIMCO effective June 19,
1998): (i) on a historical basis, (ii) on a pro-forma basis to reflect the Pre-
Insignia Merger Transactions; (iii) on a pro forma, as adjusted basis to reflect
the Pre-Insignia Merger Transactions, the offering of the Class G Preferred
Stock and Class H Preferred Stock and the application of a portion of the
proceeds therefrom to repay indebtedness; (iv) on a pro forma basis to reflect
the Insignia Merger Transactions, and (v) on a pro forma, as adjusted basis to
reflect the Insignia Merger Transactions, the offering of the Class G Preferred
Stock and Class H Preferred Stock and the application of a portion of the
proceeds therefrom to repay indebtedness. The Insignia Merger pro forma
financial information assumes that the AIMCO stockholders approve the Insignia
Merger. The information set forth in the following table should be read in
connection with, and is qualified in its entirety by reference to, the financial
statements and notes thereto and the pro forma financial information and notes
thereto incorporated by reference herein and in the accompanying Prospectus. The
following pro forma and pro forma, as adjusted data assumes that the foregoing
transactions occurred on March 31, 1998, and does not purport to be indicative
of the capitalization of AIMCO that would have resulted had such transactions in
fact occurred on such date. See "Pro Forma Financial and Operating Information
of AIMCO."
<TABLE>
<CAPTION>
PRE-INSIGNIA MERGER(1) INSIGNIA MERGER(1)
-------------------------- ---------------------------
PRO FORMA, PRO FORMA,
HISTORICAL PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
---------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Credit Facilities...................................... $ 4,000 $ 6,777 $ -- $ 125,000 $ 76,875
Secured short-term financing........................... 36,900 -- -- 272,162 272,162
Long-term debt:
Secured tax-exempt bond financing.................... 73,560 391,957 391,957 391,957 391,957
Secured notes payable................................ 697,036 735,387 735,387 764,850 764,850
Minority interests in other partnerships............... 36,128 43,768 43,768 43,768 43,768
Minority interests in AIMCO Operating Partnership...... 124,952 126,423 126,423 126,423 126,423
Company-obligated mandatorily redeemable convertible
securities of a subsidiary trust..................... -- -- -- 149,500 149,500
Class A Common Stock, par value $.01 per share,
502,377,500 authorized, 41,144,945 issued and
outstanding on a historical basis, 47,723,778 issued
and outstanding on a pro forma basis (Pre-Insignia
Merger), and 55,415,803 issued and outstanding on a
pro forma basis (Insignia Merger)(2)................. 411 477 477 554 554
Class B Common Stock, par value $.01 per share, 262,500
authorized, 162,500 issued and outstanding(3)........ 2 2 2 2 2
Class B Cumulative Convertible Preferred Stock, par
value $.01 per share, 750,000 authorized, issued and
outstanding(4)....................................... 75,000 75,000 75,000 75,000 75,000
Class C Cumulative Preferred Stock, par value $.01 per
share, 2,760,000 authorized, 2,400,000 issued and
outstanding.......................................... 60,000 60,000 60,000 60,000 60,000
Class D Cumulative Preferred Stock, par value $.01 per
share, 4,600,000 authorized, 4,200,000 issued and
outstanding.......................................... 105,000 105,000 105,000 105,000 105,000
Class G Cumulative Preferred Stock, par value $.01 per
share, 4,050,000 authorized; no shares issued and
outstanding on a historical or pro forma basis,
4,050,000 shares issued and outstanding on a pro
forma, as adjusted basis............................. -- 101,250 101,250 101,250 101,250
Class H Cumulative Preferred Stock, par value $.01 per
share, 2,300,000 authorized; no shares issued and
outstanding on a historical or pro forma basis,
2,000,000 shares issued and outstanding on a pro
forma, as adjusted basis............................. -- -- 50,000 -- 50,000
Additional paid-in capital............................. 992,001 1,240,302 1,238,427 1,543,225 1,541,350
Notes due on common stock purchases.................... (41,608) (41,608) (41,608) (41,608) (41,608)
Distributions in excess of earnings.................... (33,900) (33,900) (33,900) (33,900) (33,900)
Accumulated other comprehensive losses................. (1,843) (137) (137) (137) (137)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity............................. 1,155,063 1,506,386 1,554,511 1,809,386 1,857,511
---------- ---------- ---------- ---------- ----------
Total Capitalization........................... $2,127,639 $2,810,698 $2,852,046 $3,683,046 $3,683,046
========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) The Pre-Insignia Merger and Insignia Merger pro forma and pro forma, as
adjusted capitalization information, respectively, is presented as if the
transactions detailed above occurred on March 31, 1998.
(2) Excludes (i) 5,362,879 shares of Class A Common Stock which may be issued
in exchange for 5,362,879 AIMCO OP Units which may be tendered for
redemption; (ii) 162,500 shares of Class A Common Stock issuable upon
conversion of shares of Class B Common Stock; (iii) 1,184,080 shares of
Class A Common Stock issuable upon exercise of outstanding options and
warrants; (iv) 2,463,053 shares of Class A Common Stock which may be issued
upon conversion of 750,000 shares of Class B Preferred Stock; (v) up to
500,000 shares of Class A Common Stock that may be issued upon exercise of
warrants; and (vi) up to 1,353,968 shares of Class A Common Stock issuable
upon conversion of 6 1/2% Convertible Debentures of Insignia, if the
Insignia Merger is consummated (assuming that the market price of Class A
Common Stock is at least $38 per share at the Effective Time).
(3) Convertible into 162,500 shares of Class A Common Stock if certain
performance standards are achieved, including 8.5% annual increases in both
AIMCO's FFO per share and the market price of Class A Common Stock. See
"Description of Common Stock -- Class B Common Stock" in the accompanying
Prospectus.
(4) Convertible into 3.28407 shares of Class A Common Stock per share, or a
total of 2,463,053 shares, at the option of the holder on or after August
4, 1998, subject to certain antidilution adjustments. See "Description of
Other Capital Stock of AIMCO -- Class B Preferred Stock."
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<PAGE> 33
DESCRIPTION OF CLASS H PREFERRED STOCK
The following summary of the terms and provisions of the Class H Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the pertinent sections of the AIMCO Charter and the articles
supplementary to the AIMCO Charter (the "Articles Supplementary") establishing
the Class H Preferred Stock, each of which is available from the Company. This
description of the particular terms of the Class H Preferred Stock supplements,
and to the extent inconsistent therewith, replaces, the description of the
general terms and provisions of AIMCO's Preferred Stock, par value $.01 per
share ("Preferred Stock"), set forth in the accompanying Prospectus.
GENERAL
Under the Charter, AIMCO is authorized to issue up to 510,750,000 shares of
its capital stock, including common stock and Preferred Stock. See "Description
of Other Capital Stock of AIMCO -- General." AIMCO is authorized to issue shares
of Preferred Stock in one or more classes or subclasses, with such designations,
preferences, conversion and other rights, voting powers, restriction,
limitations as to dividends, qualifications and terms and conditions of
redemption, in each case, if any as are permitted by Maryland law and as the
AIMCO Board may determine by resolution. See "Description of Other Capital Stock
of AIMCO -- General" herein and "Description of Preferred Stock" in the
accompanying Prospectus. The Class H Preferred Stock will be a class of AIMCO's
Preferred Stock. Except for the 4,050,000 outstanding shares of Class G
Preferred Stock, the 4,200,000 outstanding shares of Class D Preferred Stock,
the 2,400,000 outstanding shares of Class C Preferred Stock and the 750,000
outstanding shares of Class B Preferred Stock, there are currently no other
classes or series of outstanding Preferred Stock. If the Insignia Merger is
consummated, shares of the Class E Preferred Stock will be, and shares of the
Class F Preferred Stock may be, issued. The Class H Preferred Stock will not be
convertible into or exchangeable for any other securities of AIMCO.
The certificates evidencing the shares of Class H Preferred Stock will
initially be issued in the form of temporary certificates. Holders of temporary
certificates will be entitled to exchange temporary certificates for definitive
certificates as soon as they are available (which AIMCO anticipates will be
within 150 days after the original issuance of the shares of Class H Preferred
Stock).
RANKING
The Class H Preferred Stock will, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of AIMCO, rank (a) prior or
senior to the common stock of AIMCO and any other class or series of capital
stock of AIMCO, including the Class E Preferred Stock, if any, to be issued
pursuant to the Insignia Merger, if the holders of Class H Preferred Stock shall
be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up in preference or priority to the holders
of shares of such class or series ("Class H Junior Stock"); (b) on a parity with
the Class B Preferred Stock, the Class C Preferred Stock, the Class D Preferred
Stock, and the Class F Preferred Stock, if any, issued pursuant to the Insignia
Merger, the Class G Preferred Stock, and with any other class or series of
capital stock of AIMCO if the holders of such class or series of stock and the
Class H Preferred Stock shall be entitled to the receipt of dividends and of
amounts distributable upon liquidation, dissolution or winding up in proportion
to their respective amounts of accrued and unpaid dividends per share or
liquidation preferences, without preference or priority of one over the other
("Class H Parity Stock"); and (c) junior to any class or series of capital stock
of AIMCO if the holders of such class or series shall be entitled to the receipt
of dividends and amounts distributable upon liquidation, dissolution or winding
up in preference or priority to the holders of the Class H Preferred Stock
("Class H Senior Stock").
DIVIDENDS
Holders of Class H Preferred Stock shall be entitled to receive, when and
as declared by the AIMCO Board of Directors, out of funds of AIMCO legally
available for payment, cash dividends at the rate of $2.375 per annum per share.
Such dividends shall be cumulative from the date of original issue, whether or
not in any
S-33
<PAGE> 34
dividend period or periods such dividends shall be declared or there shall be
funds of AIMCO legally available for the payment of such dividends, and shall be
payable quarterly on January 15, April 15, July 15 and October 15 of each year
(or, if not a business day, the next succeeding business day) (each a "Dividend
Payment Date"), commencing October 15, 1998. Any dividend payable on the Class H
Preferred Stock for any partial dividend period will be computed ratably on the
basis of twelve 30-day months and a 360-day year. The initial dividend payable
on the Class H Preferred Stock will be $.4024 per share. Dividends will be
payable in arrears to holders of record as they appear on the stock records of
AIMCO at the close of business on the January 1, April 1, July 1 or October 1,
as the case may be, immediately preceding such Dividend Payment Date. Holders of
Class H Preferred Stock shall not be entitled to receive any dividends in excess
of cumulative dividends on the Class H Preferred Stock. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on the Class H Preferred Stock that may be in arrears.
When dividends are not paid in full upon the Class H Preferred Stock or any
other class or series of Class H Parity Stock, or a sum sufficient for such
payment is not set apart, all dividends declared upon the Class H Preferred
Stock and any shares of Class H Parity Stock shall be declared ratably in
proportion to the respective amounts of dividends accumulated, accrued and
unpaid on the Class H Preferred Stock and accumulated, accrued and unpaid on
such Class H Parity Stock. Except as set forth in the preceding sentence, unless
dividends on the Class H Preferred Stock equal to the full amount of
accumulated, accrued and unpaid dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof has
been or contemporaneously is set apart for such payment, for all past dividend
periods, no dividends shall be declared or paid or set apart for payment by
AIMCO and no other distribution of cash or other property may be declared or
made, directly or indirectly, by AIMCO with respect to any shares of Class H
Parity Stock. Unless dividends equal to the full amount of all accumulated,
accrued and unpaid dividends on the Class H Preferred Stock have been paid, or
declared and set apart for payment, for all past dividend periods, no dividends
(other than dividends or distributions paid in shares of Class H Junior Stock or
options, warrants or rights to subscribe for or purchase shares of Class H
Junior Stock) may be declared or paid or set apart for payment by AIMCO and no
other distribution of cash or other property may be declared or made, directly
or indirectly, by AIMCO with respect to any shares of Class H Junior Stock, nor
shall any shares of Class H Junior Stock be redeemed, purchased or otherwise
acquired (except for a redemption, purchase or other acquisition of Common Stock
made for purposes of an employee incentive or benefit plan of AIMCO or any
subsidiary) for any consideration (or any monies be paid to or made available
for a sinking fund for the redemption of any shares of any such stock), directly
or indirectly, by AIMCO (except by conversion into or exchange for shares of
Class H Junior Stock, or options, warrants or rights to subscribe for or
purchase shares of Class H Junior Stock), nor shall any other cash or other
property be paid or distributed to or for the benefit of holders of shares of
Class H Junior Stock. Notwithstanding the foregoing provisions of this
paragraph, AIMCO shall not be prohibited from (i) declaring or paying or setting
apart for payment any dividend or distribution on any shares of Class H Parity
Stock or (ii) redeeming, purchasing or otherwise acquiring any Class H Parity
Stock, in each case, if such declaration, payment, redemption, purchase or other
acquisition is necessary to maintain AIMCO's qualification as a REIT.
The summary of certain provisions of the Class H Preferred Stock set forth
in the two immediately preceding paragraphs supersedes the description set forth
in the accompanying Prospectus under "Description of Preferred
Stock -- Dividends" with respect to the Class H Preferred Stock.
The Credit Facilities contain restrictive covenants which may limit, among
other things, the ability of the Company to pay dividends or make other
restricted payments. In particular, the BOA Credit Facility provides that the
Company may make distributions during any 12 month period in an amount in the
aggregate which does not exceed the greater of 80% of FFO for such period or
such amount as may be necessary to maintain REIT status, provided that no event
of default exists as a result of a breach of certain financial ratios and tests
that the Company is required to meet. A failure of the Company to comply with
these or other conditions and obligations contained in the Credit Facilities
could result in adverse consequences to holders of the Class H Preferred Stock,
could render the Company unable to pay required dividends or make redemptions,
and could result in an event of default under the Credit Facilities. If the
Insignia Merger is consummated, the Insignia
S-34
<PAGE> 35
Convertible Debentures underlying the 6 1/2% Trust Convertible Preferred
Securities of Insignia Financing I (which is a subsidiary of Insignia and will
become a subsidiary of AIMCO as a result of the Insignia Merger) will prohibit
the payment of dividends on AIMCO's capital stock if AIMCO elects to defer
payments of interest on the Insignia Convertible Debentures, which it will have
the right, under certain circumstances, to do for periods of up to 60 months. If
the Insignia Merger is consummated, the terms of the Class E Preferred Stock to
be issued in connection therewith will prohibit, after January 15, 1999, the
payment of dividends on any other class or series of AIMCO capital stock if
dividends have not been paid on the Class E Preferred Stock. Other securities of
the Company that may be issued in the future may also contain financial or other
covenants more restrictive than those applicable to the existing Credit
Facilities, the Insignia Convertible Debentures or the Series E Preferred Stock.
See "Risk Factors -- Debt Financing and Interest Rate Hedging Risks" and "Risk
Factors -- Holding Company Structure; Payment Restrictions."
LIQUIDATION PREFERENCES
Upon any voluntary or involuntary liquidation, dissolution or winding up of
AIMCO, before any payment or distribution by AIMCO shall be made to or set apart
for the holders of any shares of Class H Junior Stock, the holders of shares of
Class H Preferred Stock shall be entitled to receive a liquidation preference of
$25 per share (the "Class H Liquidation Preference"), plus an amount equal to
all accumulated, accrued and unpaid dividends (whether or not earned or
declared) to the date of final distribution to such holders; but such holders
shall not be entitled to any further payment. Until the holders of the Class H
Preferred Stock have been paid the Class H Liquidation Preference in full, plus
an amount equal to all accumulated, accrued and unpaid dividends (whether or not
earned or declared) to the date of final distribution to such holders, no
payment shall be made to any holder of Class H Junior Stock upon the
liquidation, dissolution or winding up of AIMCO. If upon any liquidation,
dissolution or winding up of AIMCO, the assets of AIMCO, or proceeds thereof,
distributable among the holders of Class H Preferred Stock shall be insufficient
to pay in full the above described preferential amount and liquidating payments
on any other shares of any class or series of Class H Parity Stock, then such
assets, or the proceeds thereof, shall be distributed among the holders of Class
H Preferred Stock and any such other Class H Parity Stock ratably in the same
proportion as the respective amounts that would be payable on such Class H
Preferred Stock and any such other Class H Parity Stock if all amounts payable
thereon were paid in full. A voluntary or involuntary liquidation, dissolution
or winding up of AIMCO shall not include a consolidation or merger of AIMCO with
one or more corporations, a sale or transfer of all or substantially all of
AIMCO's assets, or a statutory share exchange. The summary of certain provisions
of the Class H Preferred Stock set forth in this paragraph supersedes the
description set forth in the accompanying prospectus under "Description of
Preferred Stock -- Liquidation Rights" with respect to the Class H Preferred
Stock.
Upon any liquidation, dissolution or winding up of AIMCO, after payment
shall have been made in full to the holders of Class H Preferred Stock and any
Class H Parity Stock, any other series or class or classes of Class H Junior
Stock shall be entitled to receive any and all assets remaining to be paid or
distributed, and the holders of the Class H Preferred Stock and any Class H
Parity Stock shall not be entitled to share therein.
REDEMPTION
Shares of Class H Preferred Stock shall not be redeemable by AIMCO prior to
August 14, 2003 (except in certain limited circumstances relating to AIMCO's
maintenance of its ability to qualify as a REIT as described in "-- Restrictions
on Ownership and Transfer.") On and after August 14, 2003, AIMCO may, at its
option, redeem shares of Class H Preferred Stock, in whole or from time to time
in part, at a cash redemption price equal to 100% of the Class H Liquidation
Preference plus all accumulated, accrued and unpaid dividends to the date fixed
for redemption (the "Redemption Date"); provided, however, that in the event of
a redemption of any shares of Class H Preferred Stock, if the Redemption Date
occurs after a dividend record date and on or prior to the related Dividend
Payment Date, the dividend payable on such Dividend Payment Date in respect of
such shares called for redemption shall be payable on such Dividend Payment Date
to the holders of record at the close of business on such dividend record date,
and shall not be payable as part of the redemption price for such shares. The
Redemption Date shall be selected by AIMCO
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and shall not be less than 30 days nor more than 60 days after the date notice
of redemption is sent by AIMCO. If full cumulative dividends on all outstanding
shares of Class H Preferred Stock have not been paid or declared and set apart
for payment, no shares of Class H Preferred Stock may be redeemed unless all
outstanding shares of Class H Preferred Stock are simultaneously redeemed and
neither AIMCO nor any of its affiliates may purchase or acquire shares of Class
H Preferred Stock otherwise than pursuant to a purchase or exchange offer made
on the same terms to all holders of Class H Preferred Stock. The redemption
price for the Class H Preferred Stock (other than any portion thereof consisting
of accumulated, accrued and unpaid dividends) shall be payable solely with the
proceeds from the sale by AIMCO or the AIMCO Operating Partnership of other
capital shares of AIMCO or the AIMCO Operating Partnership (whether or not such
sale occurs concurrently with such redemption). For purposes of the preceding
sentence, "capital shares" means any common stock, preferred stock, depositary
shares, partnership or other interests, participations or other ownership
interests (however designated) and any rights (other than debt securities
convertible into or exchangeable at the option of the holder for equity
securities (unless and to the extent such debt securities are subsequently
converted into capital shares)) or options to purchase any of the foregoing of
or in AIMCO or the AIMCO Operating Partnership.
Notice of redemption of the Class H Preferred Stock shall be mailed by
AIMCO to each holder of record of the shares to be redeemed by first class mail,
postage prepaid at such holder's address as the same appears on the stock
records of AIMCO. Any notice which was mailed as described above shall be
conclusively presumed to have been duly given on the date mailed whether or not
the holder receives the notice. Each notice shall state: (i) the Redemption
Date; (ii) the number of shares of Class H Preferred Stock to be redeemed; (iii)
the place or places where certificates for such shares of Class H Preferred
Stock are to be surrendered for cash; and (iv) the redemption price payable on
such Redemption Date, including, without limitation, a statement as to whether
or not accumulated, accrued and unpaid dividends will be (x) payable as part of
the redemption price, or (y) payable on the next Dividend Payment Date to the
record holder at the close of business on the relevant record date as described
above. From and after the Redemption Date, dividends on the shares of Class H
Preferred Stock to be redeemed will cease to accrue, such shares shall no longer
be deemed to be outstanding and all rights of the holders thereof shall cease
(except (a) the right to receive the cash payable upon such redemption without
interest thereon, and (b) if the Redemption Date occurs after a dividend record
date and on or prior to the related Dividend Payment Date, the right of record
holders at the close of business on such record date to receive the dividend
payable on such Dividend Payment Date).
The Class H Preferred Stock will have no stated maturity and will not be
subject to any sinking fund or mandatory redemption provisions (except as
provided under "-- Restrictions on Ownership and Transfer").
Subject to applicable law and the limitation on purchases when dividends on
the Class H Preferred Stock are in arrears, the Company may, at any time and
from time to time, purchase any shares of Class H Preferred Stock in the open
market, by tender or by private agreement.
VOTING RIGHTS
Holders of shares of Class H Preferred Stock will not have any voting
rights, except as set forth below and except as otherwise required by applicable
law.
If and whenever dividends on any shares of Class H Preferred Stock or any
series or class of Class H Parity Stock shall be in arrears for six or more
quarterly periods (whether or not consecutive), the number of directors then
constituting the AIMCO Board of Directors shall be increased by two (if not
already increased by reason of similar types of provisions with respect to
shares of Class H Parity Stock of any other class or series which is entitled to
similar voting rights (the "Voting Preferred Stock")), and the holders of shares
of Class H Preferred Stock, together with the holders of shares of all other
Voting Preferred Stock then entitled to exercise similar voting rights, voting
as a single class regardless of series, will be entitled to vote for the
election of the two additional directors of AIMCO at any annual meeting of
stockholders or at a special meeting of the holders of the Class H Preferred
Stock and of the Voting Preferred Stock called for that purpose. AIMCO must call
such special meeting upon the request of any holder of shares of Class H
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Preferred Stock. Whenever dividends in arrears on outstanding shares of the
Class H Preferred Stock and the Voting Preferred Stock shall have been paid and
dividends thereon for the current quarterly dividend period shall have been paid
or declared and set apart for payment, then the right of the holders of the
Class H Preferred Stock and of the Voting Preferred Stock to elect such
additional two directors shall cease and the terms of office of such directors
shall terminate and the number of directors constituting the AIMCO Board of
Directors shall be reduced accordingly.
The affirmative vote or consent of at least 66 2/3% of the votes entitled
to be cast by the holders of the outstanding shares of Class H Preferred Stock
and the holders of all other classes or series of Class H Parity Stock entitled
to vote on such matters, voting as a single class, will be required to (i)
authorize, create, increase the authorized amount of, or issue any shares of any
class of Class H Senior Stock or any security convertible into shares of any
class of Class H Senior Stock, or (ii) amend, alter or repeal any provision of,
or add any provision to, the AIMCO Charter, including the Articles
Supplementary, or the By-Laws of AIMCO, if such action would materially
adversely affect the voting powers, rights or preferences of the holders of the
Class H Preferred Stock; provided, however, that no such vote of the holders of
Class H Preferred Stock shall be required if, at or prior to the time such
amendment, alteration or repeal is to take effect or the issuance of any such
Class H Senior Stock or convertible security is to be made, as the case may be,
provisions are made for the redemption of all outstanding shares of Class H
Preferred Stock. The amendment of the AIMCO Charter to authorize, create,
increase the authorized amount of or issue Class H Junior Stock or any shares of
any class of Class H Parity Stock shall not be deemed to materially adversely
affect the voting powers, rights or preferences of the holders of Class H
Preferred Stock.
With respect to the exercise of the above described voting rights, each
share of Class H Preferred Stock shall have one (1) vote per share, except that
when any other class or series of Preferred Stock shall have the right to vote
with the Class H Preferred Stock as a single class, then the Class H Preferred
Stock and such other class or series shall have one quarter of one (0.25) vote
per $25 of stated Class H Liquidation Preference.
The summary of certain provisions of the Class H Preferred Stock set forth
in the three preceding paragraphs supersedes the description set forth in the
accompanying Prospectus under "Description of Preferred Stock -- Voting Rights"
with respect to the Class H Preferred Stock.
TRANSFER AGENT
The registrar and transfer agent for the Class H Preferred Stock will be
BankBoston, N.A.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Ownership of shares of Class H Preferred Stock by any person will be
limited such that the sum of the aggregate value of all Equity Stock (including
all shares of Class H Preferred Stock) owned directly or constructively by such
person may not exceed 8.7% (or 15% in the case of certain pension trusts,
registered investment companies and Mr. Considine) of the aggregate value of all
outstanding shares of Equity Stock (the "Ownership Limit"). The AIMCO Board may
upon appropriate evidence waive the Ownership Limit. Further, certain transfers
which may have the effect of causing AIMCO to lose its status as a REIT are void
ab initio.
Any person who acquires or attempts to acquire beneficial or constructive
ownership of Class H Preferred Stock that will or may violate the Ownership
Limit, or any person who would have owned Class H Preferred Stock except for the
transfer of shares to the Trust as described below, is required to give notice
immediately to AIMCO and provide AIMCO with such other information as AIMCO may
request in order to determine the effect of such transfer on the Company's
status as a REIT.
If any transfer of Class H Preferred Stock occurs which, if effective,
would result in any person beneficially or constructively owning Class H
Preferred Stock in excess or in violation of the Ownership Limit (a "Prohibited
Transferee"), such shares of Class H Preferred Stock in excess of the Ownership
Limit shall be automatically transferred to a trustee (the "Trustee") in his
capacity as trustee of a trust (the "Trust") for
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the exclusive benefit of one or more charitable beneficiaries (the "Charitable
Beneficiaries") designated by AIMCO, and the Prohibited Transferee shall
generally have no rights in such shares, except upon sale of the shares by the
Trustee. Such automatic transfer shall be deemed to be effective as of the close
of business on the business day prior to the date of such violative transfer.
Shares of Class H Preferred Stock held in the Trust shall be issued and
outstanding shares of AIMCO. The Prohibited Transferee shall not benefit
economically from ownership of any shares of Class H Preferred Stock held in the
Trust, shall have no rights to dividends and shall not possess any rights to
vote or other rights attributable to the shares of Class H Preferred Stock held
in the Trust. The Trustee shall have all voting rights and rights to dividends
with respect to shares of Class H Preferred Stock held in the Trust, which
rights shall be exercised for the benefit of the Charitable Beneficiaries. Any
dividend or other distribution paid prior to the discovery by AIMCO that shares
of Class H Preferred Stock have been transferred to the Trustee shall be repaid
to AIMCO upon demand, and any dividend or other distribution declared but unpaid
with respect to such shares shall be rescinded as void. Any dividend or
distribution so disgorged or rescinded shall be paid to the Trustee and held in
trust for the Charitable Beneficiaries.
The Trustee may sell the Class H Preferred Stock held in the Trust to a
person, designated by the Trustee, whose ownership of the Class H Preferred
Stock will not violate the Ownership Limit. Upon such sale, the interest of the
Charitable Beneficiaries in the shares sold shall terminate and the Trustee
shall distribute the net proceeds of the sale to the Prohibited Transferee and
to the Charitable Beneficiary as described below. The Prohibited Transferee
shall receive the lesser of (i) the price paid by the Prohibited Transferee for
the shares or if the Prohibited Transferee did not give value for the shares in
connection with the event causing the shares to be held in the Trust (e.g., a
gift, devise or other such transaction), the Market Price (as defined in the
Articles Supplementary) of such shares on the day of the event causing the
shares to be held in the Trust and (ii) the price per share received by the
Trustee from the sale or other disposition of the shares held in the Trust. Any
proceeds in excess of the amount payable to the Prohibited Transferee shall be
payable to the Charitable Beneficiaries.
In addition, shares of Class H Preferred Stock held in the Trust shall be
deemed to have been offered for sale to AIMCO, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Trust (or, in the case of a devise or gift, the
Market Price at the time of such devise or gift) and (ii) the Market Price on
the date AIMCO or its designee accepts such offer.
If AIMCO's Board of Directors or a committee thereof determines that a
transfer or proposed transfer of shares of Class H Preferred Stock violates or
will violate the Ownership Limit or certain other provisions of the Charter
prohibiting transfers which may have the effect of causing AIMCO to lose its
REIT status, AIMCO's Board of Directors or a committee thereof is empowered to
take any action it deems advisable to refuse to give effect to or to prevent
such transfer, including causing AIMCO to redeem such shares at the then current
Market Price and on such other terms and conditions as AIMCO's Board of
Directors may determine (including by means of the issuance of long-term
indebtedness for the purpose of such redemption) and demanding the repayment of
any dividends received in respect of such shares. In addition, AIMCO's Board of
Directors may take such action as it determines to be advisable to maintain
AIMCO's status as a REIT, including reducing the Ownership Limit in the event of
a change in law.
All certificates representing Class H Preferred Stock will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lesser percentage prescribed in
regulations under the Code) of the outstanding shares of Class H Preferred
Stock, within 30 days after January 1 of each year, is required to give written
notice to AIMCO stating the name and address of such owner, the number of shares
of Class H Preferred Stock which the owner beneficially owns and a description
of the manner in which such shares are held. Each such owner shall provide to
AIMCO such additional information as AIMCO may request in order to determine the
effect, if any, of such ownership on AIMCO's status as a REIT and to ensure
compliance with the Ownership Limit. In addition, each stockholder shall provide
to AIMCO such information as AIMCO may request, in its sole discretion, in order
to determine AIMCO's status as a REIT and to comply
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with the requirements of any taxing authority or governmental agency to
determine any such compliance or to ensure compliance with the Ownership Limit.
DESCRIPTION OF OTHER CAPITAL STOCK OF AIMCO
GENERAL
On June 19, 1998, AIMCO amended its Charter to increase the number of
authorized shares of its capital stock to 510,750,000. As of July 30, 1998,
498,327,500 shares were classified as Class A Common Stock, 262,500 shares were
classified as Class B Common Stock, 750,000 shares were classified as Class B
Preferred Stock, 2,760,000 shares were classified as Class C Preferred Stock,
4,600,000 shares were classified as Class D Preferred Stock and 4,050,000 shares
were classified as Class G Preferred Stock. In addition, it is expected that
2,300,000 shares will be classified as Class H Preferred Stock. AIMCO's Board of
Directors, by resolution or resolutions, may from time to time classify and
reclassify any unissued shares of capital stock by setting or changing in any
one or more respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares of capital stock, including but not limited to,
ownership restrictions with respect to each class or subclass of capital stock,
and the number of shares constituting each class or subclass, and to increase or
decrease the number of shares of any such class or subclass.
CLASS B PREFERRED STOCK
On August 4, 1997, AIMCO issued 750,000 shares of Class B Preferred Stock
to an institutional investor (the "Preferred Share Investor") for $75.0 million.
The Class B Preferred Stock has an aggregate liquidation value of $75 million
and (a) ranks prior to Class A Common Stock and Class B Common Stock, and will
rank prior to the Class E Preferred Stock, if any, to be issued in the Insignia
Merger, and any other class or series of capital stock of AIMCO if the holders
of the Class B Preferred Stock are entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution, and winding-up in
preference or priority to the holders of shares of such class or series, (b)
ranks on parity with Class C Preferred Stock, Class D Preferred Stock and Class
G Preferred Stock, and will rank on a parity with Class F Preferred Stock, if
any, to be issued in the Insignia Merger, and Class H Preferred Stock, and with
any other class or series of capital stock of AIMCO if the holders of such class
of stock or series and the Class B Preferred Stock shall be entitled to the
receipt of dividends and of amounts distributable upon liquidation, dissolution
or winding up in proportion to their respective amounts of accrued and unpaid
dividends per share or liquidation preferences, without preference or priority
one over the other and (c) ranks junior to any class or series of capital stock
of AIMCO if the holders of such class or series shall be entitled to the receipt
of dividends or amounts distributable upon liquidation, dissolution or winding
up in preference or priority to the holders of the Class B Preferred Stock.
Holders of the Class B Preferred Stock are entitled to receive, when, as and if
declared by the AIMCO Board of Directors, cumulative quarterly cash dividends
per share equal to the greater of (i) $1.78125 (the "Base Rate") and (ii) the
cash dividends declared on the number of shares of Class A Common Stock into
which one share of Class B Preferred Stock is convertible. On or after August 4,
1998, each share of Class B Preferred Stock may be converted at the option of
the holder into 3.28407 shares of Class A Common Stock, subject to certain anti-
dilution adjustments. AIMCO may redeem any or all of the Class B Preferred Stock
on or after August 4, 2002, at a redemption price of $100 per share, plus unpaid
dividends accrued on the shares redeemed.
Holders of Class B Preferred Stock, voting as a class with the holders of
all AIMCO capital stock that ranks on a parity with the Class B Preferred Stock
with respect to the payment of dividends or upon liquidation, dissolution,
winding up or otherwise ("Class B Parity Stock"), will be entitled to elect (i)
two directors of AIMCO if six quarterly dividends (whether or not consecutive)
on the Class B Preferred Stock or any Class B Parity Stock are in arrears, and
(ii) one director of AIMCO if for two consecutive quarterly dividend periods
AIMCO fails to pay at least $0.4625 in dividends on the Class A Common Stock
and, in any such case, the number of directors constituting the AIMCO Board of
Directors shall be increased by one or two, as the case may be (if not already
increased by reason of similar types of provisions with respect to shares of
Class B Parity Stock). The affirmative vote of the holders of two-thirds of the
outstanding shares of Class B
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Preferred Stock will be required to amend the AIMCO Charter in any manner that
would adversely affect the rights of the holders of Class B Preferred Stock, and
to approve the issuance of any capital stock that ranks senior to the Class B
Preferred Stock with respect to payment of dividends or upon liquidation,
dissolution, winding up or otherwise. If the IRS were to make a final
determination that AIMCO does not qualify as a REIT in accordance with Sections
856 through 860 of the Code, the Base Rate for quarterly cash dividends on the
Class B Preferred Stock would be increased to $3.03125 per share.
The agreement pursuant to which AIMCO issued the Class B Preferred Stock
(the "Preferred Share Purchase Agreement") provides that the Preferred Share
Investor may require AIMCO to repurchase such investor's Class B Preferred Stock
in whole or in part at a price of $105 per share, plus accrued and unpaid
dividends on the purchased shares, if (i) AIMCO shall fail to continue to be
taxed as a REIT pursuant to Sections 856 through 860 of the Code, or (ii) upon
the occurrence of a change of control (as defined in the Preferred Share
Purchase Agreement). The Preferred Share Purchase Agreement also provides that,
so long as the Preferred Share Investor owns Class B Preferred Stock with an
aggregate liquidation preference of at least $18.75 million, neither AIMCO, the
AIMCO Operating Partnership nor any subsidiary of AIMCO may issue preferred
securities or incur indebtedness for borrowed money if immediately following
such issuance and after giving effect thereto and the application of the net
proceeds therefrom, AIMCO's ratio of aggregate consolidated earnings before
income taxes, depreciation and amortization to aggregate consolidated fixed
charges for the four fiscal quarters immediately preceding such issuance would
be less than 1.5 to 1.
CLASS C PREFERRED STOCK
On December 23, 1997, AIMCO issued 2,400,000 shares of Class C Preferred
Stock in an underwritten public offering, for net proceeds of approximately
$57.9 million. The Class C Preferred Stock (a) ranks prior to Class A Common
Stock and Class B Common Stock, and will rank prior to Class E Preferred Stock,
if any, to be issued in the Insignia Merger, and any other class or series of
capital stock of AIMCO if the holders of the Class C Preferred Stock are
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution, and winding-up in preference or priority to the
holders of shares of such class or series ("Class C Junior Stock"), (b) ranks on
parity with Class B Preferred Stock, Class D Preferred Stock and Class G
Preferred Stock and will rank on parity with Class F Preferred Stock, if any, to
be issued in the Insignia Merger, and Class H Preferred Stock, and with any
other class or series of capital stock of AIMCO if the holders of such class of
stock or series and the Class C Preferred Stock shall be entitled to the receipt
of dividends and of amounts distributable upon liquidation, dissolution or
winding up in proportion to their respective amounts of accrued and unpaid
dividends per share or liquidation preferences, without preference or priority
one over the other ("Class C Parity Stock") and (c) ranks junior to any class or
series of capital stock of AIMCO if the holders of such class or series shall be
entitled to the receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up in preference or priority to the holders of the Class
C Preferred Stock ("Class C Senior Stock").
Holders of Class C Preferred Stock are entitled to receive cash dividends
at the rate of 9% per annum of the $25 liquidation preference (equivalent to
$2.25 per annum per share). Such dividends are cumulative from the date of
original issue, and are payable quarterly on or before January 15, April 15,
July 15 and October 15 of each year. Upon any liquidation, dissolution or
winding up of AIMCO, before payment or distribution by AIMCO shall be made to or
set apart for the holders of any shares of Class C Junior Stock, the holders of
Class C Preferred Stock shall be entitled to receive a liquidation preference of
$25 per share (the "Class C Liquidation Preference"), plus an amount equal to
all accumulated, accrued and unpaid dividends to the date of final distribution
to such holders; but such holders shall not be entitled to any further payment.
If proceeds available for distribution shall be insufficient to pay the
preference described above and any liquidating payments on any other shares of
any class or series of Class C Parity Stock, then such proceeds shall be
distributed among the holders of Class C Preferred Stock and any such other
Class C Parity Stock ratably in the same proportion as the respective amounts
that would be payable on such Class C Preferred Stock and any such other Class C
Parity Stock if all amounts payable thereon were paid in full.
On and after December 23, 2002, AIMCO may redeem shares of Class C
Preferred Stock, in whole or in part, at a cash redemption price equal to 100%
of the Class C Liquidation Preference plus all accrued and
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unpaid dividends to the date fixed for redemption. The Class C Preferred Stock
has no stated maturity and will not be subject to any sinking find or mandatory
redemption provisions.
Holders of shares of Class C Preferred Stock have no voting rights, except
that if distributions on Class C Preferred Stock or any series or class of Class
C Parity Stock shall be in arrears for six or more quarterly periods, the number
of directors constituting the AIMCO Board of Directors shall be increased by two
(if not already increased by reason of similar types of provisions with respect
to shares of Class C Parity Stock) and the holders of Class C Preferred Stock
(voting together as a single class with all other shares of Class C Parity Stock
which are entitled to similar voting rights) will be entitled to vote for the
election of the two additional directors of AIMCO at any annual meeting of
stockholders or at a special meeting of the holders of the Class C Preferred
Stock called for such purpose.
There are ownership restrictions or the Class C Preferred Stock similar to
those on the Class H Preferred Stock.
CLASS D PREFERRED STOCK
On February 13, 1998, AIMCO issued 4,200,000 shares of Class D Preferred
Stock in an underwritten public offering, for net proceeds of approximately
$101.5 million. The Class D Preferred Stock (a) ranks prior to Class A Common
Stock and Class B Common Stock, and will rank prior to Class E Preferred Stock,
if any, to be issued in the Insignia Merger, and any other class or series of
capital stock of AIMCO if the holders of the Class D Preferred Stock are to be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution, and winding-up in preference or priority to the
holders of shares of such class or series ("Class D Junior Stock"), (b) ranks on
parity with Class B Preferred Stock, Class C Preferred Stock and Class G
Preferred Stock and will rank on a parity with Class F Preferred Stock, if any,
to be issued in the Insignia Merger, and Class H Preferred Stock, and with any
other class or series of capital stock of AIMCO if the holders of such class of
stock or series and the Class D Preferred Stock shall be entitled to the receipt
of dividends and of amounts distributable upon liquidation, dissolution or
winding up in proportion to their respective amounts of accrued and unpaid
dividends per share or liquidation preferences, without preference or priority
one over the other ("Class D Parity Stock") and (c) ranks junior to any class or
series of capital stock of AIMCO if the holders of such class or series shall be
entitled to the receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up in preference or priority to the holders of the Class
D Preferred Stock ("Class D Senior Stock").
Holders of Class D Preferred Stock are entitled to receive cash dividends
at the rate of 8 3/4% per annum of the $25 liquidation preference (equivalent to
$2.1875 per annum per share). Such dividends are cumulative from the date of
original issue, and are payable quarterly on or before January 15, April 15,
July 15 and October 15 of each year. Upon any liquidation, dissolution or
winding up of AIMCO, before payment or distribution by AIMCO shall be made to or
set apart for the holders of any shares of Class D Junior Stock, the holders of
Class D Preferred Stock shall be entitled to receive a liquidation preference of
$25 per share (the "Class D Liquidation Preference"), plus an amount equal to
all accumulated, accrued and unpaid dividends to the date of final distribution
to such holders; but such holders shall not be entitled to any further payment.
If proceeds available for distribution shall be insufficient to pay the
preference described above and any liquidating payments on any other shares of
any class or series of Class D Parity Stock, then such proceeds shall be
distributed among the holders of Class D Preferred Stock and any such other
Class D Parity Stock ratably in the same proportion as the respective amounts
that would be payable on such Class D Preferred Stock and any such other Class D
Parity Stock if all amounts payable thereon were paid in full.
On and after February 19, 2003, AIMCO may redeem shares of Class D
Preferred Stock, in whole or in part, at a cash redemption price equal to 100%
of the Class D Liquidation Preference plus all accrued and unpaid dividends to
the date fixed for redemption. The Class D Preferred Stock has no stated
maturity and will not be subject to any sinking fund or mandatory redemption
provisions.
Holders of shares of Class D Preferred Stock have no voting rights, except
that if distributions on Class D Preferred Stock or any series or class of Class
D Parity Stock shall be in arrears for six or more quarterly periods, the number
of directors constituting the AIMCO Board of Directors shall be increased by two
(if not
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already increased by reason of similar types of provisions with respect to
shares of Class D Parity Stock) and the holders of Class D Preferred Stock
(voting together as a single class with all other shares of Class D Parity Stock
which are entitled to similar voting rights) will be entitled to vote for the
election of the two additional directors of AIMCO at any annual meeting of
stockholders or at a special meeting of the holders of the Class D Preferred
Stock called for the purpose.
There are ownership restrictions on the Class D Preferred Stock similar to
those on the Class H Preferred Stock.
CLASS E PREFERRED STOCK
If the Insignia Merger is approved by the stockholders of AIMCO, upon
consummation of the Insignia Merger, AIMCO will issue to Insignia stockholders,
in the aggregate, a number of shares of Class E Preferred Stock approximately
equal to $303 million divided by the AIMCO Index Price, or, if AIMCO
stockholders do not approve the Insignia Merger, a number of shares of Class E
Preferred Stock approximately equal to $203 million divided by the AIMCO Index
Price, in both cases less certain cash amounts that AIMCO may elect to pay under
certain circumstances. The AIMCO Index Price is not intended to and will not
necessarily represent the fair market value of Class E Preferred Stock. The
Class E Preferred Stock (a) ranks prior to Class A Common Stock and Class B
Common Stock, and any other class or series of capital stock of AIMCO if holders
of the Class E Preferred Stock are to be entitled to the receipt of dividends or
of amounts distributable upon liquidation, dissolution, and winding-up in
preference or priority to the holders of shares of such class or series ("Class
E Junior Stock"), (b) ranks on a parity with any class or series of capital
stock of AIMCO if the holders of such class or series of stock and the Class E
Preferred Stock shall be entitled to the receipt of dividends and of amounts
distributable upon liquidation, dissolution or winding up in proportion to their
respective amounts of accrued and unpaid dividends per share or liquidation
preferences, without preference or priority one over the other ("Class E Parity
Stock") and (c) ranks junior to the Class B Preferred Stock, the Class C
Preferred Stock, the Class D Preferred Stock, the Class F Preferred Stock, if
any, to be issued in the Insignia Merger, the Class G Preferred Stock, the Class
H Preferred Stock and any other class or series of capital stock of AIMCO if the
holders of such class or series shall be entitled to the receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up in preference
or priority to the holders of the Class E Preferred Stock ("Class E Senior
Stock").
On any date (each, a "Dividend Payment Date") on which cash dividends are
paid on the Class A Common Stock prior to the Call Date (as defined below),
holders of Class E Preferred Stock shall be entitled to receive cash dividends
payable in an amount per share of Class E Preferred Stock equal to the per share
dividend payable on Class A Common Stock on such Dividend Payment Date. Such
dividends shall be cumulative from the date of original issue, and shall be
payable quarterly in arrears on the Dividend Payment Dates, commencing on the
first Dividend Payment Date after the date of original issue. Upon any
liquidation, dissolution or winding up of AIMCO, before payment or distribution
by AIMCO shall be made to or set apart for the holders of any shares of Class E
Junior Stock, the holders of Class E Preferred Stock shall be entitled to
receive a liquidation preference of $1 per share plus the Special Dividend if
such dividend is unpaid on the date of the final distribution to such holders
(collectively, the "Class E Liquidation Preference"), and thereafter each share
of Class E Preferred Stock shall have the same rights with respect to assets of
AIMCO as one share of Class A Common Stock.
On or after the twentieth anniversary of the consummation of the Insignia
Merger, AIMCO may redeem shares of Class E Preferred Stock, in whole or in part,
at a cash redemption price equal to the sum of (i) the greater of (A) the
Current Market Price (as defined in the Insignia Merger Agreement) of the Class
A Common Stock on the date specified for redemption by AIMCO in a notice sent to
holders of Class E Preferred Stock (the "Call Date") or (B) the AIMCO Index
Price (as defined in the Insignia Merger Agreement), but determined without
giving effect to the limitation of $38.00 per share, plus (ii) all accrued and
unpaid dividends to the Call Date. The Class E Preferred Stock has no stated
maturity and will not be subject to any sinking fund or mandatory redemption
provisions.
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Holders of shares of Class E Preferred Stock shall be entitled to one-half
( 1/2) of one vote with respect to all matters in which holders of Class A
Common Stock shall be entitled to vote thereon. In addition, if any portion of
the Special Dividend has yet to be declared and paid to the holders of Class E
Preferred Stock on January 15, 1999, or if distributions on Class E Preferred
Stock or any series or class of Preferred Stock of AIMCO shall be in arrears for
six or more quarterly periods, the number of directors constituting the AIMCO
Board of Directors shall be increased by two (without duplication of any
increase made pursuant to the terms of any other series of preferred stock of
AIMCO) and the holders of Class E Preferred Stock (voting together as a single
class with all other shares of Class E Parity Stock which are entitled to
similar voting rights) will be entitled to vote for the election of the
additional directors of AIMCO. Such right shall continue until full cumulative
dividends for all past dividend periods on all shares of Preferred Stock of
AIMCO, including any shares of Class E Preferred Stock, have been paid or
declared and set apart for payment.
On any date which the Special Dividend, or any portion thereof, is paid
(which may be declared by the AIMCO Board in its sole discretion), the holders
of Class E Preferred Stock shall be entitled to receive an amount per share of
Class E Preferred Stock equal to the Special Dividend divided by the Series E
Conversion Ratio (as defined in the Insignia Merger Agreement). After January
15, 1999, if any portion of the Special Dividend or any other dividend has yet
to be declared and paid to the holders of Class E Preferred Stock, no dividends
shall be declared or paid or set apart for payment by AIMCO on any other class
or series of its capital stock (including the Class H Preferred Stock offered
hereby).
On the close of business on the day on which the Special Dividend (or any
remaining unpaid portion thereof) is paid to the holders of the Class E
Preferred Stock, each share of Class E Preferred Stock will be automatically
converted into one share of Class A Common Stock without any action on the part
of AIMCO or the holder of such share (the "Conversion Date"). If AIMCO at any
time following the consummation of the Insignia Merger pays a dividend or makes
a distribution, subdivides, combines, reclassifies, issues rights, options or
warrants or makes any other distribution in securities in relation to its
outstanding Class A Common Stock, then AIMCO will contemporaneously do the same
with respect to the Class E Preferred Stock.
CLASS F PREFERRED STOCK
If the Insignia Merger is not approved by the stockholders of AIMCO, but
the Distribution and the Insignia Merger Agreement are approved by the
stockholders of Insignia, upon consummation of the Insignia Merger, AIMCO will
issue to Insignia stockholders, in the aggregate, a number of shares of Class F
Preferred Stock approximately equal to $100 million divided by the AIMCO Index
Price. The AIMCO Index Price is not intended to and will not necessarily
represent the fair market value of Class F Preferred Stock. AIMCO will not issue
any shares of Class F Preferred Stock in the event that AIMCO stockholders
approve the Insignia Merger. The Class F Preferred Stock (a) ranks prior to
Class A Common Stock, Class B Common Stock, Class E Preferred Stock, if any,
issued in the Insignia Merger, and any other class or series of capital stock of
AIMCO if holders of the Class F Preferred Stock are to be entitled to the
receipt of dividends or of amounts distributable upon liquidation, dissolution,
and winding-up in preference or priority to the holders of shares of such class
or series ("Class F Junior Stock") and (b) ranks on a parity with the Class B
Preferred Stock, the Class C Preferred Stock, the Class D Preferred Stock and
the Class G Preferred Stock and will rank on a parity with the Class H Preferred
Stock, and any other class or series of capital stock of AIMCO if the holders of
such class or series of stock and the Class F Preferred Stock shall be entitled
to the receipt of dividends and of amounts distributable upon liquidation,
dissolution or winding up in proportion to their respective amounts of accrued
and unpaid dividends per share or liquidation preferences, without preference or
priority one over the other ("Class F Parity Stock").
On any Dividend Payment Date on which cash dividends are paid on the Class
A Common Stock prior to the Call Date (as defined below), holders of Class F
Preferred Stock are entitled to receive dividends payable in cash in an amount
per share of Class F Preferred Stock equal to the greater of (i) 2.5% of the
AIMCO Index Price (determined without giving effect to the limitation of
$38.00), increasing by 0.25% after each anniversary of the consummation of the
Insignia Merger through the fifth anniversary thereof, subject to a maximum of
3.75%, and (ii) the per share dividend payable on Class A Common Stock on such
Dividend Payment Date. Such dividends shall be cumulative from the date of
original issue, and shall be payable
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quarterly in arrears on the Dividend Payment Dates, commencing on the first
Dividend Payment Date after the date of original issue. Upon any liquidation,
dissolution or winding up of AIMCO, before payment or distribution by AIMCO
shall be made to or set apart for the holders of any shares of Class F Junior
Stock, the holders of Class F Preferred Stock shall be entitled to receive an
amount per share of Class F Preferred Stock equal to the AIMCO Index Price
(determined without giving effect to the limitation of $38.00), and thereafter
each share of Class F Preferred Stock shall have the same rights with respect to
assets of AIMCO as one share of Class A Common Stock.
On and after the twentieth anniversary of the consummation of the Insignia
Merger, AIMCO may redeem shares of Class F Preferred Stock, in whole or in part,
at a cash redemption price equal to the sum of (i) the greater of (A) the
Current Market Price of the Class A Common Stock on the date specified for
redemption by AIMCO in a notice sent to holders of Class F Preferred Stock (the
"Call Date") or (B) the AIMCO Index Price (determined without giving effect to
the limitation of $38.00), plus (ii) all accrued and unpaid dividends to the
Call Date. The Class F Preferred Stock has no stated maturity and will not be
subject to any sinking fund or mandatory redemption provisions.
Holders of shares of Class F Preferred Stock have no voting rights, except
that if distributions on Class F Preferred Stock or any series or class of
preferred stock of AIMCO shall be in arrears for six or more quarterly periods,
the number of directors constituting the AIMCO Board shall be increased by two
(without duplication of any increase made pursuant to the terms of any other
series of preferred stock of AIMCO) and the holders of Class F Preferred Stock
(voting together as a single class with all other shares of Class F Parity
Stock, which are entitled to similar voting rights) will be entitled to vote for
the election of the additional directors of AIMCO. Such right shall continue
until full cumulative dividends for all past dividend periods on all shares of
Preferred Stock of AIMCO, including any shares of Class F Preferred Stock, have
been paid or declared and set apart for payment.
Each share of Class F Preferred Stock shall be automatically converted into
one share of Class A Common Stock without any action on the part of AIMCO or the
holder of such share immediately upon the approval of such conversion by the
holders of two-thirds of the outstanding shares of Class A Common Stock. If
AIMCO at any time following the consummation of the Insignia Merger pays a
dividend or makes a distribution, subdivides, combines, reclassifies, issues
rights, options or warrants or makes any other distribution in securities in
relation to its outstanding Class A Common Stock, then AIMCO will
contemporaneously do the same with respect to the Class F Preferred Stock.
CLASS G PREFERRED STOCK
In July 1998, AIMCO issued 4,050,000 shares of Class G Preferred Stock in
an underwritten public offering, for net proceeds of approximately $98 million.
The Class G Preferred Stock (a) ranks prior to Class A Common Stock and Class B
Common Stock, and will rank prior to Class E Preferred Stock, if any, to be
issued in the Insignia Merger, and any other class or series of capital stock of
AIMCO if the holders of the Class G Preferred Stock are to be entitled to the
receipt of dividends or of amounts distributable upon liquidation, dissolution,
and winding-up in preference or priority to the holders of shares of such class
or series ("Class G Junior Stock"), (b) ranks on parity with Class B Preferred
Stock, Class C Preferred Stock, Class D Preferred Stock and Class G Preferred
Stock and will rank on a parity with Class F Preferred Stock, if any, to be
issued in the Insignia Merger, and Class H Preferred Stock, and with any other
class or series of capital stock of AIMCO if the holders of such class of stock
or series and the Class G Preferred Stock shall be entitled to the receipt of
dividends and of amounts distributable upon liquidation, dissolution or winding
up in proportion to their respective amounts of accrued and unpaid dividends per
share or liquidation preferences, without preference or priority one over the
other ("Class G Parity Stock") and (c) ranks junior to any class or series of
capital stock of AIMCO if the holders of such class or series shall be entitled
to the receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up in preference or priority to the holders of the Class
G Preferred Stock ("Class G Senior Stock").
Holders of Class G Preferred Stock are entitled to receive cash dividends
at the rate of 9 3/8% per annum of the $25 liquidation preference (equivalent to
$2.34375 per annum per share). Such dividends are cumulative
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from the date of original issue, and are payable quarterly on or before January
15, April 15, July 15 and October 15 of each year, commencing October 15, 1998.
Upon any liquidation, dissolution or winding up of AIMCO, before payment or
distribution by AIMCO shall be made to or set apart for the holders of any
shares of Class G Junior Stock, the holders of Class G Preferred Stock shall be
entitled to receive a liquidation preference of $25 per share (the "Class G
Liquidation Preference"), plus an amount equal to all accumulated, accrued and
unpaid dividends to the date of final distribution to such holders; but such
holders shall not be entitled to any further payment. If proceeds available for
distribution shall be insufficient to pay the preference described above and any
liquidating payments on any other shares of any class or series of Class G
Parity Stock, then such proceeds shall be distributed among the holders of Class
G Preferred Stock and any such other Class G Parity Stock ratably in the same
proportion as the respective amounts that would be payable on such Class G
Preferred Stock and any such other Class G Parity Stock if all amounts payable
thereon were paid in full.
On and after July 15, 2008, AIMCO may redeem shares of Class G Preferred
Stock, in whole or in part, at a cash redemption price equal to 100% of the
Class G Liquidation Preference plus all accrued and unpaid dividends to the date
fixed for redemption. The Class G Preferred Stock has no stated maturity and
will not be subject to any sinking fund or mandatory redemption provisions.
Holders of shares of Class G Preferred Stock have no voting rights, except
that if distributions on Class G Preferred Stock or any series or class of Class
G Parity Stock shall be in arrears for six or more quarterly periods, the number
of directors constituting the AIMCO Board of Directors shall be increased by two
(if not already increased by reason of similar types of provisions with respect
to shares of Class G Parity Stock) and the holders of Class G Preferred Stock
(voting together as a single class with all other shares of Class G Parity Stock
which are entitled to similar voting rights) will be entitled to vote for the
election of the two additional directors of AIMCO at any annual meeting of
stockholders or at a special meeting of the holders of the Class G Preferred
Stock called for the purpose.
There are ownership restrictions on the Class G Preferred Stock similar to
those on the Class H Preferred Stock.
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UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to the
Underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Prudential Securities
Incorporated and Smith Barney Inc. are acting as Representatives (the
"Representatives"), has severally agreed to purchase from the Company, the
number of shares of Class H Preferred Stock set forth opposite their respective
names below. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, and that the
Underwriters will be obligated to purchase all of the Class H Preferred Stock if
any are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CLASS H
UNDERWRITERS PREFERRED STOCK
------------ ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 580,000
Prudential Securities Incorporated.......................... 580,000
Smith Barney Inc. .......................................... 580,000
ABN AMRO Incorporated....................................... 20,000
BT Alex. Brown Incorporated................................. 20,000
CIBC Oppenheimer Corp. ..................................... 20,000
SG Cowen Securities Corporation............................. 20,000
Dain Rauscher Wessels....................................... 20,000
EVEREN Securities, Inc. .................................... 20,000
The Ohio Company............................................ 20,000
Piper Jaffray Inc. ......................................... 20,000
Raymond James & Associates, Inc. ........................... 20,000
The Robinson-Humphrey Company, LLC.......................... 20,000
Sutro & Co. Incorporated.................................... 20,000
Tucker Anthony Incorporated................................. 20,000
Wheat First Securities, Inc. ............................... 20,000
---------
Total.......................................... 2,000,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Class H Preferred Stock to the public at the public
offering price set forth on the cover page of this Prospectus Supplement, and to
certain dealers at such price less a concession not in excess of $.50 per share.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of $.40 per share on sales to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase up
to 300,000 additional shares of Class H Preferred Stock at the price to the
public set forth on the cover page of this Prospectus Supplement, less the
underwriting discount. If the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares of
Class H Preferred Stock to be purchased by it shown in the foregoing table bears
to the 2,000,000 shares of Class H Preferred Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriters may be required to make in respect
thereof.
The Class H Preferred Stock is a new issue of securities with no
established trading market. The Company has applied to list the Class H
Preferred Stock on the NYSE under symbol "AIVPrH," subject to official notice of
issuance. Trading of the Class H Preferred Stock on the NYSE is expected to
commence
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within a 30-day period after the initial delivery of the Class H Preferred
Stock. The Underwriters have advised the Company that they intend to make a
market in the Class H Preferred Stock prior to the commencement of trading on
the NYSE. The Underwriters will have no obligation to make a market in the Class
H Preferred Stock, however, and may cease market making activities, if
commenced, at any time.
Until the distribution of the Class H Preferred Stock is completed, rules
of the Securities and Exchange Commission may limit the ability of the
Underwriters and certain selling group members to bid for and purchase the Class
H Preferred Stock. As an exception to these rules, the Representatives are
permitted to engage in certain transactions that stabilize the price of the
Class H Preferred Stock. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Class H Preferred
Stock.
If the Underwriters create a short position in the Class H Preferred Stock
in connection with the Offering, i.e., they sell more shares of Class H
Preferred Stock than are set forth on the cover page of this Prospectus
Supplement, the Representatives may reduce that short position by purchasing
shares of Class H Preferred Stock in the open market. The Representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Class H Preferred Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Class H Preferred Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class H Preferred Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or that
such transactions, once commenced, will not be discounted without notice.
Certain of the Underwriters and their affiliates, from time to time, have
provided investment banking and financial advisory services to the Company, for
which customary compensation has been received, and may continue to perform such
services in the future.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain Federal income tax considerations
regarding an investment in Class H Preferred Stock is based on current law, is
for general information only and is not tax advice. This summary supplements the
discussion set forth in the accompanying Prospectus under the heading "Certain
Federal Income Tax Considerations." This discussion does not purport to deal
with all aspects of taxation that may be relevant to particular investors in
light of their personal investment or tax circumstances.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND SALE OF CLASS H PREFERRED STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS
A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN
INCOME AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND
ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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REQUIREMENTS FOR QUALIFICATION AS A REIT
The Code provides that when a REIT acquires a corporation that is currently
a C corporation (such as Insignia), the REIT may qualify as a REIT only if, as
of the close of the year of acquisition, the REIT has no "earnings and profits"
acquired from such C corporation. In the Insignia Merger, AIMCO will succeed to
the earnings and profits of Insignia and, therefore, AIMCO must distribute such
earnings and profits by December 31, 1998. Insignia has retained independent
certified public accountants to determine Insignia's earnings and profits
through the Effective Time for purposes of this requirement. The determination
of the independent certified public accountants will be based upon Insignia's
tax returns as filed with the IRS and other assumptions and qualifications set
forth in the reports issued by such accountants. Any adjustments to Insignia's
income for taxable years ending on or before the closing of the Insignia Merger
including as a result of an examination of its returns by the IRS and the
receipt of certain indemnity or other payments could affect the calculation of
Insignia's earnings and profits. Furthermore, the determination of earnings and
profits requires the resolution of certain technical tax issues with respect to
which there is no authority directly on point and, consequently, the proper
treatment of these issues for earnings and profits purposes is not free from
doubt. There can be no assurance that the IRS will not examine the tax returns
of Insignia and propose adjustments to increase its taxable income and therefore
its earnings and profits. In this regard, the IRS can consider all taxable years
of Insignia as open for review for purposes of determining the amount of such
earnings and profits. Additionally, if the Special Dividend is not treated as a
dividend under the Code, AIMCO may, depending upon the amount of other
distributions made by AIMCO subsequent to the Insignia Merger, fail to
distribute an amount equal to Insignia's earnings and profits. AIMCO's failure
to distribute an amount equal to such earnings and profits effective on or
before December 31, 1998, would result in AIMCO's failure to qualify as a REIT.
TAX ON DISPOSITIONS OF CERTAIN ASSETS
If AIMCO acquires assets from a C corporation in a transaction in which the
adjusted tax basis of the assets in the hands of AIMCO is determined by
reference to the adjusted basis of such assets in the hands of the C corporation
(such as the assets to be acquired from Insignia in the Insignia Merger), then,
under Treasury regulations not yet promulgated, the C corporation will be
required to recognize any net built-in gain that would have been realized if it
had liquidated on the day before the date of the transfer. Pursuant to IRS
Notice 88-19, AIMCO may elect, in lieu of the treatment described above, to be
subject to tax if it recognizes gain on the disposition of any such assets
during the ten-year period beginning on the day on which it acquires such
assets, at the highest regular corporate tax rate on such gain to the extent of
the excess, if any, of the fair market value over the adjusted basis of such
assets as of the beginning of the ten-year period ("Built-in Gain"). AIMCO
intends to make such an election and, therefore, will be taxed at the highest
regular corporate tax rate on such Built-in Gain, if and to the extent that, any
such asset is sold within the specified ten-year period. It should be noted that
AIMCO has acquired (and will acquire in the Insignia Merger, if consummated) a
significant amount of assets with Built-in Gain and a taxable disposition by
AIMCO of these assets within ten years of their acquisitions would subject AIMCO
to tax under the foregoing rule.
DISTRIBUTIONS ON CLASS H PREFERRED STOCK
For a discussion of the treatment of dividends and other distributions with
respect to the shares of the Class H Preferred Stock, see "Certain Federal
Income Tax Considerations -- Taxation of Taxable Domestic Stockholders,"
"Certain Federal Income Tax Considerations -- Taxation of Tax-Exempt
Stockholders," "Certain Federal Income Tax Considerations -- Taxation of Foreign
Stockholders" in the accompanying Prospectus. In determining the extent to which
a distribution with respect to the Class H Preferred Stock constitutes a
dividend for tax purposes, the earnings and profits of AIMCO will be allocated,
on a pro rata basis, first to distributions with respect to any class of
preferred stock, and then to AIMCO Common Stock.
REDEMPTION OF CLASS H PREFERRED STOCK
A redemption of the Class H Preferred Stock will be treated under Section
302 of the Code as a dividend taxable at ordinary income tax rates (to the
extent of AIMCO's current or accumulated earnings and profits),
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<PAGE> 49
unless the redemption satisfies certain tests set forth in Section 302(b) of the
Code enabling the redemption to be treated as a sale or exchange of the Class H
Preferred Stock. The redemption will satisfy such test if it (i) is
"substantially disproportionate" with respect to the holder (which will not be
the case if only the Class H Preferred Stock is redeemed, since it generally
does not have voting rights), (ii) results in a "complete termination" of the
holder's stock interest in AIMCO, or (iii) is "not essentially equivalent to a
dividend" with respect to the holder, all within the meaning of Section 302(b)
of the Code. In determining whether any of these tests have been met, shares
considered to be owned by the holder by reason of certain constructive ownership
rules set forth in the Code, as well as shares actually owned, must generally be
taken into account. Because the determination as to whether any of the
alternative tests of Section 302(b) of the Code is satisfied with respect to any
particular holder of the Class H Preferred Stock will depend upon the facts and
circumstances as of the time the determination is made, prospective investors
are advised to consult their own tax advisors to determine such tax treatment.
If a redemption of the Class H Preferred Stock is treated as a distribution
that is taxable as a dividend, the amount of the distribution would be measured
by the amount of cash and the fair market value of any property received by the
stockholders. The stockholder's adjusted tax basis in such redeemed Class H
Preferred Stock would be transferred to the holder's remaining stockholdings in
AIMCO. If, however, the stockholder has no remaining stockholdings in AIMCO,
such basis may, under certain circumstances, be transferred to a related person
or it may be lost entirely.
TAXATION OF FOREIGN SHAREHOLDERS
A "Non-U.S. Holder" is any person other than (i) a citizen or resident of
the United States, (ii) a corporation, partnership, or other entity organized in
or under the laws of the United States or any state thereof, or the District of
Columbia, (iii) an estate whose income is includable in gross income for U.S.
Federal income tax purposes regardless of its source, or (iv) a trust if a
United States court is able to exercise primary supervision over the
administration of such trust and one or more United States fiduciaries have the
authority to control all substantial decisions of such trust. This discussion is
based on current law and is for general information only.
Unless the Class H Preferred Stock constitutes a United States real
property interest ("USRPI") within the meaning of the Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"), distributions by AIMCO which are not
dividends out of the current and accumulated earnings and profit of AIMCO will
not be subject to U.S. income or withholding tax. If it cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of the current and accumulated earnings and profits, the distribution
will be subject to withholding tax at the rate applicable to dividends. A
Non-U.S. Holder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
Notwithstanding the discussion in the preceding paragraph, if the Class H
Preferred Stock constitutes a USRPI, such distribution will be subject to 10
percent withholding and may also be subject to tax under FIRPTA. The Class H
Preferred Stock will not constitute a USRPI so long as AIMCO is a "domestically
controlled REIT." AIMCO believes that it currently is a domestically controlled
REIT. Because AIMCO's Class A Common Stock, Class C Preferred Stock, Class D
Preferred Stock and Class G Preferred Stock are, and its Class H Preferred Stock
will be, publicly traded, however, no assurance can be given that AIMCO will
continue to be a domestically controlled REIT.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Recently adopted United States Treasury Department regulations (the
"Regulations") require AIMCO to follow certain procedures in complying with
United States Federal withholding, backup withholding and information reporting
rules. Under the Regulations (and under current law), Holders are required to
provide certain information to AIMCO to avoid the imposition of backup
withholding and, for Non-U.S. Holders to claim the benefits of an income tax
treaty. The Regulations are effective for payments made after
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December 31, 1999. Holders are urged to consult their tax advisors regarding the
tax consequences of the Regulations, on the purchase, ownership and sale of the
Class H Preferred Stock.
RECENT LEGISLATION APPLICABLE TO REITS
The Taxpayer Relief Act of 1997 (the "Act") made several changes to the
Code, including changes to the provisions that govern the Federal income tax
treatment of REITs. The changes to the REIT provisions are generally effective
for taxable years beginning after the date of the enactment of the Act. For
AIMCO, the changes are effective beginning on January 1, 1998. The discussion of
the Federal income tax treatment of a REIT in the Prospectus under the heading
"Certain Federal Income Tax Considerations" does not reflect the changes made by
the Act to the REIT provisions of the Code and is superseded by the following
discussion to the extent inconsistent herewith.
The Act makes a number of changes relating to the qualification and
taxation of REITs, including the following. First, a REIT will be able to
provide certain non-customary services directly to a property without
disqualifying all of the rent from the property as "rents from real property" if
the payment for such services does not exceed 1% of the gross income from the
property. Second, a REIT's wholly-owned subsidiary will be treated as a
"qualified REIT subsidiary" even where the subsidiary was not wholly-owned by
the REIT at all times during its existence. Third, the Act repeals the
requirement that a REIT must derive less than 30% of its gross income from the
sale of stock or securities held for less than one year, real property held less
than four years, and property sold or disposed of in a "prohibited transaction."
In addition, a REIT will be able to elect to retain and pay income tax on net
long-term capital gains. In such a case, REIT shareholders would include in
income their share of the long-term capital gains retained by the REIT and would
receive a credit for their share of the taxes paid by the REIT.
As a result of other changes made by the Act and by the Internal Revenue
Service Restructuring and Reform Act of 1998 to the Code, gains of individuals
derived in respect of capital assets held for at least one year are eligible for
reduced rates of taxation. Each prospective investor should consult his own tax
advisor regarding the tax consequences to him of the changes made to the Code by
such legislation.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING REITS
The rules dealing with Federal income taxation are constantly under review
by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. Changes to the Federal laws and interpretations thereof
could adversely affect the tax consequences of an investment in AIMCO. For
example, a proposal issued by president Clinton on February 2, 1998, if enacted
into law, may adversely affect the ability of AIMCO to expand the present
activities of its Management Subsidiaries. It cannot be predicted whether, when,
in what forms, or with what effective dates, the tax laws applicable to AIMCO or
an investment in AIMCO will be changed.
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EXPERTS
The consolidated financial statements of AIMCO included in AIMCO's Annual
Report on Form 10-K/A for the year ended December 31, 1997, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated by reference in the accompanying Prospectus.
The consolidated financial statements of Ambassador Apartments, Inc. as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 included in AIMCO's Current Report on Form 8-K dated March 17,
1998 (as amended on April 3, 1998), have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated by reference in the accompanying Prospectus. The consolidated
financial statements of Insignia Financial Group, Inc. as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
included in AIMCO's Current Report on Form 8-K dated March 17, 1998 (as amended
on April 3, 1998) and the consolidated financial statements of Ambassador
Apartments, Inc. as of December 31, 1996 and 1995, and for each of the two years
in the period ended December 31, 1996, and the period from August 31, 1994
through December 31, 1994, and the combined financial statements of Prime
Properties (Predecessor to Ambassador Apartments, Inc.) for the period from
January 1, 1994 through August 30, 1994, included in Amendment No. 1 to AIMCO's
Current Report on Form 8-K dated December 23, 1997 filed February 6, 1998, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated by reference in the
accompanying prospectus, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
by reference in the accompanying Prospectus. Such consolidated financial
statements are incorporated by reference in the accompanying Prospectus in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for AIMCO by Skadden, Arps,
Slate, Meagher & Flom LLP, Los Angeles, California. Brown & Wood LLP, San
Francisco, California will act as counsel for the Underwriters. The legality of
the shares of Class H Preferred Stock offered hereby will be passed upon for
AIMCO by Piper & Marbury L.L.P., Baltimore, Maryland. Skadden, Arps, Slate,
Meagher & Flom LLP and Brown & Wood LLP will rely on Piper & Marbury L.L.P. as
to certain matters of Maryland law.
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PROSPECTUS
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
$1,000,000,000
DEBT SECURITIES
PREFERRED STOCK
CLASS A COMMON STOCK
WARRANTS
Apartment Investment and Management Company (the "Company") may offer from
time to time (i) senior, senior subordinated or subordinated debt securities
(the "Debt Securities") consisting of debentures, notes and/or other unsecured
evidences of indebtedness, (ii) shares of preferred stock, par value $.01 per
share (the "Preferred Stock"), (iii) shares of Class A Common Stock, par value
$.01 per share (the "Class A Common Stock"), and (iv) warrants to purchase Debt
Securities, Preferred Stock or Class A Common Stock, as shall be designated by
the Company at the time of the offering (the "Warrants"). The Debt Securities,
the Preferred Stock, the Class A Common Stock and the Warrants are collectively
referred to as the "Securities" and will have an aggregate initial offering
price of up to $1,000,000,000. The Securities may be offered separately or
together (in any combination) and as separate series, in any case, in amounts,
at prices and on terms to be determined at the time of sale.
The form in which the Securities are to be issued, and the terms of such
Securities, including without limitation, their specific designation, aggregate
principal amount or aggregate initial offering price, maturity, if any, rate and
times of payment of interest or dividends, if any, redemption, conversion,
exchange and sinking fund terms, if any, voting or other rights, if any,
exercise price and detachability, if any, and other specific terms will be set
forth in a Prospectus Supplement (the "Prospectus Supplement"), together with
the terms of offering of such Securities. If so specified in the applicable
Prospectus Supplement, Debt Securities of a series may be issued in whole or in
part in the form of one or more temporary or permanent global securities. The
Prospectus Supplement will also contain information, as applicable, about
certain material United States Federal income tax considerations relating to the
particular Securities offered thereby. The Prospectus Supplement will also
contain information, where applicable, as to any listing on a national
securities exchange of the Securities covered by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
Securities.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"RISK FACTORS" SET FORTH IN THE APPLICABLE 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.
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May 22, 1997
<PAGE> 53
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY OR BY ANY PROSPECTUS SUPPLEMENT OR OTHER SECURITIES OF THE
COMPANY. SUCH TRANSACTIONS MAY BE EFFECTED THROUGH THE NEW YORK STOCK EXCHANGE
OR OTHERWISE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION"
INCLUDED ELSEWHERE HEREIN AND IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
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"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; 7
World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained at prescribed rates from the Public Reference Room of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material
can also be inspected at the New York Stock Exchange, 20 Broad Street, New York,
New York 10005. The Commission also maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Securities offered hereby. As permitted
by the rules and regulations of the Commission, this Prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. Such additional information is available for inspection
and copying at the offices of the Commission. Statements contained in this
Prospectus, in any Prospectus Supplement or in any document incorporated by
reference herein or therein as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to, or incorporated by reference in, the Registration Statement, each
such statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, previously filed by the Company with the
Commission pursuant to the Exchange Act (File No. 1-13232), are incorporated
herein by reference:
(i) Annual Report on Form 10-K for the year ended December 31, 1996;
(ii) Quarterly Report on Form 10-Q/A for the quarter ended September
30, 1996, and Quarterly Report on Form 10-Q for the quarter ended March 31,
1997;
(iii) Current Reports on Form 8-K dated December 19, 1996, February
19, 1997, April 16, 1997 and May 5, 1997 (and all amendments thereto); and
(iv) the description of the Class A Common Stock which is contained in
a Registration Statement on Form 8-A (File No. 1-13232) filed July 19,
1994, including any amendment or reports filed for the purpose of updating
such description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing such documents.
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<PAGE> 54
Any statement contained herein or 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 the applicable Prospectus Supplement) or in any other subsequently filed
document that is or is deemed to be incorporated by reference herein modifies or
supersedes such previous statement. Any statement so modified or superseded
shall not be deemed to constitute a part of this Prospectus, except as so
modified or superseded.
Copies of all documents which are incorporated herein by reference (other
than the exhibits to such documents, unless such exhibits are specifically
incorporated by reference herein), will be provided without charge to any person
to whom this Prospectus has been delivered, upon request. Requests for such
copies should be directed to Apartment Investment and Management Company, 1873
South Bellaire Street, 17th Floor, Denver, Colorado 80222, Attention: Corporate
Secretary, telephone number (303) 757-8101.
---------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus or
any Prospectus Supplement and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or any underwriter or agent. This Prospectus and any Prospectus Supplement do
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction where, or to any person to whom,
it is unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus or any Prospectus Supplement nor any sale made hereunder or
thereunder shall, under any circumstances, create any implication that the
information herein or therein is correct as of any time subsequent to their
respective dates.
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<PAGE> 55
THE COMPANY
Apartment Investment and Management Company, a Maryland corporation
(together with its subsidiaries and other controlled entities, the "Company"),
is a self-administered and self-managed real estate investment trust (a "REIT")
engaged in the ownership, acquisition, development, expansion and management of
multifamily apartment properties. AIMCO Properties, L.P., a Delaware limited
partnership (the "Operating Partnership"), and its subsidiaries conduct
substantially all of the operations of the Company. As of March 31, 1997, the
Company held approximately an 86.0% interest in the Operating Partnership.
Through its controlling interests in the Operating Partnership and other limited
partnerships and limited liability companies (collectively, the "Subsidiary
Partnerships"), the Company owns or controls multifamily apartment properties
(the "Owned Properties") and manages other multifamily apartment properties (the
"Managed Properties").
As of March 31, 1997, the Company had 94 Owned Properties containing 23,764
units and 131 Managed Properties, including 17,731 apartment units managed for
third parties and affiliates. The Company's third-party property and asset
management business is principally conducted by Property Asset Management
Services, L.P., a Delaware limited partnership ("PAMS LP"). The Operating
Partnership owns a 1% interest in, and is the general partner of, PAMS LP. The
sole limited partner of PAMS LP is Property Asset Management Services, Inc., a
Delaware corporation ("PAMS Inc." and, together with PAMS LP, the "Management
Subsidiaries"), which owns a 99% interest in PAMS LP.
The Owned Properties are located in the Sunbelt regions of the United
States. The distribution of the Owned Properties reflects the Company's focus on
growth markets and its belief that geographic diversification will help to
insulate the portfolio from regional and economic fluctuations. The Company also
seeks to create concentrations of properties within each of its markets in order
to achieve economies of scale in management and operation.
In April 1997, the Company entered into agreements to acquire NHP
Incorporated, a Delaware corporation ("NHP"). NHP provides a broad array of real
estate services nationwide including property management, and asset management,
as well as a group of related services including equity investments, purchasing,
risk management and home health care. According to 1995 year-end data published
by the National Multi Housing Council and April 1994 data published by the
United States Department of Housing and Urban Development, NHP is the nation's
second largest property manager of multifamily properties, based on the number
of units managed. As of December 31, 1996, NHP's management portfolio includes
457 affordable properties and 260 conventional properties containing 58,504
affordable units and 74,540 conventional units located in 38 states, the
District of Columbia and Puerto Rico.
The Company is also continuing to negotiate the terms of a definitive
agreement with Demeter Holdings Corporation, a Massachusetts corporation, and
Capricorn Investors, L.P., a Delaware limited partnership, Phemus Corporation, a
Massachusetts corporation and an affiliate of Demeter, and J. Roderick Heller,
III, relating to the acquisition of certain entities formerly owned by NHP that
own direct and indirect interests in partnerships that own conventional and
affordable multifamily apartment properties managed primarily by NHP, along with
a captive insurance subsidiary and certain related assets (collectively, the
"NHP Real Estate Companies"). The proposed acquisitions of NHP and the NHP Real
Estate Companies are subject to a number of contingencies, including, in some
cases, obtaining approvals of governmental authorities (including HUD),
shareholders of the Company and NHP, and other third parties. Accordingly, there
can be no assurance that either of such transactions will be completed. If
completed, the NHP Acquisition is subject to a number of risks.
The Company's headquarters are located at 1873 South Bellaire Street, 17th
Floor, Denver, Colorado 80222 and its telephone number is (303) 757-8101.
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<PAGE> 56
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
working capital and general corporate purposes, which may include the repayment
of outstanding indebtedness, the financing of future acquisitions (which may
include real properties, interests therein or real estate-related securities)
and the improvement of the Owned Properties. Pending the use thereof, the
Company intends to invest any net proceeds in short-term, interest-bearing
securities. The Company will not receive any proceeds from the registered resale
of any Securities pursuant to this Prospectus.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the quarters ended
March 31, 1997 and March 31, 1996 was 1.5:1 and 1.5:1 respectively and for the
years ended December 31, 1996 and December 31, 1995 and the period from January
10, 1994 (the date of formation) to December 31, 1994 was 1.6:1, 2.1:1 and
5.8:1, respectively. Prior to the completion of the initial public offering (the
"Initial Offering"), the ratio of earnings to fixed charges of the AIMCO
Predecessors for the years ended December 31, 1993 and 1992 was 1.2:1 and 1.0:1,
respectively. The earnings of the AIMCO Predecessors for the period from January
1, 1994 to July 28, 1994 were inadequate to cover fixed charges by $1,463,000.
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for the quarters ended March 31, 1997 and March 31, 1996 was
1.5:1 and 1.5:1 respectively and for the years ended December 31, 1996 and
December 31, 1995 and the period from January 10, 1994 to December 31, 1994 was
1.6:1, 1.5:1 and 2.0:1, respectively. The AIMCO Predecessors did not have any
shares of Preferred Stock outstanding during the period from January 1, 1992
through July 28, 1994.
The ratio of earnings to fixed charges for the Company was computed by
dividing earnings by fixed charges. For this purpose, "earnings" consists of
income before minority interest plus fixed charges (other than any interest
which has been capitalized); and "fixed charges" consists of interest expense
(including amortization of loan costs) and interest which has been capitalized.
The ratio of earnings to combined fixed charges and preferred stock
dividends for the Company was computed by dividing earnings by the total of
fixed charges and preferred stock dividends. For this purpose, "earnings"
consists of income before minority interest plus fixed charges (other than any
interest which has been capitalized); "fixed charges" consists of interest
expense (including amortization of loan costs) and interest which has been
capitalized; and "preferred stock dividends" consists of the amount of pre-tax
earnings that would be required to cover preferred stock dividend requirements.
The ratio of earnings to fixed charges for the AIMCO Predecessors was
computed by dividing earnings by fixed charges. For this purpose, "earnings"
consists of income (loss) before extraordinary items and income taxes plus fixed
charges; and "fixed charges" consists of interest expense (including
amortization of loan costs). No preferred stock was issued by the AIMCO
Predecessors.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The following description sets forth certain general terms and provisions
of the Debt Securities to which any Prospectus Supplement may relate. The
particular terms of the Debt Securities offered by any Prospectus Supplement and
the extent, if any, to which such general provisions may apply to the Debt
Securities so offered will be described in the Prospectus Supplement relating to
such Debt Securities.
The Debt Securities may be issued, from time to time, in one or more
series, and will constitute either senior Debt Securities ("Senior Debt
Securities"), senior subordinated Debt Securities ("Senior Subordinated Debt
Securities") or subordinated Debt Securities ("Subordinated Debt Securities").
Senior Debt Securities may be issued under an Indenture (the "Senior Debt
Securities Indenture") to be entered into
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<PAGE> 57
between the Company and a trustee to be named in the applicable Prospectus
Supplement (the "Senior Debt Securities Trustee"). The Senior Subordinated Debt
Securities may be issued from time to time under an Indenture (the "Senior
Subordinated Debt Securities Indenture") to be entered into between the Company
and a trustee to be named in the applicable Prospectus Supplement (the "Senior
Subordinated Debt Securities Trustee"). The Subordinated Debt Securities may be
issued from time to time under an Indenture (the "Subordinated Debt Securities
Indenture") to be entered into between the Company and a trustee to be named in
the applicable Prospectus Supplement (the "Subordinated Debt Securities
Trustee").
The Senior Debt Securities Indenture, the Senior Subordinated Debt
Securities Indenture, and the Subordinated Debt Securities Indenture are
referred to herein individually as an "Indenture" and, collectively, as the
"Indentures." The Senior Debt Securities Trustee, the Senior Subordinated Debt
Securities Trustee and the Subordinated Debt Securities Trustee are referred to
herein individually as a "Trustee" and collectively as the "Trustees." Forms of
the Indentures are filed as exhibits to the Registration Statement of which this
Prospectus is a part. The Indentures will be subject to and governed by the
Trust Indenture Act of 1939, as amended (the "TIA"). Capitalized terms used in
this section which are not otherwise defined in this Prospectus shall have the
meanings set forth in the Indenture to which they relate. The statements made
under this heading relating to the Debt Securities and the Indentures are
summaries of the anticipated provisions of the Debt Securities and the
Indentures, do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all the provisions of the Indentures and the
Debt Securities, including the definitions therein of certain terms.
The Debt Securities will be direct, unsecured obligations of the Company.
The Indentures do not limit the aggregate principal amount of Debt Securities
that may be issued thereunder and provide that Debt Securities may be issued
thereunder from time to time in one or more series. Under the Indentures, the
Company will have the ability to issue Debt Securities with terms different from
those of Debt Securities previously issued, without the consent of the holders
of previously issued series of Debt Securities, in an aggregate principal amount
determined by the Company.
The applicable Prospectus Supplement or Prospectus Supplements relating to
any Senior Subordinated Debt Securities or Subordinated Debt Securities will set
forth the aggregate amount of outstanding indebtedness, as of the most recent
practicable date, that by the terms of such Debt Securities would be senior to
such Debt Securities and any limitation on the issuance of additional senior
indebtedness.
Debt Securities may be issued and sold at a discount below their principal
amount ("Discount Securities"). Special United States Federal income tax
considerations applicable to Debt Securities issued with original issue
discount, including Discount Securities, will be described in more detail in any
applicable Prospectus Supplement. Even if Debt Securities are not issued at a
discount below their principal amount, such Debt Securities may, for United
States Federal income tax purposes, be deemed to have been issued with "original
issue discount" ("OID") because of certain interest payment characteristics. In
addition, special United States Federal tax considerations or other restrictions
or terms applicable to any Debt Securities offered exclusively to United States
Aliens or denominated in a currency other than United States dollars will be set
forth in a Prospectus Supplement relating thereto.
The applicable Prospectus Supplement or Prospectus Supplements will
describe, among other things, the following terms of the Debt Securities offered
thereby (the "Offered Debt Securities"): (i) the title of the Offered Debt
Securities; (ii) any limit on the aggregate principal amount of the Offered Debt
Securities; (iii) whether the Offered Debt Securities may be represented
initially by a Debt Security in temporary or permanent global form, and if so,
the initial Depositary with respect to such temporary or permanent global Debt
Security and whether and the circumstances under which beneficial owners of
interests in any such temporary or permanent global Debt Security may exchange
such interests for Debt Securities of such series and of like tenor of any
authorized form and denomination; (iv) the price or prices at which the Offered
Debt Securities will be issued; (v) the date or dates on which the principal of
the Offered Debt Securities is payable or the method of determination thereof;
(vi) the place or places where and the manner in which the principal of and
premium, if any, and interest, if any, on such Offered Debt Securities will be
payable and the place or places where such Offered Debt Securities may be
presented for transfer and, if applicable, conversion or
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exchange; (vii) the rate or rates at which the Offered Debt Securities will bear
interest, or the method of calculating such rate or rates, if any, and the date
or dates from which such interest, if any, will accrue; (viii) the dates (the
"Interest Payment Dates"), if any, on which any interest on the Offered Debt
Securities will be payable, and the regular record date (the "Regular Record
Date") for any interest payable on any Offered Debt Securities; (ix) the right
or obligation, if any, of the Company to redeem or purchase Debt Securities of
the series pursuant to any sinking fund or analogous provisions or at the option
of a holder thereof, the conditions, if any, giving rise to such right or
obligation, and the period or periods within which, and the price or prices at
which and the terms and conditions upon which Debt Securities of the series
shall be redeemed or purchased, in whole or part, and any provisions for the
remarketing of such Debt Securities; (x) whether such Offered Debt Securities
are convertible or exchangeable into other debt or equity securities of the
Company, and, if so, the terms and conditions upon which such conversion or
exchange will be effected including the initial conversion or exchange price or
rate and any adjustments thereto, the conversion or exchange period and other
conversion or exchange provisions; (xi) any terms applicable to such Offered
Debt Securities issued at original issue discount below their stated principal
amount, including the issue price thereof and the rate or rates at which such
original issue discount will accrue; (xii) if other than the principal amount
thereof, the portion of the principal amount of the Offered Debt Securities
which will be payable upon declaration or acceleration of the maturity thereof
pursuant to an Event of Default; (xiii) any deletions from, modifications of or
additions to the Events of Default or covenants of the Company with respect to
such Offered Debt Securities, whether or not such Events of Default or covenants
are consistent with the Events of Default or covenants set forth herein; (xiv)
any special United States Federal income tax considerations applicable to the
Offered Debt Securities; and (xv) any other terms of the Offered Debt Securities
not inconsistent with the provisions of the Indenture. The applicable Prospectus
Supplement will also describe the following terms of any series of Senior
Subordinated Debt Securities or Subordinated Debt Securities offered hereby in
respect of which this Prospectus is being delivered: (a) the rights, if any, to
defer payments of interest on the Senior Subordinated Debt Securities or
Subordinated Debt Securities of such series by extending the interest payment
period, and the duration of such extensions, and (b) the subordination terms of
the Senior Subordinated Debt Securities or Subordinated Debt Securities of such
series. The foregoing is not intended to be an exclusive list of the terms that
may be applicable to any Offered Debt Securities and shall not limit in any
respect the ability of the Company to issue Debt Securities with terms different
from or in addition to those described above or elsewhere in this Prospectus
provided that such terms are not inconsistent with the applicable Indenture. Any
such Prospectus Supplement will also describe any special provisions for the
payment of additional amounts with respect to the Offered Debt Securities.
Since the operations of the Company are currently conducted principally
through subsidiaries, the Company's cash flow and its consequent ability to
service debt, including the Debt Securities, are dependent, in large part, upon
the earnings of its subsidiaries and the distribution of those earnings to the
Company, whether by dividends, loans or otherwise. The payment of dividends and
the making of loans and advances to the Company by its subsidiaries may be
subject to statutory or contractual restrictions, are contingent upon the
earnings of those subsidiaries and are subject to various business
considerations. Any right of the Company to receive assets of any of its
subsidiaries upon their liquidation or reorganization (and the consequent right
of the holders of the Debt Securities to participate in those assets) will be
effectively subordinated to the claims of that subsidiary's creditors (including
trade creditors), except to the extent that the Company is itself recognized as
a creditor of such subsidiary, in which case the claims of the Company would
still be subordinate to any security interests in the assets of such subsidiary
and any indebtedness of such subsidiary senior to that held by the Company.
FORM, EXCHANGE, REGISTRATION AND TRANSFER
The Debt Securities of a series may be issued solely as registered Debt
Securities. Debt Securities of a series may be issuable in whole or in part in
the form of one or more global Debt Securities, as described below under "Global
Debt Securities." Unless otherwise indicated in an applicable Prospectus
Supplement, Debt Securities will be issuable in denominations of $1,000 and
integral multiples thereof. Debt Securities of any series will be exchangeable
for other Debt Securities of the same series of any authorized denominations and
of a like aggregate principal amount and tenor.
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Debt Securities may be presented for exchange as provided above and, unless
otherwise indicated in an applicable Prospectus Supplement, may be presented for
registration of transfer, at the office or agency of the Company designated as
registrar or co-registrar with respect to such series of Debt Securities,
without service charge and upon payment of any taxes, assessments or other
governmental charges as described in the Indenture. Such transfer or exchange
will be effected on the books of the registrar or any other transfer agent
appointed by the Company upon such registrar or transfer agent, as the case may
be, being satisfied with the documents of title and identity of the person
making the request. The Company intends to initially appoint the Trustee for the
Offered Debt Securities as the registrar for such Offered Debt Securities and
the name of any different or additional registrar designated by the Company with
respect to the Offered Debt Securities will be included in the Prospectus
Supplement relating thereto. If a Prospectus Supplement refers to any transfer
agents (in addition to the registrar) 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 the Borough of Manhattan, The City of
New York. The Company may at any time designate additional transfer agents with
respect to any series of Debt Securities.
In the event of any partial redemption of Debt Securities of any series,
the Company will not be required to (i) issue, register the transfer of or
exchange Debt Securities of that 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; or (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.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of, and interest, if any, on, Debt Securities will be made at the
office of such paying agent or paying agents as the Company may designate from
time to time, except that, at the option of the Company, payment of principal or
interest may be made by check or by wire transfer to an account maintained by
the payee. Unless otherwise indicated in an applicable Prospectus Supplement,
payment of any installment of interest on Debt Securities will be made to the
person in whose name such Debt Security is registered at the close of business
on the Regular Record Date for such interest.
Unless otherwise indicated in an applicable Prospectus Supplement, the
Trustee for the Offered Debt Securities will be designated as the Company's sole
paying agent for payments with respect to the Offered Debt Securities. Any other
paying agents initially designated by the Company for the Offered Debt
Securities will be named in an applicable Prospectus Supplement. The Company may
at any time designate additional paying agents or rescind the designation of any
paying agent or approve a change in the office through which any paying agent
acts, except that the Company will be required to maintain a paying agent in the
Borough of Manhattan, The City of New York.
All moneys paid by the Company to a paying agent for the payment of
principal of, or interest, if any, on, any Debt Security which remains unclaimed
at the end of two years after such principal or interest shall have become due
and payable will be repaid to the Company, and the holder of such Debt Security
or any coupon will thereafter look only to the Company for payment thereof.
GLOBAL DEBT SECURITIES
The Debt Securities of a series may be issued in whole or in part in global
form. A Debt Security in global form will be deposited with, or on behalf of, a
depositary, which will be identified in the applicable Prospectus Supplement. A
global Debt Security may be issued only in registered form and in either
temporary or permanent form. A Debt Security in global form may not be
transferred except as a whole to the depositary for such Debt Security or to a
nominee or successor of such depositary. If any Debt Securities of a series are
issuable in global form, the applicable Prospectus Supplement will describe the
circumstances, if any, under which beneficial owners of interests in any such
global Debt Security may exchange such interests for
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definitive Debt Securities of such series and of like tenor and principal amount
in any authorized form and denomination, the manner of payment of principal of
and interest, if any, on any such global Debt Security and the specific terms of
the depositary arrangement with respect to any such global Debt Security.
MERGERS AND SALES OF ASSETS
The Company may not consolidate with or merge into any other person or
convey, transfer or lease its properties and assets substantially as an entirety
to another person, unless, among other things, (i) the resulting, surviving or
transferee person (if other than the Company) is organized and existing under
the laws of the United States, any state thereof or the District of Columbia and
such person expressly assumes all obligations of the Company under the Debt
Securities and the Indenture, and (ii) immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred or be continuing
under the Indenture. Upon the assumption of the Company's obligations by a
person to whom such properties or assets are conveyed, transferred or leased,
subject to certain exceptions, the Company shall be discharged from all
obligations under the Debt Securities and the Indenture.
EVENTS OF DEFAULT
Each Indenture provides that, if an Event of Default specified therein
shall have occurred and be continuing, with respect to each series of the Debt
Securities outstanding thereunder individually, the Trustee or the holders of
not less than 25% in aggregate principal amount of the outstanding Debt
Securities of such series may declare the principal amount (or, if any of the
Debt Securities of such series are Discount Securities, such portion of the
principal amount of such Debt Securities as may be specified by the terms
thereof) of the Debt Securities of such series to be immediately due and
payable. Under certain circumstances, the holders of a majority in aggregate
principal amount of the outstanding Debt Securities of such series may rescind
such a declaration.
Under each Indenture, an Event of Default is defined as, with respect to
each series of Debt Securities outstanding thereunder individually, any of the
following: (i) default in payment of the principal of any Debt Securities of
such series; (ii) default in payment of any interest on any Debt Securities of
such series when due, continuing for 30 days (or 60 days, in the case of Senior
Subordinated Debt Securities or Subordinated Debt Securities); (iii) default by
the Company in compliance with its other agreements in the Debt Securities of
such series or the Indenture relating to the Debt Securities of such series upon
the receipt by the Company of notice of such default given by the Trustee for
such Debt Securities or the holders of at least 25% in aggregate principal
amount of the outstanding Debt Securities of such series and the Company's
failure to cure such default within 60 days after receipt by the Company of such
notice; (iv) certain events of bankruptcy or insolvency; and (v) any other Event
of Default set forth in an applicable Prospectus Supplement with respect to the
Debt Securities of such series.
The Trustee shall give notice to holders of the Debt Securities of any
continuing default known to the Trustee within 90 days after the occurrence
thereof; provided, that the Trustee may withhold such notice, as to any default
other than a payment default, if it determines in good faith that withholding
the notice is in the interests of the holders.
The holders of a majority in principal amount of the outstanding Debt
Securities of any series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee with respect to the Debt Securities of such
series; provided that such direction shall not be in conflict with any law or
the Indenture and subject to certain other limitations. Before proceeding to
exercise any right or power under the Indenture at the direction of such
holders, the Trustee shall be entitled to receive from such holders reasonable
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with any such direction.
With respect to each series of Debt Securities, no holder will have any right to
pursue any remedy with respect to the Indenture or such Debt Securities, unless
(i) such holder shall have previously given the Trustee written notice of a
continuing Event of Default with respect to the Debt Securities of such series;
(ii) the holders of at least 25% in aggregate principal amount of the
outstanding Debt Securities of such series shall have made a
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written request to the Trustee to pursue such remedy; (iii) such holder or
holders have offered to the Trustee reasonable indemnity satisfactory to the
Trustee; (iv) the holders of a majority in aggregate principal amount of the
outstanding Debt Securities of such series have not given the Trustee a
direction inconsistent with such request within 60 days after receipt of such
request; and (v) the Trustee shall have failed to comply with the request within
such 60-day period.
Notwithstanding the foregoing, the right of any holder of any Debt
Securities to receive payment of the principal of and interest in respect of
such Debt Securities on the date specified in such Debt Securities as the fixed
date on which an amount equal to the principal of such Debt Securities or an
installment of principal thereof or interest thereon is due and payable (the
"Stated Maturity" or "Stated Maturities") or to institute suit for the
enforcement of any such payments shall not be impaired or adversely affected
without such holder's consent. The holders of at least a majority in aggregate
principal amount of the outstanding Debt Securities of any series may waive an
existing default with respect to such series and its consequences, other than
(i) any default in any payment of the principal of, or interest on, any Debt
Securities of such series or (ii) any default in respect of certain covenants or
provisions in the Indenture which may not be modified without the consent of the
holder of each of the outstanding Debt Securities of such series affected as
described in "Modification and Waiver," below.
Each Indenture provides that the Company shall deliver to the Trustee
within 120 days after the end of each fiscal year of the Company an officers'
certificate stating whether or not the signers know of any default that occurred
during such period.
MODIFICATION AND WAIVER
The Company and the Trustee may execute a supplemental indenture without
the consent of the holders of the Debt Securities (i) to add to the covenants,
agreements and obligations of the Company for the benefit of the holders of all
the Debt Securities of any series or to surrender any right or power conferred
in the Indenture upon the Company; (ii) to evidence the succession of another
corporation to the Company and the assumption by it of the obligations of the
Company under the Indenture and the Debt Securities; (iii) to establish the form
or terms of Debt Securities of any series as permitted by the Indenture; (iv) to
provide for the acceptance of appointment under the Indenture of a successor
Trustee with respect to the Debt Securities of one or more series and to add to
or change any provisions of the Indenture as shall be necessary to provide for
or facilitate the administration of the trusts by more than one Trustee; (v) to
cure any ambiguity, defect or inconsistency; (vi) to add to, change or eliminate
any provisions (which addition, change or elimination may apply to one or more
series of Debt Securities), provided that any such addition, change or
elimination does not (a) apply to any Debt Securities of any series created
prior to the execution of such supplemental indenture that is entitled to the
benefit of such provision or (b) modify the rights of the holder of any such
Debt Securities with respect to such provision; (vii) to secure the Debt
Securities; or (viii) to make any other change that does not adversely affect
the rights of any holder of Debt Securities.
Each Indenture provides that, with the consent of the holders of not less
than a majority in aggregate principal amount of the outstanding Debt Securities
of the series affected by such supplemental indenture, the Company and the
Trustee may also execute a supplemental indenture to add provisions to, or
change in any manner or eliminate any provisions of, the Indenture with respect
to such series of Debt Securities or modify in any manner the rights of the
holders of the Debt Securities of such series; provided that no such
supplemental indenture will, without the consent of the holder of each such
outstanding Debt Security affected thereby (i) change the stated maturity of the
principal of, or any installment of principal or interest on, any such Debt
Security or any premium payable upon redemption or repurchase thereof, or reduce
the amount of principal of any Debt Security that is a Discount Security and
that would be due and payable upon declaration of acceleration of maturity
thereof; (ii) reduce the principal amount of, or the rate of interest on, any
such Debt Security; (iii) change the place or currency of payment of principal
or interest, if any, on any such Debt Security; (iv) impair the right to
institute suit for the enforcement of any payment on or with respect to any such
Debt Security; (v) reduce the above-stated percentage of holders of Debt
Securities of any series necessary to modify or amend the Indenture for such
Debt Securities; (vi) modify the foregoing requirements or reduce the percentage
in principal amount of outstanding Debt Securities of any series
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necessary to waive any covenant or past default; or (vii) in the case of Senior
Subordinated Debt Securities or Subordinated Debt Securities, amend or modify
any of the provisions of such Indenture relating to subordination of the Debt
Securities in any manner adverse to the holders of such Debt Securities. Holders
of not less than a majority in principal amount of the outstanding Debt
Securities of any series may waive certain past defaults and may waive
compliance by the Company with certain of the restrictive covenants described
above with respect to the Debt Securities of such series.
DISCHARGE AND DEFEASANCE
Unless otherwise indicated in an applicable Prospectus Supplement, each
Indenture provides that the Company may satisfy and discharge obligations
thereunder with respect to the Debt Securities of any series by delivering to
the Trustee for cancellation all outstanding Debt Securities of such series or
depositing with the Trustee, after such outstanding Debt Securities have become
due and payable, cash sufficient to pay at Stated Maturity all of the
outstanding Debt Securities of such series and paying all other sums payable
under the Indenture with respect to such series.
In addition, unless otherwise indicated in an applicable Prospectus
Supplement, each Indenture provides that: the Company (a) shall be discharged
from its obligations in respect of the Debt Securities of such series
("defeasance and discharge"), or (b) may cease to comply with certain
restrictive covenants ("covenant defeasance"), including those described under
"Mergers and Sales of Assets," and any such omission shall not be an Event of
Default with respect to the Debt Securities of such series, in each case, at any
time prior to the Stated Maturity or redemption thereof, when the Company has
irrevocably deposited with the Trustee, in trust, (i) sufficient funds to pay
the principal of and interest to Stated Maturity (or redemption) on, the Debt
Securities of such series, or (ii) such amount of direct obligations of, or
obligations the principal of (and premium, if any) and interest on which are
fully guaranteed by, the government of the United States and which are not
subject to prepayment, redemption or call, as will, together with the
predetermined and certain income to accrue thereon without consideration of any
reinvestment thereof, be sufficient to pay when due the principal of (and
premium, if any) and interest to Stated Maturity (or redemption) on, the Debt
Securities of such series. Upon such defeasance and discharge, the holders of
the Debt Securities of such series shall no longer be entitled to the benefits
of the Indenture, except for the purposes of registration of transfer and
exchange of the Debt Securities of such series and replacement of lost, stolen
or mutilated Debt Securities and shall look only to such deposited funds or
obligations for payment.
THE TRUSTEES
The Senior Debt Securities Trustee, the Senior Subordinated Debt Securities
Trustee and the Subordinated Debt Securities Trustee will be named in the
applicable Prospectus Supplement. Each Trustee will be permitted to engage in
other transactions with the Company and each of its subsidiaries; however, if a
Trustee acquires any conflicting interest, it must eliminate such conflict or
resign.
DESCRIPTION OF PREFERRED STOCK
GENERAL
The Company may issue, from time to time, shares of one or more series or
classes of Preferred Stock. The following description sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The particular terms of any series of Preferred Stock and the
extent, if any, to which such general provisions may apply to the series of
Preferred Stock so offered will be described in the Prospectus Supplement
relating to such Preferred Stock. The following summary of certain provisions of
the Preferred Stock do not purport to be complete and is subject to, and is
qualified in its entirety by express reference to, the provisions of the
Company's Charter (the "Charter") relating to a specific series of the Preferred
Stock, which will be in the form filed as an exhibit to or incorporated by
reference in the Registration Statement of which this Prospectus is a part at or
prior to the time of issuance of such series of Preferred Stock.
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Under the Charter, the Company has the authority to issue up to 10,000,000
shares of Preferred Stock. The Board of Directors of the Company is authorized
to issue shares of Preferred Stock, in one or more classes or subclasses, and
may classify or reclassify any unissued shares of Preferred Stock by setting or
changing in any one or more respects the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of Preferred Stock
including, but not limited to, ownership restrictions consistent with the
Ownership Limit (defined below) with respect to each class or subclass of
Preferred Stock, and the number of shares constituting each class or subclass,
and to increase or decrease the number of shares of any such class or subclass,
to the extent permitted by the Maryland General Corporation Law (the "MGCL").
The Board of Directors of the Company shall be authorized to determine for
each series of Preferred Stock, and the Prospectus Supplement shall set forth
with respect to such series: (i) the designation of such shares and the number
of shares that constitute such series, (ii) the dividend rate (or the method of
calculation thereof), if any, on the shares of such series and the priority as
to payment of dividends with respect to other classes or series of capital stock
of the Company, (iii) the dividend periods (or the method of calculation
thereof), (iv) the voting rights of the shares, (v) the liquidation preference
and the priority as to payment of such liquidation preference with respect to
other classes or series of capital stock of the Company and any other rights of
the shares of such series upon any liquidation or winding-up of the Company,
(vi) whether or not and on what terms the shares of such series will be subject
to redemption or repurchase at the option of the Company, (vii) whether and on
what terms the shares of such series will be convertible into or exchangeable
for other debt or equity securities of the Company, (viii) whether the shares of
such series of Preferred Stock will be listed on a securities exchange, (x) any
special United States Federal income tax considerations applicable to such
series, and (ix) the other rights and privileges and any qualifications,
limitations or restrictions of such rights or privileges of such series not
inconsistent with the Charter and the MGCL.
DIVIDENDS
Holders of shares of Preferred Stock shall be entitled to receive, when and
as declared by the applicable Board of Directors out of funds of the Company
legally available therefor, an annual cash dividend payable at such dates and at
such rates, if any, per share per annum as set forth in the applicable
Prospectus Supplement.
Unless otherwise set forth in the applicable Prospectus Supplement, each
series of Preferred Stock will rank junior as to dividends to any Preferred
Stock that may be issued in the future that is expressly senior as to dividends
to the Preferred Stock. If at any time the Company has failed to pay accrued
dividends on any such senior shares at the time such dividends are payable, the
Company may not pay any dividend on the Preferred Stock or redeem or otherwise
repurchase shares of Preferred Stock until such accumulated but unpaid dividends
on such senior shares have been paid or set aside for payment in full by the
Company.
Unless otherwise set forth in the applicable Prospectus Supplement, no
dividends (other than in common stock or other capital stock ranking junior to
the Preferred Stock of any series as to dividends and upon liquidation) shall be
declared or paid or set aside for payment, nor shall any other distribution be
declared or made upon the common stock, or any other capital stock of the
Company ranking junior to or on a parity with the Preferred Stock of such series
as to dividends, nor shall any common stock or any other capital stock of the
Company ranking junior to or on a parity with the Preferred Stock of such series
as to dividends or upon liquidation be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any shares of any such stock) by the Company (except
by conversion into or exchange for other capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation) unless (i) if such series of Preferred Stock has a cumulative
dividend, full cumulative dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for all past dividend periods and the then
current dividend period and (ii) if such series of Preferred Stock does not have
a cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then current dividend
period; provided, however, that any monies theretofore deposited in any sinking
fund with
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respect to any preferred stock in compliance with the provisions of such sinking
fund may thereafter be applied to the purchase or redemption of such preferred
stock in accordance with the terms of such sinking fund, regardless of whether
at the time of such application full cumulative dividends upon shares of the
Preferred Stock outstanding on the last dividend payment date shall have been
paid or declared and set apart for payment; and provided, further, that any such
junior or parity preferred stock or common stock may be converted into or
exchanged for stock of the Company ranking junior to the Preferred Stock as to
dividends.
The amount of dividends payable for the initial dividend period or any
period shorter than a full dividend period shall be computed on the basis of a
360-day year of twelve 30-day months. Accrued but unpaid dividends will not bear
interest.
CONVERTIBILITY
No series of Preferred Stock will be convertible into, or exchangeable for,
other securities or property except as set forth in the applicable Prospectus
Supplement, which will set forth the terms and conditions upon which such
conversion or exchange may be effected, including the initial conversion or
exchange rate and any adjustments thereto, the conversion or exchange period and
any other conversion or exchange provisions.
REDEMPTION AND SINKING FUND
No series of Preferred Stock will be redeemable or be entitled to receive
the benefit of a sinking fund except as set forth in the applicable Prospectus
Supplement, which will set forth the terms and conditions thereof, including the
dates and redemption prices of any such redemption, any conditions thereto, and
any other redemption or sinking fund provisions.
LIQUIDATION RIGHTS
Unless otherwise set forth in the applicable Prospectus Supplement, in the
event of any liquidation, dissolution or winding up of the Company, the holders
of shares of each series of Preferred Stock are entitled to receive out of
assets of the Company available for distribution to stockholders, before any
distribution of assets is made to holders of: (i) any other shares of preferred
stock ranking junior to such series of Preferred Stock as to rights upon
liquidation, dissolution or winding up; and (ii) shares of common stock,
liquidating distributions per share in the amount of the liquidation preference
specified in the applicable Prospectus Supplement for such series of Preferred
Stock plus any dividends accrued and accumulated but unpaid to the date of final
distribution; but the holders of each series of Preferred Stock will not be
entitled to receive the liquidating distribution of, plus such dividends on,
such shares until the liquidation preference of any shares of the Company's
capital stock ranking senior to such series of the Preferred Stock as to the
rights upon liquidation, dissolution or winding up shall have been paid (or a
sum set aside therefor sufficient to provide for payment) in full. If upon any
liquidation, dissolution or winding up of the Company, the amounts payable with
respect to the Preferred Stock, and any other Preferred Stock ranking as to any
such distribution on a parity with the Preferred Stock are not paid in full, the
holders of the preferred stock and such other parity preferred stock will share
ratably in any such distribution of assets in proportion to the full respective
preferential amount to which they are entitled. Unless otherwise specified in a
Prospectus Supplement for a series of Preferred Stock, after payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of shares of Preferred Stock will not be entitled to any further participation
in any distribution of assets by the Company. Neither a consolidation or merger
of the Company with another corporation nor a sale of securities shall be
considered a liquidation, dissolution or winding up of the Company.
VOTING RIGHTS
Holders of Preferred Stock will not have any voting right except as set
forth below or in the applicable Prospectus Supplement or as otherwise from time
to time required by law. Whenever dividends on any applicable series of
Preferred Stock or any other class or series of stock ranking on a parity with
the applicable series of Preferred Stock with respect to the payment of
dividends shall be in arrears for the equivalent of six
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quarterly dividend periods, whether or not consecutive, the holders of shares of
such series of Preferred Stock (voting separately as a class with all other
series of Preferred Stock then entitled to such voting rights) will be entitled
to vote for the election of two of the authorized number of directors of the
Company at the next annual meeting of stockholders and at each subsequent
meeting until all dividends accumulated on such series of Preferred Stock shall
have been fully paid or set apart for payment. The term of office of all
directors elected by the holders of such Preferred Stock shall terminate
immediately upon the termination of the right of the holders of such Preferred
Stock to vote for directors. Unless otherwise set forth in the applicable
Prospectus Supplement, holders of shares of Preferred Stock will have one vote
for each share held.
So long as any shares of any series of Preferred Stock remain outstanding,
the Company shall not, without the consent of holders of at least two-thirds of
the shares of such series of Preferred Stock outstanding at the time, voting
separately as a class with all other series of Preferred Stock of the Company
upon which like voting rights have been conferred and are exercisable, (i) issue
or increase the authorized amount of any class or series of stock ranking prior
to the outstanding Preferred Stock as to dividends or upon liquidation or (ii)
amend, alter or repeal the provisions of the Company's Charter relating to such
series of Preferred Stock, whether by merger, consolidation or otherwise, so as
to materially adversely affect any power, preference or special right of such
series of Preferred Stock or the holders thereof; provided, however, that any
increase in the amount of the authorized common stock or authorized preferred
stock or any increase or decrease in the number of shares of any series of
preferred stock or the creation and issuance of other series of common stock or
preferred stock ranking on a parity with or junior to Preferred Stock as to
dividends and upon liquidation, dissolution or winding up shall not be deemed to
materially adversely affect such powers, preferences or special rights.
MISCELLANEOUS
The holders of Preferred Stock will have no preemptive rights. The
Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. Shares of Preferred Stock
redeemed or otherwise reacquired by the Company shall resume the status of
authorized and unissued shares of Preferred Stock undesignated as to series, and
shall be available for subsequent issuance. There are no restrictions on
repurchase or redemption of the Preferred Stock while there is any arrearage on
sinking fund installments except as may be set forth in an applicable Prospectus
Supplement. Payment of dividends on, and the redemption or repurchase of, any
series of Preferred Stock may be restricted by loan agreements, indentures and
other agreements entered into by the Company. The accompanying Prospectus
Supplement will describe any material contractual restrictions on such dividend
payments.
NO OTHER RIGHTS
The shares of a series of Preferred Stock will not have any preferences,
voting powers or relative, participating, optional or other special rights
except as set forth above or in the applicable Prospectus Supplement or the
Charter or as otherwise required by law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for each series of Preferred Stock will be
designated in the applicable Prospectus Supplement.
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DESCRIPTION OF COMMON STOCK
GENERAL
The Charter authorizes the issuance of up to 150,000,000 shares of Class A
Common Stock with a par value of $.01 per share. As of March 31, 1997, there
were 17,587,036 shares of Class A Common Stock issued and outstanding.
Subsequent to that date, the Company issued an aggregate of 2,300,000 shares of
Class A Common Stock in separate public offerings. In addition, at such date,
the Company had entered into agreements to acquire NHP which, if completed,
would result in the issuance of up to 7,570,000 additional shares of Class A
Common Stock. In addition, up to 150,000, 500,000 and 500,000 shares of Class A
Common Stock have been reserved for issuance under the Company's 1994 Stock
Option Plan (the "1994 Plan"), the 1996 Stock Award and Incentive Plan (the
"1996 Plan") and the Non-Qualified Employee Stock Option Plan (the
"Non-Qualified Plan"), respectively. The 1997 Stock Award and Incentive Plan
(the "1997 Plan") covers 10% of the shares of the Company's Common Stock
outstanding as of the first day of the fiscal year during which any award is
made but in no event more than 20,000,000 shares of Common Stock. The Class A
Common Stock is traded on the NYSE under the symbol "AIV." ChaseMellon
Shareholder Services, L.L.C. serves as transfer agent and registrar of the Class
A Common Stock. In addition, the Charter originally authorized 750,000 shares of
Class B Common Stock with a par value of $.01 per share (the "Class B Common
Stock" and, together with the Class A Common Stock, the "Common Stock"), which
number of authorized shares is subject to automatic reduction by the number of
shares of Class B Common Stock that have been converted into Class A Common
Stock. As of March 31, 1997, 325,000 shares of Class B Common Stock had been so
converted, leaving a total of 425,000 shares of Class B Common Stock authorized.
(See "-- Class B Common Stock" below.)
Holders of the Class A Common Stock are entitled to receive dividends, when
and as declared by the Board of Directors, out of funds legally available
therefor. The holders of shares of Class A Common Stock, upon any liquidation,
dissolution or winding-up of the Company, are entitled to receive ratably any
assets remaining after payment in full of all liabilities of the Company and the
liquidation preferences of preferred stock. The shares of Class A Common Stock
possess ordinary voting rights for the election of Directors and in respect of
other corporate matters, each share entitling the holder thereof to one vote.
Holders of shares of Class A Common Stock do not have cumulative voting rights
in the election of Directors, which means that holders of more than 50% of the
shares of Class A Common Stock voting for the election of Directors can elect
all of the Directors if they choose to do so and the holders of the remaining
shares cannot elect any Directors. Holders of shares of Class A Common Stock do
not have preemptive rights, which means they have no right to acquire any
additional shares of Class A Common Stock that may be issued by the Company at a
subsequent date.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year and the shares of common 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 (see "Certain Federal Income Tax
Considerations Taxation of the Company Income Tests"). Because the Board of
Directors believes that it is essential for the Company to continue to qualify
as a REIT, the Board of Directors has adopted, and the shareholders have
approved, provisions of the Company's Charter restricting the acquisition of
shares of Common Stock.
Subject to certain exceptions specified in the Company's Charter, no holder
may own, or be deemed to own by virtue of various attribution and constructive
ownership provisions of the Code and Rule 13d-3 under the Exchange Act, more
than 8.7% (or 15% in the case of certain pension trusts described in the Code,
investment companies registered under the Investment Company Act of 1940 and Mr.
Considine) of the outstanding shares of Common Stock (the "Ownership Limit").
The Board of Directors may waive the Ownership Limit if evidence satisfactory to
the Board of Directors and the Company's tax counsel is presented
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<PAGE> 67
that such ownership will not then or in the future jeopardize the Company's
status as a REIT. However, in no event may such holder's direct or indirect
ownership of Common Stock exceed 9.8% of the total outstanding shares of Common
Stock. As a condition of such waiver, the Board of Directors may require
opinions of counsel satisfactory to it and/or an undertaking from the applicant
with respect to preserving the REIT status of the Company. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Directors determines that it is no longer in the best interests of the Company
to attempt to qualify, or to continue to qualify, as a REIT and a resolution
terminating the Company's status as a REIT and amending the Company's Charter to
remove the foregoing restrictions is duly adopted by the Board of Directors and
a majority of the Company's shareholders. If shares of Common Stock in excess of
the Ownership Limit, or shares of Common Stock which would cause the REIT to be
beneficially owned by less than 100 persons, or which would result in the
Company being "closely held," within the meaning of Section 856(h) of the Code,
or which would otherwise result in the Company failing to qualify as a REIT, are
issued or transferred to any person, such issuance or transfer shall be null and
void to the intended transferee, and the intended transferee would acquire no
rights to the stock. Shares of Common Stock transferred in excess of the
Ownership Limit or other applicable limitations will automatically be
transferred to a trust for the exclusive benefit of one or more qualifying
charitable organizations to be designated by the Company. Shares transferred to
such trust will remain outstanding, and the trustee of the trust will have all
voting and dividend rights pertaining to such shares. The trustee of such trust
may transfer such shares to a person whose ownership of such shares does not
violate the Ownership Limit or other applicable limitation. Upon a sale of such
shares by the trustee, the interest of the charitable beneficiary will
terminate, and the sales proceeds would be paid, first, to the original intended
transferee, to the extent of the lesser of (a) such transferee's original
purchase price (or the original market value of such shares if purportedly
acquired by gift or devise) and (b) the price received by the trustee, and,
second, any remainder to the charitable beneficiary. In addition, shares of
stock held in such trust are purchasable by the Company for a 90-day period at a
price equal to the lesser of the price paid for the stock by the original
intended transferee (or the original market value of such shares if purportedly
acquired by gift or devise) and the market price for the stock on the date that
the Company determines to purchase the stock. The 90-day period commences on the
date of the violation transfer or the date that the Board of Directors
determines in good faith that a violative transfer has occurred, whichever is
later. All certificates representing shares of Common Stock bear a legend
referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code and Rule 13d-3 under the Exchange Act, more than a specified percentage
of the outstanding shares of Common Stock must file an affidavit with the
Company containing the information specified in the Company's Charter within 30
days after January 1 of each year. In addition, each stockholder shall upon
demand be required to disclose to the Company in writing such information with
respect to the direct, indirect and constructive ownership of shares as the
Board of Directors deems necessary to comply with the provisions of the Code
applicable to a REIT or to comply with the requirements of any taxing authority
or governmental agency.
The ownership limitations may have the effect of precluding acquisition of
control of the Company by certain third parties unless the Board of Directors
determines that maintenance of REIT status is no longer in the best interests of
the Company.
CLASS B COMMON STOCK
The Class B Common Stock does not have voting or dividend rights and,
unless converted into Class A Common Stock, as described below, is subject to
repurchase by the Company as described below. As of December 31 of each of the
years 1994 through 1998 (each, a "Year-End Testing Date"), a number of the
shares of Class B Common Stock outstanding as of such date (the "Eligible Class
B Shares") become eligible for automatic conversion (subject to the Ownership
Limit) into an equal number of shares of Class A Common Stock (subject to
adjustment upon the occurrence of certain events in respect of the Class A
Common Stock, including stock dividends, subdivisions, combinations and
reclassifications). Once converted or forfeited, the Class B Common Stock may
not be reissued by the Company.
The Eligible Class B Shares convert to Class A Common Stock if (i) the
Company's Funds from Operations Per Share (as defined below) reaches certain
annual and cumulative growth targets and (ii) the
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average market price for a share of Class A Common Stock for a 90-calendar day
period beginning on any day on or after the October 1 immediately preceding the
relevant Year-End Testing Date equals or exceeds a specified target price.
"Funds from Operations Per Share" or "FFO Per Share" means, for any period, (i)
net income (loss), computed in accordance with generally accepted accounting
principles, excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures, less any preferred stock
dividend payments, divided by (ii) the sum of (a) the number of shares of the
Class A Common Stock outstanding on the last day of such period (excluding any
shares of the Class A Common Stock into which shares of the Class B Common Stock
shall have been converted as a result of the conversion of shares of the Class B
Common Stock on the last day of such period) and (b) the number of shares of the
Class A Common Stock issuable to acquire units of limited partnership that (x)
may be tendered for redemption in any limited partnership in which the Company
serves as general partner and (y) are outstanding on the last day of such
period.
Set forth below for each of the remaining Year-End Testing Dates is (i) the
number of shares of Class B Common Stock that become Eligible Class B Shares as
of such date, (ii) the annual FFO Per Share growth target (as a percentage
increase in FFO Per Share from the prior year), (iii) the cumulative FFO Per
Share growth target (in FFO Per Share) and (iv) the average market price target:
<TABLE>
<CAPTION>
CUMULATIVE FFO
ELIGIBLE CLASS B ANNUAL FFO PER PER SHARE AVERAGE MARKET
YEAR-END TESTING DATE SHARES(1) SHARE GROWTH TARGET GROWTH TARGET PRICE TARGET
- --------------------- ---------------- ------------------- -------------- --------------
<S> <C> <C> <C> <C>
December 31, 1997............... 162,500 8.5% 2.544 $24.307
December 31, 1998............... 162,500 8.5% 2.760 $26.373
</TABLE>
- ---------------
(1) Assumes that only the shares of Class B Common Stock outstanding as of
December 31, 1996 remain outstanding until converted into shares of Class A
Common Stock.
If the annual growth target is not met for a particular Year-End Testing
Date, the Eligible Class B Shares for that date may be converted as of a
subsequent Year-End Testing Date if all of the targets are met for that
subsequent Year-End Testing Date. Any Class B Common Stock that has not been
converted into Class A Common Stock following December 31, 1998 will be subject
to repurchase by the Company at a price of $0.10 per share. Class B Common Stock
is also subject to automatic conversion upon the occurrence of certain events,
including a change of control (as defined in the Company's Charter). The Board
of Directors may increase the number of shares which are eligible for conversion
as of any Year-End Testing Date and may, under certain circumstances, accelerate
the conversion of outstanding Class B Common Stock at such time and in such
amount as it may determine appropriate.
BUSINESS COMBINATIONS
Under the MGCL certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an affiliate of the corporation who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then-outstanding voting stock of
the corporation (an "Interested Stockholder") or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the board of directors of the corporation and
approved by the affirmative vote of at least (a) 80% of the votes entitled to be
cast by holders of outstanding voting shares of the corporation, voting together
as a single voting group, and (b) two-thirds of the votes entitled to be cast by
holders of outstanding voting shares of the corporation other than shares held
by the Interested Stockholder with whom the business combination is to be
effected, unless, among other conditions, the corporation's shareholders receive
a minimum price (as defined in the MGCL) for their shares and the consideration
is received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. The business combination statute could have the
effect of discouraging offers to acquire the Company and of increasing the
difficulty of consummating any such offer. These provisions of the MGCL do not
apply,
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however, to business combinations that are approved or exempted by the board of
directors of the corporation prior to the time that the Interested Stockholder
becomes an Interested Stockholder.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control shares" are voting shares of stock
that, if aggregated with all other shares of stock previously acquired by that
person, would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power: (i) one-fifth or
more but less than one-third, (ii) one-third or more but less than a majority,
or (iii) a majority or more of all voting power. Control shares do not include
shares the acquiring person is then entitled to vote as a result of having
previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares,
subject to certain exceptions. A person who has made or proposes to make a
control share acquisition, upon satisfaction of certain conditions (including an
undertaking to pay expenses), may compel the corporation's board of directors to
call a special meeting of shareholders, to be held within 50 days of demand, to
consider the voting rights of the shares. If no request for a meeting is made,
the corporation may itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an "acquiring person statement" as required by the statute,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to voting
rights, as of the date of the last control share acquisition or of any meeting
of shareholders at which the voting rights of such shares were considered and
not approved. If voting rights for control shares are approved at a shareholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other shareholders may exercise appraisal rights. The fair
value of the shares as determined for purposes of the appraisal rights may not
be less than the highest price per share paid in the control share acquisition,
and certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the corporation's
articles of incorporation or bylaws prior to the control share acquisition. The
control share acquisition statute could have the effect of discouraging offers
to acquire the Company and of increasing the difficulty of consummating any such
offer.
DESCRIPTION OF WARRANTS
GENERAL
The Company may issue, together with other Securities or separately,
warrants for the purchase of Debt Securities, Preferred Stock or Class A Common
Stock (the "Warrants"). The Warrants may be issued under a Warrant Agreement
(each, a "Warrant Agreement") to be entered into between the Company and a bank
or trust company, as warrant agent (the "Warrant Agent"), as set forth in the
applicable Prospectus Supplement relating to any or all Warrants in respect of
which this Prospectus is being delivered. The Warrant Agent will act solely as
an agent of the Company in connection with the Warrants of a particular series
and will not assume any obligation or relationship of agency or trust for or
with any holders or beneficial owners of Warrants. The Warrant Agreement for
each Warrant, including the forms of certificates representing the Warrants
("Warrant Certificates"), will be filed as an exhibit to, or incorporated by
reference in, the Registration Statement of which this Prospectus forms a part
at or prior to the time of the issuance of such Warrants.
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<PAGE> 70
The following description sets forth certain general terms and provisions
of the Warrants to which any Prospectus Supplement may relate. The particular
terms of the Warrants to which any Prospectus Supplement may relate and the
extent, if any, to which such general provisions may apply to the Warrants so
offered will be described in the applicable Prospectus Supplement. Capitalized
terms used in this section which are not otherwise defined in this Prospectus
shall have the meanings set forth in the Warrant Agreement and Warrant
Certificate. The following summary of certain provisions of the Warrants,
Warrant Agreement and Warrant Certificate does not purport to be complete and is
subject to, and is qualified in its entirety by express reference to, all the
provisions of the Warrant Agreement and Warrant Certificate, including the
definitions therein of certain terms.
Reference is made to the applicable Prospectus Supplement for the terms of
Warrants in respect of which this Prospectus is being delivered, the Warrant
Agreement relating to such Warrants and the Warrant Certificates representing
such Warrants, including the following: (i) the designation, aggregate principal
amount and terms of the Debt Securities or the designation and terms of the
Preferred Stock, if any, purchasable upon exercise of such Warrants; (ii) the
procedures and conditions relating to the exercise of such Warrants; (iii) the
designation and terms of any related Securities with which such Warrants are
issued and the number of such Warrants issued with each such Security; (iv) the
date, if any, on and after which such Warrants and the related Securities will
be separately transferable; (v) the offering price of the Warrants, if any; (vi)
the principal amount of Debt Securities or the number of shares of Preferred
Stock or Common Stock purchasable upon exercise of each Warrant and the price at
which such principal amount of Debt Securities or shares of Preferred Stock or
Class A Common Stock may be purchased upon such exercise, or the method of
determining such number and price; (vii) the date on which the right to exercise
such Warrants shall commence and the date on which such right shall expire;
(viii) a discussion of United States Federal income tax considerations
applicable to the ownership or exercise of such Warrants; (ix) whether the
Warrants represented by the Warrant Certificates will be issued in registered or
bearer form, and, if registered, where they may be transferred and registered;
(x) call provisions of such Warrants, if any; and (xi) any other terms of the
Warrants.
Warrant Certificates will be exchangeable for new Warrant Certificates of
different denominations and Warrants may be exercised at the corporate trust
office of the Warrant Agent or any other office indicated in the applicable
Prospectus Supplement. Prior to the exercise of their Warrants, holders of
Warrants will not have any of the rights of holders of the Securities
purchasable upon such exercise and will not be entitled to payments of principal
of (or premium, if any) or interest, if any, on the Debt Securities purchasable
upon such exercise or to any dividend payments or voting rights that holders of
the Preferred Stock or Common Stock purchasable upon such exercise may be
entitled to.
Each Warrant will entitle the holder to purchase for cash such principal
amount of Debt Securities, or such number of shares of Preferred Stock or Class
A Common Stock, at such exercise price as shall, in each case, be set forth in,
or be determinable as set forth in, the applicable Prospectus Supplement
relating to the Warrants offered thereby. Unless otherwise specified in the
applicable Prospectus Supplement, Warrants may be exercised at any time up to
5:00 p.m. New York City time on the expiration date set forth in the applicable
Prospectus Supplement. After 5:00 p.m. New York City time on the expiration
date, unexercised Warrants will become void.
Warrants may be exercised as set forth in the applicable Prospectus
Supplement relating to the Warrants. Upon receipt of payment and the Warrant
Certificate properly completed and duly executed at the corporate trust office
of the Warrant Agent on any other office indicated in the applicable Prospectus
Supplement, the Company will, as soon as practicable, forward the Securities
purchasable upon such exercise. If less than all of the Warrants represented by
such Warrant Certificate are exercised, a new Warrant Certificate will be issued
for the remaining amount of Warrants.
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<PAGE> 71
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents or dealers. Any such underwriter, agent or dealer involved in the
offer and sale of the Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the 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 the prevailing market prices at the time of
sale or at negotiated prices. The Company also may, from time to time, authorize
underwriters acting as the Company's agents to offer and sell the Securities
upon the terms and conditions set forth in the applicable Prospectus Supplement.
In connection with the sale of Securities, underwriters may be deemed to have
received compensation from the Company in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of Securities for
whom they may act as agent. Underwriters may sell 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 commissions from the purchasers for whom they may act as
agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of 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 Securities may be deemed to be
underwriters under the Securities Act, and any discounts and commissions
received by them and any profit realized by them on resale of the 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.
If a dealer is utilized in the sale of the Securities in respect of which
this Prospectus is delivered, the Company will sell such Securities to such
dealer, as principal. The dealer may then resell such Securities to the public
at varying prices to be determined by such dealer at the time of resale.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to Delayed Delivery
Contracts ("Contracts") providing for payment and delivery on the date or dates
stated in such Prospectus Supplement. Each Contract will be for an amount not
less than, and the aggregate principal amount of Securities sold pursuant to
Contracts shall not be less nor more than, the respective amounts stated in the
applicable Prospectus Supplement. Institutions with whom 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 the
approval of the Company. The terms and conditions of any Contracts will be set
forth in any Prospectus Supplement relating to the Securities being offered.
Agents and underwriters will have no responsibility in respect of the delivery
or performance of Contracts.
Until the distribution of the Securities offered pursuant to any Prospectus
Supplement is completed, the Commission's rules may limit the ability of any
underwriter participating in such distribution to bid for and purchase the
Securities offered thereby and other securities of the Company. As an exception
to these rules, the underwriters are permitted to engage in certain transactions
that stabilize or maintain the price of such securities. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of such securities. If any such underwriter creates a short position
in such securities in connection with the offering, such underwriter may reduce
such short position by purchasing securities.
In general, bids for or purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might otherwise be in the absence of such bids or
purchases.
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Neither the Company nor any underwriter participating in any distribution
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
offered Securities or other securities of the Company. In addition, neither the
Company nor any such underwriter makes any representation that such underwriter
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
Certain of the underwriters, if any, and their affiliates may be customers
of, engage in transactions with and perform services for the Company in the
ordinary course of business.
The Securities may or may not be listed on a national securities exchange.
No assurances can be given that there will be a market for any of the
Securities.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material Federal income tax considerations
regarding an investment in Securities of the Company is based on current law, is
for general information only and is not tax advice. This discussion does not
purport to deal with all aspects of taxation that may be relevant to particular
investors in light of their personal investment or tax circumstances, or, except
to the extent discussed under the headings "Taxation of Tax-Exempt Stockholders"
and "Taxation of Non-U.S. Stockholders," to certain types of investors
(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) that are subject to special treatment under the
Federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND SALE OF THE SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN INCOME AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The REIT provisions of the Code are highly technical and complex.
The following sets forth the material aspects of the provisions of the Code that
govern the Federal income tax treatment of a REIT and its stockholders. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change which may apply
retroactively.
The Company has elected to be taxed as a REIT under the Code commencing
with its taxable year ending December 31, 1994, and the Company intends to
continue to operate in such a manner. In the opinion of Skadden, Arps, Slate,
Meagher & Flom LLP, commencing with the Company's taxable year ending December
31, 1994, the Company was organized in conformity with the requirements for
qualification as a REIT, and its proposed method of operation and its actual
method of operation since formation, will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based and conditioned upon certain assumptions and
representations made by the Company as to factual matters (including
representations of the Company concerning its business and properties as set
forth in this Prospectus). The opinion is expressed as of its date and Skadden,
Arps, Slate, Meagher & Flom LLP has no obligation to advise holders of
Securities of any subsequent change in the matters stated, represented or
assumed or any subsequent change in the applicable law. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet,
through actual annual operating results, distribution levels and diversity of
stock ownership, the various qualification tests imposed under the Code as
discussed below, the results of which will not be reviewed by Skadden, Arps,
Slate, Meagher & Flom LLP. Accordingly, no assurance can be given that the
actual results of the Company's operation for any one taxable year will satisfy
such requirements. See " Failure to Qualify." An opinion of counsel is not
binding on the
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Internal Revenue Service (the "Service"), and no assurance can be given that the
Service will not challenge the Company's eligibility for taxation as a REIT.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to Federal corporate income tax on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a corporation. However, the Company will be subject to Federal
income tax as follows: First, the Company will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains. Second, under certain circumstances, the Company may be subject
to the "alternative minimum tax" on its items of tax preference. Third, if the
Company has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure property),
such income will be subject to a 100% tax. Fourth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), but has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on an
amount equal to (a) the gross income attributable to the greater of the amount
by which the Company fails the 75% or 95% test multiplied by (b) a fraction
intended to reflect the Company's profitability. Fifth, 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 periods,
the Company would be subjected to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. In addition, the Company
could also be subject to tax in certain situations and on certain transactions
not presently contemplated.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for the special Code provisions applicable to REITs;
(4) that is neither a financial institution nor an insurance company subject to
certain provisions of the Code; (5) the beneficial ownership of which is held by
100 or more persons; (6) in which, during the last half of each taxable year,
not more than 50% in value of the outstanding stock is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities); and (7) which meets certain other tests described below
(including with respect to the nature of its income and assets). The Code
provides that conditions (1) through (4) must be met during the entire taxable
year, and that condition (5) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. The Company's Charter provides for restrictions regarding transfer of
its shares, which provisions are intended to assist the Company in continuing to
satisfy the share ownership requirements described in conditions (5) and (6)
above. Such transfer restrictions are described in "Description of Common Stock
Restrictions on Transfer."
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year from
the record holders of certain percentages of its stock in which the record
holders are to disclose the actual owners of the shares (i.e., the persons
required to include in gross income the REIT dividends). A list of those persons
failing or refusing to comply with this demand must be maintained as part of the
Company's records. A stockholder who fails or refuses to comply with the demand
must submit a statement with its tax return disclosing the actual ownership of
the shares and certain other information.
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company satisfies this requirement.
Ownership of Partnership Interests. In the case of a REIT that is a partner
in a partnership, regulations provide that the REIT is deemed to own its
proportionate share of the partnership's assets and to earn its proportionate
share of the partnership's income. In addition, the assets and gross income of
the partnership retain the same character in the hands of the REIT for purposes
of the gross income and asset tests applicable to REITs as described below.
Thus, the Company's proportionate share of the assets, liabilities and items of
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income of the Subsidiary Partnerships will be treated as assets, liabilities and
items of income of the Company for purposes of applying the REIT requirements
described herein. A summary of the rules governing the Federal income taxation
of partnerships and their partners is provided below in "Tax Aspects of the
Company's Investments in Partnerships."
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from "prohibited
transactions," i.e., certain sales of property held primarily for sale to
customers in the ordinary course of business) for each taxable year must be
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments, and from other dividends, interest and gain from the sale
or disposition of stock or securities (or from any combination of the
foregoing). Third, short-term gain from the sale or other disposition of stock
or securities, gain from certain sales of property held primarily for sale, and
gain on the sale or other disposition of real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property)
must, in the aggregate, represent less than 30% of the Company's gross income
for each taxable year.
Rents received by the Company through the Subsidiary Partnerships will
qualify as "rents from real property" in satisfying the gross income
requirements described above, only if several conditions are met. 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." Moreover, for rents received to qualify as "rents
from real property," the REIT 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" from which the REIT derives no revenue.
However, the Company (or its affiliates) are permitted to, and do directly
perform services that are "usually or customarily rendered" in connection with
the rental of space for occupancy only and are not otherwise considered rendered
to the occupant of the property.
The Management Subsidiaries will receive management fees and other income.
A portion of such fees and other income will accrue to the Company through the
Operating Partnership's interest in PAMS LP. Such fee and other income generally
will not qualify under the 95% gross income test. The Company also expects to
receive distributions indirectly from the Management Subsidiaries through PAMS
Inc. that will be classified as dividend income to the extent of the earnings
and profits of PAMS Inc. Such distributions will qualify under the 95% gross
income test but not under the 75% gross income test.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests (though not the 30% gross income test) 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 will be generally
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 incorrect information on the
schedule 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. If these relief provisions are
inapplicable to a particular set of circumstances involving the Company, the
Company will not qualify as a REIT. As discussed above in "-- General," even
where these relief provisions apply, a tax is imposed with respect to the excess
net income.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including its allocable share of real estate assets held by the
Subsidiary Partnerships), stock or debt instruments held for not more than one
year purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, cash, cash items and government securities.
Second, not more than 25% of the Company's total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the
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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.
The Company indirectly owns interests in the Management Subsidiaries. As
set forth above, the ownership of more than 10% of the voting securities of any
one issuer by a REIT is prohibited by the asset tests. The Company believes that
its indirect ownership interest in PAMS Inc. qualifies under these rules.
Skadden, Arps, Slate, Meagher & Flom LLP, in rendering its opinion as to the
qualification of the Company as a REIT, has relied on representations of the
Company as to the value of the Operating Partnership's total assets and the
value of the Operating Partnership's interest in PAMS Inc. No independent
appraisals have been obtained to support the Company's conclusions as to the
values of the Operating Partnership's interest in PAMS Inc., and this value is
subject to change in the future. Accordingly, there can be no assurance that the
Service will not contend that the Operating Partnership's ownership interests in
the PAMS Inc. disqualifies the Company from treatment as a REIT.
The Company's indirect interests in the Operating Partnership and other
Subsidiary Partnerships are held through wholly owned corporate subsidiaries of
the Company organized and operated as "qualified REIT subsidiaries" within the
meaning of the Code. Qualified REIT subsidiaries are not treated as separate
entities from their parent REIT for Federal income tax purposes. Instead, all
assets, liabilities and items of income, deduction and credit of each qualified
REIT subsidiary are treated as assets, liabilities and items of the Company.
Each qualified REIT subsidiary therefore will not be subject to federal
corporate income taxation, although it may be subject to state or local
taxation. In addition, the Company's ownership of the voting stock of each
qualified REIT subsidiary does not violate the general restriction against
ownership of more than 10% of the voting securities of any issuer.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the net income
(after tax), if any, from foreclosure property, minus (B) the sum of certain
items of noncash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid with or before the
first regular dividend payment after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at the capital gains or ordinary corporate tax rates, as
the case may be. Furthermore, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company believes that it has made, and intends to
make, timely distributions sufficient to satisfy this annual distribution
requirement.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income (including receipt
of distributions from the Operating Partnership) and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of the Company. In the event that such
timing differences occur, in order to meet the 95% distribution requirement, the
Company may find it necessary to arrange for short-term, or possibly long-term,
borrowings or to pay dividends in the form of taxable distributions of property.
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's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based on the amount of any
deduction taken for deficiency dividends.
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
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minimum tax) on its taxable income at regular corporate rates. Distributions to
stockholders 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 of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS
General. Substantially all of the Company's investments are held indirectly
through the Operating Partnership. In general, partnerships are "pass-through"
entities that are not subject to Federal income tax. Rather, partners are
allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from the
partnership. The Company will include in its income its proportionate share of
the foregoing partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for purposes of the
REIT asset tests, the Company will include its proportionate share of assets
held by the Partnerships. See "-- Taxation of the Company -- Ownership of
Partnership Interests."
Entity Classification. The Company's direct and indirect investment in
partnerships involves special tax considerations, including the possibility of a
challenge by the Service of the status of any of the Partnerships as a
partnership (as opposed to an association taxable as a corporation) for Federal
income tax purposes. If any of these entities were treated as an association for
Federal income tax purposes, it would be taxable as a corporation and therefore
subject to an entity-level tax on its income. In such a situation, the character
of the Company's assets and items of gross income would change and could
preclude the Company from satisfying the asset tests and the income tests (see
"-- Taxation of the Company -- Asset Tests" and "-- Taxation of the
Company -- Income Tests"), and in turn could prevent the Company from qualifying
as a REIT. See "-- Taxation of the Company -- Failure to Qualify" above for a
discussion of the effect of the Company's failure to meet such tests for a
taxable year. In addition, any change in the status of any of the Subsidiary
Partnerships for tax purposes might be treated as a taxable event, in which case
the Company might incur a tax liability without any related cash distributions.
In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, which opinion
is based upon certain assumptions and representations by the Company and on
opinions of local counsel with respect to matters of local law, each of the
Subsidiary Partnerships will be treated as a partnership for federal income tax
purposes. The opinion is expressed as of its date and Skadden, Arps, Slate,
Meagher & Flom LLP has no obligation to advise holders of Securities of any
subsequent change in the matters stated, represented or assumed or any
subsequent change in the applicable law. An opinion of counsel, however, is not
binding on the Service, and no assurance can be given that the Service will not
challenge the status of these entities as partnerships for Federal income tax
purposes.
Tax Allocations with Respect to the Properties. Pursuant to the Code and
the regulations thereunder, 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 in a manner such
that the contributing partner is charged with, or benefits from, respectively,
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 contributed
property at the time of contribution, and the adjusted tax basis of such
property at the time of contribution (a "Book-Tax Difference"). Such allocations
are solely for Federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The
Operating Partnership was formed by way of contributions of appreciated property
(including certain of the Owned Properties). Consequently, allocations must be
made in a manner consistent with these requirements. Where a partner contributes
cash to a partnership that holds appreciated property, the Treasury regulations
provide for a similar allocation of such
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items to the other partners. These rules apply to the contribution by the
Company to the Operating Partnership of the cash proceeds received in any
offerings of its stock.
In general, certain holders of partnership interests in the Operating
Partnership ("OP Units") will be allocated lower amounts of depreciation
deductions for tax purposes and increased taxable income and gain on sale by the
Operating Partnership or the Property Partnerships of the contributed Owned
Properties. This will tend to eliminate the Book-Tax Difference over the life of
these partnerships. However, the special allocations do not always entirely
rectify the Book-Tax Difference on an annual basis or with respect to a specific
taxable transaction such as a sale. Thus, the carryover basis of the contributed
Owned Properties in the hands of the Partnerships may cause the Company to be
allocated lower depreciation and other deductions, and possibly greater amounts
of taxable income in the event of a sale of such contributed assets in excess of
the economic or book income allocated to it as a result of such sale. This may
cause the Company to recognize taxable income in excess of cash proceeds, which
might adversely affect the Company's ability to comply with the REIT
distribution requirements. See "-- Taxation of the Company -- Annual
Distribution Requirements."
With respect to any property purchased or to be purchased by any of the
Partnerships (other than through the issuance of OP Units) subsequent to the
formation of the Company, such property will initially have a tax basis equal to
its fair market value and the special allocation provisions described above will
not apply.
Sale of the Properties. The Company's share of any gain realized by the
Operating Partnership or a Property Partnership on the sale of any property held
as inventory or primarily for sale to customers in the ordinary course of
business will be treated as income from a prohibited transaction that is subject
to a 100% penalty tax. See "-- Requirements for Qualification -- Income Tests."
Under existing law, whether property is held as inventory or primarily for sale
to customers in the ordinary course of a partnership's trade or business is a
question of fact that depends on all the facts and circumstances with respect to
the particular transaction. The Operating Partnership and the Property
Partnerships intend to hold the Owned Properties for investment with a view to
long-term appreciation, to engage in the business of acquiring, developing,
owning, and operating the Owned Properties (and other apartment properties) and
to make such occasional sales of the Owned Properties, including peripheral
land, as are consistent with the Company's investment objectives.
TAXATION OF MANAGEMENT SUBSIDIARIES
A portion of the amounts to be used to fund distributions to stockholders
is expected to come from the Management Subsidiaries, through dividends paid on
the non-voting preferred stock of PAMS Inc. held by the Operating Partnership,
distributions paid to the Operating Partnership as the general partner of PAMS
LP and interest paid by PAMS Inc. on certain installment notes held by the
Operating Partnership. PAMS Inc. will not qualify as a REIT and will pay
Federal, state and local income taxes on their taxable income at normal
corporate rates. The Management Subsidiaries intend to claim annual deductions
for interest and amortization. No assurance can be given that the Service will
not challenge such deductions. Any Federal, state or local income taxes that
PAMS Inc. is required to pay will reduce the Company's cash flow from operating
activities and its ability to make payments to holders of its securities.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
General. As long as the Company qualifies as a REIT, distributions made to
the Company's taxable domestic stockholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent that they do not exceed the Company's actual net capital gain for the
taxable year) without regard to the period for which the stockholder has held
its 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 stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's shares, but rather will
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reduce the adjusted basis of such shares. To the extent that such distributions
exceed the adjusted basis of a stockholder's shares, they will be included in
income as long-term capital gain (or short-term capital gain if the shares have
been held for one year or less) provided that the shares are a capital asset in
the hands of the stockholder. In addition, any dividend declared by the Company
in October, November or December of any year and payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the stockholder on December 31 of such year,
provided that the dividend is actually paid by the Company during January of the
following calendar year. Stockholders may not include in their individual income
tax returns any net operating losses or capital losses of the Company.
In general, any loss upon a sale or exchange of shares by a stockholder 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 stockholder as
long-term capital gain.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Based upon a published ruling by the Service, distributions by the Company
to a stockholder that is a tax-exempt entity will not constitute "unrelated
business taxable income" ("UBTI"), provided that the tax-exempt entity has not
financed the acquisition of its shares with "acquisition indebtedness" within
the meaning of the Code and the shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity.
Notwithstanding the preceding paragraph, however, a portion of the
dividends paid by the Company may be treated as UBTI to certain domestic private
pension trusts if the Company is treated as a "pension-held REIT." The Company
believes that it is not, and does not expect to become, a "pension-held REIT."
If the Company were to become a pension-held REIT, these rules generally would
only apply to certain pension trusts that hold more than 10% of the Company's
stock.
TAXATION OF FOREIGN STOCKHOLDERS
The following is a discussion of certain anticipated U.S. federal income
and estate tax consequences of the ownership and disposition of the Company's
stock applicable to Non-U.S. Holders of such stock. A "Non-U.S. Holder" is any
person other than (i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in the United States or under
the laws of the United States or of any state thereof, or (iii) an estate or
trust whose income is includable in gross income for U.S. Federal income tax
purposes regardless of its source. The discussion is based on current law and is
for general information only. The discussion addresses only certain and not all
aspects of U.S. Federal income and estate taxation.
Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of the Company's earnings and profits which are not attributable to
capital gains of the Company and which are not effectively connected with a U.S.
trade or business of the Non-U.S. Holder will be subject to U.S. withholding tax
at the rate of 30% (unless reduced by treaty). In general, Non-U.S. Holders will
not be considered engaged in a U.S. trade or business solely as a result of
their ownership of stock of the Company. In cases where the dividend income from
a Non-U.S. Holder's investment in stock of the Company is (or is treated as)
effectively connected with the Non-U.S. Holder's conduct of a U.S. trade or
business, the Non-U.S. Holder generally will be subject to U.S. tax at graduated
rates, in the same manner as U.S. stockholders are taxed with respect to such
dividends (and may also be subject to the 30% branch profits tax in the case of
a Non-U.S. Holder that is a foreign corporation).
Non-Dividend Distribution. Unless the Class A Common Stock constitutes a
United States Real Property Interest (a "USRPI"), distributions by the Company
which are not dividends out of the earnings and profits of the Company will not
be subject to U.S. income or withholding tax. If it 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 distribution will be
subject to withholding at the rate applicable to dividends. However, the
Non-U.S. Holder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company. If the Class A
Common Stock constitutes a USRPI, such distributions will be subject to 10%
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withholding and taxed pursuant to the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA") at a rate of 35% to the extent such distributions exceed
a stockholder's basis in his or her Class A Common Stock.
Capital Gain Dividends. Under FIRPTA, a distribution made by AIMCO to a
Non-U.S. Holder, to the extent attributable to gains from dispositions of USRPIs
such as the properties beneficially owned by AIMCO ("USRPI Capital Gains"), will
be considered effectively connected with a U.S. trade or business of the Non-
U.S. Holder and subject to U.S. income tax at the rate applicable to U.S.
individuals or corporations, without regard to whether such distribution is
designated as a capital gain dividend. In addition, AIMCO will be required to
withhold tax equal to 35% of the amount of dividends to the extent such
dividends constitute USRPI Capital Gains. Distributions subject to FIRPTA may
also be subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder that is not entitled to treaty exemption.
Disposition of Stock of the Company. Unless the Company's stock constitutes
a USRPI, a sale of such stock by a Non-U.S. Holder generally will not be subject
to U.S. taxation under FIRPTA. The stock will not constitute a USRPI if the
Company is a "domestically controlled REIT." A domestically controlled REIT is a
REIT in which, at all times during a specified testing period, less than 50% in
value of its shares is held directly or indirectly by Non-U.S. Holders. The
Company believes that it is, and it expects to continue to be a domestically
controlled REIT, and therefore that the sale of the Company's stock will not be
subject to taxation under FIRPTA. Because the Company's stock will be publicly
traded, however, no assurance can be given the Company will continue to be a
domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a
Non-U.S. Holder's sale of stock generally will still not be subject to tax under
FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly traded"
(as defined by applicable Treasury regulations) on an established securities
market (e.g., the NYSE, on which the Company's Class A Common Stock is listed)
and (ii) the selling Non-U.S. Holder held 5% or less of the Company's
out-standing stock at all times during a specified testing period.
If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S.
stockholder with respect to such gain (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals) and the pur-chaser of the stock could be required to withhold 10%
of the purchase price and remit such amount to the Service.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in the stock of the Company is effectively connected with a U.S.
trade or business conducted by such Non-U.S. holder, the Non-U.S. Holder will be
subject to the same treatment as a U.S. stockholder with respect to such gain,
or (ii) if the Non-U.S. Holder is a nonresident alien individual who was present
in the United States for 183 days or more during the taxable year and has a "tax
home" in the United States, the nonresident alien individual will be subject to
a 30% tax on the individual's capital gain.
Estate Tax. Stock of the Company owned or treated as owned by an individual
who is not a citizen or resident (as specially defined for U.S. Federal estate
tax purposes) of the United States at the time of death will be includable in
the individual's gross estate for U.S. Federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. Such individual's estate may be
subject to U.S. Federal estate tax on the property includable in the estate for
U.S. Federal estate tax purposes.
Information Reporting and Backup Withholding. The Company must report
annually to the Service and to each Non-U.S. Holder the amount of dividends
(including any capital gain dividends) paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced or eliminated by an applicable tax treaty.
Copies of these returns may also be made available under the provisions of a
specific treaty or agreement with the tax authorities in the country in which
the Non-U.S. Holder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required under
the U.S. information reporting requirements) and
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information reporting will generally not apply to dividends (including any
capital gain dividends) paid on stock of the Company to a Non-U.S. Holder at an
address outside the United States.
The payment of the proceeds from the disposition of stock of the Company to
or through a U.S. office of a broker will be subject to information reporting
and backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States Federal income tax liability, provided that the
required information is furnished to the Service.
These information reporting and backup withholding rules are under review
by the U.S. Treasury and their application to the Securities could be changed by
future regulations. On April 15, 1996, the Service issued proposed Treasury
Regulations concerning the withholding of tax and reporting for certain amounts
paid to non-resident individuals and foreign corporations. The proposed Treasury
Regulations, if adopted in their present form, would be effective for payments
made after December 31, 1997. Prospective purchasers should consult their tax
advisors concerning the potential adoption of such proposed Treasury Regulations
and the potential effect on their ownership of Securities.
OTHER TAX CONSEQUENCES
Possible Legislative or Other Actions Affecting Tax
Consequences. Prospective investors in the Securities should recognize that the
present Federal income tax treatment of an investment in the Operating
Partnership or the Company may be modified by legislative, judicial or
administrative action at any time, and that any such action may affect
investments and commitments previously made. The rules dealing with Federal
income taxation are constantly under review by persons involved in the
legislative process and by the Service and the U.S. Treasury Department,
resulting in revisions of regulations and revised interpretations of established
concepts as well as statutory changes. Revisions in Federal tax laws and
interpretations thereof could adversely affect the tax consequences of an
investment in the Operating Partnership or the Company. For example, a recent
Federal budget proposal contains language which, if enacted in its present form,
would result in the immediate taxation of all gain inherent in a corporation's
assets upon an election by the corporation to become a REIT, and thus would
effectively preclude the Company from re-electing REIT status following a
termination of its REIT qualification.
State and Local Taxes. The Company and its shareholders may be subject to
state or local taxation in various state or local jurisdictions, including those
in which it or they 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 shareholders
should consult their own tax advisors regarding the effect of state and local
tax laws on an investment in the Company.
LEGAL MATTERS
Certain tax matters will be passed upon for the Company by Skadden, Arps,
Slate, Meagher & Flom LLP, Los Angeles, California. The validity of the
Securities offered hereby will be passed upon for the Company by Piper & Marbury
L.L.P., Baltimore, Maryland. Certain matters as to Maryland law will be passed
upon for the Company by Piper & Marbury L.L.P. Certain matters as to Florida law
will be passed upon for the Company by Shumaker, Loop & Kendrick, Tampa,
Florida.
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EXPERTS
The consolidated financial statements of Apartment Investment and
Management Company and the combined financial statements of The AIMCO
Predecessors included in Apartment Investment and Management Company's Annual
Report on Form 10-K for the year ended December 31, 1996 have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such consolidated and
combined financial statements are incorporated herein by reference in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of NHP Incorporated for the years
ended December 31, 1996, 1995 and 1994 included in the Company's Current Report
on Form 8-K dated April 16, 1997, have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their report thereon included
therein and incorporated by reference herein. Such consolidated financial
statements are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
As noted in their report, Arthur Andersen LLP did not audit the 1994
financial statements of certain real estate partnerships whose operating results
are included in "income (loss) from discontinued real estate operations, net of
income taxes" in the 1994 consolidated financial statements. The financial
statements of these real estate partnerships were audited by other auditors,
whose reports are filed as exhibits to the Company's Current Report on Form 8-K,
dated April 16, 1997, and Arthur Andersen LLP's opinion, insofar as it relates
to the amounts included in the consolidated financial statements for these real
estate partnerships, is based solely on the reports of those auditors included
therein and incorporated herein by reference. The auditors on whose reports
Arthur Andersen LLP relied are: Anders, Minkler & Diehl LLP; Dauby O'Connor &
Zaleski, LLC; Deloitte & Touche LLP; Edwards Leap & Sauer; George A. Hieronymous
& Company, LLC; Goldenberg Rosenthal Friedlander, LLP; Hansen, Hunter & Kibbee,
P.C.; J.H. Cohn LLP; J.A. Plumer & Co., P.A.; Marks Shron & Company, LLP;
Reznick Fedder & Silverman; and Russell Thompson Butler & Houston.
The Historical Summary of Gross Income and Direct Operating Expenses of
Villa Ladera Apartments for the year ended December 31, 1995 included in the
Company's Current Report on Form 8-K, dated December 19, 1996, has been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such Historical Summary
is incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
Any financial statements and schedules hereafter filed by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act and
incorporated by reference in this Prospectus that have been examined and are the
subject of a report by independent accountants will be so incorporated herein by
reference in reliance upon such reports given and upon the authority of such
firms as experts in accounting and auditing to the extent covered by consents
filed with the Commission.
30
<PAGE> 82
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL 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 THE UNDERWRITERS. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING
PROSPECTUS CONSTITUTES AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Forward-Looking Statements.............. S-2
Summary................................. S-3
Risk Factors............................ S-17
Use of Proceeds......................... S-31
Ratio of Earnings to Fixed Charges...... S-31
Capitalization of AIMCO................. S-32
Description of Class H Preferred
Stock................................. S-33
Description of Other Capital Stock of
AIMCO................................. S-39
Underwriting............................ S-46
Certain Federal Income Tax
Considerations........................ S-47
Experts................................. S-51
Legal Matters........................... S-51
PROSPECTUS
Available Information................... 2
Incorporation of Certain Documents by
Reference............................. 2
The Company............................. 4
Use of Proceeds......................... 5
Ratio of Earnings to Fixed Charges...... 5
Description of Debt Securities.......... 5
Description of Preferred Stock.......... 11
Description of Common Stock............. 15
Description of Warrants................. 18
Plan of Distribution.................... 20
Certain Federal Income Tax
Considerations........................ 21
Legal Matters........................... 29
Experts................................. 30
</TABLE>
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2,000,000 SHARES
AIMCO LOGO
APARTMENT
INVESTMENT AND
MANAGEMENT COMPANY
9 1/2% CLASS H CUMULATIVE
PREFERRED STOCK
(LIQUIDATION PREFERENCE
$25 PER SHARE)
---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
AUGUST 11, 1998
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